The Cost After the Price

The wage appears in the model. The childhood that produced the worker does not. Someone fed him before he was useful, taught him a language and absorbed the cost of his mistakes. The employer can buy an hour of his time without acquiring any of that history. The transaction is perfectly real. Its apparent completeness is the fiction.

Karl Polanyi made this distinction unusually sharp in The Great Transformation, published in 1944. He called labour, land and money "fictitious commodities". The phrase sounds like an accusation of fraud. His definition was more exact: a commodity is something produced for sale. Human activity accompanies a life lived for other purposes. Land is nature. Money, in his account, is purchasing power created through banking and public finance. They can be traded, but their existence cannot be explained as the manufacture of articles for a market.

The fiction allows a vast amount of useful business to happen. Polanyi recognised that markets in these things were essential to a market economy. His objection concerned what followed when the organising fiction became a complete account of the world. A worker cannot be stored like an unsold chair. A landscape cannot be replaced on the timetable of a procurement department. Treating either as though it could invites consequences that the transaction has no reason to describe.

Consider a hypothetical factory whose labour costs are falling. One explanation is better machinery. Another is a transfer of costs to households: irregular hours, unpaid recovery, the need for a second adult to remain available whenever the roster changes. The accounts can distinguish these explanations only if someone asks. A smaller wage bill proves that the firm pays less. It does not, by itself, prove that the work requires fewer resources.

This is where capital becomes disconnected from culture. Culture sounds soft because much of its economic work occurs before anyone opens a spreadsheet. It gives people habits of cooperation, standards they will enforce without supervision and obligations they will honour when enforcement would be expensive. A firm benefits from those arrangements without having commissioned them. A return calculated inside the firm can therefore depend on resources whose reproduction takes place outside it.

There is an easy, rather tedious version of this argument in which prices are vulgar and everything important is beyond calculation. Friedrich Hayek supplies a reason to refuse it.

In his 1945 essay "The Use of Knowledge in Society", Hayek asks us to imagine tin becoming scarcer. Perhaps a source of supply has disappeared; perhaps a new use has become more valuable. Most people using tin need not discover which event occurred. A change in price tells them to economise. Their adjustments pass through substitutes and other uses, coordinating people who do not know one another and could never assemble the whole situation in a single mind.

That economy of knowledge is a genuine achievement. A business does not need to conduct a social history of every input before deciding whether to use less of it. Requiring complete understanding before action would paralyse the coordination that makes a complex economy possible. The romance of a world without prices usually arrives without an explanation of how its inhabitants will know what is scarce.

Hayek's example also makes the limit easier to see. The signal helps participants adjust to the terms on which tin is available. It cannot, merely by being a price, certify that those terms include every relevant consequence. A cost can be absent because it belongs to someone outside the contract. A loss can emerge after the investment has been sold. People who cannot bid do not cease to have an interest in the result.

The two arguments need not be forced into agreement. Hayek is explaining an information system. Polanyi is asking what happens when the conditions of human life are subordinated to a market organised around a convenient description of them. Read together, they make a more demanding question possible: which costs does the signal transmit, and which arrangements must exist for the signal to be worth trusting?

Polanyi's own historical account should not be treated as a verdict immune to scrutiny. Scholars have disputed both his history and his use of "embeddedness". An economy never literally escapes law, institutions or social relations. The image of a market floating free of society can conceal the very dependencies it is meant to expose. The useful question concerns the kind of dependence a particular arrangement creates, and who is permitted to decline it.

Old arrangements deserve the same suspicion. Custom can preserve a craft; it can also reserve that craft for the sons of people already admitted. A community can support its members while making departure ruinously expensive. Describing an institution as cultural gives no reason to protect every privilege it contains. The test is what it enables people to sustain, on what terms, and at whose expense.

For an investor, this suggests a less flattering form of diligence. A business may have an attractive margin because it has learned to use less. It may have the same margin because someone else has agreed, or been obliged, to carry more. Those are different investments. The distinction will not always appear in the audited figures, because the figures answer a narrower question about the entity being audited.

The relevant inquiry follows the obligation beyond the transaction. Who restores the capacity being used, and what happens when they can no longer keep doing so at the proposed rate? These questions do not require a grand moral theory. They require curiosity about a source of supply that the model has treated as permanent.

Capital is remarkably good at purchasing access to things it did not create. The trouble begins when access is mistaken for independence. A contract can close while the work of keeping its parties capable of performing it remains open.

The ledger balances at the point where the ledger ends. That is a feature of accounting. It is a dangerous theory of the world.