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Value Economics
free market solution to all social & economic ills

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Value Economics    Posted: September 3, 2009 Reply with quote


NOTE:
A separate website has been set up to educate the public about Value Economics —

visit: FreeAmerica.us (under construction)



Value Economics
A True Free Market for True Global Freedom

Summary Points:

  • Accounts for full value — including ruinously costly economic externalities (side effects) — to achieve true pricing, profit incentive, and production value; solves problems of health, education, social welfare, infrastructure, security, energy, resources, and environment, including climate change.

  • Improves business and economic efficiency through perfect competition & information.

  • Self-regulating to function smoothly and robustly without government or central bank intervention, and without debilitating boom/bust cycles.

  • Self-enforcing to safeguard free market functioning without constricting regulation and bureaucratic control; every citizen protects the market.

  • Creates free market mechanism to protect, preserve & promote the value of public goods; ends 'tragedy of commons'.

  • Distributes wealth and dispenses social justice fairly through free market exchange, according to merit, free of class bias, and without social engineering.

  • Minimizes (or eliminates) taxes and maximizes investment; ensures capital flow to highest value outcome, including public needs: citizens invest in the nation.

~ ~ ~


Free market economics is a crown jewel yet to be set on the true throne of freedom.

Economic freedom — as we know it — has proven to be a mixed blessing for society. Our free market system has brought great prosperity and progress, but all too often it has the opposite effect, creating problems that drain our resources, sap wealth, leave waste, divide society, and erode our quality of life. Vital needs go unmet, quality of goods and services fail, and negative side-effects eat up value. On rare occasions, our economy spirals into meltdowns that threaten the very fabric of the free market system itself. They force us to compromise market ideals in order to save the system. Bailouts, regulation, and other intervention water down the value of economic freedom. Booms have been our blessing, but busts our curse.

Fortunately, the curse is a mixed blessing too. Economic suffering aside, downturns present both a challenge and opportunity. The challenge is to examine our economy and see why it doesn't always produce the result we want. Is there merely a bug in the system or is the system itself to blame? If we accept this challenge and probe deeply, we find that the ideal of economic freedom is sound, but that the flaws in our version of it are far more fundamental than we think. Free markets work, but we don't have a true free market. This presents the opportunity.

The opportunity is to re-explore and restore true free market ideals. If we embrace this opportunity, we will not only solve our economic problems, but also transform free market economics into a system that solves all of society's ills. We will create a market economy that accounts for all that is best in humanity, and manufactures that into economic output. We will forge an economy that employs all of our hopes and dreams — our best values — and crafts them into goods and services. We will construct markets that assemble every resource of human potential and fashion from that our material world. We will discover that free market economics is a system so perfect that it can bring forth — literally — a utopian society.

Through a pure freedom ideal we will remake economy, and in so doing, remake our world.

Freedom is our heritage. It opens the door to the blossoming of the human spirit. Economic freedom — in its pure form and true expression — monetizes and materializes that spirit. It manifests the full value of that spirit. Economic freedom makes the human ideal practical.

Free market economics thrives on the opportunity to meet society's needs. It flourishes on the chance to satisfy human desire. A true free market economy meets every human need and satisfies all desire. It succeeds because at the same time, it cultures holistic life built on honest need and balanced desire. It fosters life in harmony with the resources that nurture and sustain it.

A true free market works the same way our broken one does, without the failings. If that sounds modest, it is only because the failings are so chronic and ingrained that we no longer even notice, accepting them as part of the system. The system is so broken that we don't realize the extent of the break.

An added woe of economic crises is that, while they motivate us to reform the system, they mask the broader problem and therefore blind us to more fundamental solutions. We see only the immediate financial crisis, and not the more systemic sickness. We fail to comprehend the true nature, depth, and scope of our economic plight.

We also miss these issues because we're caught up in the areas they impact, ignoring the underlying economics. We face a health crisis, an education crisis, social crises, environmental crises, and an energy crisis. We see all these as distinct and separate from economy, but they are not. In every case, the underlying economics fail to fuel solutions to these problems.

We don't so much face a health crisis as we do a health economics crisis. Our environmental crisis is fundamentally an environmental economics crisis. Our education and social crises are also rooted in economics, as is our energy crisis. Even our international crises have major economic components.

The root problem is deeper even than this. We do not even face a collection of economic-related crises in these fields. Fundamentally, we face one crisis alone, a purely economic crisis. In every case — health, education, society, energy, and environment — the profit incentive that drives our free market system fails to spur solutions to the problems at hand. Yet for each crisis, solutions either exist or can be developed given financial incentive. With proper incentive, the free market will solve these crises the same way it meets every need: through innovation, applied resources, skilled training, and work.

This crisis is not new. Our health, social, and environmental problems have not suddenly exploded onto the scene. Rather, they have been brewing and growing — sometimes in view, sometimes not — for years. They are chronic burdens present long before any current meltdown, and will weigh on us long after if we don't treat the real crisis.

Nor is this economic crisis based in political ideology. It is not a matter of government involvement, regulation, or taxation. Again, it is purely economic. If the free market works as it should, questions of ideology become moot. Ideology rages because the system doesn't work. So we fight over whether and how government should fix it.

While the depth and scope of the problem may sound dire, it is actually good news. It means that, because all these crises stem from one basic problem, they are resolved by one fundamental solution. A working free market system solves them all. We need only restore true free market principles.

A true free market is self-regulating, self-correcting, and a self-dispenser of economic justice. It self-manages economic and environmental resources, and self-promotes personal and social welfare. A true free market centers on the emblem of economy: value.

Value is the measure by which we assign a monetary number to everything we buy & sell. By accounting for all value we can measure, we set fair prices in the marketplace, and let economic freedom do the rest. This translates to maximum value in economic output.

The economic system that achieves this is a free market economy, but being an evolution of our current system — which ignores value in many ways — it is best termed 'Value Economics'. The name reminds us of its aim. Value Economics maximizes production value. It is a free market system that runs smoothly, free of intervention. Value Economics restores full value to the ideal of economic freedom.

Economics today is at a crossroads. We face a crisis far deeper, broader, more systemic, and costlier than any current financial crunch. The up-side is that with one deep, broad, systemic stroke, we can solve not only our economic crisis, but also our many other crises, and achieve our full economic potential. We do it simply by making our free market work as it was originally intended to work.

The direction we choose at this juncture in time determines our economic future for generations. We can address this crisis in cursory fashion and wait for the next to occur, throwing good money after bad while fleeced by our own economy. We can invest — poorly — in patchwork solutions, waiting for the next bubble to burst. Or we can see the enormous economic value — and human value — in doing it right, and make a sound investment in restoring the system. That is the wiser economic choice.

When systems fail, we question our core values. In times of economic crisis, we debate our free market ideal. Some say leave it alone and accept its shortcomings and occasional crashes. Others say intervene to control and shore it up. Still others — opponents of the free market system — say abandon it all together.

Should we forsake free market economics? No, we should perfect it.

Free market economics is not ready for rejection. It is ripe for revolution.

The ideal of economic freedom burns as brightly today as ever. To restore its full value, we need only return to the root of its glory.

Free market economics was a revolution in itself and is steeped in revolution history. It arose amidst a sea of economic turmoil. It is credited with fueling the industrial revolution, which brought great progress and filled society with a spirit of achievement. Today, rising from our own economic turmoil, we can spark a new economic revolution — not an overthrow of our past, but a renewal of it — and rekindle our entrepreneurial spirit once more.

If we do, we will inspire an age of innovation and abundance, founded on holistic values, the likes of which we have never seen. Economic freedom will literally set the world free.

To understand that this is no exaggeration, let's explore the promise that economics holds.

It lies in the spirit of that word which is everyone's favorite economic term: FREE.

DAWN OF ECONOMIC FREEDOM

By all historical accounts, 1776 was a banner year for freedom. Most know 1776 as the year of American Independence. On July 4 of that annum, colonial leaders signed the Declaration of Independence, beginning a new age of political freedom.

Political freedom is no doubt a blessing to civilization. It unleashes the creative genius of man & woman for the betterment of all society. As a governing principle, it protects our sovereign birthright as free human beings.

Remarkably though, it may be that the declaration of political freedom in 1776, for all its impact and worth, was not even the most vital freedom established that year. That exalted honor may instead go to a declaration of economic freedom — published the very same year, 1776 — by a largely unknown Scotsman named Adam Smith.

Smith's book, titled The Wealth of Nations — well known to economists, but few others — set down the principles of free market economics. In doing so, it lay the foundation for economic freedom in the world.

While economists avidly affirm the seminal nature of Smith's work, not even they likely would go as far to suggest that it surpasses the famous political declaration of that year. But despite the lack of annual fireworks to back it up, we can make a serious case for it.

For while a nation's political system no doubt sustains the life of its people, on a daily basis its economic system impacts them more.

How often, for example, do you exercise your free speech right to protest government, or demand action on a strongly held view? How often do you believe government — 'representative' as it is — actually does your bidding? How often do you neglect to vote because "it doesn't change anything anyway"?

In contrast, how many times a day do you buy something you want at a fair price, to provide for your wants and needs? How many times do you marvel at the mall at the incredible variety of products available? Phrases like, "what'll they think of next" and, "too much to choose from" come to mind.

When was the last time government came out with a technological innovation — like the automobile, television, or computer — that transformed life overnight?

There is no doubt that political freedom has a silent value that we take for granted every day, but economic freedom is more responsible for advancing our quality of life. We might say that political freedom's best feature is providing the environment for economic freedom to flourish. Indeed, the two invariably go together in society, making their tandem 1776 declarations all the more extraordinary.

But economics is a ruler of life in its own right. How often are your shopping, activity, entertainment, or other plans dictated by the economics of price and availability? We drive the extra mile for that sale, or because one store has exactly what we want. We go here, not there, because of brand or because it's cheaper. We change plans because they're out of tickets or out of stock.

Not just little things, but major decisions too. We take that job because it pays better. We send kids to college within our budget. We put off that car to pay for the wedding, spending it on a thousand dollar dress. We retire when our end-of-life savings are secure. All these choices are economic.

Economics governs our lives. It is the prime mover of behavior on a day-to-day basis. The daily act of earning a living and providing for self and family directs societal life.

Politics itself bows down to economics. "It's the economy, stupid," is ingrained in our political lexicon. Elections are won & lost on the issue. Thomas Jefferson, one of America's great political leaders, paid it homage: "I place economy among the first and most important virtues...."

One notorious sign of the sway economy holds over us is that old adage, "money is the root of all evil." While this seems to undercut the vision of economics as savior, it hints the reverse. If we can use money in a truly positive way, it can be a means for all good. Our economic system holds that much power.

Remarkably, Adam Smith's free market ideal holds the key to do it, if only we apply it fully. All we need do is restore full value to money, and what it buys.

ECONOMIC VALUE

Economics is, if nothing else, the science of value. It quantifies value and manages its exchange to produce output of value for society.

Value itself is abstract. The challenge of economics is to quantify and account for it as accurately as possible. Economy fails to produce ideal output when it inadequately accounts for value. Such is the case with economy today. For all its achievements, we can do better.

To see how, let's get a grasp on this abstract thing called 'value'.

The first, and most important, thing to know about value is that you decide it. In a free market, you — not government, not elite economists — determine the value of things. This is the first hint of the transformative power of economy. There is no bureaucracy, no planned management, no political agendas, or ill-conceived ideas. There is just you and your wallet or pocketbook to decide value.

So what is value?

Typically, value boils down to the simple notion of how much something is worth. This is so basic to free market exchange that we take it for granted. Every time we shop, we consciously or unconsciously decide how much products are worth. But even this most basic concept has more impact than you think.

To demonstrate, let's discuss the value of things, starting with one that is part of every economic exchange: the money with which you buy.

Value of Money

Believe it or not, you decide the value of money. That's right. Money only has value to the extent that we give it.

This is more than hyperbole or semantics. Paper money, unbacked by a commodity valued in its own right (such as gold), is worth only the value we give it.

Unbacked currency is technically known as 'fiat' money. Fiat simply means "by authorized decree". In other words, the money has value because government says so. But that is only half the story.

Government decrees that the national currency (in America, the dollar) has value, but it does not decree how much value. That depends on economic factors.

One such factor (a major one) is money supply. When a nation's Central Bank (in America, the Federal Reserve) authorizes the printing of more paper money, its value goes down because there is more of it. More money serving the same economy means less value for each currency unit (i.e. dollar). An example makes it clear:

If there are $100 in circulation and 100 loaves of bread comprising the entire economy, each loaf might sell for $1. If the money supply suddenly grows to $200, each loaf now costs $2, because there's more money buying the same bread. Each dollar then, is worth only half of what it was: $1 buys half a loaf. The value of $1 is now 50 cents. There is a common term for this: inflation. If you want a real world lesson, ask your parents what a dollar bought when they were young.

Inflation is stark truth that the value of money is its real worth, not some dollar designation.

Money supply though, merely influences its value. It doesn't set it. That power remains with you. If, in the market, you and everyone else refuse to buy bread at $2 per loaf, the price comes back down. If you are steadfast, you can bring it back to $1. If you're irate at the price hike and want to teach the baker a lesson, you and your fellow shoppers can boycott the bakery, driving the price down more.

This is the most well known principle of economics in action: supply & demand. When demand drops, so does the price. You, the consumer, controlling demand, ultimately set the price. And thereby, you set the value of your dollar.

Every time you buy or don't buy an item, you change — ever-so-slightly — the value of money. If you buy, you tell the market that the item is worth more than your money. That devalues the dollar, literally. (By buying, you increase demand, driving up prices. With higher prices, your dollar buys less: it is devalued.) By not buying, you say that your dollar is worth more than the item. By holding onto your purchasing power, you increase the value of the dollar.

These value shifts, of course, are microscopic. They're the domain of microeconomics, which studies individual transactions in the marketplace. But don't be fooled; how you value things can have macroscopic effects. To see the dizzying — and devastating — power you have, just look at the times when we all act as one. Then we, the people, have far more power to set value than any Central Bank. We can make things exceedingly over-valued...or practically worthless.

Before we give some examples, note that value is always relative. When you shop, you're not so much setting the value of money or products as you are weighing the relative value between them. With each purchase decision, you ask, "Which has more value to me, my money or the item?" If it's the item, you buy; if it's your money, you keep it. That's why in every exchange (or non-exchange), the value of one goes up while the other goes down.

So the following extremes, which we typically see as over- and undervalued assets ('items'), are just as truly over- and undervalued money. They should be painfully familiar:
  • Wall Street Crash of 1929;
  • Black Monday, 1987 (largest 1-day % stock decline in U.S. history);
  • Dot-com bubble...and burst, 1995-2002;
  • Housing bubble of the 1990's...and burst, leading to the subprime mortgage meltdown and global financial crisis of 2008.
In each case, consumers (typically investors) bought something in great quantity, driving prices exceedingly high. Values skyrocketed above their true market value. When unsustainable levels peak, they plummet. Economic disaster results.

The Dot-com crash at the turn of the millennium by no means had the greatest impact, but it's an excellent teaching tool for several reasons. The main one is that it weighs the value of something highly intangible, like fiat money itself. The Dot-com boom & bust centered around the value of stocks (paper certificates of value) of startup companies (with few hard assets and no track record) competing in the internet market (unproven, existing only in cyberspace, and lacking traditional market territories) against virtually identical companies (same business plan and model, with only a different dot-com name).

Nearly all value was in everyone's head. With very little real and concrete worth, the Dot-com boom/bust shows how our perception of value has huge economic impact.

The Dot-com event also teaches well because it clearly shows both sides of the story.

There are two phases to every boom/bust cycle. Both misgauge true market value. The Dot-com bubble (boom phase), from 1995-2001, saw the NASDAQ stock index (serving the tech market, including internet cos.) rose from under 1000 to over 5000 in March, 2000. Most of that was in a frenzied 1 1/2 year period that saw the index more than triple in value. Hi-tech wizards quit traditional jobs, competing in cyberspace. They were all looking to cash in on perceived value.

At the very outset of the bubble in 1996, Federal Reserve chairman Alan Greenspan made an oft-quoted remark, warning of "irrational exuberance" in the stock market. Translate that as overrated value.

The Dot-com bust was equally dramatic, wiping out $5 trillion in market value from March, 2000 to October, 2002. Most of that came in one short year. As of 2008, the market is still barely half of its peak value.

How real is the impact of perceived value? If everyone today were to suddenly decide that the stocks again had value, tomorrow they'd be back at 5000. The likelihood of that happening may not be real, but the economic impact of how we gauge value is very real. It almost defies logic, but it is.

The NASDAQ chart below clearly shows both the rise and fall of tech stock value:


Another reason we can well learn from the Dot-com episode is the balanced nature of the cycle. The near perfect symmetry of the Dot-com swing might even be beautiful, if the downside weren't so painful. But that's the point. We lament the $5 trillion lost, but if we overvalued it to begin with, was it ever really there?

Balanced between every boom & bust is true market value; everything else is, well, misvalued.

All this results from how we quantify, measure, and account for value. And when we set the value of items in the market, we also set it for the money with which we buy. Booms & busts exceedingly inflate, or deflate, the value of money.

It may be mind-boggling to conceive, but the same statement made earlier about stock value can be applied to money. If everyone today agreed that our money was worthless, it would be so. Don't believe it? Look it up:

The Random House Unabridged Dictionary (2008) defines 'fiduciary' thus: "depending on public confidence for value or currency, as fiat money." Money, like everything else, only has the value we give it.

Value is everything. Economy trades in value, not money. Money is just a medium of exchange. What we exchange is value. Economy must represent true & full value.

That is the need for Value Economics.

Economists will argue that our current free market system correctly accounts for quantitative value through the law of supply & demand. It weighs the value of supply (production costs) against demand, the item's value to buyers. As explained above, every microeconomic purchase (and non-purchase) contributes to its consensus value. That sets the "true" market value.

But what about booms & busts, and the more common but less extreme inflationary spurts & recessions? Something more than single market transactions are setting value. 'Irrational exuberance' and equally unreasonable panic & fear distort value and drive it to extremes. Do we account for these in ways that help to smooth the bumps? Value Economics does.

But there are even greater unaccounted for values in the equation. What about health, social, or environmental costs (and cost benefits) associated with goods & services? These are very real — and vital to society — yet rarely included in product value. Shockingly, this is the sole reason economy doesn't produce what we want in these areas. Value Economics does.

Before we explain how, let's explore another side of value.

Value Quality

Above, we talked about quantitative value: that money (and what we buy with it) are worth certain amounts or they're not. That is certainly important, and Value Economics increases economic efficiency and improves its functioning, producing more output. It also stabilizes the economy so that it has fewer and shallower recessionary swings, where monetary value is lost. But this is not its main contribution. Quantitatively, our current economy does pretty well. There is definitely room for improvement — and devastating value meltdowns must be eliminated — but overall, production and growth are good.

That in itself is a testament to free market principles, and hints at the productive potential we can unleash by applying those principles truly and fully. As you'll soon learn, there is much in our current economy that inhibits free market functioning.

Beyond this though, is something more than quantitative value. That is qualitative value. This is the real contribution of Value Economics.

We're not talking here about the quality of our cars, clothes, and appliances, etc. Again, our current economy does a decent job at that. Rather, we're speaking of overall quality measured by a broad spectrum of human values.

To show exactly what we mean by value quality, and how vital it is to a related value — quality of life — let's examine the economy of a small, hypothetical nation. It also clearly shows the difference between qualitative and quantitative value.

A Tale of Two Economies
~ Part I ~

We'll call this country, 'Dollarland'. Its population is two, which conveniently simplifies our study of free-market exchange. Dollarland's economy is vibrant. Here are the statistics:
  • 100% employment;
  • 0% inflation;
  • $100,000 per capita gross economic product;
  • $100,000 per capita income;
  • 100% annual economic growth;
  • 100% equal distribution of wealth.
Based on quantitative value, is this a healthy economy? Any economist would say, 'yes'.

Let's look closer.

Dollarland's economy is famous around the world. Some would say 'infamous'.

One of Dollarland's citizens produces and sells guns; the other traffics in drugs. Together they make a dynamic economic duo, transacting with each other, annually doubling their production, sales, and wealth, to the tune of $100,000 each in the current year.

Dollarland's vigorous economy thrives another day, until one accuses the other of theft. A fight ensues, and they each pull a gun and shoot the other dead. Immediately after, two citizens return to the country from overseas, looking for work. Finding only guns and drugs, they gather the items and pick up exactly where the first two left off, leading to their own fatal duel. Fresh citizens fill in again, doubling their wealth until death. Thus Dollarland's economic cycle repeats, producing ever-expanding growth.

Now, based on complete value, is this a healthy economy?

The value difference is quality.

If you need figures to drive home that this also has real quantitative value, here they are:
  • 100% drug use;
  • 150% crime rate (2 murders, 1 theft);
  • 100% mortality rate;
  • 0 housing;
  • 0 healthcare;
  • 0 education.
Of course, in a real society impacting others, these would have real dollar costs, including law enforcement, public housing, drug abuse treatment, healthcare (gunshot wounds), and lost production in more useful economic sectors.

While obviously extreme, this example makes graphically clear that there is more to economy than money and quantitative value. Numbers do not tell the whole story. What is missing in Dollarland's economy?

Full Value

The answer is what we've been discussing all along: value. Not mere 'utility' value, but broad human value.

Dollarland's goods and services do not represent all that society values. Economy aims at producing value, not mere money exchange. Quality matters as much as quantity; what we produce impacts our quality of life more than how much. Economic abundance ultimately has little value if it doesn't give us the life we want.

This doesn't mean Dollarland's economy has no value; it just lacks full value. Its goods and services provide some immediate value. But why does it not produce a better society?

The reason is that value is not restricted to obvious goods and immediate services, or mere labor and materials. Full value includes these, but also more. It encompasses everything we cherish in life — the full spectrum of human values. Their worth is expressed in their name: values.

We value health, vitality, and longevity in personal life. We value quality education for our children. We value social justice, order, and welfare. We value art & culture. We value appealing urban environments and sustainable resources. We value clean air, water, and land. We value peace.

Value applies to every facet of life. These are real economic commodities that we desire.

If long, healthy life were available in the market for a price, would you buy it? Many, if not most, would. Most would also buy crime-free society and a clean environment. If these are real economic commodities that we would pay good money for, why aren't they included in price insofar as products impact them?

Dollarland's economy, like ours typically does, only accounts for immediate and obvious values. These drive the economy, deciding the goods and services available. They also set relative prices between products, influencing which ones we purchase. Even when full value products are available, price motivates us to buy inferior ones because it doesn't account for their true worth. Thus, our economy promotes immediate value at the expense of greater, overall value.

And because of its power, economy blinds us. We get wrapped up in the money aspect. Dollarland's citizens want the best guns and drugs at the cheapest price, thinking that's the ideal. Chasing dollars, they never have time for their real values. They lament the 100% murder rate, but think, "What can I do about it?"

What kind of society does this create? Like Dollarland's, not the one we want. Consider the following problems we face, and the economic conditions that perpetuate them: countless social ills, which many products & services contribute to, despite the cost; failing education, which we fail to fund with the enormous cost benefit it brings; poor public health, which we perpetuate with products that ignore huge health costs & cost benefits, and fight with a medical system that profits when we're sick; crumbling infrastructure, which we ignore though that cost is more than the cost of rebuilding; energy crisis, which we fail to address despite the vast economic windfall it would bring; environmental pollution, which we never account for until taxpayers must clean it up; underdeveloped arts, while economy promotes 'starving artists'; and billions spent preparing for and waging war, which ignores the enormous economic value of peace.

Worse, because economy doesn't address these issues as it should, we dump them off on government. Then we fund the bureaucratic mess by a method that we seek to minimize: taxes! Thus, we tackle ever-growing problems with a hopefully ever-shrinking pool of money. How economically prudent is that?

If we don't want these things, why does our economy promote them? Economy is to serve society, not enslave it. Its purpose is to produce value. Value is what we desire, not economy replete with negative side effects.

Now think if the opposite were true. What if chasing dollars produced all the things we value? Envision economy solving — no, preventing — these problems, one purchase at a time. Imagine the world we can create by awarding profit to the values we want.

That is the promise of Value Economics.

Value Economics is a practical way to promote better health, education, social welfare (reduced poverty, crime, drug abuse, etc.), environment (sustainability & preservation), and even international relations. Yes, merely by exercising the power of your pocketbook, you can qualitatively improve every area of life, including promoting world peace. That is the promise — and power — of Value Economics.

Value is everything; what we value and how much. Value Economics restores quantitative and qualitative value — full value — to economy.

The above introduction has been lengthy, but it was needed to show just how central and vital value is to the economy. In doing so, it makes clear that by truly and fully accounting for value, we can wholly transform economic output, qualitatively and quantitatively.

Now it's time to learn how to use the power of value. By exercising your power in the market, you help build the society you want.

THE FREE MARKET IDEAL

Adam Smith's Wealth of Nations, despite limited fanfare, has endured over two centuries of economic thought and is still regarded as an accurate presentation of free market principles.

Smith's basic premise was that individuals, acting in their own economic 'self-interest', serve the needs of society. This oft-cited passage makes the seemingly paradoxical point:

Quote:
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."


It could not be a simpler or more beautiful system. We take care of ourselves, as is natural, and in doing so, we take care of society.

If we accept the free-market ideal (and there have been critics, which we'll discuss later), then we must assume that if economy doesn't promote all we want in society, we haven't applied the ideal truly. That is exactly the case.

Value Economics aims to fully & truly apply the free market ideal.

The mechanism by which the free market operates is profit incentive. By rewarding profit for value, economy motivates individuals to seek and produce value.

What is so powerful about profit incentive is that it can motivate people to just about anything. That can produce positive or negative results.

But if you think about it, it shouldn't be so. Everyone wants positive results, or at least, most of us do. Why then, would we create incentive for negative outcomes by paying for them?

Why would we pay to become sick? Why would we pay for social ills? Or a depleted or polluted environment?

The answer is that we don't. That is, we don't pay for them when we buy things. They come as unintended or ignored side effects.

We don't pay these negative costs in our transactions because we don't account for them. They're not part of our pricing equation, so they don't figure in. We leave out part of the total value.

How we account for value determines whether our economic output is good, bad, or mediocre.

It determines how profit incentive works. If we fail to fully account for value, we create misplaced incentives. We establish incentive for unwanted outcomes. We also miss incentives for positive ones.

Profit incentive (as it now operates) creates much good in our economy, but not all good. It partly fails because it mainly rewards immediate values: what we want and need now. We pay to satisfy immediate desires. Profit incentive currently doesn't adequately reward (or discourage) broader values that range beyond the present transaction. It neglects health, social, and environmental costs that show up later and/or impact the broader society.

In short, profit rewards some negative things and fails to reward many positives. In economic terms, it is 'inefficient'. Value Economics maximizes efficiency by better accounting for what profit does and doesn't reward.

Some may regard this as a luxury, not a necessity. They may agree that economic output would improve, but at added cost. They might suggest that we're better off accepting the negative effects in order to save the cost.

That argument though, is critically flawed in every way.

First, the truth is that we DO pay for negative economic outcomes. We pay in cold, hard cash.

We pay for negative health effects through healthcare costs and lost work production. We pay for social ills through costs of crime & justice, insurance, and social programs. We pay for environmental impact through waste disposal costs, toxic cleanups, more healthcare, and resource hikes. We pay these costs elsewhere in the economy, often through taxes. We pay down the road or we pay a different piper, but we pay.

Since we pay the costs anyway, why not account for them up front and eliminate the problem? By ignoring them, we not only pay the dollar cost, but also we suffer the problem. We pay twice.

Plus, the financial burden is more. It costs a lot more to clean up a mess — whether it's health, crime, or the environment — than to prevent it in the first place. As you'll see later, these costs are enormous. Preventing these ills comes at cost savings, not added cost.

Far from being a luxury, full accounting is an economic necessity. It is our current partial accounting that costs more. These real dollar costs drain the economy. We can't afford them.

We're not done yet. We pay yet a bigger cost.

We pay the untold cost of missed opportunities for innovative solutions by not fully rewarding them in the marketplace. Instead, we discourage solutions because immediate costs may seem higher, though long-term cost is lower.

How many health & energy solutions have we missed because profit incentive is not high enough? How many environmental solutions remain unfound due to lacking profit incentive? These costs are crippling not just to economy, but to our quality of life.

By accounting for costs & cost benefits up front, we encourage solutions through profit incentive. We save both suffering and money. We can use that money to produce other things. We also enjoy the value and benefit of real economic solutions.

Is It Broke...?

Some may go even beyond the luxury vs. necessity debate and take a stronger stand. They might argue, "If it ain't broke, don't fix it." But is our economy broken?

We can answer this two ways: in practice and in principle.

In practice, let's look at results. These are clearly mixed. On the one hand, our free market has afforded us great material progress and comfort, and improved our standard of living. On the other, it has delivered inadequate healthcare, contributed to social problems, left a wake of pollution, depleted our resources, and brought profit to war; all with high taxes, huge deficits, and poor distribution of wealth. Did we mention financial meltdowns?

Even our material comfort has its downside. Our economy promotes a wasteful, ad-crazed, fad-obsessed, mass-consumption society, where 'disposable' means value and today's 'new' is tomorrow's trash. Creature comforts are over-sized and super-sized while companies down-size and the resources to fuel it all dwindle to zero. We sell materialism at the expense of what we really value.

Only the most rosy-eyed (or blind) pragmatist would claim such an economy merits a do-not-touch seal of approval.

On principle, the verdict is the same: mixed. Notably, this directly relates to our mixed results. The principles of our free market economy are sound. This explains the positive results above. However, we have applied them neither fully nor well. Therein lies the cause of its shortcomings.

We can see this by examining the standards for grading the market set by economics itself. Economists list several factors required for free markets to work effectively. Among them are:
  • perfect competition;
  • perfect information (for both buyers & sellers); and
  • perfectly rational consumers.
We'll discuss the first and last later since we haven't introduced them, but perfect information more than makes the case now.

To work ideally, free markets require everyone to have perfect information in order to make optimal economic choices. Business requires it to determine which goods & services to sell. Consumers need it to know which is the best buy.

Currently, such information mainly focuses on immediate value. Producers total the cost values of labor & materials, etc., and weigh that against reported sales in deciding products and price. Consumers, in turn, weigh these product and price options against their immediate and obvious wants & needs.

Defenders of our current economy might argue that that constitutes (reasonably) perfect information.

But if a consumer buys a product that 10 years down the road gives him cancer, why did he buy it? Assuming he wouldn't have if he had known the health impact, the answer is obvious: imperfect information.

The consumer lacked complete information, and so made a poor economic choice.

This isn't to say that consumers will or won't buy any product with known health risks. Maybe the benefit outweighs the risk. Maybe the risk doesn't bother them. The point though, is this: consumers must have all information to best make that choice.

If we had all information, would we buy products that shorten lives, decay social values, deplete resources, and pollute vs. ones that promote longevity, strengthen society, and are environmentally green?

Again, it's not important whether you answer yes or no. What's important is that you have the information to make those choices. Our current economy does not include this information.

Some might suggest that it's the role of the media and consumer groups to inform us of such things. That's a cop-out. It relies on outside actors to provide something fundamental to economic functioning.

It also sets up conflict. We can see how by rephrasing the above question: How many times do we buy something that we know is less healthy or environmentally sound because it's cheaper than the better one?

That our current economy encourages us to buy products of inferior value is a sign that it's broken. That's not the way a free market should work.

Plus, we can't reasonably expect consumers to know and weigh all values relating to all products in the market. Therefore, if our complex economy is to reasonably convey product information, we need a better way.

Fortunately, there is one. It is not only an exacting information system, but also one fundamental to economics: accounting.

By accounting for these values in the price of goods & services, they are built in to our economic choices. Market forces work on them naturally.

Accounting adds all information on a product. It then gives us the total, down to the penny, in price. It is as near to perfect information as you can get.

So, by its own standard, our current economy falls short.

That is just one specific principle; there are others that we'll discuss later, as mentioned above. But what about broader economic principles? What about economics as a whole? What is it for, 'in principle'?

Economics is a social science. Like other social sciences — geography, history, sociology, psychology, political science, and more — we study economics to understand and improve our lives. Every science exists as a discipline to improve our lives. That is its practical aim. Without that, science is of little or no practical use.

Economics aims to better life by providing the wants and needs of society. We must attempt to address any way in which it fails to do so. Likewise, we must apply economic measures that clearly promise to improve life. This advances the science.

Science is never static; it is ever evolving. Social sciences in particular grow and change as society changes. Our current economic model suited society in the days of abundant resources and limited human impact. Today though, we live in an interconnected global community where every economic decision intimately affects everything else. Resources are less; our imprint is more.

Society has evolved. Economics must evolve with it.

The dollar impact of health, social, educational, and environmental values on our national and global economy is very real. That in itself is reason enough to address them. But even in principle, we must account for these values if we are to be true to our free market ideal.

The free market ideal says that individual buyers & sellers, acting in their self-interest, serve the interest of society.

The vast majority of us would count among those quality health & education, social welfare, habitable urban spaces, clean & sustainable environment, and peace. Yet our economic output fails to meet them effectively. It behooves us to inquire then, what we can do to improve it.

Some might say that public health, education, and environment are not the responsibility of economics. It is true that every field has its own study to guide it. But economics is responsible for those ways in which it impacts other fields.

When profit incentive drives the types of treatments & cures, their distribution, and the availability of medical resources & services, economy plays a direct role in public health. When market forces build our schools (or not), determine teacher qualifications, and produce our textbooks, economy directly impacts our quality of education. When factories pollute our planet and deplete our resources, and discarded goods fill our dumps, economics impacts environment.

If our market economy negatively impacts society in these areas, it is either irresponsible or ignorant to say that it isn't somehow broken.

Still others might suggest that economics is concerned with 'what is', not 'what should be'. These are, in fact, two distinct fields of economics, 'positive' and 'normative', respectively.

Positive economics might simply say that the economy creates problems in these areas. Normative economics would say that economy ought to create solutions, not problems.

But we cannot simply brush off these problems as normative ones. As we've seen, they are very positive. They have real dollar costs. It is not that economy ought not create problems, it's that it is inefficient, according to positive economics, when it does. In real dollars, our economy fails to produce real value. That is as positive as positive economics gets.

In this context, it is somewhat ironic that the adage in question here uses the word 'broke'. Not only is our current economy partly broken in the normative sense, but also it tends toward broke in the positive sense.

By Its Own Admission

Economics is well aware of these broad impacts for which we don't currently account. In fact, economics specifically studies them. It just doesn't do much about them.

Economics calls these broad impacts 'externalities', because they fall outside the scope of the immediate transaction.

Economics mainly determines price by immediate and obvious value. For the seller, that is the cost of labor & materials, etc. For the buyer, it is immediate need & desire. Neither buyer nor seller thinks much about environmental impact, long-term health cost, or broad social impact. Those values therefore don't figure into the item price. They are 'external' to the transaction.

It is revealing to note that Adam Smith didn't claim that all self-interest benefits society or that self-interest is always good. He merely argued against the common notion that self-interest — basically selfishness — is innately bad. Smith also realized that competing self-interest in the free market keeps individual self-interest in check, for the good of society.

However, there are times when both buyer & seller agree to a transaction in the immediate self-interest of each, that doesn't serve their long-term interests. For example, cigarettes, which impact the buyer's future health. Or over-forested lumber that dries up the seller's supply, putting him out of business down the road.

Externalities may have positive impact too. Healthy food does more than meet hunger need; it also reduces long-term healthcare. Sustainable forestry does more than build today's home; it ensures housing for every generation. That has enormous, unaccounted for value.

Or the transaction may impact the broad society. How well we educate and train our youth (through education-related transactions, such as school funding, teacher pay, textbook purchase, etc.) impacts crime and poverty, and other social welfare values. It also impacts economic productivity and the wealth of the nation.

Below are just a few examples of externalities that have very real economic costs (negative externalities) or cost benefits (positive externalities).

Negative Externalities:
    Health -
  • Tobacco & alcohol-related conditions;
  • Dietary-related illness from trans fats, processed foods, etc.;
  • Sickness & disease from pesticides & herbicides;
  • Antibiotic-resistant bacteria from medical treatment and animal farming practices;
  • Toxic product poisoning (lead paint, household chemicals);
  • Pollution-related illness;

    Social Welfare -
  • Lost productivity due to tobacco, alcohol, and dietary-related illness;
  • Alcohol-related traffic accidents;
  • Traffic congestion due to overcrowded urban spaces;
  • Media and/or entertainment-inspired violence;
  • Crime due to overcrowding & urban decay;
  • Gun-related violence;
  • Cost of war;

    Environment -
  • Global warming from fossil fuel technology;
  • Pollution & run-off from industrial farming;
  • Loss of resources due to unsustainable harvesting (deforestation, overfishing);
  • Land degradation due to mining;
  • Manufacturing pollution;
  • Waste disposal, including bio-hazardous, toxic, and nuclear.
Economists generally accept climate change as the 'mother' of all externalities, with the greatest cost.

Positive Externalities:
    Health -
  • Preventive value of healthy diet, including organics;
  • Preventive value of dietary & herbal supplements;
  • Preventive value of lifestyle habits — fitness, meditation, etc.;
  • Preventive treatments & medicine — massage, acupuncture, ayurveda, etc.;

    Social Welfare -
  • Increased productivity due to education & job training;
  • Social value of stay-at-home parenting;
  • Cultural value of arts & entertainment;
  • Social & cultural value of religious & spiritual practice;
  • Social value of mentoring, tutoring, and outreach programs;
  • Cultural value of youth & other social groups;
  • Inspirational value of books, media, and entertainment;
  • Economic value of law & order;
  • Counseling programs for various ills;
  • Economic value of peace;

    Environment -
  • Renewable, clean, and/or alternative energy technology;
  • Pollution prevention & control practices;
  • Energy conservation practices;
  • Green building & other materials;
  • Sustainable resource management;
  • Sustainable farming practices;
  • Planting of trees & other greenery;
  • Habitat restoration;
  • Biodegradable product use;
  • Recycling & efficient waste disposal;
  • Conversion of waste to fuel & other uses.
Some of the above externalities are clear and costly, while others are less so. They are not meant as definitive costs to account for. Rather, they give an idea of the many values to consider. The dollar amounts are often significant.

The very existence and study of externalities by economics amounts to self-admission that our current system has flaws. And the scale and range of externalities shows the magnitude of the problem.

Why do we not account for externalities? One reason is that they seem abstract. What is the monetary value of health, social welfare, clean environment, and peace? Yet the costs of these are very real. Healthcare, crime, substance abuse, environmental cleanup, lost productivity, and war all take exacting tolls on our economy. Reams of research studies show real dollar costs for these things. And they are not trivial.

Another reason is that the values are often separated from related transactions in time. The cost of war and re-building, while very concrete, may come long after the making and selling of bombs. The same is true for environmental clean-up of toxic products. Still, regardless of how far removed such values are, their presence cannot be denied. And their cost is real. If you buy a hundred year bond, or a house with a 30-year mortgage, no one says, "That was so long ago, forget about the money."

More to the point, modern research is sophisticated enough to assign dollar figures to such values. Plentiful studies identify the direct and indirect costs of crime, disease, pollution, war, and more. We know major causes and contributing factors to these. We also know costs of corresponding solutions, including education and job training, health care, urban renewal, and environmental fixes. We even apportion costs among the population to identify annual per capita rates. Computer models can today identify the health care cost per pack of cigarettes for an individual smoker, based on their likelihood of developing cancer and other conditions, depending on number of packs smoked per day. We continually refine this study, and given attention, we can achieve far more detailed and precise results.

We don't just know costs; we know cost benefits. We know the cost savings of health regimens like diet, exercise, meditation, preventive care. We know how much pollution is saved by alternative fuels. We have good estimates of the savings of sustainable resource management.

In short, the dollar value of human values is remarkably clear today. It is certainly clear enough to begin to account for them, even if not exact. And it is clearly more accurate than not accounting for them at all.

From a strict economic perspective, our current system amounts to deceptive accounting practice. Failing to account for real costs and cost-savings in daily economic exchange distorts price & profit. Some goods and services then sell below true market value, and others above. Still others never make it to market due to lost profitability. This has disastrous consequences for a free market economy, not in terms of statistics, but in terms of output quality. Quantity may be high, but quality — what we as society value — is low. We create Dollarland.

Economics says that goods with negative externalities are over-produced relative to their true market value; goods with positive externalities are under-produced. In simple language, that means we have more junk products, and fewer good ones.

Value economics removes these market distortions by accounting for the costs & cost-benefits of externalities up front. This creates true market pricing and true profit incentive. This in turn shifts production and demand for goods in the direction of true value.

Economists would say this changes the aggregate 'Production Possibility Frontier', the range of goods & services that society can produce with available resources. The rest of us would simply say we produce better products and thereby build a better society.

What's Broke, What's Not

Let's be clear that our economy is not broken in the true sense. Its foundation on the free market ideal is strong, stable, and permanent. What is off is how we apply that ideal. We don't do full accounting. That is why our public health, social welfare, and environment have problems we've not accounted for. In that sense — and that sense alone — our current economy is broken.

Ultimately, we must move beyond the paradigm of broken & fixed all together, because economics is innately an inexact science. While that may seem to discourage so-called fixes, it instead does the opposite. Because economics is innately inexact, it behooves us to improve it as best we can. The many fiscal and monetary policies of today have that very aim.

Economy's fuzziness means that we can't accept failings on the excuse that it's an 'exact' science. If it were physics and the universe was failing, we would have to accept our fate because it's based on immutable laws of nature, hard science. There'd be nothing we could (or should) do about it. But because economics is not absolute, there is no case for leaving an inefficient system as is.

Fortunately, we don't have to change the system. We need only make it work as designed. Value Economics doesn't so much fix the economy as it does give it a good cleaning, overhaul, and tune-up. Then, like a sputtering car fresh from the garage, our economy will 'run like new'.

Our economy has achieved great things; it has also made quite a mess. Ironically, we clean up this mess the same way we created it: with economic solutions. Economy can be the solution, not the problem, if we only give it a chance.

How?

To paraphrase a line from the movie Field of Dreams, make it profitable and solutions will come. Its corollary also holds: make problems unprofitable and they will go away.

That is the promise of Value Economics.

The Fix

Externality costs are real and must be accounted for for our free market to work as it should. Value Economics aims to account for these externalities. By making all value internal to the equation, we determine the true market price and create true profit incentive. That brings the best products to market.

The beauty of Value Economics is that it addresses externalities at the time of transaction — as the free market should — rather than after the fact, through remedies. Thus, Value Economics eliminates the need for remedies by eliminating problems at their source.

We don't create health, social, and environmental ills, so we needn't remedy them. Instead, free market incentive drives real product solutions. At the very least, in cases where innovative goods and services are still in development, we pay the cost of externalities up front, so we're not blind-sided down the road.

Value Economics brings external values to our attention at point-of-purchase, to be considered along with immediate value. We then make the best overall economic choice.

The mechanism by which Value Economics does this exactly suits our free market system.

Value Economics informs us of true value at the time of purchase in a direct, yet unspoken way: through price. Rather than moralizing about what we should or shouldn't buy (or worse, legislating it), Value Economics simply totals up the costs & cost benefits — ALL of them — and lets buyer & seller decide in the free market. Everyone is free to act in their self-interest, but the full impact of that self-interest is accounted for.

The wisdom of this approach reveals itself when we compare Value Economics with the way we currently deal with externalities. To introduce this, let's return to Dollarland.

A Tale of Two Economies
~ Part II ~

If you thought Dollarland had problems before, it's got double trouble now.

After several fatal cycles of economic 'growth', two government leaders return from overseas diplomacy and discover the two latest market players plying their trades. The feds represent Dollarland's two political parties, conservative and liberal.

Seeing the goods being sold and pile of bodies, they each campaign to clean up the country. (Naturally, they must campaign before they actually do anything. Never mind that the problem grows worse.) They each craft their government response.

The liberal wants to nationalize the economy and take over business. The conservative vows to 'stay out of the market' and let it resolve itself.

Our two wheeler-dealers like the conservative platform and elect him to office. The bodies pile up and society decays further. By the next election cycle, even the dealers fear the hands-off approach, and so elect the liberal. After a long maze of bureaucracy, government swoops in and our liberal owns the business. There's just one problem; it's not his job to run business and he doesn't know how. He ends gun & drug running but can't produce anything in its place. Dollarland's economy goes into a tailspin.

The next election cycle, the two politicos draw from different elements of their party platforms. The right-wing hard-liner clamors to throw the latest two bums in jail while the bleeding-heart liberal pleads for rehabilitation and social programs to help the disadvantaged men.

Our miscreants like the liberal approach. By the end of his term, Dollarland has two lazy citizens, fat on welfare, contributing nothing to the economy. At this point, even they doubt the value of hand-outs and think they need some discipline. So they next elect the conservative, and agree to jail. Their incarceration costs the nation $50,000 each, per year. Meanwhile, they produce nothing for the economy. At the end of their jail time, the two emerge angry, bitter, and jaded. They return to their old ways fueled with new vengeance.

The lawmakers wise up — just a bit — and try a fiscal approach. The right pledges to deregulate and slash taxes to stimulate the economy. The left promises to tax, regulate, and rein in big business. The dealers prefer the conservative stimulus and elect the 'pro-business' right. But this only emboldens the two and ravages the environment. Drugs grow on public land and toxic weaponry waste fills the streams. Facing compromised resources, the ex-cons elect the liberal in the next election. Gun & drug laws pass, miring business in bureaucracy. Taxes cut into profits. Renegade business is cut back, but production plummets. The output figures aren't pretty.

Our politicians are at their wits end and the nation is in crisis.

Just then, the Dollarland economist paddles ashore in a small rowboat, returning after consulting for others abroad. His dinky boat belies the low status of Dollarland economists.

Having exhausted all other options, the politicos seek out their economic advisor. They brief him. "Dollarland is facing a social crisis: crime, drug abuse, and gun ownership," laments the leftist. "Loss of production, loss of wealth, and a welfare state," retorts the rightist. "Greedy profit-taking and environmental decay," launches the liberal. "Stifling taxes and endless red-tape," counters the conservative.

"We demand to know why!!!" they bellow in unison.

The economist calmly looks at the drug dealer, then the gun dealer, then back at the politicians. He replies in an even tone:

"It's the economy, stupid."

So they tell the economic advisor to do whatever he sees fit.

First he strikes all heavy-handed laws from the books. He removes all manipulative economic regulations. He cancels all welfare programs and hand-outs. He drops taxes. He guarantees private ownership and restores a true free market. Then he approaches Dollarland’s two dealer outlaws and asks them what they want.

"Drugs and guns," the scoundrels laugh, scornfully.

"Fine, you can have that," the economist replies, "It's a free country. What else do you want?"

The two eye each other suspiciously. Each pulls the economist aside and whispers, "He wants to kill me."

The economist addresses them, "So you both want to live." They shrug, and nod. Then the economist asks, "How much is your life worth to you?" Neither has an answer, so the economist offers, "Well, your predecessors doubled their net worth annually, until government stepped in. You're down to $25,000 each now, but I got government out, so you should start growing again. Even at a modest 5-10% annually, you're each worth a cool $1 million in about 20 years. Why don't we leave it at that?" The two grudgingly nod, not sure whether to trust the owner of the dinky dinghy.

The economist continues, "Tell you what. As Chief Economist, I also run the Central Bank. I'm willing to invest $1 million in each of you, to use as you please, provided you don't kill your buddy. So long as the other guy doesn't die by your hand, the million's yours to keep."

Now he has their interest.

"What's the catch?" demands the drug dealer.

"No catch," mellows the money man.

"What's in it for you?" asks the gunner suspiciously, hand on his weapon.

"You pay me back 5% of $1 million over 25 years. That's $50,000 per year. After 20 years, I get my $1 million back, and the last five years are profit."

"And we each get the million now?" the drug dealer probes, sniffing out any trick.

"Yep."

They eye each other up & down, then the economist. Then they wince at the rotting corpses of their predecessors all around them.

"We'll do it," they blurt.

"Then it's a deal," agrees the economist. He starts for the bank, then turns. "....By the way, anything else you want?"

"A decent meal would be nice," begs the gun trader.

The economist looks to the drug dealer. "Can you do that?"

"Well, I do have crop experience," he snorts, "and I've been known to whip up some grub." He turns to his former partner in crime. "I'll supply the food if you put a roof over our heads."

Not to be outdone, the gun maker boasts, "That's nothin' compared to crafting fine firearms. You got a deal."

"Great," says the economist. "Why don't you pay him $10,000 for a year's supply of food, and he'll pay $10,000 for the shelter.

They all get busy, and after a few months, the economist returns. There are crops in the field and smoke rising from the chimneys of two mud huts. The gunner-turned-homebuilder is honing his brick making skills out front.

"Nice work," admires the economist. "Tell you what. Now that you've got some disposable income, why don't you take $100,000, buy some construction materials from that overseas tanker that just came to port, and build yourself a nice home?"

"Hmmm...a swanky bachelor pad might suit me just fine," he fancies.

The druggie-turned-farmer comes in from the field with a haul of herbs. Overhearing, he adds, "Hey, I'll buy a load too and pay you $100 grand to build me a pad of my own."

"You're on," the builder shoots back, without his gun.

"What's that you got there?" the economist asks the planter.

"I've been studying up on the medicinal power of herbs. Been growing 'em next to my crops."

The builder perks up. "You got something for my aching back? This construction work's killing me. And my ulcer's been acting up since our fightin' days. And my feet...."

"Why don't you give him a lifetime of healthcare for $100 grand?" suggests the economist to the budding herbalist.

Just then, the two feds arrive, hoping to score political points for all the positive change in the land. Overhearing, they want in on the action. "I can use a new house too," the liberal lays in.

"I've got gout," grumbles the conservative. Then an idea strikes him. "Hey, our foreign trade partner's in the market for grain and tea. Sure would help our trade balance."

"Any market for pre-fab housing units?" asks the builder?

"Hmm...a big storm just knocked out a hundred units south of the border. I'll look into it. You can do some good," lauds the liberal.

So they all do their business and a year later the homes are ready. They move in.

"Hey, not bad," the now certified health provider praises. "I like the fireplace."

"Check out the sky-lit loft," his new builder neighbor brags.

They sink into a couple of lounges on the deck and sip some drinks. "You know...I could get used to this," the herbalist gushes.

"Think I'll get married and settle down," dreams the homebuilder. "I hear two single women just got back from overseas."

"Guess I better plant more crops if we've got families to feed," his buddy replies, putting his farmer hat back on.

"Yeah, and I ought to start on a school and church," the expanding builder adds.

The economist arrives and finds them on the deck. "Wow, nice digs, guys. You wear your wealth well."

"Hey, come up here and join us for a drink, you old money dog!" barks the proud homebuilder.

"Sure," he replies, economically. "By the way, what do you fine gents want me to do with all these guns and drugs?"

They look at each other.

"Burn them," comes the tandem reply, "They bring down the property value."

Red

While clearly fanciful like the first part, this epilogue shows the power of economy to better society simply by accounting for external values. These values represent what we want, and therefore have real monetary value. By awarding value to what we want, economic output creates it.

Attaching profit to human values generates incentive to produce them. This profit-incentive inspires investment, the free-market catalyst for change. In this way, Value Economics uses profit motive to improve health, social welfare, and the environment.

Given the opportunity — and economic incentive — most people will make positive economic choices. Certainly, society as a whole will. And they will pull the rest of society along with them. Value Economics inspires an innovative mind-set in society. Because profit is maximum for products of genuine value, every business seeks to produce them. First, a few bright innovators develop new solutions, then others follow, building on that success. This snowball effect completely transforms society.

Free Market Value
Trumps Market Manipulation

Dollarland's initial response is exactly like our current one: bring in government. Because the economy isn't serving the full & best interest of society, we must bring in that bureaucratic servant of the public interest, government.

This clearly shows that government intervention is more a necessary evil than a real solution. We allow government in because that is better than crime, pollution, and public health crises. But it strongly suggests that if there is a better way, we surely should do it.

Government can never and will never solve the problems of externalities. There are several reasons why:
  • it is an outside remedy rather than inside solution;
  • it is a temporary band-aid rather than permanent cure;
  • it acts after the fact rather than preventively;
  • it manipulates rather than trusts in the market;
  • it is bureaucratic, facing an efficient market;
  • it relies on unpopular & insufficient funding (taxes);
  • it (typically) penalizes negative externalities without rewarding positive ones, slowing growth rather than speeding progress;
  • it combats the economy, depleting resources on both sides in an invariably losing battle.
As powerful as government is, it pales in comparison to the broad economy — in every way — as an agent for change in social welfare. No matter how vigorously government pursues objectives, if economic forces work against it, the plan fails.

Government has different strategies for dealing with externalities, depending on whether they are positive or negative. All are flawed.

Legislators address negative externalities mainly through regulation and taxation. Government imposes legal limits to curtail negative impact, and may fine or tax business to further contain the problem. The main flaw here is that this cuts production while providing no incentive for solutions.

Our current economy, which rewards only immediate value, does not do enough to motivate real economic solutions. Two examples show why this is so. In the case of social welfare, business is not rewarded for the positive impact its services might provide. Thus job training, youth groups, counseling services, etc., all of which have positive social value, are under-provided because there is now little profit in it. A different factor slows innovation in fields like medical and energy technology. Here, research & development costs for new solutions can be enormous, discouraging business from pursuing them due to unsure reward.

The government approach does nothing to remedy this. It only penalizes negative impact. That merely curbs production. Positive incentive is needed to shift production to innovative solutions.

Beyond this, government monitoring and enforcement tends to be costly and bureaucratic. It is not the most economically efficient approach.

As a last resort, government calls for 'corporate responsibility' to encourage the best products and business practices. It asks companies to invest in green technology while giving little incentive to do so. Likewise, government encourages consumer responsibility. It urges citizens to follow agency guidelines for healthy diet as a way to contain health costs. It encourages purchase of green products, even though they may cost more.

This method hardly merits response. While the calls are laudable and make good political sound bites, they are wholly ineffective in bringing about substantive change. The best of intentions fail in the face of economic forces arrayed against them.

To address positive externalities, government uses different tools. These are typically tax breaks, grants, subsidies, entitlements, and provisions. Unfortunately, they are all flawed too.

Tax breaks merely amount to giving back what government first took. That in itself is inefficient. Beyond that though, tax breaks are seldom equal to the real dollar value of the positive impact. They therefore do not provide enough incentive for the act. There is a reason tax solutions are rarely enough. Since we always seek to lower them, tax funds are always lacking.

Grants, subsidies, entitlements, and provisions suffer the same shortage problem, since they are funded by taxes. They are also not awarded strictly on economic merit, and therefore may not even have positive impact.

For example, farm subsidies for not growing crops, or for growing certain crops and not others, are questionable economically. Experience with welfare entitlements shows that these often do little, if anything, to improve actual welfare. Government giveaways always run the risk of encouraging idleness. In economic terms, that means zero production.

The last area is government provision. This is where government provides a good or service that the economy doesn't provide itself. Two good examples of this are education and roads. As mentioned, these are chronically underfunded because we do so with taxes. More than that though, provisions are especially underfunded relative to their value. They are called 'provisions' because of their clear need (as opposed to more charitable 'entitlements'). Thus, the quality of these provisions isn't nearly what it should be. This is especially true with education, as we'll see later.

Ironically, the one exception to this is defense spending. This government provision never seems to lack funding. On the one hand it is understandable, since defense is a fundamental need. But any realistic economic view of the matter shows that the real dollar value of peace so vastly outweighs that of mere defense, that large military spending represents a gross mismanagement of society's wealth.

This is why defense spending has such a poor record of maintaining peace. Government monetizes all of the costs of war, but accounts not a penny for the value of peace.

What's more, a cold hard look reveals that negative externalities resulting from our current economy — namely depleted natural resources, but also violent social tendencies — greatly contribute to making the world such a combative and dangerous place.

This points to another problem with the governmental approach: it is fragmented & narrow, rather than comprehensive & holistic.

Besides government, our current economy relies on other inefficient, insufficient, and/or costly ways to address externalities.

The main alternative for negative externalities is the tort system. In court, parties harmed by economic activities can sue those responsible for. Common examples are product safety lawsuits and the well known class action suits against tobacco companies.

This approach has many shortcomings:
  • only compensates for the problem; doesn't prevent it;
  • does little to curtail negative economic activity;
  • exhausting & time-consuming legal battles;
  • rewards address damage only to plaintiff(s) and may not account for total economic impact;
  • expensive legal fees soak up much of the reward;
  • often addresses only isolated incidents (e.g. medical malpractice), rather than systemic problems;
  • only addresses a small percentage of all negative externalities.
For positive externalities, two of the main non-government handlers are charity and philanthropy. These, while highly laudable, have their own shortcomings. Like government, they typically lack the funds to satisfy the economic need. Also, fund dispersal is determined by charitable boards, often with specific missions, rather than optimal economic need.

Perhaps worst of all, this system reduces the businesses & organizations that have this positive impact, particularly social & environmental groups, to being beggars & welfare recipients. Because our economy doesn't reward them for the real dollar value they create, they cannot profit, and therefore must instead rely on charity funding.

But there is a more important economic impact. Because these groups cannot profit, there is no economic incentive for them to exist! Clearly, that is no way to encourage such valuable groups.

Not accounting for positive externalities means that the economy will under-produce them. There is no profit in social & environmental programs (that is why these groups are typically 'non-profit'), so few pursue them. The shortage of groups means we don't fully address these values. Social & environmental ills result. Our charity system does nothing to reduce this economic shortfall.

The best of our current approaches is, not surprisingly, the one that follows free market principles: investment. We rely on investment to fund research & development of new, positive economic solutions. So-called 'venture capital' is especially tapped for far-reaching and highly innovative solutions.

Unfortunately, our current investment model too suffers from the same major flaw. That flaw is responsible for ALL shortage of investment funds.

The flaw is what we've been saying all along: that our economy doesn't account for all of the dollar reward of positive economic activities.

The impact of that flaw is as devastating as it is simple to understand...and remedy.

Investment funds approach, but never surpass, the expected return on investment. If we expect a potential product to return $1 million dollars in profit, total investment in developing that product will not exceed $1 million. If it does, investors lose money.

Therefore, if we don't reward business for all positive product value, it fails to attract the investment it deserves. If the above product brings $100 million in cost savings to the environment, it warrants investment of $50-75 million or more. If we fail to account for that, investment lacks and production stalls. We're left with $100 million in environmental damage that we pay for through health costs, resource depletion, reduced harvests, lost productivity, and/or direct cleanup.

We pay the $100 million either way, through band-aid remedies like we do today, or real investment solutions that prevent the problem and improve our quality of life, AND turn a profit.

The solution to this fatal flaw is simple: account for positive externalities. That attracts investment worthy of the product's true value. Or in practical terms, it attracts the investment needed to bring the product to market.

Value Economics offers this solution.

This one feature will bring a tidal wave of new, innovative products to market. It has special implication for solving our energy crisis, as we'll see later.

Just as a preview, consider this: clean, renewable energy has virtually unlimited economic benefit, yet we "can't afford" to invest in it. Something is wrong with this picture.

Against this muddled view, Value Economics offers clear solutions.

Value Economics greatly reduces or eliminates the need for government intervention, as well as other current flawed approaches. Whereas these methods aim to succeed in the face of market forces, Value Economics uses the free market to achieve its aim. Rather than fighting the system, it empowers the system to work as it should.

Our current approach to externalities is, ironically, external. We treat them from outside the economy. We bring in government, court, charity, and philanthropy to fix what the economy breaks. Value Economics empowers the economy to solve its own problems from within. The dollar value of externalities is built in to the system. Value Economics accounts for everything internally; externalities cease to exist.

Value Economics doesn't rely on the good intentions of buyers & sellers, or of government & charity. Rather, it relies on the good power of money to account for total value.

Economic Justice
vs. Economic Efficiency

The problems posed by economic externalities, and the solutions promised by their remedies, point to a fundamental economic issue. That is the distinction between economic efficiency and economic justice.

Externalities create problems of both economic efficiency and justice. If a $100 product brings $100 worth of value, yet creates $50 worth of problems, it is both inefficient and unfair (to those negatively impacted). Likewise, solutions and remedies for externalities bring (or at least aim to bring) both efficiency and justice. They make the economy fair and make it work better.

Economic justice and efficiency go hand in hand, but there is an important distinction: the cost of justice. We'll explain that in a moment, but first we must remove some apprehension and euphoria over economic justice.

Some economists (typically free market 'purists'), and firms, may be leery of talk of economic justice. It hints of normative economics, discussed earlier, where we abandon free market ideals for what 'should be'.

Consumers, on the other hand, may like the ring of economic justice. They envision finally getting their just reward after ages of exploitation by 'the system'.

Neither of these views are what we mean by economic justice. Here, we mean justice in the purely economic sense: receive a dollar value for a dollar paid. That is economically fair and just. It is also perfectly efficient.

Economic justice, rather than subverting the free market ideal, upholds it. The entire free market is built on the idea of open and fair trade between equal partners. That ensures a fair deal for both. It also ensures efficiency.

Economic efficiency and justice then, in theory, are exactly equivalent. When every transaction is true & fair (just), economy is perfectly efficient. It produces goods & services of optimal value.

But there's a catch when we bring them off the theoretical blackboard and into the practical market.

To bring both economic efficiency and justice to market demands a full accounting of value. We must account for every iota of value to ensure true, fair, and efficient pricing. We must account for all externalities. Therein lies the difficulty.

It is not (in theory anyway) an insurmountable difficulty, but it comes at a cost. That cost is the expense — in time, effort, and real dollars — of determining full and exact value. This expenditure is needed to investigate and calculate the value. We can call that the cost of economic justice. It comes at the expense of economic efficiency.

We saw above how the courts sometimes remedy negative externalities pertaining to health and environment. For example, a court may award a $1 million settlement to compensate for health damages. That may serve economic justice, but if court costs eat up half of that, it is economically inefficient. It therefore fails to result in the positive economic impact that it should.

This cost occurs with 'outside' solutions to the problem of externalities. We bring in the courts (or government) to solve an economic problem, and that incurs extra cost. But the cost of justice applies even to internal economic solutions. That is evident when we apply what may currently be the lone true free market solution to externalities.

Before we describe it, we should just mention that the existence of such a method itself is further proof that externalities are real, and that they pose problems in our current economy. Economists take them seriously and attempt to address them. So seriously, in fact, that this particular solution partly earned its developer the 1991 Nobel Prize in Economics.

The method applies the Coase Theorem, developed by British economist Ronald Coase. Coase asserts that true market value (economic efficiency & justice) can be restored by allowing all impacted parties to bargain for fair compensation of the externality. For example, a cigarette smoker could bargain with a tobacco company to compensate for healthcare costs.

Coase's idea works in theory, but unfortunately it is impractical to apply due to the cost of bringing justice. Coase himself acknowledged that this often precludes bargaining. As in our earlier courtroom example, costs may eat up the remedy, even with this 'inside' solution. For example, experts may need to be hired to determine the exact impact, good or bad.

The problem multiplies when applied to the broad economy. There are innumerable such transactions affecting multitudes of buyers and sellers. The time, energy, and expense of addressing the impact of each sale would consume our resources. This clearly doesn't result in economic efficiency.

Thus paradoxically, economic justice and efficiency, which are equivalent in theory, may be mutually exclusive in practice. For economic justice to be absolute, all value must be accounted for without exception. In practice, due to the costs of determining absolutely all value, economic justice is typically inefficient.

We might say that Coase's theorem seeks economic justice first and efficiency second. It mainly aims to ensure that every party involved gets a fair economic deal. It does this by applying itself to specific transactions; for example, those between a smoker and tobacco company.

Value Economics accounts for externalities differently. It focuses on impact to the total economy.

Value Economics aims for economic efficiency first and justice second. It achieves this by concerning itself more with aggregate impact than individual ones.

Value Economics accounts for aggregate costs & cost benefits to the broad economy, not to individual consumers. For example, it accounts for aggregate health cost or benefit to the nation, not impact on one consumer. Or it tallies aggregate environmental impact, not the cost or benefit to individual residents or land owners.

Value Economics does apply to specific transactions, like the Coase Theorem. However, there is a clear distinction. Coase applies to each case separately, requiring cost determination for each. For example, every smoker bargains separately with their tobacco company for fair compensation. Cost impact must be determined in each case. That is inefficient and prohibitive.

Value Economics works different. It makes a single determination of aggregate impact, then simply divides that up equally amongst sales. For example, if research shows smoking to have a $100 million annual health cost to the nation, and 100 million packs of cigarettes are sold each year, then $1 is added to the cost of each pack.

This keeps the 'cost of justice' down, making it economically efficient.

By accounting for and applying these values on an economy-wide scale, the cost of calculating the values is spread throughout the economy, making per-transaction cost insignificant. We calculate the value once, then apply it to all like transactions. The cost is further spread over time since it is repeatable for future transactions.

Thus Value Economics seeks to bring both economic justice & efficiency, but favors efficiency. Because both are impossible to attain together in the real world, Value Economics 'settles' for economic efficiency.

Value Economics does not seek to address every minute externality. While its stated aim is to account for all value, we must view that in the context of practical application. If, for particular transactions, the cost of determining the remedy exceeds the remedy itself, it doesn't add value to the economy and Value Economics ignores it.

Value Economics doesn't aim to create absolute economic justice. That is a laudable, but impossible goal, even without cost inefficiency. Rather, Value Economics accounts for those inequities where the value of justice clearly outweighs the cost of bringing it. That restores economic efficiency to the broad economy, as best we can do.

This is a strength of Value Economics, not a weakness. Value Economics seeks to solve the broad health, social, and environmental problems caused by our current lax accounting. While it may be true that every tiny amount contributes to that, on a practical level, it is the major accounting omissions that mainly harm society. This strategy allows Value Economics to achieve its goal at minimal effort & expense, and without micro-managing itself to death.

Most important is the effect of this efficiency on the economy. It's not just that Value Economics is an efficient way to promote economic justice, and that we should adopt it to that end. No, economic efficiency has a far greater purpose that serves the free market ideal.

Earlier we cleared up misconceptions about economic justice. Now we'll dispel a costly myth about economic efficiency. In doing so, we'll show its prime value.

Economic efficiency commonly means that society produces the most it can, given its resources. This sounds straightforward, but covers up a potential Dollarland syndrome. Rather than rehashing that far-fetched tale, we'll draw a more realistic lesson from our current economy. We'll stick with the smoking example that we've been using, since it's familiar to all.

In our new Dollarland, there are two companies. One sells cigarettes, the other provides healthcare. They use all resources of the nation efficiently, and thus provide the maximum quantity of cigarettes and healthcare possible. In common economic terms, the new Dollarland runs with maximum efficiency.

But does it produce all it can? If 50% of the healthcare costs go toward treating the ill effects of smoking, that takes those resources away from other production. We easily see that if we change tobacco growing to say, wheat. To keep things simple, we'll assume that we produce the same dollar value of wheat as we did tobacco, so efficiency isn't changed. But what of the impact on healthcare? We now require 50% less, so those resources can go to homes, schools, more products, or any other economic need. That is essentially free production.

That means that the tobacco economy, while it seemed efficient, was grossly inefficient. Every dollar we spend on economic fixes is another dollar we could spend on what we really value. This is the price we pay for not accounting for value up front. It is the cost of economic inefficiency.

Since our current definition of economic efficiency is incomplete at best, and downright false at worst, we need a new one.

True economic efficiency is as simple as it is basic. It is found in that fundamental economic measure: price.

Price is perfectly efficient when it accounts for full value.

Economists like exact formulas, so we must add one thing. Skip the next several paragraphs if details don't matter to you.

We saw above that there are trade-offs between economic justice and efficiency due to the cost of justice. If we 'buy' more justice, we have less efficiency. If we buy optimal efficiency, we compromise justice.

Therefore, we should add to our definition that:

Price remains efficient where the cost of accounting for value is less than the value added (or subtracted).

To return to our example of $100 million health cost added to 100 million cigarette packs at $1 per pack, the dollar change would be efficient so long as the research to prove it costs less than $100 million. If the research is less costly than the correction, it is efficient to apply it.

We can further refine it thus: the final value correction should equal the initial amount less the 'cost of justice'. In our example, if the cost to research the externality equals $25 million, then the final value correction should be 75 cents per pack, not $1. However, we must allow for already absorbed cost of justice:

If the research already exists, or its cost is justified by its value elsewhere in the economy, there is no added expense and so no cost of justice. For example, if firms are willing to the free market price of the research for their own marketing or product development, etc., then the research adds no cost to the economy.

The important point here is not the details though. Rather, it is the practical impact of this price efficiency on the market.

When we account for externalities in the price, it creates profit incentive for goods & services of genuine value. Positive externalities save money; accounting for that brings price down. Negative externalities cost money; accounting for that raises price. That encourages sales for good products and discourages negative product sales. Higher sales mean higher profits for the companies that make them. That encourages them to make more. At the same time, low sales discourage low value production.

This is how real economic efficiency transforms Dollarland into a true value economy, easily and without intervention.

Let's again use smoking as an example to show this. On the one side, the dollar added to each pack of cigarettes discourages smoking. But there is a flip side too. There is the positive value of products that help quit smoking.

Let's apply this to one method to demonstrate. Say a nicotine patch costs $25 per week for 10 weeks of treatment. That totals $250. Say it also has a 10% success rate. And let's say that the health cost for the average smoker comes to $25,000 over the course of a lifetime. That means that a quit-smoking product with a 10% success rate saves the economy $2,500 each time the method is tried ($25,000 saving x 10% success rate).

As you can see, the true value is 10 times more than the cost of the product itself! That means it is more economically efficient to pay smokers up to $2,500 to try the patch for 10 weeks than to charge them $250.

If nicotine patch producers were paid for the positive value of their product, this would be the real economic result.

Not only does this dramatically encourage smokers to quit, but also it changes the entire profit dynamic for producers. Now, there are huge profits to be made for products to stop smoking, compared to diminished profits for cigarettes. Business resources shift to anti-smoking products. Investment dollars pour in, spurring more successful methods. In little time at all, smoking is greatly reduced, with no government intervention.

This is the real value of economic efficiency, far beyond maximal output given limited resources. Real economic efficiency empowers the economy to produce goods & services of optimal value. It maximizes not just quantitative value, but also qualitative.

In the case of our new Dollarland, real economic efficiency — where price accounts for full value — gives the tobacco company profit incentive to switch to wheat, without government having to coerce it to do so.

This points to another relation between economic efficiency and justice. Optimal efficiency, while it may compromise individual justice, results in a more important social justice. Economic efficiency delivers vastly improved results in areas like public health, education, social welfare, energy, and the environment. This is the real justice everyone wants from the economy. Each individual wants to feel as though their broad values are being met. Thus economic efficiency serves justice to each individual indirectly.

Economic efficiency is yet another way we can understand that our current economy needs restoring. While it satisfies the common definition of efficiency, it is not truly so. That explains why it fails to bring economic justice to society in the form of getting what we pay for in healthcare, education, environment, and more.

Value Economics, in delivering economic efficiency, brings this social justice.

Price Paradox

If economic efficiency and justice seem abstract, here is a more stark indicator of our wayward economy: price. A close look at our current pricing method shows that it often directly flaunts free market ideals.

We've seen that not accounting for true value in pricing distorts profit incentive, leading to under-production of quality goods and over-production of inferior goods. But the impact is often more dramatic than that. It can directly oppose the free market ideal it aims to uphold.

When we fail to account for true value, we often turn price on its head, literally. We create situations where the less a product costs in total value, the higher its price. This not only defies logic, but also it creates the exact opposite profit incentive that the market intends.

It literally leads producers to make worse products because they make more money doing so. Why add value if it lowers profit? All this because we don't reward added value.

We'll give a simple example to demonstrate shortly, but first let's dive more deeply into the irrationality of it, because this price paradox entirely undermines our free market economy.

Common sense suggests that high value products should cost more than inferior ones. Indeed, that's how we currently price things. Thus our current market encourages low quality products: they cost less.

But the cost impact of externalities shows that true value typically costs less than lesser value. That means we can — and should — price it less. That would encourage high quality products because, again, they cost less.

The common sense view is based on immediate costs. Low quality products are made of cheaper materials, and less design & planning goes into them. They cost less to make, so they sell for less. But very often, so-called cheap goods and services have hidden costs that we pay elsewhere in the economy.

Conversely, more goes into far-sighted solutions, so they typically cost more. Quality education costs more than second-rate education. But these goods and services may pay for themselves many times over in economic benefit. Well educated workers contribute far more to economic production. This makes their true cost far less.

This completely turns profit incentive upside-down, especially in cases where high value products directly compete with low value ones. Our current economy promotes inferior goods, while quality solutions go bankrupt.

The absurdity of this is crystal clear when we word the comparison between price and value two ways. First, we'll describe it the way we typically do:

The higher the value, the higher the price. The lower the value, the lower the price.

It sounds reasonable. Now let's substitute real dollar cost for value. Since money and value are related (as the statements assert), the logic should hold.

But remember that high value products have positive externalities that lower their true cost. Conversely, low value products have negative externalities that raise their true cost. So our new statements read:

The lower the cost, the higher the price. The higher the cost, the lower the price.

It is so unfathomable that you think it must be a trick. Yet this is the way our current economy works.

Let's use an example to show how value goes up in smoke.

We'll compare two coal power plants. One has air filters on its smoke stacks, the other does not. Naturally, due to the added filter cost, electricity from that plant costs more because it costs more to produce. We also 'value' it more for its cleaner output.

This fits our first statement: the higher the value, the higher the price.

Let's attach dollar amounts to these values. Say that the cost of producing unfiltered power is $100 per megawatt hour (MWh), while filtered power costs $110. Both plants generate 1 million MWh per year. That totals $100 & $110 million in annual costs, respectively. They price their products accordingly, with the clean energy costing more.

These prices account for immediate value, like our current economy does. Now let's account for full value. To do that, we'll add externalities, the cost impact of pollution in terms of public health & related lost productivity, reduced crop yields, direct clean-up, etc.

Say that pollution from the unfiltered plant costs $25 million each year, and that filtering cuts this to $10 million. Now the price profile is very different:

Dirty power costs $125 million annually ($100M + $25M). Clean energy costs $120 million ($110M + $10M). In terms of true value, clean energy is cheaper, not more expensive, than the polluting version.

That leaves us with the price paradox: the product with the lower cost is priced higher.

The impact of this in the marketplace is clear. In our current economy, dirty power is cheap so everyone buys it. Higher sales mean more profits, encouraging companies to produce it. Our energy is accompanied by poorer health, lower productivity, and a polluted environment.

When we account for full value, it is just the opposite. Clean energy is now cheaper, so everyone buys that. Higher sales mean more profits, encouraging companies to produce clean energy. We get power without sacrificing health and productivity. Plus we get a clean environment.

Clear the smoke and you see how utterly irrational our current economy is.

This is what happens when we don't account for full value in pricing. We currently subvert the entire purpose of the free market, which is to bring the best products to market.

Value Economics accounts for all costs and cost savings in determining price. It thereby eliminates the price paradox.

Look what else it does:

In our current economy, government imposes regulations and fines on companies to reign in pollution. Environmental groups get in the fray by lobbying against the firms. Naturally, business fights these anti-pollution efforts because it hurts their profits. This sets up a perpetual conflict between business and green activists.

Why? Because we penalize business for negative externalities without rewarding them for positive ones.

Value Economics sets up price dynamics that encourage green business practices that truly add value. Rather than waging eco-corporate warfare, we create powerful green partnerships where business innovation fuels environmental savings, which return to business as profit.

Value Economics restores true pricing, which creates profit incentive that drives business in a positive direction. That delivers best production per dollar.

The Bottom Line

Remedies for externalities — whether government, courts, charity, or the Coase Theorem — are needed because externalities exist in the first place. The most efficient solution is to account for them internally, and thereby eliminate them. That generates economic output of optimal value, professional jargon for more good products, and less bad ones. That reduces and eliminates health, social, and environmental problems. That, in turn, rids us of the need for government and other outside intervention in the economy.

We began this section discussing the free market ideal. It is firmly entrenched in our economy, and rightly so; we shouldn't lightly tinker with it. So let's view our current economy in the context of that ideal to see if we really need a fix, and what that fix is.

In a free market, myriad transactions made in self-interest should benefit society. Yet we see that many transactions bring little benefit or even harm society. For the broad values we cherish most — health, education, social welfare, environment — our current economy fails us.

That clearly shows that our free market does not satisfy its own ideal.

Certainly our free market founders believed that it should serve society fully. The free market principle is sound and capable of delivering on its promise. And certainly if it did, economy would run smoothly by itself, without need of government intervention.

Intervention is unpopular, bureaucratic, tax-based, and litigious. It also typically doesn't work. Market solutions are flexible, efficient, attractive, and effective. They also shift decision-making to trained economists — where it should be — taking it out of the hands of politicians, judges, and juries untrained in economics.

For all these reasons, summarized here and detailed above, market solutions work best. And the best market solution is the market itself; no extra fix needed.

Economists today should therefore endeavor to discover why our markets don't work as intended in the free market ideal. We must ask ourselves why our economy contributes to, rather than solves, so many problems.

The answer comes back to the basic issue of value and how we account for it (or don't). Flawed accounting undermines the free market ideal. It distorts price and profit incentive. That reduces the value of economic output.

If we want true value, we must account for it. It's as simple as that.

Value Economics accounts for full value. In this way — and more (which you'll learn later) — it fulfills the free market ideal.

Let's see how.


[Value Economics continues in the post below.]

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Part II - Value Economics Defined    Posted: September 3, 2009 Reply with quote


VALUE ECONOMICS

First Principle of Value Economics

Value Economics starts from a premise with which every economist will agree:

Arrow Account for full value in the price of goods & services.

This is nothing new. Economics already aims to account for full value in pricing. It's just been neither accurate nor complete. We've left value out. This is understandable if we look at history.

In the past, especially in Adam Smith's day, this value was negligable. The world was like an open frontier. Man's impact on society, the environment, and even his long-term impact on himself (health, etc.) was small compared to the value of his economic production. Accounting for them seemed trivial. Things were also more natural then -- fewer man-made products meant less unintended side effects. The sky was our only limit.

Today we see the sky, and it's dirty. We see the impact of food & drink on health. We see how media and entertainment impact culture & society. We see the reality that our once endless resources are limited.

Also today, we're much better equipped to account for these values. Research studies in health, education, sociology, ecology, and more not only verify the impact on these values, but also indicate real dollar amounts. Computer technology makes organizing, parsing, and applying these results easier. And the Internet makes them universally available.

In the past, even if we sought full accounting, it was undoable. Today, we see the need and have the research & technology to make our free market ideal.

The first principle of Value Economics creates true profit incentive. By accounting for all costs & cost benefits, we lower the price of true quality products. We also require products with negative impact to account for these costs up front, raising their prices. This encourages sales of products with the best total value. That means profit for the companies that make them.

This is a corollary to the first principle:

Maximum profit goes to the economic outcome with the most total value.

This profit incentive induces business to invest in and develop such products & services. Entirely new businesses spring up, committed to positive product solutions. At the same time, the free market discourages negative impact products.

In this simple way, Value Economics achieves what mountains of legislation, regulation, and health, social, & environmental programs never can.

Through true profit incentive, economic output rises in value, tending toward full value.

This fulfills Adam Smith's free market ideal of self-interest that best serves society.

It also gives us a litmus test for evaluating every feature of our economic system. It is a simple way to see if we're accounting for value.

Value equates with desire. If nobody wants a thing, it has no economic value. Conversely, if everyone wants it, it's worth a fortune, regardless of any other factor. Good health, social welfare, and a livable environment all have value because we want them. We're willing to pay for them -- their costs figure into our lives. Desire defines value.

The litmus test for every aspect of economy then, is this: does it create profit incentive for what we want? If it doesn't, it is likely because we're not accounting for full value. We're not counting all the costs & cost benefits involved.

Our polluting power plant was one example of how profit incentive didn't create what we want. Here are some more:
  • health system with profit incentive only to cure illness, not prevent it;
  • education without profit incentive to educate well;
  • no profit incentive to maintain infrastructure;
  • little profit incentive to develop renewable energy;
  • no profit incentive to manage natural resources;
  • no profit incentive to preserve the environment;
  • no profit incentive to stop climate change;
  • profit incentive to wage war, but none to keep peace.
There is a common expression we use in trying to figure out why things turn out the way they do in life: "follow the money." Plain & simple, results go where the money is, for better or worse. Problems abound because profits - money - lead to them. Value Economics promises better results by shifting profits to positive economic outcomes.

Money and profits are not the problem. It is what we encourage in order to get them. Value Economics uses money and profit to create the results we want. It works because those results also happen to be the best economic value.

Thus by one simple method - accounting for full value in pricing - Value Economics transforms the entire economy.

Nothing outside is needed -- no government regulation, no court litigation. Value Economics is virtually self-sufficient. This built-in strength shows itself in a profound feature: Value Economics relies on 100% free and open markets.

Let's take a closer look at the mechanism by which it achieves this.

True Value Accounting

In Value Economics, all items sell at True Value Price -- price that accounts for full value. True Value Pricing comprises two parts:

regular market price+/-corrections for externalities

Business takes care of regular pricing, as usual. Value Economics computes the corrections. Business then combines the net correction with its regular price, giving the True Value Price.

For example, if an item normally sells for $10, but there is a value correction of $2 to account for negative externalities, the item will now cost $12. If the $2 accounts for positive externalities - cost savings - the new price is $8.

Value Economics computes the corrections using True Value Accounting. True Value Accounting, as its name suggests, restores true value to the price of goods & services. It achieves this by accounting for the real dollar costs and savings of known externalities. True Value Accounting is simply the math that quantifies the value of externalities. It computes the exact dollar amount of an externality for a given purchase. It applies these amounts using Value Savers.

Value Savers can be positive or negative, depending on whether they account for positive or negative externalities, respectively. Value Economics accounts for positive externalities using Value Added Rewards. It accounts for negative externalities through Value Lost Fees.

Value Added Rewards are paid to firms, allowing them to lower item pricing. Value Lost Fees are charged to firms, forcing them to raise item prices. Value Saver is the collective term for both.

Value Savers preserve the value currently lost to the pricing equation through externalities. An externality again, is any cost or savings external to the transaction itself. Because we currently don't account for their value, it is lost to the pricing equation. Like any real cost or savings though, we must account for it sometime. Thus we end up paying for side-effects, overruns, inefficiencies, hidden costs, and raised taxes, etc. elsewhere in the economy. These are largely externalities we didn't account for. Value Savers account for externalities now, letting us make better economic choices, so they don't come back to haunt us later. Value Savers protect value.

In most cases, we'll refer specifically to Value Added Rewards or Value Lost Fees, as appropriate. Sometimes though, we'll discuss their collective role as Value Savers.

Returning to our $10 example, in the case of positive externalities, a $2 Value Added Reward would be paid to the firm, letting them lower the price to $8. In the case of negative externalities, the firm would pay a $2 Value Lost Fee, making them raise the price to $12.

Value Savers apply to both production and consumption of the product. For example, a product may have negative externalities associated with manufacturing, but positive externalities benefiting consumers. Value Economics accounts for both, resulting in a net correction for business equal to the sum.

To illustrate, our $10 sample product may have a negative $2 pollution externality for manufacturing, but also a positive $2 healthcare reducing externality. That gives a zero net correction, so the price remains $10.

Value corrections are based on the best science available, agreed to by expert consensus. Issues in determining Value Saver amounts are discussed later. Methods for collection and disbursement of the two types of Value Savers are also explained later.

Value Savers apply to both goods & services -- all economic transactions. Everything sells at True Value Price.

True Value Pricing shifts market dynamics in an intriguing and positive way. High value products become cheaper in the marketplace, while low value items get more expensive. Typically it is the opposite, but that is only because high value products commonly cost more to make - better quality materials & labor - and so are more expensive. But with externalities, there are no extra direct costs that the seller must recoup. Externalities are indirect costs -- costs that show up later & elsewhere in the economy. Now that cost, or savings, is applied to the current purchase. So if the product saves money somewhere in the economy, you get that savings now. That lowers the price of a high value item.

Low value items work just the opposite. If a product causes added costs down the road, we must pay it now, so we know its true cost. That raises its price, discouraging purchase. (Note that 'low value items' doesn't mean currently inexpensive ones. It means items that are worth less than their current price, due to negative externalities. Only these go up in price, not any item that costs, say, under $10. In other words, it's not a loaf of bread or a quart of milk that goes up in price, it's that gas guzzling car or cancer-causing cigarette.)

All this makes for a shopper's paradise. Consumers buy the less expensive product, as usual, but this now is the best total value. Thus sales - and profits - for high value products increase. That makes business happy.

Value Savers create true profit incentive -- monetary reward for high product value.

True profit incentive has both economic & psychological effect. This results from the way that profit incentive works. It has the straightforward economic effect just discussed -- consumers buy low priced, high quality items and firms profit from that. But there is an added effect as well.

Because firms want to profit, and in order to secure future profits, they will commit themselves to developing new, high value products. This fuels an entirely new corporate mind-set, one that will unleash a flood of innovation aimed at profiting from the newly accounted for value.

At the same time, consumers will demand and clamor for more high value products, that are now more affordable than low value ones. Consumer psychology shifts as well. Together, these transform the market into a hotbed of innovative value. Everyone benefits. It is the Anti-Dollarland.

Beyond creating true profit incentive, one Value Saver - the Value Lost Fee - has the added role of funding remedies for the negative externalities for which they account. Value Lost Fees, which are collected from business, go toward fixing the negative externalities they are responsible for. They do not add an economic burden; they merely pay for existing burdens up front, so we can decide whether they're worth it when we purchase.

If a $2 Value Lost Fee is assessed to tobacco companies for each pack of cigarettes sold, that fee goes to pay cancer treatment for smokers. Thus that expense is no longer borne by the public through taxes, insurance premiums, or other means. Those who choose to buy & sell cigarettes take full responsibility for the act, and pay the costs at time of transaction. Society is not soaked with the bill down the road.

We'll emphasize here that Value Lost Fees are not 'added' costs. Nor are they taxes, fines, or any other punitive fees, just as Value Added Rewards are not subsidies, etc. In both cases, the value corrections are the actual costs or savings attributed to the manufacturing and consumption of the product, as best determined by science.

In the case of Value Lost Fees, they are not new costs because we pay them even now. We simply pay them in other ways or at other times. We may pay them through taxes, insurance premiums, higher prices on other items, or general higher prices on all items. Or we may pay them later through lost productivity, healthcare, environmental clean-up, etc.

Value Economics simply accounts for them here & now - at point of purchase - rather than elsewhere and later. It merely restores, in an ironically appropriate way, accountability to economics. Every product sells at true price, and the consumers and firms that buy & sell them take responsibility for their actions.

Neither are Value Added Rewards and Value Lost Fees arbitrary. Value Economics does not assign vague or wishful values to externalities. If real dollar impact is there, science will prove it, and thus justify accountability.

Value Added Rewards (VARs) and Value Lost Fees (VLFs) are like any other cost or cost reduction that firms account for when setting price. And like now, firms aim to account for all costs and reductions in order to determine the true price. Now they simply have more data - all data - in their pricing equation. That gives the True Value Price.

We've seen how True Value Pricing, by changing profit incentive, brings the best products to market. This greatly improves quality of life in society.

One of the remarkable features of Value Economics though, is the ease with which it achieves this.

You might think that to bring about substantial change in society, we must apply Value Economics to every last item, accounting for every detail, leaving no stone unturned. While we'll see later that it's relatively easy to implement a comprehensive system, we need not even do so.

Several factors greatly increase the speed, ease, and profitability of effecting great change in society.

First, high value solutions typically have a dual impact. They not only decrease negative externalities, but also they increase the positive. For example, health solutions not only cut treatment costs, but also they increase economic production. Healthy workers mean more vitality on the job, less sick-leave, and more output. This expands the economy.

Second, broad values, as you might expect, impact a wide range of cost-saving issues in society. This means we can achieve widespread benefit through a few key areas of life.

A perfect example is education. Raising the quality of education has numerous cost benefits. It has the basic impact of increasing productivity. It inspires genius to solve our most pressing and intractable problems. At the same time, it reduces a host of social problems, including crime, substance abuse, unemployment, and others. It also reduces healthcare costs, because better educated citizens take better care of their health.

Value Added Rewards in this one area - education - would ripple throughout society. In fact, it is hard to conceive of an education system that could possibly cost as much as the value it creates. Therefore, whatever we invest in free market education will pay for itself many times over.

Last, but by no means least, Value Economics breaks the cycle of problems so that we needn't face them again. One-time investments produce lifetime returns, and in this case lifetime refers to society, which endures for millennia. For example, developing clean renewable energy and eco-friendly products resolves environmental issues for all time.

These factors - when translated into Value Added Rewards - create more than enough profit incentive to tackle the greatest issues of our day. They also promise a real-dollar return on investment.

Though not necessarily recommended, one more point can be added. In many - if not most or even all - cases, it may be possible to achieve results using Value Added Rewards alone, without resorting to VLFs. This is because the cost savings of positive solutions are enough to create profit incentive for business, if we monetize them through VARs.

For example, the education incentives indicated above may be enough to address social issues, without needing to assess Value Lost Fees for negative impacts. Likewise, clean energy incentives may solve environmental problems without resorting to VLFs for (minor) polluters.

We'll talk more about this option later.

With these added selling points in mind, let's give some examples that show how Value Economics creates a veritable free-market utopia.

Value Economics
in Action

Before we apply Value Economics to specific items & issues, let's list a few examples of current policy toward externalities.

Common mechanisms for addressing negative externalities are excise taxes. Among the most familiar are alcohol, tobacco, firearms, and gasoline taxes. Also common are pollution taxes, or so-called 'eco-taxes'. Where legal, activities like gambling are also often taxed. Excise taxes can amount to up to half of consumer cost on an item or act.

These examples show that Value Lost Fees are not out of line with current policies toward negative externalities. VLFs simply replace them with a more complete, accurate, non-bureaucratic, non-moralistic, and economically effective mechanism. VLFs are based purely on economics.

Current responses to positive externalities are less common, but they do exist. The main mechanisms are subsidies. One emerging class of these rewards renewable energy use and other eco-friendly practices.

The problem with these is that they are typically narrowly applied and unfairly distributed. More important, they are woefully inadequate in accounting for the full economic benefit of the externality. This creates insufficient profit incentive pursue it. VARs apply throughout the economy fully and equitably, creating strong profit incentive.

One interesting example is a protection offered by regulation. Copyright and patent law ensure that authors and inventors profit from the positive impact of their ideas. This provides the incentive to innovate.

With that background, let's explore solutions promised by Value Economics.

We'll look at several major social & economic areas it will effect. For each we'll list current problems and their real dollar costs. We'll point out how we pay these costs to show that they're real, even though we don't pay them with our purchase. We'll show the inadequacies of current solutions. Then we'll show how Value Lost Fees reduce profit incentive to produce & consume these items, thereby reducing or even eliminating the problem.

Next, we'll identify current solutions that we under-produce due to lack of profit incentive. We'll explain how added profit incentive increases production, resolving the problem. Beyond that, we'll show how increased profit incentive inspires investment in innovative solutions that we can't even fathom today.

We'll even show that VLFs and/or VARs may prevent the problem all together, entirely removing the need to address it. We'll show that solving these problems may have cost saving benefits for all future generations. These further increase VARs, creating still more incentive.

Last, we'll estimate the total net savings Value Economics brings in real dollars. Equally important, we'll indicate the shift in qualitative value - the Dollarland effect - that raises our quality of life. We'll end by noting any side-benefits or other relevant points influencing value.

Sources for statistics quoted in the examples are listed at the end of this work.

As you read through the examples, you may find yourself thinking, 'That sounds great, but it's impractical to apply.' Or you might think that it's impossible to enforce, or find some other flaw. We will answer all those questions and concerns after the examples. We will also deal with criticisms that some may have. Value Economics offers ingenious - and free market based - solutions to all these issues, making it a practical, profitable, and equitable system to apply.

For now, we'll just focus on how Value Savers (VARs & VLFs) apply to different areas of society, and the economic and social - quality of life - impact they have. Keep in mind that, while they are value 'corrections', they do not, in truth, change free market prices. They restore free market pricing. By accounting for full economic value, they remove the price distortions in our current economy. Value Savers ensure True Value Pricing.


[Value Economics continues in the post below.]

Copyright 2009, Society for Sacred Sexuality - all rights reserved.
Gary Joseph
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Part III - Public Health    Posted: September 3, 2009 Reply with quote


Public Health

That our current healthcare system is in crisis is news to no one. Yet this is so despite the fact that the free market mainly drives it. Clearly, either the free market has failed or we've failed to correctly apply it. It is the latter.

Our current healthcare problems start with our inability to cure, alleviate, or even diagnose many conditions. It goes on to include drug dependencies, side effects, and creation of treatment resistant viruses and bacteria. On the patient side, it leaves lack of vitality and fitness even in the absence of specific symptoms, high incidence of obesity and other risk-factors, and public ignorance of dietary and other self-health measures. Compounding the crisis are conditions relating to environmental toxins and pollution, pesticide contamination of food and water, and substance abuse, none of which our healthcare system does much to combat.

The direct cost of these problems is our consequent healthcare bill, which has risen to crisis proportions. The U.S. spends over $2 trillion annually on healthcare ($6,700 per capita, over $25,000 for a family of four), and rising. In 2006, spending translated to over 15% of our GDP (highest in the world), compared to 8-10% for the UK, Canada, Sweden, and Japan, all of which rank higher than the U.S. on the World Health Organization Life Expectancy scale. Worse, in an economic slap in the face, none of those four have a free market healthcare system -- all have some form of socialized medicine.

Federal healthcare spending exceeds all other areas of public spending, including defense. Yet even when combined with state & local government health expenditures, it still covers less than half the national health bill. Moreover, the tab is rising faster than our ability to pay it. In 1960, healthcare spending totaled 5% of the U.S. Gross Domestic Product (GDP). In 2005, it consumed 16%. In 1960, healthcare spending represented about 3% of total government spending. Today it eats up over 25%.

Spending on Medicare, our main public health insurance, is expected to double over the next two decades, ballooning to nearly a quarter of the federal budget. Medicare has grown 1.5 times faster than the economy for the past four decades. It is projected to be insolvent by 2019, according to the most recent report by the Social Security and Medicare trustees.

The private insurance picture is no prettier. Family premiums have risen to over $12,500 for employer-shared plans, the most common type. That's up from under $6,000 a decade ago. Today's plans feature higher deductibles and a higher payment share for employees. Premium hikes routinely outstrip pay raises.

All that is just a partial diagnosis. Direct medical costs do not even disclose our full economic burden. For that, we must add lost productivity in the workplace, called indirect costs.

Indirect health costs include economic loss due to employee absenteeism, on-the-job productivity loss, contagion to other workers from sick employees, and reduced business profits due to company health costs. There is also the lost productivity due to premature death from illness.

One study pegged this cost at $1.5 trillion for a list of major conditions, nearly doubling our healthcare tab.

One group of ailments account for the lion's share of direct and indirect healthcare costs: chronic conditions. They also best illustrate the problems with our current system, and point to the solution.

Chronic disease - any condition that is recurrent or long-lasting - includes a list of familiar and costly maladies:
  • heart disease (inc. hypertension & high cholesterol precursors)
  • cancer
  • diabetes
  • obesity
  • allergies
  • asthma
  • arthritis
  • osteoporosis
  • chronic pain
  • attention & psychological disorders
In 2005, almost 50% of the population (133 million) suffered from at least one chronic condition. That number is more striking considering that nagging symptoms often go unreported. (A 1990 Census study reported a whopping 300 million conditions - more than the entire population at that time - indicating many people with multiple ailments.)

Chronic conditions account for over 75% of healthcare spending and 70% of all U.S. deaths -- over 1.7 million annually. Lost productivity resulting from these ongoing ailments can cost as much as 2-3 times that of direct treatment. In 2003, the U.S. spent over $1 trillion in work-related costs for chronic conditions.

Chronic health conditions and/or associated risk factors such as obesity, tobacco use, and low physical activity are linked with:
  • greater job impairment
  • more sick days and absenteeism
  • more workers' compensation claims
  • higher injury rate
  • higher disability rate
Costs for chronic conditions, like all health costs, are projected to balloon in the future. One estimate predicts a 42% increase by 2023, totaling $4.1 trillion in treatment and lost economic output.

All in all, direct and indirect health costs for all conditions already take a toll of $3.5 to $4 trillion dollars -- more than the entire federal budget. That comes to over $11,500 for every man, woman, and child in the United States each year.

We pay most of this massive hemorrhage of our economic lifeblood in ways we don't realize. A full 87% of medical treatment costs are indirect payments. We pay over 45 percent - $900 billion - through federal, state, and local taxes, which fund Medicaid, Medicare, and other government programs. We dole out another $850 billion (42%) for health insurance premiums and other private programs. We shoulder the remaining $250 billion through direct payments to medical providers.

Then there is the $1.5 trillion or so that we pay through lost economic output, which translates into a lower standard of living for all. If you need a dollar figure, it amounts to not getting a $5,000 bonus each year -- $20,000 for a family of four. What could you buy with that extra wealth?

Spreading the cost out through taxes, insurance, and lost productivity hides the real economic pain and masks the true extent of our healthcare crisis.

The state of our healthcare system was accurately summed up in a Washington Post report titled, "U.S. 'Not Getting What We Pay For'" (November 30, 2008). The article is a clear indictment of the economics that drive our current healthcare system and issues a clarion call for a new one based on real value -- positive health results.

According to the chairman of a leading medical center, "As much as half of the $2.3 trillion spent today does nothing to improve health." A chief executive of Kaiser Permanente adds even that "much of it is dangerous."

It is not that we don't have answers. The article states:

Quote:
...among physicians, insurers, academics and corporate executives from across the ideological spectrum, there is remarkably broad consensus on what ought to be done.

A high-performance 21st-century health system, they say, must revolve around the central goal of paying for results. That will entail managing chronic illnesses better, adopting electronic medical records, coordinating care, researching what treatments work best, realigning financial incentives to reward success, encouraging prevention strategies and, most daunting but perhaps most important, saying no to expensive, unproven therapies.

"There is more than enough money in the system....We just are not spending it well."

While that sounds like a huge, complex task, it boils down to a simple cure-all. One item mentioned achieves the whole thing -- realigning financial incentives. Every goal listed is more cost efficient. We need only account for those efficiencies in our pricing to ensure that we make the best economic choices. Value Economics does that.

The reason reform has been hard to come by is that we try to reform the wrong thing. It is not healthcare per se that needs reform; it is the economics that drive it.

Prodding and coercing healthcare into needed reform will never work. The system is too big and too entrenched to be moved by government or activist intervention. We shouldn't - and needn't - try. Rather, simply change the underlying economics. Then healthcare will evolve itself, naturally from within. Economics will drive it and profits will fuel it.

A perfect example of this applies to one solution mentioned in the article:

Quote:
One way to reconfigure health spending is to shift large sums into prevention and wellness....The idea is to tackle the handful of preventable, chronic illnesses such as heart disease and diabetes that account for 75 percent of health-care costs.

Each year, for example, the United States spends $450 billion treating heart and artery disease....It would be wiser, [a medical administrator] argued, to attack underlying problems such as smoking, diabetes, high cholesterol and high blood pressure.

How do we 'shift large sums'? By shifting profit incentive. Rather than goading providers into shifting resources where they should be, we should ask ourselves why our financial incentives aren't where they should be. Resources belong in prevention because that's the most economic solution (not to mention the best health solution). If it's the most economic, why is it not the most profitable? Our current economics make no sense.

The following sums up our misplaced incentives:

Quote:
One fundamental problem is how doctors are paid....Under the current fee-for-service scheme, "the more you do, the more you make"....There is no incentive to keep people out of doctors' offices, hospitals, imaging centers and dialysis clinics.

The president of the National Business Group on Health, which represents large employers, points out the hidden economic cost:

Quote:
A whole-body scan that is covered by insurance may seem like a bargain, [she said]. "But one way or another we're all paying" for it in higher premiums, increased government expenditures, and even false-positive results that lead to more costly, invasive procedures.

Another health executive decries the lack of focus on prevention:

Quote:
"We wait for people to get sick, and then we invest enormous sums to fix them up. We should build primary care as the core."

The article concludes with a question and healthcare challenge:

Quote:
Even if only a third of [the waste from a particular area of healthcare] could be invested in critical programs, "imagine the possibilities," said Peter Orszag, [nominee for] director of the Office of Management and Budget in the Obama administration. "Given the scale of it, I am puzzled as to why we are not doing more to improve the efficiency of the health system."

The reason we can't improve it is that the real inefficiency is not in our health system, it's in the underlying economics. Profits steer healthcare in the wrong direction. To move forward, we must realign our steering.

Current healthcare reform addresses the wrong issues.

The major effort now aims to provide healthcare for all citizens. That is a noble cause, but it misses the real issue in two ways.

First, it does nothing to reduce the nation's health bill. We call it 'affordable healthcare', but it's not a healthcare plan -- it's a finance plan for universal insurance. It doesn't reduce healthcare; it merely dictates how we pay for it. We pay the same health bill whether through income and business taxes, direct premiums, co-pays, or any other means. It doesn't reduce the net economic drain of healthcare one cent.

Focusing on financing healthcare distracts us from the real task of using economics to reduce healthcare, not just pay for it.

Second, a universal healthcare 'plan' should not be needed. Healthcare is a universal need, therefore a properly functioning free market should meet that need, without a centralized plan. Focusing on such a plan distracts us from the real task of fixing the failed economics that create the need for a plan.

Other efforts aim to increase efficiency in the healthcare system. This too is laudable, but largely fails because we miss the real inefficiency. We will only have truly efficient healthcare by creating proper financial incentives based on real economic value. If a certain practice or program is more efficient, yet providers don't profit by offering it, why should they? Our current free market encourages inefficiency.

Addressing healthcare inefficiency may seem like the right issue, but it's not. The right issue is economic efficiency.

True economic efficiency does more than eliminate superficial waste. Using profit incentive, it encourages products and services that produce higher value results. In terms of healthcare, it promotes products, practices, and programs that create better health for less money.

Let's see how Value Economics tackles the single greatest inefficiency in our healthcare system.

As the Post article points out, the biggest inefficiency in our healthcare system is our focus on treatment rather than prevention. Statistics bear this out.

Of the chronic conditions that account for 3/4 of healthcare spending, most are preventable, controllable, and/or treatable to some degree through health management & wellness programs.

According to the World Health Organization (WHO), at least 80% of premature deaths from cardiovascular heart disease and strokes can be prevented through diet, physical activity, and tobacco avoidance. Heart disease has been the leading cause of death in the United States for the past 80 years, more than the next five causes combined. The 80% reduction amounts to $350 billion of the nearly half trillion total economic cost of this killer.

Cancer, the number two killer, costs the nation over $200 billion annually, according to the National Institutes of Health (NIH). Yet American Cancer Society statistics show that 1/3 of cancer deaths are diet & fitness related and another 15-20% result from tobacco & alcohol use. Thus roughly half of all cancer is preventable by those means alone. Many skin and toxin induced cancers are preventable as well.

Diabetes & pre-diabetes, afflicting 25% of the population, costs $174 billion per year according to the American Diabetes Association. It reports that the cost of caring for diagnosed diabetics is a staggering $1 out of every $5 in total health care costs. Yet they also state that "[s]mall changes in diet and exercise can prevent type 2 diabetes from developing or slow it in its tracks."

An NIH-sponsored Diabetes Prevention Program found that lifestyle intervention reduced diabetes development by 58% over 3 years. The reduction was even greater - 71% - for those over the age of 60. The report states, "Interventions to prevent or delay type 2 diabetes in individuals with pre-diabetes can be feasible and cost-effective. Research has found that lifestyle interventions are more cost-effective than medications." An average 65% prevention rate yields annual savings over $100 billion.

Last, obesity, while overlapping with heart disease, merits attention itself. Two-thirds of adult Americans are overweight or obese. Nearly half of those are in the obese group. 17% of children & teens are overweight or obese. Obesity has more than doubled since 1960, from 13 to 32 percent, with most of the rise occurring since 1980.

NIH puts the economic toll for obesity at $120 billion per year. The condition contributes to many other chronic ailments, accounting for about one-third the cost of arthritis and heart disease, 20% of breast and colorectal cancer costs, 40% for diabetes and hypertension, and 25% of costs for stroke, according to the American Obesity Association. Obese children are more prone to high cholesterol, hypertension, heart disease, diabetes, stroke, osteoarthritis, depression, sleep apnea, and uterine, breast, colorectal, kidney and gall bladder cancer.

Yet obesity is almost wholly preventable. The Milken Institute pegs the annual savings from this one condition alone at $60 billion in direct costs, plus $250 billion in added job productivity.

Taken together, over 25% of healthcare and related productivity costs are avoidable through health management programs, according to a 2007 study conducted by the Milken Institute. That represents $650 billion in savings over current health costs.

As much as the economics driving healthcare cost us in dollars, they are even costlier in a deeper way. They distort the way we perceive health, healthcare, and how we promote the former while reducing the latter. For most of us, health is something we get from our doctor. We buy it, like anything else, at the 'healthcare store'. Our economic system trains us to think of health as a commodity we buy, rather than a natural resource we protect. That is a very costly proposition.

A landmark study published March, 2004, in the Journal of the American Medicine Association (JAMA) shatters this economic myth. The study, titled "Actual Causes of Death in the United States" reveals our fundamental misconception about healthcare and the critical flaw in the way we address our public health crisis.

The study begins with a list we've all seen before, 'Leading Causes of Death in the United States'. The list is as chilling as the cure is costly and complex:
  • Heart disease (711,000 deaths)
  • Cancer (553,000)
  • Stroke (168,000)
  • Respiratory disease (122,000)
  • Accident (98,000)
  • Diabetes (69,000)
  • Influenza & pneumonia (65,000)
  • Alzheimer disease (50,000)
  • Kidney disease (37,000)
  • Blood poisoning (31,000)
We have few, if any, perfect cures for these ominous killers. What solutions we do have are costly and typically laced with side effects -- chemotherapies, drugs (often lifetime prescriptions), bypass surgeries, dialysis machines, etc. The very thought of tackling these menaces evokes images of long-term, expensive, high tech care. So that is what we pursue, where we pour our money, and in what we put our faith. We depend on expensive solutions to save us from the problem.

But the study follows with a second list that paints a very different picture of how to address our public health needs.

The second list is one we never see - a list we rarely even think about - the one named in the study's title. The actual causes of death in the United States are:
  • Tobacco (435,000 deaths; 18.1% of total US deaths)
  • Poor diet and physical inactivity (400,000; 16.6%)
  • Alcohol consumption (85,000; 3.5%)
  • Infectious [i.e. transmitted] disease (75,000; 3.1%)
  • Toxins (55,000; 2.3%)
  • Motor vehicle collisions (43,000; 1.8%)
  • Firearm incidents (29,000; 1.2%)
  • Sexually Transmitted Disease (20,000; .8%)
  • Drug abuse (17,000; .7%)
    (Total 48.1% of annual deaths)
Suddenly, the solution to our health crisis seems (relatively) simple, obvious, cheap, easy, low tech, and mundane. Through modest dietary and lifestyle changes we can eliminate nearly 40% of annual deaths. Add more care in managing exposure to disease and accidents, and the number rises to nearly half of the total 2.4 million deaths each year. Plus, those solutions have positive quality of life side effects, not negative ones.

The study cites the following as context:

Quote:
Modifiable behavioral risk factors are leading causes of mortality in the United States. Quantifying these will provide insight into the effects of recent trends and the implications of missed prevention opportunities.

Among its conclusions:

Quote:
These findings, along with escalating health care costs and aging population, argue persuasively that the need to establish a more preventive orientation in the US health care and public health systems has become more urgent.

Though tobacco led all killers at the time of the study (data is from 2000), the authors note this:

Quote:
The most striking finding was the substantial increase in the number of estimated deaths attributable to poor diet and physical inactivity....it is clear that if the increasing trend of overweight is not reversed over the next few years, poor diet and physical inactivity will likely overtake tobacco as the leading preventable cause of mortality.

Last, the researchers leave no doubt as to the broader impact:

Quote:
Our study reported actual causes of mortality in the United States. However, these causes are also associated with a large morbidity [sickness] burden. In addition to premature death, years of lost life, diminished productivity, and high rates of disability, decreased quality of life is also strongly associated with these actual causes. A recent World Health Organization report finds these actual causes of death to be the leading causes of total disease burden, not just mortality, in the developed world.

Why have we lost sight of the real cure for our health ills?

Because we - our minds & our thinking - naturally follow the money. Since our money pours into expensive, curative treatment, we assume that the solution to our health problems lie therein. We blindly believe that if we throw more money at it, we'll cure everything. We forget that whatever we prevent, we don't need to cure. We forget that old adage that reveals the relative economic value of the two: an ounce of prevention is worth a pound of cure.

As the researchers point out to their medical peers in the study, the healthcare profession forgets its own creed:

Quote:
In ancient times, Hippocrates [whose Hippocratic Oath guides modern medical ethics] stated that "the function of protecting and developing health must rank even above that of restoring it when it is impaired."

Exactly what is the economic value of prevention? Studies show it can be highly cost-efficient.

Research published in the Journal of Nutrition Education and Behavior on the cost-benefit of nutrition education in preventing chronic disease reports a basic savings of $10.64 for every $1 invested.

A study co-sponsored by the Prevention Institute, Trust for America's Health, New York Academy of Medicine, The California Endowment, and others, states that an investment of just $10 per person per year in fitness, nutrition, and anti-smoking programs could save over $16 billion annually in healthcare costs within five years. The study also cites a return of $5.60 for every $1 invested in community-based prevention.

The Center for Value-Based Health Management surveyed 42 worksite health promotion studies and found an average $5.93 return on every investment dollar.

The Centers for Disease Control (CDC) reports that administering their Arthritis Self-Help Course to 10,000 individuals will give a net savings of more than $2.5 million ($11.5 billion applied to all arthritis sufferers). The CDC also cites proven anti-smoking programs as the most cost-effective of all clinical prevention services.

A survey of studies by the American Dietetic Association (diabetic care group) found that annual savings between $500-8,000 per person are possible for effective diabetes programs.

Another Washington Post article, titled "Disease Prevention Called a Better Bet (July 18, 2008), sums up the findings of one study:

Quote:
"People think preventive health care pays off 20 or 30 years from now, but this shows you get the money back almost immediately, and then the savings grow bigger and bigger," [Senator Tom] Harkin [D-Iowa] said.

The above studies represent savings from reduced illness, minus the cost of the prevention program. Net economic savings ultimately depend on the cost and effectiveness of prevention program. Program costs must be subtracted from any savings. For example, heart disease costs $448 billion per year. A prevention program with a 25% success rate saves $112 billion annually. If the program cost is half that, the net savings are $56 billion. This is the amount of resources freed up for other economic - non-health related - activity.

The full economic benefit may be more than research shows though. Many prevention studies only include savings for direct treatment, leaving out work productivity. For chronic conditions - the most common prevention targets - productivity costs can be 2-3 times higher than direct medical costs, as stated earlier. That can double or triple investment value.

There is more. Making prevention easier - and more economically efficient - is the fact that the prescription for most of these ailments is essentially the same: diet and exercise. Studies that show specific savings for, say, heart disease, may not even include added savings from the same program, at no extra cost, for reduced obesity, diabetes, and cancer. This 'multiplier effect' greatly increases the economic benefit.

Added to that is a generational effect -- parents that learn and adopt better diet & exercise habits pass those down to their children, who pass it down to theirs, compounding the economic value at no added cost. Would-be at-risk children who learn healthy living habits at home free up virtually the entire preventable healthcare costs - for example, $350 billion for heart disease, according to WHO - for other economic activity.

All told, these figures point to the enormous economic value of prevention programs that our current free market fails to tap.

It is easy to get lost in the details of such figures, so let's add some perspective to drive home exactly how much economic value is at stake. Of the nation's total $3.5 trillion health bill ($2 trillion direct care + $1.5 productivity cost), 75% goes for chronic disease -- over $2.5 trillion. Much of this is preventable as shown above, but even if we lop off $1.5 trillion for the share that's not, it comes to over $3,000 for every man, woman, and child in the nation.

That means that a family of four could spend $12,000 a year on prevention care. If we subtract out the 30-50% of the population that already leads healthy lifestyles and doesn't need the programs, it leaves $20-24,000 for the rest.

We can debate the effectiveness and cost-efficiency of health prevention programs, but consider what that money buys: every family could pay for a professional health consultant to come to the home and plan, implement, and monitor a personalized program. What would be the success rate of plans like that?

They would leave the nation in the same economic state, but with a big quality of life difference: the vast majority would be healthy. That's with a high cost solution -- in-home professional care. The free market can do better than that. Better programs would create health AND economic savings.

The bottom line is this: the best economic investment we can make is in the health education and prevention programs that empower people to keep themselves healthy for life. The way to lower healthcare costs is to make people healthier. Prevention and wellness programs are far and away the most cost effective way to reduce our healthcare bill and promote health.

If such savings - and therefore profits - are possible, why doesn't our economy deliver them? We complain about greed, yet here are profits on the table, ripe for the taking, and we fail to monetize them. We give the healthcare industry no way to profit from this vital social need.

The reason is what we've been saying all along -- we don't account for full value. We don't account for the enormous savings prevention programs bring. The result is that our economy under-produces them relative to their true value.

If a health entrepreneur wants to offer a program, factors like labor, facility, and equipment costs determine the price. Based on that price, the business attracts a certain number of customers. That satisfies a certain level of economic need.

But if the real economic cost of that program is less due to savings elsewhere in the economy - in healthcare treatment costs and work productivity - shouldn't the entrepreneur be able to pass those savings on to the customer in the form of lower prices? That would attract more business and allow it to expand. That satisfies the true social need - based on true economic value - for that service.

How many community recreation centers, playing fields, swimming pools, etc. are not built because they cannot be funded? How many fitness and anti-smoking programs aren't tried due to expense? How many health promotion services never even make it to market because the profit picture is bleak?

Few effective, innovative programs come to market only because we don't reward them with due profits. Put simply, our current healthcare system - or rather, our current economy - fails to make prevention as profitable as it truly is.

The second Post article shows how these economics translate into life choices for society...or deny choice:

Quote:
"What's been interesting is that if you make it easier for people to make better choices, they actually do," said Jeffrey Levi, executive director of the Trust for America's Health.

The researchers commended several innovative community health initiatives, including a children's program in Dallas that has led to healthier eating and increased physical activity among youngsters and the District's new Child Health Action Plan, which targets some of the city's worst health problems affecting youth.

However, the researchers found that many such programs lack funding, a chronic problem for many preventive health initiatives.

Free market economics aims to promote opportunity, both for business to profit and for consumers to meet needs. But if market values and prices are distorted, opportunities are lost and consumer needs denied.

Value Economics rewards businesses for the full value of their goods & services. Firms whose products create savings elsewhere in the economy (positive externalities) get Value Added Rewards. These allow them to lower their prices. The result is that they get more customers and their business expands. Plus, increased profitability inspires new business startups. Thus, more such goods & services come to society.

In terms of health, VARs reduce prices and thereby promote business for those with effective solutions in the wellness industry. Health centers, fitness clubs, nutrition products & services, whole body medicine, massage services, spa treatments, stress management services, meditation centers, etc., with proven programs to improve health and/or reduce treatment costs reap the savings they generate.

(VAR amounts are based on savings shown by research, as explained earlier. Details of how products & services are rated, as well as how VARs are disbursed and where they come from, are explained later.)

This is how a free market should function. Business earns the full value of its product.

Lower prices on proven prevention programs would increase participation. That would improve the health - and lower the health bill - of society.

In all this, we should not overlook one major point. Our current system does not even allow prevention programs to achieve their full potential. By denying due profits for wellness programs, we have no idea what innovative - and cost efficient - solutions the free market can create. Lack of profits discourage creative entrepreneurs and investors alike.

Some prevention programs are less effective due to low interest and long-term participation. But that is only because market creativity is absent. Daily exercise may have limited appeal, but consider these alternatives recently reported by the press:

A Washington Post article titled, "Fitness Revolution in Motion -- New Video Games For Children Provide Workouts in Disguise" (Feb. 8, 2009) describes a new breed of exercise machines that "marry video games and fitness", engaging kids in active workouts while having fun. Pictures of rapt kids lost in their workout worlds illustrate the point.

An AP report titled, "Bollywood-style Dance Classes Drawing Big Crowds" (Feb. 19, 2009) notes "people are flocking" to dance classes that "mix traditional Indian folk dances with hip-hop moves". It cites appeal to those who are "bored with their gym workouts", adding that "the U.S. exercise industry is taking notice".

That's the difference between free market solutions and non-market ones that simply promote prevention because it's 'good for you'. Market solutions appeal to desire, whereas others don't. In a free market, if customers don't want your product or service, you're out of business. The market promotes appealing solutions.

The same goes for diet & nutrition. Healthy food is full of economic value, but because we don't reward that, it's too often devoid of taste value. No wonder people turn their noses up at healthy diets.

Government programs and scientific reports that tell us to eat healthy have no incentive to make it taste good, but food-related enterprises do. Restaurants, food manufacturers & retailers, cookbook authors, cooking classes, etc. all want your business, so they make their food tasty. If we reward them with profits for making it healthy, the food will be nutritious and delicious.

Cultures in Asia, Mediterranean Europe, and the Middle East have delicious, healthy cuisines - that we often pay good money for in restaurants - yet we still describe 'health food' as 'bland'. There is plenty of healthy Western-style fare too, and much more to be conceived by a free market that rewards it with profits.

This is not to recommend specific fitness or diet plans over others, or even to suggest specific value in those mentioned above. Rather, it is to demonstrate the ability of the free market to come up with creative solutions - the best solutions - if we give it full opportunity to promote health. We do that by giving the wellness industry the profits it earns.

To those who say that free markets can't meet the need of promoting health, ask which is easier - and cheaper - for the market to achieve: tasty healthy food and fun fitness programs, or cures for obesity, heart disease, diabetes, and cancer?

Is gastric bypass surgery - sowing a person's stomach closed - really the best and most economical way to meet our dietary needs? Does heart-bypass surgery satisfy our fitness need? Profits should go to the most economical solution. That will happen when we account for all the savings prevention brings. Otherwise, we just subsidize disease treatment.

The cost-savings quoted in the prevention studies above are from known programs, developed with little or no profit incentive. Imagine the innovative, effective, cost-efficient programs that will come along when there's money to be made. Such programs might save double, triple, or more over current ones. What's more, the competition-driven market will hone the industry in time, lowering costs and raising effectiveness. That nets more value.

If we can efficiently prevent or manage even 1/4 of our ailments, that saves nearly $1 trillion per year, without any change in healthcare treatment. (Total equals savings from reduced treatment need + increased work productivity - cost of prevention.)

That is the free market at work, without intervention, bureaucracy, or control.

Value Economics does not discourage or limit healthcare treatment options in any way. It only promotes prevention programs where they are effective. Value Added Rewards for successful prevention programs do not raise treatment costs or impact the use of treatment in any way. It merely reduces the need for it, for prevented conditions. (Value Economics actually lowers treatment costs by other means, bringing more healthcare savings. These are explained later.)

Thus Value Economics doesn't promote prevention at the expense of treatment, it promotes prevention alongside treatment. This makes healthcare balanced and complete.

Where prevention doesn't succeed and treatment is needed, it is available. There are also many conditions that are not preventable (by known means anyway) for which treatment is needed. Treatment in these cases proceeds as normal.

Value corrections not only don't hamper treatment, they do, in fact, promote it. VLFs reduce sales of problem-causing products, and their resulting healthcare costs, freeing up resources for other things. We can spend that savings on developing cures for conditions we don't or can't prevent, if they prove to be the best economic opportunities. VARs, where externality savings exceed the correction itself, have the same effect. (A full explanation of the difference in how VARs & VLFs work is given later.)

Finally, in all our economic analysis, we cannot overlook the value of health itself as part of our quality of life. The added peace and happiness of good health augments the dollar savings of prevention, even if we don't account for it economically. That only sweetens the deal.

Earlier we spoke of value and showed that economic value begins with what we want. We pay for what we value and desire, and only that. But if our economy doesn't monetize that value, we have no financial incentive to create it. We want health, but we don't give businesses that promote health their due profits. We don't account for the true economic value of health.

We must account for that value if we want our economy to produce it. Health has enormous economic value, and lack of it comes at an astronomical price. Value Economics monetizes the value of health to create a healthy society.

In this section, we've seen how Value Economics reduces healthcare costs by promoting health. It does this by monetizing the savings of successful programs and rewarding the businesses that create them. This is a program-specific approach. It assesses and accounts for the economic value of specific health & wellness programs. Later, we'll see a broad-based solution that addresses healthcare economics as a whole. Together with this program-specific approach, it completely transforms healthcare through the power of the free market.

Now though, let's apply program-specific solutions to increase treatment efficiency too. Just as Value Economics creates incentives for the best prevention solutions, so it does for optimal treatment programs. This works the same way as Value Added Rewards for prevention and will have a more modest impact, so we'll explain it quickly.

Different treatment programs, just like prevention programs, have economic side effects -- externalities. Some of these are positive and some negative. Value Economics rewards the positive and collects the cost of the negative, ensuring True Pricing for healthcare treatment. This lets all parties involved in treatment decisions make the best economic choice.

A good example lies in treatment of infectious disease. Effective treatment for contagious conditions not only helps the immediate patient, but also saves money by reducing the number of people infected. Simple things like cold and flu remedies, if shown by research to reduce contagiousness, have added economic benefit. They reduce treatment need for others and lost job productivity for sick employees. With VARs, these could be sold at greatly reduced cost (even given free if appropriate). This increases their use, reducing disease spread through society.

(It's worth adding other prevention examples here, because prevention of infectious disease has even greater economic benefit. Vaccine type solutions, where safe, and other immune system boosters, would earn Value Added Rewards. Other products, like condoms that prevent sexually transmitted disease, earn the same.)

Here again, market creativity can provide innovative solutions as well. Suppose studies show that employees save the economy more by staying home when sick rather than reporting for work and infecting others. A creative business might outfit ill patients with GPS bracelets and pay them to stay home, with revenues coming from VARs paid for by savings to the broad economy. This may or may not be an economical solution, but it shows once again ways that the market can solve basic needs.

While the savings may seem trivial, they are not. One study pegs the annual economic cost of the common cold at $40 billion, with over half that coming from lost work productivity. Since that all results from contagious spread, control may prove very cost efficient.

Treatments may have negative side effects too. For example, antibiotic use - which promotes drug-resistant bacteria - has added costs ranging from $100 million to $30 billion annually, not counting lost productivity and premature death. Value Economics accounts for these through Value Lost Fees. VLFs make such treatments more expensive at point-of-purchase, so that providers have incentive to use alternatives where available and to develop them where not. (All VLF funds go to treat the side effects so there is no net added cost; the higher up-front price merely encourages alternative treatments.)

The following shows how VLFs might be calculated and applied, and their economic impact. It is for illustrative purposes only.

In 2000, there were an estimated 160 million antibiotic prescriptions, about half of which (80 million) went to human patients (the rest went for farm & agricultural use). At the same time, the CDC reported an estimated $8 billion annual cost (in 2001 dollars) resulting from antibiotic-resistant hospital infections. That amounts to $100 added cost per human prescription.

Value Economics assesses this cost on each prescription, creating strong incentive to find and use alternatives. It achieves this without any added net cost to the healthcare system. Without Value Economics, the total cost is spread between the antibiotics and the extra treatment required to manage the side effects. With Value Economics, the same total cost is paid in the price of the antibiotic.

Let's assume that the average antibiotic prescription costs $50. For 80 million prescriptions, that totals $4 billion. Add the $8 billion to treat anti-biotic resistance and the total health bill is $12 billion. In contrast, Value Economics adds $100 to each prescription cost, bringing the average to $150. Multiplied by 80 million prescriptions, that comes to the same $12 billion total health bill. But here's the difference:

Now that antibiotic prescriptions cost an average $150 each rather than $50, doctors think twice about prescribing them, patients think twice about requesting & buying them, and insurers tighten restrictions on covering them. If there is no alternative, then we go ahead with the antibiotic treatment, at no added healthcare cost. But antibiotics are not always needed.

The Alliance Working for Antibiotic Resistance Education (AWARE) states that "[t]he majority of antibiotic prescribing in the outpatient setting is not supported by principles of evidence-based medicine." The group cites "CDC estimates that up to 40% of antibiotics prescribed in doctors' offices are for viral infections, which are not treatable with antibiotics." It adds that "in otherwise healthy patients, most upper-respiratory infections, even bacterial infections, will subside without antibiotics."

Value Economics reduces unneeded prescriptions, saving money, easing treatment burden, and increasing the effectiveness for patients that really need it. Savings come not only through reduced prescriptions, but also through reduced incidence of resistance in those who get antibiotics. With fewer prescriptions, we spawn fewer antibiotic-resistant bacteria, making treatment more effective and cost efficient when given.

In the same way, Value Economics accounts for the side effects of prescription drugs through VLFs. Higher point-of-purchase prices encourages providers, patients, and insurers to seek alternatives, where available, without adding to the net healthcare bill. The changed profit picture (including potential Value Added Rewards for treatments without side effects) also creates incentive to develop more cost efficient treatments.

(It may be best, under our current insurance-based system, to have insurers assume the added up-front cost of medications, so that patients do not suffer added financial burden. Since insurers would not have to pay for treatment related to drug side effects, their bottom line remains the same. Treatment side effects are paid for by the collected VLF funds. Again, collection and disbursement details for these funds are explained later.)

The same VLF strategy applies to all healthcare treatment with known side effects and/or other negative externalities. In each case, if there is a treatment alternative, it encourages that alternative. In every case, it encourages development of new treatments, free of side effects. In no case do VLFs add net financial burden to healthcare treatment.

To understand the economic impact of VLFs, we need only follow the money. Currently, treatment costs for antibiotic and prescription drug side effects are borne by hospitals and medical centers, not the product manufacturers who sell them. Hospitals essentially subsidize these side effects. Because manufacturers don't bear financial responsibility for the side effects, they have little incentive to eliminate them.

Free market success requires that sellers bear the full economic cost of their products, so that they have financial incentive to minimize them. This 'ownership' aspect of free market economics - owning financial responsibility where it is due - is required for another reason. It ensures that items are correctly priced in the market. That, in turn, ensures correct supply and demand according to the product's true economic value. And that, in turn, ensures that products and services with the best overall economic value are in the greatest supply and demand.

Through Value Lost Fees, Value Economics places the full cost of health treatments - side effects and all - on the shoulders of their producers, where they belong. Others should not have to pay for the shortcomings of their products.

If we fail to do this, we create a 'pass the buck' economy, where no one is responsible for side effects and other negative externalities. That results in the society we have today, where problems grow unchecked because no one owns them. Those who create the problems pass their costs to someone else, and so on, until they ultimately fall on the public, typically in the form of taxes to remedy some big mess.

The cycle perpetuates because those who create the problem have no incentive to fix it. And those who do have incentive - the ones who pay the cost - did not create the problem, so they have no power to stop it. It is a recipe for economic - and social - disaster.

VLFs create proper incentive even when the responsible party does pay for side effects, but indirectly. If a particular hospital treatment routinely yields side effects, yet the hospital bills such treatment separately, it fails to see the connection. With VLFs, the side effect cost is billed to the original treatment (prorated based on its likelihood). That way, the hospital's internal accounting reveals which treatments are eating up profits and where costs can be cut. Hospital administrators can then make effective policy decisions as to which treatments to promote and which to discourage.

Value corrections like this - VARs for treatments with positive externalities and VLFs for those with negative ones - will bring modest (perhaps significant) healthcare savings. Later, we'll see another way that Value Economics increases treatment efficiency. Together with the more fundamental shift to prevention, they will substantially reduce our healthcare bill. And as mentioned, we'll also see a broad-based solution that transforms the healthcare dynamic completely.

Here though, we have not even exhausted the ways that Value Savers increase healthcare efficiency.

Value Added Rewards are the perfect way to tackle big projects that bring long-term value, but have high up-front costs. A prime example is the push for electronic medical records. Here is a program that will save billions of dollars, yet we can't afford to implement it! Such failures expose the shortcomings of our current economic system.

How does Value Economics do it? Simple -- monetize the future savings and sell them as investment instruments on the open market.

We can't raise private investment for the project - through the free market, without government funding - because we don't account for the value it brings. The program is estimated to cost $150 billion. Economists need only calculate how long it will take to recoup the cost, plus a reasonable (or even healthy) rate of return, and sell long-term investments to fund it. The investments, likely in the 10-25 year range, could be sold to those seeking long-term capital -- corporations, pension funds, foundations & institutions, governments, etc. They can even be packaged into a type of individual retirement account. (Alternatively, they can be sold by the government as Treasury Bonds.)

The return on such an investment is essentially the Value Added Reward of shifting to electronic medical records. They create that much healthcare savings, and more.

Raising most or all of the needed funds up front allows implementation in a timely and efficient manner. Standards can be set, software providers can meet those standards, and healthcare providers can purchase systems with confidence. Contrast that with the current piecemeal approach where, due to limited funding and no timeframe, standards are not set, software follows different protocol, and providers hesitate to buy because they don't know which system will win out. Plus, drawn out implementation inevitably includes mid-stream changes that mean wasted early efforts and resources.

Thus, Value Added Rewards aren't merely ways to monetize immediate or short-term savings. They offer ways to capitalize on long-term savings to raise money for immediate needs. This is similar to conventional investment - where investors put up capital in the hope of a long-term return - except here there is little or no risk. The projected savings are based on known factors with relative certainty. Investing in savings from medical record efficiency is not like investing in a new product or company.

A more striking example of how this applies might be to controlling the spread of AIDS. A Washington Post article titled, "Model Predicts Halt to Africa's AIDS Epidemic" (Nov. 26, 2008) reports of a program that would stop the spread of AIDS in southern Africa in about a decade, using drugs that dramatically reduce the rate of transmission. The cost of the program is initially high, but the article states that by 2032, it runs about the same as current treatment strategies: $1.7 billion annually. Thereafter presumably, it costs less.

The article doesn't say why researchers don't endorse the project, but if it's due to funding, it is another example of not monetizing future savings. By not implementing the program, we pay more in the long run. Value Economics converts long-term savings into immediate capital to get the job done.

Finally, there is one last way in which Value Savers promote health and lower the nation's health bill. Health and healthcare, like other examples we'll explore, interrelate with other sectors of society. Virtually everything we do impacts our health in some way, often profoundly. Value Economics solves our health crisis holistically by optimizing not just health programs themselves, but also other products that influence health.

If we want to truly solve our health crisis, we must do more than account for externalities in our prevention & treatment programs. Other economic products have health impacts for which we must also account if we are to see their true value. These health impacts - for better or worse - are the positive and negative externalities of those products.

Primary among them are food products. As already discussed, diet is a lead factor in promoting health or the ill health that raises treatment costs. Value Savers promote healthy diet several ways.

First, they apply to basic foods and/or food groups. Value Added Rewards can go to whole grains, fruits, vegetables, lean meats, and healthy oils. VLFs can be assessed on refined, processed, and fatty foods wherever research shows them to have negative health effects.

Second, they apply to specific ingredients used in manufactured foods. VLFs account for hidden costs in items like trans fats, artificial flavorings & colorings, and other additives shown to be unhealthy. They can even apply to unhealthy cooking processes and portioned amounts, like deep fat frying and high sodium per serving.

Third, Value Savers apply to agricultural practices like organic farming, and pesticide & antibiotic use. A study published in the International Journal of Agricultural Sustainability conservatively estimates the cost of farming related pathogens and pesticides at $1.5 billion annually.

VARs for organics and VLFs for chemical-laden food may well mean that organic produce costs less in stores, or the same, as conventional produce. That would dramatically change both our consumption and farming habits for the better. And isn't that the way a free market should work? If organic produce has a lower economic cost - when health impact is included - it's price should be lower.

Once again, the thing we want - health - is also the most economical. But that is only if we account for full value.

Pesticide and antibiotic use in farming is another example of our failure to follow true free market principles. These practices have become popular over the years as ways to increase yields. Farms earn more money from the same amount of work. In other words, we believe them to be economically efficient. But if they end up costing more than they save, they are not. In that case, the free market should discourage use, not encourage it.

The reason our market fails is that farmers who follow the practice don't pay for its economic impact. They reap the reward of greater yields, but they pass the health cost to others. With that distorted profit picture, they make the wrong economic choice.

This isn't to pass judgment on certain foods or farming practices, or even to suggest we should eat or not eat certain things. It simply acknowledges the economic fact that these products have costs that we must account for. We pay these costs anyway in our multi-trillion dollar health bill. We might as well pay them up front to see whether it's really worth it. That way we make the best economic choice.

VLFs will not hurt the food industry; there are alternatives and VAR opportunities in every case. Food sellers are like any other business. They adapt to market conditions to maximize profit. Current market conditions let them profit - even encourage profit - in ways with unhealthy side effects. Value Savers merely restore true free market conditions. Food producers will adapt to these new conditions to again maximize profits. So long as society must eat - and that is always - food sellers will profit. Value Economics ensures that they profit from the best quality food.

Most of what we call 'junk food' - snacks, sweets, processed foods, flavored drinks, etc. - is not unhealthy per se. They are unhealthy because of certain ingredients we make them with: trans fats, refined sugars & carbs, artificial additives. In nearly every case, there are healthy alternatives - good oils, whole sweeteners & grains, natural flavorings - that taste just as good. The reason food manufacturers resist these healthy alternatives is that they typically add cost to their items. Value Economics simply shows that the true added cost comes with unhealthy ingredients. This will show up in ingredient prices, using VARs & VLFs. Food manufacturers will then - just as they do now - choose and use the cheapest food ingredients. Only now, they'll be healthy.

When food providers see the economic implications of the foods they sell in their own bottom lines - the added profit in selling healthy food and the added cost of selling unhealthy food - they will use their free market creativity to produce delicious, wholesome cuisine -- the exact prescription for health.

Neither do food VLFs add to the net economic burden of consumers. VLFs collected for this purpose go to pay for the diet-related health treatments they account for. Thus consumers would have reduced health bills. (Under our insurance based system, insurers would no longer pay for the diet-related share of these treatments. They would then pass those savings to consumers in the form of lower premiums.)

Plus, in more cases than not, VARs & VLFs will drive food manufacturers to make healthier foods, which means consumers won't face the added expense of unhealthy foods. Instead, they will reap the economic reward of better public health - lower treatment costs and higher work productivity - to free up resources for other consumer goods.

The main consumer impact it will have is this: it creates more wholesome food products and the economic incentive to eat healthy. It also rightly shifts the economic burden of eating unhealthy to those producers and consumers who still choose to do it. Under our current system, everyone pays the same health insurance premium to cover diet-related illness. Those who eat healthy diets pay just as much as unhealthy eaters. Health food junkies, in effect, subsidize junk food junkies. Value Economics simply makes everyone pay their fair share. In doing so, it creates incentive for eating habits to change, both on the producer side and consumer side.

While you may not think that any one meal or food portion significantly impacts health in an economic sense, the numbers may surprise you. As stated earlier, studies show the costs of obesity, heart disease, cancer, and diabetes at $120, $450, $200, and $175 billion, respectively -- $950 billion together. If we assume diet to be responsible for 1/3 of that, it totals over $300 billion (genetics, smoking, fitness, and other factors account for remaining costs).

For the U.S. population of 300 million, that comes to $1000 per person, per year. Divide that by 365 and we get just under $3 per day, or $1 per meal for 3 meals. That equates to a full 10-20% of the food budget for average families (meal cost $5-10). The figure is higher if we take out those foods that don't have a negative health impact. The main culprits - trans fats, refined & artificial sweeteners, carcinogenic additives, nutrient-stripped grains, etc. - are responsible for the entire cost.

Applying Value Savers may not be as challenging as we think either. We can apply any VARs & VLFs at the source -- food producers. They then pass the cost or savings on to manufacturers, wholesalers, and distributors, who pass it to retailers, who set the price. That way, we needn't measure the amount of every ingredient in every manufactured food product, etc.

There are a limited number of basic, natural food products -- fruits, vegetables, meats, grains, etc. These can even be rated by food group, given a flat VAR when sold as fresh (some meats may get VLFs).

For manufactured foods, ingredients are already assessed at the supply level. Producers of trans fats, refined sweeteners, food additives, etc., pay the VLF and pass the cost down the line. Those manufacturers that process their own food ingredients are mainly large firms, of which there are relatively few. In addition, there are likely to be relatively few ingredients and manufacturing processes that merit VLF assessment. Accounting for these 'main offenders' alone will have significant health impact.

Likewise, pesticide and chemical fertilizer manufacturers would pay VLFs when they sell to farmers, who pass the cost on to produce sellers.

Regardless of method, it will be for economists to determine whether it is economical to apply the Value Savers to specific food products. Where implementation costs exceed value gained, the externality is ignored.

Value Economics price incentives will motivate food growers to cultivate natural farming techniques. It will drive food manufacturers to abandon unhealthy ingredients and stock their products with healthy ones. And it will feed consumer desire for healthy grocery items.

In this way, Value Economics creates its own dietary prevention program - with no program cost - by bringing the healthiest foods to market. Many of the prevention savings noted earlier can be had without a single penny spent on actual prevention programs.

A second major area that has costly health impact is smoking. The 'Actual Causes of Death' study above cites tobacco as the nation's #1 killer, accounting for nearly 1 in 5 deaths.

Earlier, we used the example of smoking to explain the general impact of Value Savers, specifically Value Lost Fees. At that time, we threw out a hypothetical figure of $100 million to account for the economic health toll of cigarettes, which came to $1 per pack if 100 million packs were sold.

If that seemed like a lot, try the real figures: The Journal of the National Cancer Institute reports that a full 25% of the nearly $1.1 trillion lost productivity and loss of life costs due to cancer are from lung cancer -- $250 billion. That does not even include treatment costs. A 1998 Dept. of Treasury report states that the total cost of smoking could be as high as $300-375 billion. That comes to a staggering $10-15 per pack for the annual 24 billion packs sold. The American Cancer Society set the figure at $7 per pack, but however you cut it, it's no blowing smoke.

VLFs on cigarettes would more than double their current cost, creating a strong price deterrent. (Value Lost Fees would replace current cigarette taxes, offsetting some of the correction.) The true price of cigarettes creates a very different profit picture for tobacco companies, acting as disincentive. Yet VLFs add no net burden to the economy -- funds would go to pay lung cancer treatment costs.

While the Value Lost Fees are high, they do represent the actual cost of smoking a pack of cigarettes. That cost should be borne by those who buy & sell them, not society at large.

Smokers already bear much of this cost through the higher health insurance premiums they pay, so VLFs don't significantly add to their financial burden. But they shift the payment from health insurance to the cigarettes themselves, to show smokers the true cost of their habit. (Smoker health premiums would come down because insurers no longer pay that bill -- it is paid by the VLFs.)

More important, it shifts the economic burden from healthcare to the tobacco industry that creates it. Smoking related health costs will never come down until economic pressures reduce smoking. Higher tobacco industry costs will force cigarette price rises, which reduces smoking. Currently, healthcare effectively subsidizes smoking by paying for its costs.

As for the remaining cost of smoking - lost work productivity - society unfairly subsidizes that. Society pays for lost productivity through higher product prices at the store. Value Economics shifts that cost to those responsible for it.

Do price disincentives work? A Washington Post report ("Cigarettes' Cost in Dollars and Lives"; Feb. 9, 2009) says, "Research shows that for every 10 percent increase in the price of cigarettes, tobacco use drops 7 percent among youths and 2 percent among adults." The average price of cigarettes is about $5 per pack; 10% price increments are 50 cents. $6 cigarettes drop youth smoking by 14% and the adult habit by 4%.

What that research likely didn't measure, is the reduction when cigarettes are priced at their true cost. There is a big difference in paying an extra $1-2 per pack vs. $5-10 more. If smokers see the true cost of their habit every time they buy a pack, rates would plummet. Equally important, it would prove a sure deterrent to starting the habit.

Studies show that a full 70% of smokers want to quit. Value Economics gives them the incentive to do so. At the same time, it promotes tools to help them through Value Added Rewards for anti-smoking products and services, according to their effectiveness.

Based on the above costs, a mere 10% reduction in smoking could save the economy $25 billion annually. Plus, it keeps an added $12 billion in consumer pockets due to fewer cigarette buys (2.4 billion packs x $5 per pack). Similar savings come for alcohol, which costs the nation $185 billion per year.

Does less smoking translate into real healthcare reductions? Studies indicate it ought to, but sometimes real life examples make the point better. A Washington Post blurb (Jan. 1, 2009) notes that a smoking ban in Pueblo, Colorado led to a 41% reduction in hospital heart attack admissions in three years. Eight earlier studies also found correlation, over shorter periods.

The issue of smoking brings up special concerns that Value Economics addresses in a novel way. First, it takes the social debate over smoking out of the hands of activists and lobbyists on both sides, and resolves it solely through economics. Anti-smoking advocates can no longer claim that smoking exacts an economic toll on society, and tobacco lobbyists cannot claim their industry is being unfairly singled out or burdened. Everyone simply pays their fair share in the free market economy.

More important though, is how Value Economics addresses the impact on the tobacco industry and the lives of the workers and communities that rely on it. Value Economics promotes the transition of business, workers, and communities to higher value enterprises using the added economic value as investment. You'll learn more about this later.

A final area with health impact is environmental pollution. Manufacturing processes and other economic by-products like toxic waste and auto exhaust that pollute our air, water, and land, have real economic costs related to health. Scientific research is increasingly bearing this out.

The U.S. Centers for Disease Control (CDC) ranks toxic metals as the number one environmental health threat to children, affecting millions of children each year. The main culprit though, is air pollution. Asthma and other respiratory conditions, which we didn't even include among 'preventable' ailments, are highly impacted by air pollution.

An American Lung Association study estimated health costs and lost work productivity due to acid rain pollutants at over $40 billion per year, in 1988. The World Health Organization reports that respiratory problems are now the number one cause of death among children.

The Florida League of Conservation Voters cites numerous studies indicating the extent - and cost - of the damage. Among the findings:
  • People living in areas that exceed Federal standards for particulates on 42 or more days per year had a 33% higher incidence of bronchitis and 74% more asthma flare-ups. (Adverse effects were also significant in areas not exceeding Federal standards.)

  • An EPA study estimates that 60,000 people die annually from lung damage caused by breathing particulates. The study found a roughly 6% increase in deaths for every 50 gram/cubic meter increase in small particulates.

  • Health costs due to air pollution above Federal standards in a 4-county Los Angeles area were estimated at over $9.4 billion per year -- just one metropolitan region.
The League reports that asthma related deaths have increased 77% in the last decade, and that the percentage of Americans with asthma has increased 33% during the period, while hospitalizations for children have doubled. A USC study found that children in smog-filled Los Angeles had 6-17% less lung capacity than those in less polluted areas. Autopsies of adolescent car accident victims in LA found that 80% had "notable lung abnormalities" [their quotes] and 27% had severe lung lesions known to result from noxious particles.

It turns out then that respiratory illness, which affects nearly 1 in 5 Americans and costs the nation over $50 billion annually, is largely preventable by reducing air pollution. Through Value Lost Fees, Value Economics achieves that to the exact degree that it is economically profitable and efficient. Because VLFs add no net burden to the economy at large, it strikes the perfect economic balance between manufacturer interests and public health interest.

As to whether pollution abatement in general is economically efficient, a White House report found it to be so. The Office of Budget and Management states that economic benefits resulting from compliance with federal environmental regulations outweigh their costs ("Economic Benefits of Compliance Outpace Costs", 2004).

True Value Pricing in these health-related areas - food & agriculture industries, smoking (and also alcohol) use, environmental pollution, and others - brings added healthcare savings to society. All have spillover benefits for health. Together with value corrections for prevention and treatment programs themselves, they create a broad-based, self-reinforcing health promotion system to address public need.

The health impact of food, smoking, pollution, etc., shows the challenge of addressing health in piecemeal fashion. Prevention plans that promote healthy diet have little chance to succeed when the food industry pushes unhealthy food. Value Economics is holistic -- all components support each other, rather than conflict. This makes the whole system more efficient. Prevention programs promoting diet and exercise will be even more cost efficient than currently shown when healthy food and fitness enterprises thrive in the economy.

All this stems from accounting for positive and negative externalities of health-related products and services. Effective prevention programs and health-promoting products earn rewards. Treatments with side effects and health-damaging products pay for their own ill effects. VARs and VLFs shift market dynamics and realign financial incentives toward what works -- goods and services of maximum value. The result is a healthier public and a lower national health bill.

All told, the economic impact of this is astounding. For review, the annual costs of largely preventable ailments are (in billions):
  • Heart disease - $300B
  • Obesity - $120-310B
  • Diabetes - $175B
  • Common Cold - $40B
Health costs of other factors discussed are:
  • Smoking - $150-375B
  • Alcohol - $185B
  • Antibiotic resistant illness due to medical treatment - $8-30B
  • Air pollutants - $40B
  • Farm pesticides - $1B
The above factors alone add over a trillion dollars to our annual health bill. (Cancer costs were not included since most preventable cancers result from obesity, smoking, and alcohol, which are counted elsewhere. Likewise, heart disease costs were reduced by 1/3 to account for the portion counted under smoking. Preventable respiratory conditions are not included because they are counted under air pollution and smoking.)

If we prevent even a quarter to half of that, we save up to a half trillion dollars per year. (Cost of prevention programs reduces savings, though studies cited earlier indicate 500-1000% returns on investment are possible. Also, life extension has its own costs, such as end-of-life care, that reduce net savings. All these factors must be accounted for to get a true economic picture.)

Any net savings from reduced healthcare treatment is money we can spend on household items, consumer goods & services, or education, infrastructure, and other public needs.

There is an even greater reward: the nation gets a free economic stimulus. Improved health increases work productivity and economic output, raising the GDP. Businesses produce more goods at the same cost, lowering prices and making products more plentiful. This raises our overall standard of living.

Also, since VLFs include costs for lost productivity, that portion of VLF funds reimburses business for health-related productivity losses (ways to do this are discussed later). The end result is that producers of unhealthy products - whether it be food, cigarettes and alcohol, pollution, etc. - and the consumers who buy them, pay business for the lost productivity they cause. Under our current system, business (and ultimately the consumer public) subsidizes the sale of unhealthy products. Value Economics puts the financial burden where it should be - with the producers & consumers who buy & sell the products - to discourage their use. That's how free markets work.

In this section, we've covered different health-related transactions and explained how Value Economics treats them. While the specifics of each are varied, the underlying principle in all is simple and the same: account for the full costs and savings (including externalities) of products so that their true economic value shows in their price. Then price - as it should in a free market - leads us to buy and sell the highest value products. Put simply, we get the most for our money. We avoid the Dollarland syndrome where we create plenty, but much of it causes problems that we must then pay to fix, which takes money away from what we want.


Copyright 2009, Society for Sacred Sexuality - all rights reserved.
Gary Joseph
SSS Founder


Joined: 16 Jun 2004
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    Posted: September 3, 2009 Reply with quote



[Remaining sections on Value Economics will be presented in point form as time permits.]

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