More of your crazy economics questions, answered

25th January, 2024

Last year, inspired by Randall Munroe’s delightful books What If? and What If? 2, I invited the good folk of Twitter to ask me absurd hypothetical questions about the economy, to which I would attempt some serious answers. This year, we’re going to do it all again.

Alex asks: How big would an asteroid made of precious metal have to be for it to be worth doing a space mission to bring it back?

To answer this question I consulted Soonish, a book by Kelly and Zach Weinersmith, which devotes a chapter to the problem. Some asteroids have much higher concentrations of metal than are typical near the surface of earth, and a decent-sized golden asteroid does sound tempting. Alas, there are three problems: physics, engineering and economics. Engineering first. If you want to mine an asteroid, you either need to set up a refinery in space (difficult) or send huge amounts of unrefined ore back through the atmosphere to be refined back on Earth (messy). Then there’s economics: if you somehow did find an inexpensive way to bring a million tonnes of gold back to Earth, gold itself would become frustratingly cheap. A space-mining monopoly might be able to hoard a stockpile and release it slowly, but even that is doubtful. Two competing space miners would be a recipe for a price collapse.

And finally, physics itself: Earth’s gravitational pull is strong, which means it’s hugely energy-intensive to get up into orbit. The cost of getting anything into space is nearly £20,000/kg. This is going to make your asteroid-mining venture expensive, but more fundamentally it means that the most valuable things in space aren’t gold and platinum, but basics such as soil and water. These are the things you’ll need to support any kind of human settlement in space. Forget the golden asteroid: if there’s money in mining anything from asteroids, it will be compost and ice.

Anita asks: Could a universal currency ever be based on electricity, or currents?

The economics textbooks will tell you that a good currency has three characteristics. First, it is a store of value, something that will still be worth a decent amount tomorrow, next week or next month. There are lots of possibilities here: gold, bitcoin or dollars, for sure, but also rice, or shares in Apple, or a house. (Less good: tickets to see a concert tonight, fresh vegetables, the Argentine peso.)

Second, money serves as a unit of account, meaning that it has a consistent, well-understood price relative to other goods. Salt was once a good example, since both the supply of and demand for salt were very stable. It seems likely that some contracts were denominated in salt — hence the word “salary”. Here bitcoin falls down, because its price fluctuates wildly; the same is true of shares in a tech titan. These may or may not be attractive investments, but if you have to keep double-checking their price, they are not attractive currencies.

Finally, money needs to operate as a medium of exchange. Traditionally that would have meant lightweight, divisible, easy-to-recognise, hard-to-forge notes or coins — or, in extremis, portable standardised goods such as cigarettes or tins of mackerel. But these considerations are less important in a cashless society. You can pay dollars for goods using a credit card which you later settle in euros, and in principle retailers around the world will happily accept your credit card whether your bank wants you to pay the bill using Swiss francs or bitcoin.

With that preamble out of the way, where do we stand on a current currency? The answer is that electricity is one of the worst currencies imaginable. Electricity is a very poor store of value, since the problem of how to store electricity is one of the defining ones of our age. It is telling that most solutions to the electricity storage problem begin by turning the electricity into something else, such as chemical potential energy. And few commodities fluctuate in price more wildly than electricity. Because it cannot easily be stored, the price will leap and crash minute by minute depending on factors such as whether the wind is blowing, whether the sun has disappeared behind a cloud and whether everyone has just put the kettle on. Consumers are shielded from all this volatility, but it is there nevertheless. There must be a worse candidate for a currency than electricity, but I cannot think of one.

Olly asks: What if your tax bill was discounted by the distance you lived from the centre of London (eg if you lived in Kingsway, you paid the full amount; if you lived in Shetland, you would pay no tax)?

I suppose the aim here might be to encourage people to move away from London and into less populated areas. If this policy was a success, the likely outcome would be a damaged environment (with more driving and less travel by efficient methods such as trains, bicycles and elevators) and a much less dynamic economy (since cities are where most innovation takes place). I am reminded of the great urbanist Jane Jacobs’s sarcastic description of “a nice, even smear of mixed economic activity”, which seems so plausible from behind a bureaucrat’s desk, and which would be such a disaster in practice.

Fortunately, this tax would make less difference than you think. In response to these tax incentives, some people would be minded to move further away from Kingsway and closer to Shetland. The mere temptation for this mass exodus to occur would prompt both rents and property prices to adjust, offsetting the tax. Owners of London property would suffer, while owners of property far from the charms of Kingsway would prosper. Not many people would actually move. Thank goodness.

Michael asks: What if inflation was made illegal? Could we legislate that no prices could ever rise?

The economist Alex Tabarrok notes that “a price is a signal wrapped up in an incentive”. What he means is that an increase in the price of a product informs everyone that the product is in short supply, and also rewards consumers who buy less and producers who make more. A well-functioning price system — that is, one in which prices can rise (and fall) — is absolutely fundamental to encouraging an efficient use of resources in a complex economy. These relative price changes are useful, even if a generalised rise in prices is unwelcome. The challenge is to allow relative prices to change without allowing average prices to rise. That contradiction is why most efforts to control inflation start by trying to influence the price of money itself. But you have a different proposal, so let’s run with it. Imagine that your law freezing all prices is introduced and that it is widely respected. Two things follow: the economy cannot properly adjust to shortages and surpluses, and the economy cannot adjust to technological change. For example, would it even be legal to offer a new edition of the iPhone or the Tesla for sale? That would seem to introduce a new price, which is against the law. Or perhaps you think it should be legal to introduce new products at new prices — in which case, expect products to be endlessly withdrawn, reformulated in some trivial way and then reintroduced at a different price.

It would also be hard to cope with fluctuations in supply or demand. Say there is an increase in the demand for physiotherapists, or coffee. Normally, we’d expect the price of coffee to rise (inducing people to drink tea instead and encouraging coffee farmers to cultivate more coffee beans) and the salaries of physiotherapists to rise (encouraging them to work overtime or delay retirement and attracting new people into the profession). But because you’ve outlawed price rises, none of this can happen: instead expect long queues for treatment and empty shelves in the supermarket. In truth, it seems more likely that the law would be widely flouted. There would be many surpluses, many shortages and a lot of needless fuss doing deals under the counter or around the back to sell goods at a price that reflected economic reality rather than the mandated and unchanging official price. What would happen if inflation was made illegal? Nothing good.

Nicola asks: In the UK, we used to print banknotes on paper, now it’s a horrible slippery plastic. Could we use a more environmentally friendly material, like leaves? Or perhaps something edible — printed on some sort of simple flour and water biscuit? No waste!

Fans of Douglas Adams may recall the tale of the civilisation that decided to adopt the leaf as legal tender. Briefly believing themselves to be rich, they soon found “three deciduous forests buying one ship’s peanut”. This won’t do. Whether your proposal runs into a similar problem rather depends on your approach. If you simply plan to allow any leaf to serve as currency, the resulting hyperinflation problem will at least put our recent travails into perspective. But perhaps you intend only officially issued currency, printed on leaves or nutritious wafers, to circulate as legal tender. This might work, but I have some concerns. There is, of course, the question of whether security features such as the transparent window, metallic foils and holograms can really be added to an edible substrate.

There is also the question of durability. The Bank of England will replace damaged notes with new ones, and keeps track of these exchanges. Since the most common note, the £20, was replaced with plastic in early 2020, there has been a notable fall in requests to exchange currency. Maybe that simply reflects the switch to electronic payments during and after the pandemic. But I wonder: one common source of damage is listed as “chewed/eaten” — such lamentable incidents became very rare almost overnight when plastic notes were introduced. Your edible currency may seem sustainable; it will not be so sustainable if people snack on the contents of their wallets and the Bank of England has to keep printing replacement currency wafers.

Written for and first published in the Financial Times on 22 December 2023.

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