Spatial Markets: A Look At True Value
Imagine you are put in charge of an island. Your goal is to find the most efficient way to utilize this land.
On the west side of this island is a town. Bars, restaurants, old hotels and factories, a sleepy residential patch at the margins.
On the east there is wilderness. Many generations have gone there to hunt, forage and fish.
In the center is a public plaza with curious architecture, a unique visual style but its purpose remains unknown.
How will you define this efficiency? Gross domestic product? Exports? Employment?
How about we cut to the chase and say:
The efficiency, in this case, is the total value derived from the land minus the total cost.
Let’s say value is what individuals and firms are willing to pay for a good, service, experience or location.
For example: Every morning the workers go to a donut shop and pay $5 for a cup of coffee and a sandwich.
The shop has experimented with different prices to maximize profit and found that the most the workers will pay for the coffee and sandwich is $7.
So, on average the workers get $2 of what is called consumer surplus with every purchase. They derive $2 of value every time they go so they continue to support the business.
Every business on the island is adding value but appears to be at a standstill. Only so many workers want donuts every day. Expansion would result in wasted resources. Donuts would go stale, pots of coffee would sit idly on the burner. Less efficiency.
So you decide to bring expansion, new opportunities to the island. Just in time, you receive a proposal for a steel mill.
It sounds great, efficiently put together so it takes up very little space, right on the coast near where people live so worker commutes will be short, your economists give you a prediction of the total profit-loss and it seems too good to be true. With your approval the steel mill is built.
A few years later, after this massive expansion you survey the residents of the island. All you ask is how happy are they with where they live. On average they all rate their happiness lower than before the mill was built. What gives?
As it turns out the cost of the mill was not simply the cost of capital and a plot of land. The mill had frequent accidents resulting in carcinogenic chemical releases. Your citizens were paying for the mill with their wellbeing.
Well at least this structure has stimulated the local economy, right? Your economists sheepishly shake their heads.
While some wages have increased, much of the revenue generated by the mill winds up off the island, in the pockets of the CEOs, investors and the like.
With these new insights you set about solving these issues. A group of engineers comes to you with the big idea of capturing the emissions of the mill and storing them for use as raw material in a storage facility at the center of the island.
Better yet they factor into this plan the concern about keeping money on the island. They show that this miraculous plan will overall increase wealth of the residents by $10 per month, per household.
So you give the go-ahead. You check in with your residents a year later.
Oh no.
Health issues from on your island remain the same. Happiness of your residents has fallen further.
As it turns out this emission capture plan only lessened very specific emissions at the cost of overall efficiency. What’s more the storage facility has caught fire several times resulting in dangerous releases.
Since the construction of the storage facility your residents are also overall less satisfied with the way the land is being used.
But why? The land was just used as some plaza with a few fountains. There are other public spaces. Why not increase efficiency?
An old woman enters your office. She has lived on the island since long before your rule. She has one request: That you come with her to see her garden.
Thinking she’s just a funny old eccentric but needing a break from all the mayhem you agree.
Stepping through her garden gate you find an unexplainable feeling washing over you. Something about the geometry of this space makes you feel profoundly safe, at home and at peace.
There are pillars of stone and steel tangled with red flowering vines, there are wildly shaped archways and verandas with chattering mockingbirds.
She tells you that her husband was the architect behind this garden as well as the plaza, now home to the storage facility. She says that his work only meant so much in pictures but to dwell within it was something else entirely. Indeed this garden is greater than the sum of its parts.
You pour your fatigued little politician heart out over tea as she listens sagely. You lament “I should never have tried to bring everything forward, there is no need for all this productivity.”
She responds matter of factly “That’s a stupid thing to say…. We only get so much land, without young folks optimizing productivity we’d be in a dismal, hungry spot.
But these new fangled facilities, they are… Not direct enough means. You think they will usher you to the tomorrow you seek. But they only side track you. If you make the saucer the goal, you’ll never drink the tea.
My husband was a sharp business person, he spoke the language of finance, tread in that tumultuous sea but it was not his end goal. That was to sit in the plaza with me and have our morning donuts while he babbled about arches or some such.
By the end of his life his only goal was to putter in the woods and teach our nephew how to hunt pheasants.”
The following year you go about subsidizing a new age of innovation. Young entrepreneurs come to you with all manner of new ideas and you give them the means to test them out but under two strict conditions:
They must demonstrate that all costs of their the business are theirs to pay. No leaky buckets.
The end result must be more value over all.
You find that your role, while involving many delicate counterbalances, is not impossible.
The land is much greater than the sum of its parts, an ever changing gestalt of histories, trade, new technologies. If you didn’t know better you might even call this factor a spirit of the land, a genius loci as your old mentor would put it.
But there is one calculation at the heart of it all: See the value for what it is and optimize.