The Productive Value Bridge Between Behavioral and Traditional Economics
Lance Amundsen
Abstract
Societies consist of individuals who must interact with each other to survive. These interactions exchange something we define as Productive Value (PV). PV is defined as information, services, goods, currencies and other types of quantifiable value, aligning with concepts from information economics (Stiglitz, 2000). The ability to generate PV comes from an individual's Productive Power (PP), which parallels human capital theory (Becker, 1964). PP comes from an individual's knowledge and physical abilities. An individual's knowledge is a function of past interactions, or experiences, reflecting principles from behavioral economics (Kahneman & Tversky, 1979). Exchanges involving physical work derive from our ability to convert potential muscle energy to kinetic energy.
Individuals both profit and lose in interactions, thereby increasing or decreasing their PP, a concept that aligns with utility theory (Von Neumann & Morgenstern, 1944). Those individuals who profit more than others over time gain a competitive advantage because of increased PP, reminiscent of the resource-based view in strategic management (Barney, 1991).
The Productive Value Model for Bridging Behavioral and Traditional Economics looks at the way these interactions occur. It proposes a simple mathematical relationship for the PV exchanges. In addition to examining the traditional categories of value (currencies, goods, or services), the model introduces information as a new category of value. Furthermore, the utility gained in any value exchanges are examined for profit or loss, with the resulting change to an individual's Productive Power (including knowledge, skills, and well-being). This approach integrates aspects of endogenous growth theory (Romer, 1994) and evolutionary economics (Nelson & Winter, 1982).
Table of Contents
The Productive Value Bridge Between Behavioral and Traditional Economics 1
Abstract 1
Postulates 3
Productive Value and Productive Power 3
Information Both is and Describes Productive Value 5
Categories of Productive Power 5
Measuring Productive Value Exchanges 6
Willing Interactions versus Unwilling Interactions 8
Profit versus Loss and Risk 9
Evaluating Productive Power 10
Magnifying Productive Value 11
Technology 12
Teamwork 12
Natural Selection and Survival of the Fittest 12
The Productive Power of Societies 13
The Importance of Societal Defense 14
Why Some Demographics Fall Economically Behind Others 14
The Bridge to Behavioral Economics 15
The Bridge to Traditional Economics 16
Summary 17
Additional Topics for Examination 18
Applicability to Species other than Humans 18
On Well Being and Mental Health 19
Investigating and Quantifying Non-typical Productive Power Group Categories 20
Examining the Productive Power of Past Competing Societies 21
Further Mathematical Investigation 23
Further Analysis of Information within the Model 24
Separated Parent Families 25
Analysis of Militaries 26
References 28
Postulates
Traditional economics is the study of the marketplace, while behavioral economics attempts to describe "why" individuals in the marketplace do what they do. This paper presents a model to bridge these two fields of study, building upon existing economic frameworks.
The model makes two fundamental assumptions:
1. Individuals require other individuals and interact to survive. This aligns with the concept of social capital (Coleman, 1988), which emphasizes the importance of social relationships in economic outcomes.
2. Individuals exchange something of value with others when they interact. This postulate is consistent with the basic premises of exchange theory in economics (Homans, 1958) and relates to utility theory (Von Neumann & Morgenstern, 1944).
These postulates form the foundation for our Productive Value (PV) and Productive Power (PP) concepts. PV encompasses all forms of exchangeable value, including information, services, goods, and currencies. This broad definition of value aligns with information economics (Stiglitz, 2000) and extends beyond traditional economic measures.
PP, defined as the ability to generate PV, is analogous to human capital (Becker, 1964) but encompasses a wider range of capabilities. It includes not only education and skills but also the ability to process information and make decisions, reflecting insights from behavioral economics (Kahneman & Tversky, 1979).
By integrating these concepts, our model aims to provide a more comprehensive framework for understanding economic interactions, bridging the gap between traditional market analysis and individual decision-making processes.
Productive Value and Productive Power
Individuals exchange value with others through various forms of interaction. This exchange process is fundamental to economic activity and social interaction (Homans, 1958). We define all things exchanged between individuals as Productive Value, or PV. This concept of PV extends beyond traditional economic measures to include not only money, goods, and services, but also information. This broader definition aligns with information economics (Stiglitz, 2000), recognizing the crucial role of information in economic exchanges.
We define the ability to generate PV to exchange as Productive Power, or PP. This concept of PP has similarities to human capital theory (Becker, 1964), which views individuals' skills, knowledge, and experiences as assets. However, PP encompasses a wider range of capabilities, including the potential energy stored in our muscles and the knowledge in our brains.
To understand our model, let's start with an analogy:
Think about electricity for a minute. Imagine a wire connected to two sources, each able to send electrical power to the other. Each has a battery containing stored power as well as a mechanism to send or receive power. Now consider a case where the energies exchanged are usually in pairs and related: When one battery sends power to the other, most often the other battery reciprocates and sends power to the first battery as well. Furthermore, the power exchanged can be positive or negative; each side can not only send power to the other but "steal" it as well.
This analogy illustrates the dynamic nature of PV exchanges in human interactions, reflecting aspects of game theory (Von Neumann & Morgenstern, 1944) and social exchange theory (Emerson, 1976).
Our "battery" is the knowledge in our brain, the potential power stored in our muscles, as well as the goods we store and the services we are capable of performing. With them, we exchange PV in "Interactions". Interactions are defined simply as any exchange of PV between two individuals.
For example, we exchange $1 in PV for one cup of coffee of PV. We pay our hair stylist PV in the form of dollars while the other individual exchanges PV in the form of services. Someone gives another a hot stock tip that turns a profit, and thus PV is received as a result. These examples illustrate how our model can encompass both traditional economic exchanges and information-based interactions, bridging concepts from traditional and behavioral economics (Kahneman & Tversky, 1979).
Opinions, a category of information, can sometimes add large increases to our PP. While opinions may contain the greatest amounts of PV exchanged in any economy, it is the day-to-day goods and services exchanges in the economy that society currently focuses on. GDP is the easiest to quantify if currencies are involved. In fact, we can measure all categories of PV in units of dollars if we so choose. Services are currently measured that way. Harder to measure are information exchanges that don't immediately have an obvious PV (although $300 for an hour's worth of information from an attorney and such is already included in current marketplace measurements). But by far, the majority of information exchanges of PV are not measured.
This challenge of measuring intangible value aligns with ongoing debates in economics about the limitations of GDP and the need for more comprehensive measures of economic well-being (Stiglitz, Sen, & Fitoussi, 2009).
To summarize, individuals exchange Productive Value (PV) in Interactions. Any positive PV received increases an individual's Productive Power (PP) while any negative PV received reduces PP. Examples of PV include (in historic order) information, services, goods, and eventually currencies. Examples of PP would include the potential power stored in our muscles, as well as the knowledge in our brains, and of course the currency and goods in our possession. This framework provides a more holistic view of economic interactions, integrating aspects of traditional economics, behavioral economics, and information economics.
Information Both is and Describes Productive Value
Individuals only voluntarily enter into interactions when an interaction is expected to yield a profit. This expectation aligns with the concept of rational choice theory in economics (Becker, 1976), though it's important to note that our model allows for a broader interpretation of "profit" beyond mere monetary gain.
How do we know whether an interaction is going to be profitable or not? Based on the information provided to us. Before individuals exchange PV, they use information to describe the PV they are about to offer in an exchange. This role of information in facilitating economic transactions is a cornerstone of information economics (Stiglitz, 2000).
One side shows a dollar bill and the other shows a cup of coffee. Perhaps the coffee is described as hot. Or one side explains (promotes) a good or service (like an excellent haircut) to the other to entice an exchange of PV. Perhaps, the store clerk describes the varied uses of a particular hand tool an individual is considering for purchase. These examples illustrate the concept of information asymmetry in markets (Akerlof, 1970), where one party has more or better information than the other.
There is one more element to understand. While information can describe PV, it also can be PV. A hot stock tip may have great value in and of itself, if the appropriate interactions are entered into such that an individual can convert that stock tip into a stock purchase and sale at a profit. This dual nature of information as both a facilitator of transactions and a valuable commodity itself is explored in the economics of information goods (Shapiro & Varian, 1998).
So, information both is and describes PV. Obviously, the quality of the information exchanged between two individuals is of utmost importance (what if the store clerk is lying?). Sometimes certifications are given to certify individuals who transact in exchanging information as PV (an attorney passes the bar exam certifying that the information he/she provides is of positive PV). In other cases, bad advice is given. These issues of information quality and credibility relate to the concept of signaling in economics (Spence, 1973) and the challenges of maintaining trust in economic relationships (Arrow, 1972).
This model is an attempt to quantify "all" of the PV we exchange, not just those involving direct use of currencies. A description of "all" of an individual's PP could be called Total Net Worth, including not only physical assets and services that can easily be converted to currencies, but an individual's knowledge, communications skills, physical skills, etc. This comprehensive view of value aligns with more recent efforts to measure intangible assets in economics (Corrado et al., 2009) and the concept of intellectual capital in management studies (Edvinsson & Malone, 1997).
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