27 June 2016

I think that humans, and humanity in general are hard-wired to optimize our decisions for wealth. This has effect on the environment and our relations with each other.

Here are a couple of equations I came up with, to help me analyze specific situations in life:

wealth increase =
  + useful need
  - natural resources fair prices
  - total seller profit
  - hidden environment cost

monetary cost =
  + natural resources fair prices
  + total seller profit

Lets explain each term.

Wealth increase

This term refers to how much a given transaction, action, investment, or generally decision would affect the overall well-being of a person, or institution.

Useful need

This is synonymous to value derived by the person from the action. If I am hungry and I buy a sandwich, the sandwich immediately fulfills a need - nutrition. In normal situation, the value is not very high as we don’t immediately need to eat, though if we are very hungry, the value increases quite a lot. Being very hungry affects other parts of our well-being and decision making so handling the hunger we would avoid losing a lot of value on other actions.

On the other hand, if I had just eaten and am not hungry, then the need is zero, or even negative.

Natural resources needed

In the sandwich example, the resources include the bread, the vegetables, the cheese, the meat, the wrapping, or the partial cost of the plate, the cost of washing the plate, the proportional cost required to furnish the restaurant, the proportional cost of the utilities for the restaurant, etc. I want to measure this cost in terms of the base cost of the natural resources required for this. This cost is easy to determine, as generally natural resources are commodities with very well defined cost.

I do not want to measure this by the monetary cost of all of these, as it may vary wildly from place to place, and the person buying the sandwich has no control over any of it. When they buy the sandwich, they buy the whole package, or nothing.

Total seller profit

This includes all profit to the seller from all transactions required to produce the good, in the example case the sandwich. The restaurant bought the bread and the ingredients from producers, who made some profit. The restaurant also pays rent to a landlord, this is whole other action, in which the landlord makes profit.

The restaurant also pays certain utilities which are also actions of their own, sending some seller profit towards the providers of these utilities.

Hidden environment cost

By hidden environment cost, I mean the cost of all consequences of the use of the raw ingredients which is unavoidable to pay in the future. For example, some the sandwich ingredients were transported to the restaurant using vehicles which burn gasoline. Burning gasoline very likely has a hidden environment cost, global warming. If burning so much gasoline results in environment damage which causes 5 trillion dollars cost in 20 years, then the hidden cost of the action is the proportion of these 5 trillion attributed to the amount of gasoline burned for the transaction, at present value. Producing the ingredients might have other hidden cost, by creating water pollution, or disrupting fragile ecosystems. For example, for a ten dollar sandwich, the total hidden cost might be 40 cents.

The caveat, is that this hidden cost is not payed by the people making the sandwich transaction. This hidden cost is payed in the future, by everybody.

Corollaries

Having defined this basic equation, I will go on in the next few posts and discuss several important corollaries, not necessarily in the order below:

  1. Carbon tax and other hidden cost neutralizers. Environmental debt, and the interest we pay for it.
  2. Being frugal, when does it help the environment, and when it hurts.
  3. Does giving tips benefit society?
  4. Using commodities verses using designer products.
  5. Investments which generate seller profit for us. How to find opportunity.

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I write these posts to clarify my thoughts and improve my communication. They are mainly written for myself, and my future self, but I'd love to hear any comments you might have, especially if you disagree with what I've written, or if you've found it valuable in any way. Message me on Twitter @themitak or email me at comments@dimitarsimeonov.com.