Inflation
It dawned on me the other day that you might be able to completely eliminate inflation, given adequate supply. Just imagine an auction, where bidders submit bids to an order book, and the order book is processed by the seller in a manner that maximizes the seller’s revenues. This is probably what’s going to happen with any competent seller, since they will generally seek to maximize revenues.
Now imagine that everyone is aware of the seller’s reservation price, the supply being sold, and the demand. If we assume that supply is adequate to satisfy demand, there is no incentive on the part of any bidder, to bid above the reservation price. Now assume that we give every bidder more money, effectively increasing the money supply of the auction. It doesn’t matter, there’s no still incentive to compete, because everyone knows that there’s adequate supply.
This suggests that economies could benefit radically through regulation that requires transparency with respect to reservation prices, supply, and demand, and moreover, imposes an order book concept, like you find in financial market exchanges. This is not hard to implement, and it’s at least worth experimenting with, to see if e.g., sector-based inflation can be controlled.
Yield on Consumption
Preferences have long been considered by economists, and I don’t know who considered the question first. However, I do know that prior to Von Neumann, only ordinal preferences were well understood. An example of an ordinal preference is that you prefer apples to bananas. However, this is not a quantitative relationship, and instead places apples higher in an ordinal queue, with respect to bananas.
Genius that he was, from what I understand, Von Neumann flippantly solved the problem of cardinal preferences using lotteries. Specifically, he attached probabilities to outcomes, and then asked for the indifference point. So as an example, you could be indifferent to getting an apple with a probability of .2 (and getting nothing at all with a probability of .8), and a banana with a probability of .8 (and nothing with a probability of .2). If that’s true, then you view both lotteries (apple lottery and banana lottery) as equivalent, suggesting that you’re willing to take the significant chance that you get nothing in the case of an apple, because you like apples so much. You could argue that you like apples 4 times more than bananas. As a result, Von Neumann’s use of lotteries allows us to at least think objectively about cardinal preferences.
However, just because people assign such great value to e.g., apples versus bananas, doesn’t mean that they’ve solved a problem in economics. For example, just ask an alcoholic, whether they’d rather have a beer versus dinner, and you’d be shocked to find that at least some would go for the beer. In more precise terms, even if we can measure cardinal preferences, it doesn’t imply that human beings have tuned them to any reasonable metric. The question is then, can we measure the “correctness”, for lack of a better word, of the consumption behaviors of individuals. I believe the answer is yes.
Specifically, consumption will impact GDP. As a consequence, we could in a laboratory environment substitute one consumer good with another, throughout an entire economy, and measure the impact on GDP over time, versus a control economy that did not make use of the substitution. Though this is difficult to do in practice, we can nonetheless construct obvious thought experiments. For example, imagine instead of paying for internet service, everyone in the United States decides to eat $150 worth of candy every month, forgoing internet service. This will with near certainty have a negative impact on GDP, and eventually, a negative impact on health, which will again, have a negative impact on GDP. This simple experiment implies that the yield on consuming internet services is significantly higher than the yield on consuming candy.
This is deliberately a bit comical, but it’s an extremely serious idea, that would allow for objective preferences, that are simply correct, in the context of the returns they generate. In this view, societies that have objectively better preferences, will have higher GDP’s per capita.
Information Overload 