The Price Was Never Real

The prices we have become accustomed to are not neutral.

Many depend upon realities we would find deeply uncomfortable if we had to experience them ourselves: dangerous work, inadequate wages, environmental destruction, political accommodation, military protection and communities carrying costs on our behalf.

We accept these realities partly because they do not directly affect us. Somebody else experiences the pollution. Somebody else works for the inadequate wage. Somebody else lives under the hostile or repressive regime. Somebody else loses the forest, the water or the soil.

We experience the lower price.

Distance allows us to mistake transferred costs for genuine efficiency. It also enables us to treat the conditions supporting our cost of living as though they were free.

They are not free. The price simply does not tell us who is paying.

Nor, in truth, have our political leaders made much effort to explain it. They have generally presented the cost of living as something to be kept as low as possible, without being sufficiently candid about the conditions on which those lower costs depend. We are rarely told what apparent affordability requires us to tolerate, what risks are accumulating beneath it, or what protecting ourselves from those risks might eventually cost.

The result is a tacit bargain between markets, governments and consumers. We enjoy the lower price while the more uncomfortable parts of the arrangement remain distant, unmeasured and largely unexplained.

The price before the crisis

The conflict involving Iran and the disruption of shipping through the Strait of Hormuz make this bargain unusually visible.

Hormuz is one of the most important physical bottlenecks in the global economy. Before the recent disruption, more than a quarter of global seaborne oil trade and around one fifth of liquefied natural gas trade passed through it. When that passage is obstructed, the effects travel rapidly through freight rates, insurance, energy, fertiliser, food, business costs and household bills.

The conventional explanation is straightforward: conflict has caused prices to rise.

Of course it has, but that is only half the story.

The previous price of oil was not simply the cost of extracting, processing and transporting it. It also depended upon safe passage through international waters, functioning ports, affordable maritime insurance, geopolitical containment, security provided by states and naval forces, and a continued willingness to tolerate considerable political risk in return for uninterrupted supply.

It depended, in other words, upon an entire political and physical system that barely appeared in the price.

These conditions were enormously valuable, but because they were not separately priced, they appeared to be free. Of course, they were never free. Their value was simply excluded from the oil price, along with the liabilities created by depending upon them.

The previous price also concealed an uncomfortable political accommodation. Whatever view one takes of the origins, conduct or justification of the conflict, the deeper economic problem remains. Our cost of living became dependent upon a set of geopolitical conditions without the price revealing the nature or fragility of that dependence.

Governments knew that the dependency existed. Energy markets, security agencies and foreign policy officials understood the strategic importance of the Strait. Yet political leaders rarely explained to the public that apparently affordable energy rested upon a particular geopolitical settlement, considerable military protection and the continued containment of forces that could disrupt it.

Instead, the lower price was allowed to appear normal. The political and security architecture supporting it remained largely invisible, as did the consequences if that architecture failed.

When the conditions changed, the hidden liability became financially visible.

What appears to be a new cost may therefore be an old cost arriving late.

The bargain we were never shown

This leads us somewhere uncomfortable.

If confronting aggression, repression or instability threatens energy supplies and raises the cost of living, the economic signal appears to tell us that confrontation is unaffordable. Continued accommodation appears cheaper.

Does that mean we would rather tolerate an objectionable political reality than pay more for fuel and food? Not necessarily. It means the price never showed us the bargain we were making.

Political leadership should, at least in part, involve explaining such bargains. It should mean telling people that the cheapest immediate option may create the greatest long term exposure, that resilience carries an upfront cost, and that protecting certain principles may affect prices. It should also mean acknowledging honestly who benefits from a political or economic arrangement and who is required to carry its costs.

That explanation has largely been absent.

Perhaps political leaders feared that voters would reject higher prices, greater investment or any policy that threatened established expectations about the cost of living. Perhaps the electoral rewards of maintaining short term affordability were simply greater than those associated with explaining long term vulnerability. Whatever the reason, the public was rarely invited into an honest discussion about the trade-off.

Years of apparently cheap prices therefore encouraged dependence. By the time the risk materialised, the moral choice and the cost of living had become entangled. Suddenly, the choice was presented as principle or affordability, security or growth, resilience or efficiency.

Perhaps society would have made the same choice had the full consequences been visible from the beginning. Perhaps not. The point is that the economic signal never asked us, and political leadership did little to compensate for its silence.

The lower price was presented as though it were simply the product of an efficient market, rather than the product of a system containing dependencies, transferred costs and moral compromises.

A more complete economic signal would have revealed the exposure earlier. It would have shown that concentrated dependence on a politically unstable corridor represented a liability. It would have recognised the value of diversified energy sources, alternative transport routes, strategic reserves and domestic resilience before a crisis made them essential.

Instead, resilience is usually treated as a cost. Spare capacity looks unproductive, inventories tie up capital, redundant suppliers appear inefficient and diversification sacrifices economies of scale. More robust infrastructure costs more, at least according to the financial accounts.

Political leaders then face an awkward choice. They can explain why society should pay now for protection against something that might happen later, or they can enjoy the political benefit of the lower immediate cost.

Too often, they choose the latter.

The optimised system therefore wins, until it fails. At that point, the supposedly inefficient resilience turns out to have been an asset all along.

Distance makes things cheap

The same bargain extends far beyond oil.

Cheap clothing may depend upon workers in unsafe factories receiving wages we would never accept ourselves. Cheap food may depend upon soil degradation, groundwater depletion, poorly paid labour, animal suffering or communities exposed to pesticides and pollution. Cheap electronics may depend upon hazardous mineral extraction, weak labour protections and environmental damage far from the eventual consumer.

Cheap energy may depend upon pollution being imposed on communities that do not consume most of it, or climate costs being passed to people who have not yet been born. Efficient supply chains may depend upon workers, ecosystems and governments absorbing risks that businesses and consumers do not.

These realities are not entirely unknown. Most of us understand, at least in general terms, that cheap products may carry hidden consequences. Yet geographical, social and financial distance makes those consequences abstract.

The worker is not in the shop. The polluted river is not visible on the bill. The exhausted soil is not listed on the receipt. The naval protection does not appear at the petrol pump. The future climate damage is not included on the electricity statement.

We see the product and its price. Everything required to make that price possible recedes from view.

Political debate often reinforces this separation. Leaders promise to reduce prices, protect purchasing power and make goods more affordable. These are understandable objectives, particularly for households already struggling to meet essential costs. However, the accompanying explanation rarely extends to why something is cheap, what conditions sustain that price, or whether it can endure.

The difficult message is not simply that some things may need to cost more. Higher prices do not automatically create fair wages, cleaner production or greater resilience. The more difficult and useful message is that society must distinguish between genuine efficiency and apparent efficiency achieved by transferring costs elsewhere.

That requires political leaders to explain the difference. It also requires them to acknowledge that costs do not disappear simply because consumers are protected from seeing them at the point of sale.

This is not primarily a question of individual consumer morality. Consumers cannot investigate the complete history of everything they purchase, and many households have little freedom to pay more. People make decisions using the information and options available to them.

The more important failure sits within the economic information we provide to businesses, investors, governments and the public.

The price does not distinguish between a genuine reduction in the resources required to produce something and a cost that has merely been transferred elsewhere.

Both appear as efficiency.

The cost of living stands on quicksand

We talk about the cost of living as though it were an objective property of the economy. It is not. It is the product of a particular moment, supported by a particular arrangement of natural, human, social, political and physical systems.

Consumer price indices tell us how much households currently pay for a representative basket of goods and services. They are useful measures of changes in expenditure, but they do not tell us whether the underlying prices are complete or durable.

Consider two products priced at £1 and £1.20. The £1 product appears more efficient. However, its price may depend upon suppressed wages, subsidised energy, depleted groundwater, degraded soils, unsecured shipping routes or pollution transferred to another community. The £1.20 product may include better wages, cleaner energy, more resilient production or the maintenance of the natural systems on which future production depends.

The comparison tells us which transaction is cheaper. It does not necessarily tell us which system costs less.

This distinction is almost entirely absent from the way we discuss inflation and the cost of living. A price can remain stable while everything supporting it deteriorates. Soils lose fertility, infrastructure ages, workers burn out, aquifers fall, political risks intensify and production becomes increasingly concentrated. Resilience can be steadily stripped from the system in pursuit of efficiency without any of this appearing in the market price.

The price stays low because the cost is carried elsewhere. The system appears stable because much of its instability is experienced by somebody else.

Governments then congratulate themselves for preserving affordability without explaining that the foundations supporting it are weakening. Any attempt to invest in those foundations can be presented as an additional burden, while the much larger cost of their eventual failure remains hypothetical and politically remote.

This helps explain why preventative investment is so difficult. The cost of resilience is immediate, visible and attributable to somebody’s decision. The cost of fragility remains hidden until the system fails, at which point it can be blamed on an external shock.

But the shock may have been accumulating for years.

It was external only to the accounts.

We have seen this before

Europe’s dependence on Russian gas followed the same pattern. For years, relatively cheap pipeline gas supported European households and industry. The price reflected extraction and delivery, but it did not adequately reflect the strategic liability created by concentrating energy dependence in an increasingly hostile state.

Political leaders did not create that dependency alone, but they permitted it to deepen without adequately explaining the bargain being made. Affordable energy and industrial competitiveness were visible. The growing geopolitical exposure was discussed in specialist circles but rarely incorporated into the public account of what that affordability depended upon.

Following Russia’s invasion of Ukraine, the liability was internalised. The gas had not suddenly become more useful. A previously discounted geopolitical exposure had become financially visible.

COVID exposed the same weakness in global supply chains. Businesses had been encouraged to eliminate inventory, consolidate suppliers and minimise spare capacity. These decisions reduced visible costs and improved reported efficiency, but the savings depended upon ports, borders, factories, workers and transport networks continuing to operate without major interruption.

Governments benefited from the lower prices and greater availability produced by these systems, but rarely explained how much depended upon their uninterrupted operation. Resilience looked like waste until its absence became extraordinarily expensive.

Food prices tell the same story. Cheap food can depend upon declining soil quality, groundwater extraction, vulnerable pollinator populations, fossil fuel derived fertilisers and a relatively stable climate. The supermarket price captures the transaction, but it does not record the deterioration of the systems required to produce tomorrow’s food.

A drought, crop failure or fertiliser shortage is then said to cause food inflation. More accurately, it reveals the value of ecological and industrial foundations that had previously been treated as unlimited and, therefore, economically worthless.

Energy subsidies make the political problem particularly explicit. Governments intervene to prevent global energy prices from reaching households, often for understandable social and economic reasons. According to the International Monetary Fund, explicit fossil fuel subsidies reached approximately $1.4 trillion in 2022 as governments sought to shield consumers and businesses from rapidly rising costs.

Energy remained more affordable at the point of sale, but the cost did not disappear. It moved into public finances, taxation and debt, while many of the underlying costs associated with polluted air, climate damage and future energy insecurity remained outside the transaction altogether.

The political message was that government had reduced the cost.

In reality, much of the cost had been moved.

Apparently cheap for whom, and for how long?

Inflation is sometimes an accounting event

When inflation rises, central banks increase interest rates. When the economy stalls, they lower them and may create more money to encourage lending, investment and spending.

Think about that for a moment. We have constructed an economic system comprising billions of people, millions of businesses, ecosystems, energy networks, institutions, shipping routes and supply chains. Our principal response when the system becomes too hot or too cold is to change the price and availability of money.

It is like trying to control the climate of an entire building with a single thermostat.

Interest rates can reduce demand for energy, but they cannot produce more energy. They can suppress household spending, but they cannot reopen a shipping lane. They can make somebody’s mortgage more expensive, but they cannot restore depleted soils, train skilled workers, rebuild infrastructure or resolve the conflict that interrupted supply.

When inflation begins in the real economy, monetary policy does not repair the underlying problem. It applies financial pressure until demand shrinks to fit whatever diminished supply remains. The thermometer may move in the desired direction, but the building is no less fragile.

Inflation is usually described as a monetary phenomenon or as too much demand chasing too little supply. It can, of course, be both. But inflation can also be understood as an accounting event: the moment when a cost excluded from the price is finally forced back into it.

Geopolitical risk becomes an insurance premium. Climate instability becomes a food bill. Ecosystem degradation becomes lost production. Underinvestment becomes disruption. Low wages become labour scarcity. Pollution becomes taxation, litigation or healthcare expenditure. Strategic dependence becomes an energy crisis.

The cost existed before it was financially recognised.

This is why raising interest rates can be both necessary and absurd. A central bank may need to prevent a supply shock spreading through wages, expectations and other prices, but increasing interest rates does not resolve the original failure. It redistributes its consequences.

Mortgage holders pay more, businesses postpone investment, employment weakens, governments face higher borrowing costs and households consume less. Apparently, the answer to an oil shortage is to make somebody’s mortgage more expensive.

That may cool measured inflation, but let us not pretend it has produced more oil, secured the shipping route or made the underlying system less vulnerable. We are cooling the financial economy because we failed to understand and maintain the foundations of the real one.

Political leaders then compound the problem if they describe the resulting inflation solely as something being done to us by hostile governments, global markets or unforeseen events. External events plainly matter, but that explanation avoids the more difficult question: why were our economies so exposed in the first place?

A more honest political account would distinguish between the event that revealed the vulnerability and the decisions that allowed the vulnerability to accumulate. It would explain why restoring resilience may require investment, changes in consumption, different patterns of production or, in some cases, higher immediate costs.

Without that explanation, the public encounters only the bill. It is then understandably angry at whoever appears to have delivered it.

The market price is not enough

None of this means that every environmental, social, moral or geopolitical consideration can, or should, be perfectly incorporated into every market price.

Nor would a higher price automatically make a product virtuous. A company can charge more while continuing to exploit workers, damage ecosystems or expose society to risk. The objective is not simply to make everything more expensive.

The objective is to make the foundations and consequences of economic activity visible.

Decision makers need to know what makes a price possible. What natural systems does a business depend upon? Who is carrying costs that do not appear in the transaction? Which social, institutional and political conditions support supply? Where is production concentrated? What would happen if transferred costs were taxed, regulated, litigated or disrupted? How much financial value is at stake over two, five or ten years?

These are often treated as sustainability questions. They are not. They are questions about the quality and durability of value.

They are also questions that should improve political choices. Governments cannot explain trade-offs honestly if the information available to them captures only immediate financial costs. Nor can they build support for resilience if its value remains invisible while every investment required to create it appears as an expense.

This is the purpose of capital intelligence and the reason we built the Value2Society Operating System.

V2S extends the field of view beyond the financial transaction. It identifies the natural, human, social, intellectual and produced foundations supporting financial performance. It measures the costs and benefits experienced beyond the boundaries of the organisation. Through Value@Stake, it assesses how apparently external effects might return as financial risk or opportunity.

Importantly, this does not require every external cost to be loaded immediately onto consumers. Some costs should be addressed through better technology, investment, regulation, changes in business models or a fairer distribution of value. Simply raising prices can punish those least able to pay while leaving the underlying system unchanged.

The first requirement is visibility. Before deciding who should act or who should pay, we need to understand the whole system of value supporting the price.

Political leadership should then help society understand the choices. What are we prepared to tolerate in return for a lower price? Which costs should be absorbed by businesses, governments or consumers? What should be invested now to reduce future exposure? Where is apparent affordability simply concealing a bill that somebody else is already paying?

These are difficult questions, but avoiding them does not make the underlying trade-offs disappear. It merely ensures that we confront them later, under worse conditions and with fewer choices.

The objective is not to replace the financial accounts. It is to reveal what those accounts depend upon, who and what they leave outside the decision, and how those exclusions may eventually return.

Before the bill arrives

The fragility of today’s economics is not that prices tell us nothing. It is that we repeatedly ask them to tell us everything.

A low price may indicate genuine efficiency. It may also mean that somebody else is paying, an asset is being depleted, a risk is being ignored, a public good is being consumed without payment or resilience has been stripped from the system.

Often, the low price depends upon a reality we tolerate because it remains sufficiently distant from us. We do not experience the dangerous work, the polluted water, the political repression or the depleted landscape. We experience affordability.

Political leaders have too often reinforced the illusion by promising to protect the lower price without explaining the bargain beneath it. They have avoided telling us that resilience costs money, that some forms of apparent efficiency are simply transferred costs, and that maintaining certain principles may have consequences for what we pay.

This is not an argument for accepting every price increase or excusing every failure of government. It is an argument for greater honesty about what prices contain, what they exclude and what our accustomed standard of living has sometimes required other people and places to absorb.

Until we distinguish between genuine efficiency and transferred cost, we will continue to mistake cheapness for value. Then, when the hidden dependency fails or the uncomfortable reality can no longer be ignored, we will call the consequence inflation and ask central banks to suppress enough demand to make the numbers work again.

We cannot manage the temperature of the real economy solely by changing the temperature of money. We need to understand what makes economic activity possible, recognise who and what carries its costs, and bring that intelligence into the decisions shaping it.

We also need political leaders willing to explain those choices before the bill arrives.

Because the price before the crisis was never the whole price.

It was simply the part we had agreed to pay.

This essay began as a line of enquiry developed through the work on Value2Society. ChatGPT was used as a thinking and editorial partner, testing the argument, challenging its edges and helping shape it for publication.