Modern Monetary Theory discussion

[Samson]

The supply/demand curve IS an abstraction. The fact that mini economies-of-scale happens is a 2nd layer of complication. Increase demand more, and you'll find increased supply with diminishing returns of capital investment.
The criticism that the models predict a drive to equilibrium is valid, but the models also predict a drive to an average. Not really the same thing.

I dunno, this is a bit like calling physics 'wrong' because you're dropping a real cow from an airplane and not a spherical, frictionless, cow.

Many of the models are useful. They're also handy because they have pretty nicely defined terms and concepts, which speeds up discussion. The fact that we're people and not homo economicus can be used within the discussion framework. They just don't be able to seem to flit between using currency as an accounting short-hand and as a legal entity.

Economics has a huge psychology component, and the field is only just beginning to flirt with realizing that. And unlike, say, animal psychology experiments, even telling people

With some pretty simple physics I could tell you with reasonable accuracy how long that cow will take to hit the ground. We can test it and find out how close I came (perhaps without the cow, but you know what I mean).

There are other bits of physics where we cannot check so easily, but they are built on logical steps from rules that have been defined by empirical observation, and we believe them. I am thinking of the red shift for example.

Neither of these seem true for economics. It does not make verifiable predictions about the future with the accuracy of physics. It does not have a foundation of empirical evidence and a solid logical derivation from them to its useful conclusions.

Even your simple statement "Increase demand more, and you'll find increased supply with diminishing returns of capital investment" does not seem accurate. Does Huawei have a lower ROI than Blackberry because it started later, or Kia than Rover? Bollywood than Hollywood? If we list companies in a sector, how much of the variance in ROI is explained by incorporation date? Are you making a statement of fact, a statistical hypothesis or a belief?

 

[El_Machinae]

The Bollywood vs Hollywood example is a good one that I think we could unpack and given that they're producing an Information Technology, honestly, I don't know what to say. I don't think even measuring such things can be done 'easily', because it spirals into complication nearly instantly. Of course, it's probably just outside my ability.

But comparing the ROI of two companies wouldn't work. You're missing both externalities and failed startups in the diminishing returns on capital, for example. Also, because you're adding time as a variable, 'innovation' as a deflationary force kicks in as a variable.

The supply/demand curve doesn't really include time as a variable. It merely includes change as a dimension that we interpret as time.

 

[Samson]

The Bollywood vs Hollywood example is a good one that I think we could unpack and given that they're producing an Information Technology, honestly, I don't know what to say. I don't think even measuring such things can be done 'easily', because it spirals into complication nearly instantly. Of course, it's probably just outside my ability.

But comparing the ROI of two companies wouldn't work. You're missing both externalities and failed startups in the diminishing returns on capital, for example. Also, because you're adding time as a variable, 'innovation' as a deflationary force kicks in as a variable.

You made a statement. If it was an empirical statement then there should be good evidence to demonstrate it. If it is a statement of belief then it is probably not a good thing on which to base some of the most important decisions we make as a species. I am trying to work out what it is.

I know it is hard. I know biology is hard. We used to just assume that the body worked by a combination of 4 humors, and did not check because it was hard. Because of this we got blood letting, and doctors probably doing more harm than good for 2000 years. It does not seem unreasonable to ask if there is better evidence for "increased supply with diminishing returns of capital investment" than for the humoural theory.

The supply/demand curve doesn't really include time as a variable. It merely includes change as a dimension that we interpret as time.

This I do not get. I would say that "how something changes" as synonymous with "the function of something and time". What do you mean by the word?

 

[Lexicus]

This I do not get. I would say that "how something changes" as synonymous with "the function of something and time". What do you mean by the word?

I can't speak for El_Mach but a major problem with the supply/demand --> equilibrium model is precisely that it lacks dynamism, and does not contain an account of how the economy can change over time, beyond reference to vaguely-defined "external shocks" such as oil embargoes or financial crises (or pandemics).

 

[Birdjaguar]

Many of the models are useful. They're also handy because they have pretty nicely defined terms and concepts, which speeds up discussion. The fact that we're people and not homo economicus can be used within the discussion framework.

In many ways economists function like philosophers and need a language to talk/argue with each other about. The fact that what they talk about may not be useful outside of the field is often forgotten. One can chatter all day long about supply and demand, but if you want to know what happens when company X cuts prices or expands production of its phones, just look at the market. The answers are usually there.

 

[Samson]

I can't speak for El_Mach but a major problem with the supply/demand --> equilibrium model is precisely that it lacks dynamism, and does not contain an account of how the economy can change over time, beyond reference to vaguely-defined "external shocks" such as oil embargoes or financial crises (or pandemics).

Again I think I may be saying the same thing as you, but if I was studying a biological feature that had the cyclical nature of the economy I would take it as evidence that it is not an equilibrium system.

 

[Hrothbern]

I think that much of the supply-demand thinking is based on production cost thinking that is slowly getting outdated since the last 100 years and for many products still in an accelerating phase.

Some completely mature products like sport-leisure shoes are by now saturated in the decreased production cost maturing.
Some products like TVs are still in a phase where the deflationary effect on cost from productivity increases is still cancelled for a big part by adding features by manufacturers to get "better" TVs to keep their turnover protected (no deflation for customers).

Here the "smile curves" that show that on average R&D, branding, marketing survive as cost determinants. The next links in the chain to diminish are the combi logistics & the middlemen downstream of production to be replaced by logistics only.

And yeah... it also means that traditional thoughts that the workers in the production factory "own" the benefits of production are atomised, because they only control the lowest link in the total chain and increasingly so. And vertical integration no longer exists for many products.
New answers need to be found.

 

[Birdjaguar]

And what happens to all that when multi material 3D printing evolves so one can "print" those shoes at home or down the street?

 

[Samson]

1/250th of the price of a shoe goes to the person who made it? I never grasped it was so low.

 

[uppi]

And what happens to all that when multi material 3D printing evolves so one can "print" those shoes at home or down the street?

The production cost decreases even further and en even greater share of the profits is made from R&D, design and marketing.

 

[Hrothbern]

And what happens to all that when multi material 3D printing evolves so one can "print" those shoes at home or down the street?

yeah the world is changing
R&D, design and marketing will stay
Whereby even there public domain will have big effects from influencers to shareware.

 

[Samson]

The production cost decreases even further and en even greater share of the profits is made from R&D, design and marketing.

Makes one think that piratebay may become more important.

 

[Hrothbern]

1/250th of the price of a shoe goes to the person who made it? I never grasped it was so low.

You have maybe noticed that I have now and then discussion with Inno on the scale size effect of production. He never believes me, but I know how the metal industry ticks (and other sectors do need metal products like machines or turbine blades).
My "job" mind is basically a library of metals (many hundreds of steel grades disregarding the many more that are only brand name differences), a library for processes for metals, a library of processing machines, a library of needed knowledge with a lot of pointers between including value (for the application) and cost (capital and work hours)
Not complicated, just a couple of lists with pointers.

In that shoe example you see also the effect that for example the machines used by China are very much cheaper than machines in the rich countries.
Because those machines are build with Chinese labor cost, the materials mined with Chinese build machines and Chinese labor cost, the factories from building to the postage & stationary with Chinese labor cost, etc,etc.
And all that for the commodities, the matured products or components, at scale sizes that are beyond our western comprehension
One Chinese city for 90% of all garment buttons in the world etc.

 

[Birdjaguar]

With local 3D printing hard costs = materials and use of the machine. Everything else is contribution margin. Distribution costs go to zero. Allocation of costs to R&D or marketing etc. is arbitrary.

 

[El_Machinae]

This I do not get. I would say that "how something changes" as synonymous with "the function of something and time". What do you mean by the word?

"Changes in Time" in an economic sense would include every single component of human activity as well as natural activity. It's an all-encompassing variable. Depending on the complication of the process, including 'time' as a variable means that you need to include other factors that vary based on time.

"Change" doesn't need to include time, necessarily, except insofar as we need time in order to materially enact change. Change is a dimensional variable in the matrix of the calculation. In our heads, we tend to think of it as 'time', but that's a proxy for our metaphors. I might be being too metaphorical here, but "time" and "change" are slightly different concepts. We short-hand between the two.

"increased supply with diminishing returns of capital investment"

Well, we collectively voted for increased spending (increased demand) on healthcare and that spending has been compounding at rates faster than growth (increased supply) but the amount of lifespan purchased has been going down at the same time (diminishing returns*).
Student loans have skyrocketed the amount of education people are paying for, but the benefits of that education aren't compounding.
Demand for palm oil has created a true ecological concern
As incomes rise, the demand for meat has risen, and created true ecological concern

*monthly reminder that medicine has a huge information technology component and can undergo rapid deflation once there's been sufficient investment in IT.

 

[Samson]

Well, we collectively voted for increased spending (increased demand) on healthcare and that spending has been compounding at rates faster than growth (increased supply) but the amount of lifespan purchased has been going down at the same time (diminishing returns*).

*monthly reminder that medicine has a huge information technology component and can undergo rapid deflation once there's been sufficient investment in IT.

This is the one I know about. Are you really trying to argue that this graph can be usefully predicted by "increased supply with diminishing returns of capital investment"? If so, can you present any evidence?

(source)

 

[Hrothbern]

Allocation of costs to R&D or marketing etc. is arbitrary.

And this part means that "poor" people will have to accept they get the "less status" products... but do get their products... and are able to have their own subculture exchange of "IP" with their own subculture status.
There will still be lots of products that cannot be made 3D or are too expensive.
You can for exampleput a lotus layer on glass that makes the surface hydrophobic. Hard water with for example chalk will no longer leave deposits on your wine glasses or shower wands. And that is nice, practical and becomes also status.
You can also add nano-layers of near diamond structure on metals. You can tune how brittle (harder) or how tough (less brittle) you make them, but they are incredibly harder and have more wear tear resistance than Ti gold coating on a HSS drill bit.
In general you can also not make hardened metals like gears for a car transmission or hardentemper and make your own bolt cutter.
But that's not where we spend the bulk of our money.

 

[Birdjaguar]

And this part means that "poor" people will have to accept they get the "less status" products... but do get their products... and are able to have their own subculture exchange of "IP" with their own subculture status.
There will still be lots of products that cannot be made 3D or are too expensive....

A big yes to both of those. More customization is coming, especially for those who can afford it.

 

[El_Machinae]

This is the one I know about. Are you really trying to argue that this graph can be usefully predicted by "increased supply with diminishing returns of capital investment"? If so, can you present any evidence?

(source)

I think you're making very good points. There should be more obvious examples.

 

[Samson]

I think you're making very good points. There should be more obvious examples.

I do not think there should be, in much the same way the the important facts in medicine can not be determined by obvious examples. These things are complicated.

What I think there should be (if economics is a search for truth, rather than advocacy) is combinations of the mathematical models and vast economic data (which exist already in economics) with statistical tools (which exist in empirical science) to quantify and compare the predictive power of the models.

I think you know about the importance of evidence based medicine, I think the reasons apply as much to economics.