I Am Speechless Still

Sigh. Do we really need to teach Economics 1 here at Reform Club University Graduate School? Well, I see that indeed we do, as certain of our stalwarts seem to have swallowed various versions of the Broken Window fallacy (see my post below) whole, washed down with the old “planned obsolescence” chestnut.

Disasters cannot yield economic growth (that is, a bigger economy, or to say the same thing, greater aggregate wealth) because the resources used to repair the attendant physical damage—put aside the human suffering that cannot be redeemed at all—otherwise would have been used to produce other goods valued by individuals. Accordingly: Disasters must make the economy smaller in the aggregate. Yes, certain sectors (e.g., construction) will be bigger, and owners of inputs (labor and capital) in those sectors will be wealthier than otherwise would have been the case; but other sectors will be smaller, owners of inputs in those sectors will be poorer, and it is unambiguously the case that the losses exceed the gains, because in the absence of the disaster we would have both the housing and other physical capital as well as the other goods. Period. And please note that while owners of inputs in such sectors as construction might become wealthier, that does not mean that they are made better off (or happier) by the disaster, in that they might lose loved ones as well.

The “planned obsolescence” argument—as old as it is silly—assumes away the marginal cost of added quality, in this case added longevity. Consider the simple case of a razor blade that lasts forever; if we ignore such irrelevant complications as present value calculations (more on this below), risk aversion, and the like, consumers would be willing to pay for an infinite-life razor blade the expected lifetime purchase cost of ordinary razor blades. If the marginal (“extra”) cost of producing such a blade is less than (or in the simple case, equal to) the added value of the blade to consumers, then profit-maximizing firms will produce the blade. If it is not, then the firms will not produce it, and that outcome is wholly efficient, that is, consistent with the interests of consumers, because the extra resources needed to produce the infinite-life blade would yield greater value for consumers in the production of other goods.

Only if the discount rate used by producers to calculate present values is higher than that applied by consumers might some version of the planned obsolescence argument make any sense at all, and that outcome would not necessarily be inefficient. And, anyway, I rather doubt that the “planned obsolescence” crowd has anything quite so sophisticated in mind; their goal is to attack capitalism, however mindlessly. Precisely why would producers discount the future more heavily than consumers (on the margin)? The only plausible argument is the corporation income tax, which in a nutshell forces the corporate sector to discount the future more heavily than other sectors. Is the “planned obsolescence” argument really a left-wing call for fundamental tax reform? Please…

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26 thoughts on “I Am Speechless Still

  1. “Disasters cannot yield economic growth (that is, a bigger economy, or to say the same thing, greater aggregate wealth) because the resources used to repair the attendant physical damage—put aside the human suffering that cannot be redeemed at all—otherwise would have been used to produce other goods valued by individuals.”

    You can’t say that for certain. Perhaps those funds would have sat in a savings account yielding less than inflation rates. Maybe the person who normally would only work 20 hours a week is inspired to work forty to help clean up the damage of a disaster (I assume you see productive work as the basis of economic growth by the creation of value). Of course neither of these points are assured of happening and hence I cannot say a disaster WILL bring about economic growth only that it may.

    “and it is unambiguously the case that the losses exceed the gains, because in the absence of the disaster we would have both the housing and other physical capital as well as the other goods. Period.”

    You are mistaken as above. But don’t take my word for it even your fellow economists disagree (see the Keynsian interpretation of the Broken Window).

    ” And please note that while owners of inputs in such sectors as construction might become wealthier, that does not mean that they are made better off (or happier) by the disaster, in that they might lose loved ones as well.”

    Oh my that’s sloppy Zycher. Mixing emotion into an economic analysis? Frankly I’m amazed you’d write something so amateurish.

    “Consider the simple case of a razor blade that lasts forever; if we ignore such irrelevant complications as present value calculations (more on this below), risk aversion, and the like, consumers would be willing to pay for an infinite-life razor blade the expected lifetime purchase cost of ordinary razor blades.”

    Apparently you’ve never heard of sticker shock. Of course they won’t pay the same as they would for a lifetime supply of razors, nobody is that stupid. The advantage is in playing less. If you paid the same for a permanent razor as someone who bought a succession of cheap disposable razors then you’d only have narrowed your options and gained nothing, a net loss. However that’s never really the issue. A more realistic example are the long life hallogen bulbs which cost twice as much but last upwards of four times as long. See less cost than gained lifespan.

    “And, anyway, I rather doubt that the “planned obsolescence” crowd has anything quite so sophisticated in mind; their goal is to attack capitalism, however mindlessly.”

    I’m going to have to call you on this.

    Lets look at Microsoft as an example. MS comes out with a new operating system approximately every two years (looking only at the line for servers or PCs not both). Why?

    They could of course go on a longer development cycle, indeed the incredibly poor performance of their OS during the first year would suggest at least another year of development would be a good idea. During that time they could of course release further patches for their already released OS maintaining their market advantage through a competitive product.

    But they don’t. They have a planned functional obsolescense built into their business plan. They will come out with a new product every two years because it makes them money. Not because the consumer sees any advantage from it. If they could they’d come out with one every other week but of course the transition time and the willingness of customers to indulge them precludes this.

    So why do consumers continue to buy their new products? Because they stop supporting their old ones, an effective death sentence to an MS product and it’s assortment of critical faults.

    I’m curious if you deny any of this?

    Because if not then your whole long (incorrect) tirade goes right out the window. We have a perfect real-world example of a company doing what you claim no company would do: building a product to be intentionally limited so as to make further profit at the expense of their customers.

    Any response?

  2. I should point out that the issue of assuming people will pay the price of x razors for a razor that lasts x lifetimes is where you make your biggest error. Since the consumer would never do such and since the marginal costs are not nearly that high an increased lifetime product is bought for a higher price but less than x. That’s precisely why planned obsolescense is used. It’s preferable to sell x razors at standard price than one razor for somewhat less than x (hopefully I don’t have to do the algebra to show this is mathematically sound).

    Again I don’t understand how you can claim this doesn’t occur when it is an admitted part of many company’s business plan. Trust me- I work for one of them. It really does happen all the time in the real world, despite what economics academicians might think.

  3. I seriously doubt Doctor Zycher will stick around and play with you, T-man. He’s pretty rigorous with his time and he probably sees arguing with you as a matter of rapidly diminishing marginal returns. No offense, I’m just guessing you’re wasting time trying to draw him into a big discussion.

  4. It’s okay I just looked him and up and found out he’s part of the Cato institute. It always gives me a warm fuzzy to know I can argue circles around those guys even in their chosen field. It may not be very fair of me but i enjoy it all the same.

  5. T, this is one of the less savory aspects of your character. JFE is the same way. I once heard it said that fear is the world’s worst perfume. Unwarranted triumphalism is not much better.

  6. “T, this is one of the less savory aspects of your character. JFE is the same way. I once heard it said that fear is the world’s worst perfume. Unwarranted triumphalism is not much better.”

    I’m sorry hunter but frankly anyone associated with the dinosaur the Cato institute is asking for it. Lets face it their entire existence is predicated on ignoring the last 50 years so that they can continue pretending not only that free markets work when they have been proven not to (except in the most limited cases) but also that they work better than any other system.

    I have little patience or regard for people who choose to decieve themselves and then wear that as a badge of honor.

  7. “I always love it when engineers and B-schoolers collide and confuse being half-assed economists with repealng the laws of economics.”

    There are no laws of economics. The very founding principle that you stated is even incorrect. When they can’t even get an accurate staring point they are assuredly not going to get anything else right.

    Of course the proof is in the pudding as they say. It used to be joked that economists were as inaccurate as the weatherman BUT THE METEROLOGISTS GOT BETTER. The day that economists can predict economic activity with anythin remotely resembling accuracy is the day they’ll be able to claim some actual progress.

    “Businesses run by rules of thumb all the time, because additional knowledge also has a high marginal cost, and sometimes “good enough for government work” really is good enough on average.”

    So if I say something happens, you say it doesn’t and then I show you it happening that somehow proves your point? Or are you arguing that economic theory is so divorced from reality that you don’t have to bother with wether or not it has any real world application? If its the second case then sure I can agree with you, no problem.

    God I love arguing with economists. It’s viscerally satisfying. Sorry, hunter, there goes the triumphalism again.

    I notice that no one actualy attempted to try and refute my arguments against Zycher’s thesis (other than Kathy’s up is down argument of course).

  8. That’s because we rationally choose to spend our times on things that are more fun and rewarding.

  9. “That’s because we rationally choose to spend our times on things that are more fun and rewarding.”

    Maybe, or maybe you know his argument is fatally flawed. Or maybe you just suspect it is with that sort of icky icy feeling in your gut as you start to realize everything you’ve based your perceptions of society on are a lie.

    Or maybe you just have better things to do than defend you cherished beliefs from being savaged.

    One has to wonder what was the point of making a forum though when you refuse to discuss any matter that… well… matters to you.

  10. “JFE is the same way.”

    Oh! OH! I was just pwned! Hunter is teh pwnx0r!

    End sarcasm.

    Being lectured by Hunter on unwarranted triumphalism? Where will the irony end?

  11. So if I say something happens, you say it doesn’t and then I show you it happening that somehow proves your point

    You don’t show it happening. It doesn’t matter what a bunch of mid level engineers and marketing hacks think they’re doing. They call it the invisible hand because it works without the conscious intention of the players.

    You claim that companies build widgets that last five years, when they could build widgets that last for twenty years with no additional input costs. If that is true (which it most certainly is not, but I’ll stipulate your argument just to get to the next part) then one of these things must be true. (1) Consumers would find the 20 year widgets more attractive and be willing to pay more for them than the 5 year widgets. (2) Consumers would not find the 20 year widgets more attractive and are not willing to pay a premium for them.

    If (1) is true, then the company is turning down free money. If this is your company, then you are stupid, and have no business lecturing other people about economics. If this is your company and you do it long enough, someone else will figure it out and you will be looking for work instead of spending your entire workday writing posts claiming that economics does not exist and posting them to economics blogs.

    If (2) is true, then the company is doing exactly what consumers want.

    Which is it?

  12. “You don’t show it happening. It doesn’t matter what a bunch of mid level engineers and marketing hacks think they’re doing.”

    OH MY GOD. Your faith in economics is so blind that it doesn’t matter if I put the evidence right in front of you you’ll claim it doesn’t exist.

    “They call it the invisible hand because it works without the conscious intention of the players.”

    It doesn’t work that way but that’s another discussion. Since the invisible hand here is not acting as Zycher claims it would (preventing the use of malicious planned obsolescense) then how do you claim that the invisible hand exists at all? It doesn’t matter whether they intend to follow your economic “laws” or not the only thing that matters is if those “laws” predict reality and I’ve just shown that at least this interpretation of them does not indeed predict reality.

    “You claim that companies build widgets that last five years, when they could build widgets that last for twenty years with no additional input costs.”

    No with MARGIONAL additional costs.

    “then one of these things must be true. (1) Consumers would find the 20 year widgets more attractive and be willing to pay more for them than the 5 year widgets. (2) Consumers would not find the 20 year widgets more attractive and are not willing to pay a premium for them.”

    Apparently I do have to prove the algebra to you. Okay pay attention:

    You sell razor blades. Each blade lasts one month and costs 50 cents to produce and you sell for a dollar. Your engineering department says “hey we can use (blank) material to make blades just as good that last 5 years.” You look at their data and ask how much the blades will cost. Turns out they cost you a dollar to produce, twice as much. Marketing tells you you can easily sell them for 5 dollars, five times the other razors.

    Lets do the math:

    normal razor makes 50 cents on each unit sold.
    improved razor makes 4 dollars on each razor sold.

    Okay you are convinced it looks great. Then I wander into your office and start pointing out a few things. The normal razors last a month which means the customer who wants to continue to shave buys one every month. The new razor lasts 5 years or 60 months.

    Now unfortunately there is a finite pool of necks, underarms, and legs that need to be shaved. Let’s say that market is 100 million people in the US. Now that means selling 100 million razors per month or 50 million dollars profit per month for the entire market (which your company Kathy has some share of). Now when you start selling the new razors that market changes. Lets assume we predict full market penetration with everyone eventually using the new razor. That means 100 million every five years. Which means 400 milion dollars profit per five years, or 7 million every month.

    7 is less than 50, right?

    Now of course we are looking at a static analysis here and not a growing population but it works out the same no matter what if you increase life span for a product you reduce refresh rate which means your effective market shrinks.

    Businesses don’t like to shrink their own markets, surely they taught you that in Econ. So depite your assertion that there are only 2 possible situations for planned obsolescense I’ve shown you mathematically at least one more. It is in fact the paradigm that rules in many key industries.

    Again take my word for it, while this is an abstract evalutaion for you I am actually seeing this every day in my job.

    “If (1) is true, then the company is turning down free money. If this is your company, then you are stupid, and have no business lecturing other people about economics.”

    Since you insulted me first I’m glad to point out how idiotic it is that I have to explain the idea of a market refrsh to the woman with an econ degree.

    Do you want to try again or have you learned the lesson?

  13. T … in your “analysis” you have assumed that there are multiple companies involved. Thus, you are assuming massive collusion.

    If your defense of your position requires some kind of conspiracy theory, I suggest you try again.

  14. “T … in your “analysis” you have assumed that there are multiple companies involved. Thus, you are assuming massive collusion.”

    No more so than price fixing schemes which are facts of life. They happen. In fact this is even easier since it actually requires no agreement between parties simply each of them understanding the situation.

    And furthermore it’s not like the companies involve deny this. Planned obsolescense is a very conventional part of modern business plans.

  15. This discussion is leading me to a question I’ve been interested in for a while. Do any of the reform clubbers have real jobs?

    Let me clarify that by “real job” I don’t mean writing for an internet rag, even if it does pay you. Nor do I mean patting yourself over the back for naming a think tank after yourself.

    I mean a real job. One that actually involves labor and the production of something.

    Okay Kathy’s a mom, I’ll give you that one, it’s a real job (if unpaid). What about the rest of you?

    See listening to Zycher I’m getting this weird feeling like he’s purely a theory guy, that he’s never actually seen economics in action much less been part of putting it in action himself. In other words he sounds (and I find this irony delcious I assure you) like the Ivory Tower Academician that conservatives so often complaign about.

    Kathy’s insistence that theory is king even though it doesn’t match reality follows this same pattern. It’s the kind of mentality you see among people really enamored of their field’s theory and not yet experienced in the real world application. Perhaps econ majors need more laboratory style classes?

    So I have to ask, how many of you really have worked in the real world outside of school and outside of washington punditry?

  16. Hey T, we don’t make a forum with any obligation that we participate. If I had my way, this would just be a straight “no comments” weblog like instapundit, hugh hewitt, etc.

    The idea that you are threatening anybody with any creeping awareness is hilarious. I tried to get you into a basic conversation about philosophy and values and you bowed out, not me. This, of course, was after you complained that you weren’t being engaged.

  17. And JFE, I’ve never done any happy little victory dances like you where I run around claiming “I WIN! I WIN!” So, I can’t imagine what irony to which you refer.

  18. “Hey T, we don’t make a forum with any obligation that we participate. If I had my way, this would just be a straight “no comments” weblog like instapundit, hugh hewitt, etc.”

    Up to you, although it would almost certainly decrease your actual viewership.

    “The idea that you are threatening anybody with any creeping awareness is hilarious. I tried to get you into a basic conversation about philosophy and values and you bowed out, not me.”

    I did? When was that? We had a conversation over a couple days about some philosophy stuff and then I had a weekend. As I recall when I came back and took a look nothing new had been added. If you did add something I’m more than happy to look at it. Do you remember which thread it was?

  19. “And JFE, I’ve never done any happy little victory dances like you where I run around claiming “I WIN! I WIN!” So, I can’t imagine what irony to which you refer.”

    Yeah you never do that. Except in the post immediately before this one:

    “I tried to get you into a basic conversation about philosophy and values and you bowed out, not me.”

    Whoopsy!

  20. T, I stand by my assertion on the victory dance thing. I think we’d all be better off if commenters avoided that. It would keep the discourse at a higher level. Readers are more than capable of deciding for themselves who has the better argument. I seriously doubt they are ever swayed by self-congratulation.

  21. I can’t help but notice you avoided saying whether you or any other reform clubber had a real job, avoided trying to support Zycher and Kathy’s claims, and avoided following up on the topic you claim I bowed out on.

  22. But weren’t you reading, T? He said he’s under no obligation to tell you anything, or even engage you. Which he isn’t. But it’s still funny to see him take his version of the moral high road and then make like it’s not his version of the “happy happy joy joy” song from Ren and Stimpy.

    I agree with you on the comments thing. The best part about blogs is the discourse. Through this blog, I’ve discovered an interest in ethics and philosophy I didn’t know I had, and the contributors here have led me to read in subjects I never would have if not for the discourse. It would be a sad thing to see the comments go.

    But then, we all know how much conservatives hate dissenting voices. =]

  23. P.S. I never denied the absurd triumphalism. My fiancee would be the first to agree that it is unseemly coming from me.

    It’s the unwarranted part that I find funny. =]

  24. Did you want a full C.V., Tlaloc, or will highlights suffice? I have spent a fair amount of time in think tanks and universities. I have also worked in a telephone factory, a recording studio, and a nursing home. I have run several small businesses, including a construction subcontracting company and a farm. I have been a union member. You could find any of us in Nexis/Lexis I suppose, but I am probably the only Reform Clubber listed in Index Medicus. I helped create the computer coding system that thousands of health facilities worldwide now use to digitally transmit and store medical test results.

  25. I’ve had plenty of real jobs. Too real. I’ve worked in an imposter perfume factory, at a nutrasweet packaging company (it’s in your nostrils at all times), at an Albertson’s grocery store, at an electronics firm cleaning circuit boards, at a drug store, and as a lawn cutter for a school district.

    Professionally, I’ve done a good bit of college teaching, worked for a large multi-specialty health clinic, for a large insurance company, in university administration, and in several public policy advocacy roles. Also, plenty of freelance writing.

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