Comment by mlyle

Comment by mlyle 2 days ago

> . Unlike what Econ 101 asserts about maximizing comparative advantage being the most profitable strategy, there is absolutely no guarantee that following a locally-optimal comparative-advantage strategy is globally optimal over a long-term window,

I think there's little doubt that our change in allocation of resources has been advantageous versus staying an economy focused on primary metals and relatively simple manufacturing. Do you really feel otherwise?

Of course, economic assessments and the behavior of markets generally assumes free choice by participants. So there's always:

1. Geopolitical risks: state leverage can turn a local absolute advantage in e.g. producing war materiel into other advantages.

2. Sure, we could back ourselves into a corner, ultimately, by not being able to provide a key part of the value chain by following that gradient. (Geopolitics can be related, too, in that states can gather together lots of small advantages and use them in coordinated ways against other states).

So our state, of course, needs to focus on countering those actions of other parties. And maintaining some diversity beyond what is economically optimal can add resilience.

(One point I make in class: our textbook pretty much says that price controls are always dumb... but that there are plenty of reasons that a country might desire to have a surplus of food or to not be dependent upon another country).

The track record of those who would seek to centrally plan and optimize for some future outcome instead of following that profit gradient has been very poor. Not to say that it's never worked: but generally following the profit gradient has yielded better outcomes.

> because of (unlike what any econ 101 textbook teaches), marginal costs decline with production quantity in the manufacturing sector.

Unlike what any econ 101 teaches? Talking about LRATC, returns to scale, etc, is a big part of my unit 3. If you're not referring to that and instead e.g. Wright's law, that too is mentioned.

mitthrowaway2 2 days ago

I wasn't talking about "base metals and relatively simple manufacturing". Were you? When Tim Cook explained, in 2017, why the iphone had to be made in China, he explained that it's because China dominates advanced manufacturing, and has skill that cannot be replicated elsewhere.

The behavior of markets assumes free choices by participants that rewards the participants who make those choices. I do not dispute that the CEOs who were responsible for shipping supply chains to China were following their incentives, and it worked out well for them. I would argue that there are alterations to regulations on corporate governance which would increase long-term profitability of those corporations overall, but that the key people in the corporations aren't properly incentivized to pass them, nor are shareholders sufficiently informed or coordinated.

> Talking about LRATC, returns to scale, etc, is a big part of my unit 3

In your unit 3, do you draw LRATC curve as a parabola? Because that's the wrong shape for manufactured goods. Not only do average costs decrease, so do marginal costs, and this is monotonic over all but the shortest timescales. Wright's law is about half of the reason, yes.

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mlyle 2 days ago

> I wasn't talking about "base metals and relatively simple manufacturing". Were you?
A whole lot of the decline that we're talking about has been in those sectors. Microchips and aerospace grew; simple consumer goods and steel manufacturing fell through the floor.
> The behavior of markets assumes free choices by participants t...
Incentives can be, and often are misaligned. However, the context of our discussion is talking about large overall economic growth that has outpaced manufacturing growth, even though it is still positive. This isn't evidence of misaligned incentives.
> In your unit 3, do you draw LRATC curve as a parabola? Because that's the wrong shape for manufactured goods.
It's absolutely a bathtub.
It's steep-downward sloping, mostly flat for a loooooonnnggg time, and then upward sloping. Indeed, this understanding of the shape of LRATC originally comes from study of manufactured goods. At some point coordination gets hard and further increases in quantity require using resources that are not well suited for the task.
Of course, the quantity at which costs slope upwards may be at an impractically large quantity for any industry-- in which case that industry is likely to be a natural monopoly. And there are some recent arguments that coordination is easier thanks to information technology and that it is even harder to reach diseconomies of scale.

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- mitthrowaway2 2 days ago
  
  > It's absolutely a bathtub.
  I endeavour to convince you that you are teaching your students a falsehood. Natural resource industries have bathtub-shaped average costs. Average costs fall strictly monotonically for manufacturing, and marginal costs either fall or remain constant. Constant marginal costs are what you get if you don't even bother to solve coordination problems, and just copy-and-paste your whole assembly line instead (except even then you can't help but gain economies of scale, if only from your tooling suppliers). The misconception that it's a bathtub does not come from the study of manufactured goods, it comes from thought experiments about manufactured goods done by people who never managed quote requests at a real factory. Empirical studies done on actual firms almost never show rising marginal costs at any quantity.
  That this error has permeated introductory economics is a very, very big problem.
  
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  mlyle 2 days ago
  
  > Constant marginal costs are what you get if you don't even bother to solve coordination problems
  You still have coordination problems on the supply and distribution side.
  > Average costs fall strictly monotonically for manufacturing
  This is an extraordinary claim that is easy to refute with simple thought experiments. e.g. You think that if I want 103% of the units that a set of equipment from ASML can deliver, that average costs will be lower than producing 100%? Or do you mean "strictly monotonically" in some other sense?
  Being able to vary your capital in the long run doesn't mean that you can have 10.3 sets of photolithography apparatus.
  > and just copy-and-paste your whole assembly line instead
  If you copy and paste and have everything truly independent, without the need for any coordination of resources, what you effectively have is multiple firms. In practice, firms still need to allocate scarce resources among lines.
  > The misconception that it's a bathtub does not come from the study of manufactured goods , it comes from thought experiments about manufactured goods
  This is a falsehood. Bain conducted reams of real-world research on manufacturing, plant size, firm size, and returns to scale, and this informs today's idea of LRAC. Of course, this research is 70 years old, and recent data is more ambiguous. As I've said, some believe that information technology has changed everything.
  
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  labcomputer 2 days ago
  
  > and marginal costs either fall or remain constant
  Not true. If your factory can make N widgets per year, and you want to make N+1 widgets, the marginal cost of the N+1th widget is vastly greater than the Nth widget.
  
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corimaith 2 days ago

You know, part of the problem with the massive youth unemployment in China is that the Chinese, just like most people, don't want to work in blue collar advanced manufacturing. You might call jobs like consulting or investment banking as "useless jobs", but that kind of comfy white collar job is what everyone is sending their kids to university for.

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