Comment by mitthrowaway2

Comment by mitthrowaway2 3 days ago

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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.

mlyle 3 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 3 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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      • dr_dshiv 2 days ago

        I’ve been interested in Henry Charles Carey, the chief economic advisor to Abraham Lincoln. He wrote a book called the “Harmony of Interests” about the need for state policy + markets (to contrast with purely free markets). Lots of data and rigorous argumentation.

        Apparently this was known as the “American School” of economics — and it dominated from the mid-late 1800s for over a century.

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      • kragen 2 days ago

        it seems that you both agree that it depends on the timescale; asml's next model of machine may be able to produce 10% more, or 91% less, and in either case that extra 3% of your demand will lower the average costs

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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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      • hyeonwho4 2 days ago

        I think the parent comment was talking about building factories and amortizing their costs over your unit production, whereas you assume the factory is a fixed cost with fixed capacity and looking at the marginal cost to produce a unit, which is really rare in many real world situations.

        For most goods, the factory doesn't run anywhere near N, and the fixed costs are 6 or more orders of magnitude higher than the marginal widget costs, so your business is well served just by finding any method to use that plant more effectivly. As an example, I was quoted $60,000 for a mold which would have produced parts at $0.005. (Very small plastic widgets.) At that ratio, any amount of scale will increase my profit, since the marginal costs, even if they increase by a factor of 10 or 100, are negligible to the cost of the tooling. (And the global market for this widget is measured in hundreds of units.) Any amount of reusing the mold is going to save me money. Sure we have problems if we need N+1 widgets in less than 1/N more time, but if we expected to need 2N widgets, we could reuse the tooling design at a second factory, and marginal costs actually do keep dropping.

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      • mitthrowaway2 2 days ago

        But in real life, by the time you received orders for N/2 widgets, you were already breaking ground on your next factory. And if you get an order for 100N, you smile because now you can switch to a higher productivity manufacturing method, like stamping instead of machining; at 10000N you can invest in mass-producing the machines-that-make-the-machines. This is how we end up being able to make even complex products like cars so cheaply that we have more cars than people.

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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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