The American Economic Paradigm

Discussion in 'Economics' started by Corey, Nov 20, 2008.

  1. Corey


    First, I apologize for the length of this thread. I wish I were a bit more terse. Secondly, no, this isn't an "America Bashing" thread. I am creating it in hopes of having a philosophical discussion of economic possibility and the role of the middle class, specifically in the United States (though, of course, everyone is free to chime in). Without further adieu...

    This is something I have thought about for a long while now, and it wasn't until reading Nassim Taleb's 'The Black Swan' that I was able to fully understand what I was thinking.

    I have always felt that America's greatest asset was our respect for intellectual property. Entrepreneurial ventures would never take off if it weren't for patent and copyright laws. This intellectual protection is the great equalizer in our society. Only in America can the largest corporations start from the laboratory project of two nerds from Stanford.

    Others, argue, however, that America owes its rich economic history to a strong middle class, starting from the industrial revolution and continuing until after World War II. In these days, the middle class represented a much larger proportion of society -- people were more 'average'.

    Yet now, it seems that the middle class is shrinking. We are more bound to 'extremism'. What has happened?

    My theory, so acutely described by Taleb, is the concept of job scalability. You see, in a non-scalable job, your payout is restricted by your energy input. A baker can only bake so much bread -- his income will be capped. On the other hand, due to expanding technology, it takes a writer no more effort to write a book for one person than it does a few hundred million. This job, therefore, is scalable -- your energy input does not restrict your income. The same goes for inventing a cure for a disease or developing a new technology. It was scalable film that put non-scalable local theatre out of business.

    This, therefore, is why I believe that our middle class is shrinking. By exporting our labor, America has drastically decreased the number of non-scalable jobs in the United States, decreasing the size of the middle class. In its place, the number of scalable opportunities has increased. The fact of the matter is: there is more money in the idea than in the product. To Nike, the concept of the shoe is worth more than all the factories in Asia combined. Our economy is leveraged on idea design -- which is why we can lose non-scalable jobs and still have an increase in standard of living.

    Unfortunately, this also means that there will be higher inequality. It also means that opportunity (more aptly named luck) will play a larger role in success in the future than it ever has before.

    So where does that leave America? Well, in a pickle, I suppose. There will always be a need for certain non-scalable jobs ... I will always want my freshly baked bread and my teeth cleaned and my yearly doctor check-ups. For the most part, though, factory jobs will go out the window. Even more so, in the future, as those with the scalable jobs design robots to replace those in the non-scalable. Technology seems to replace the non-scalable at a faster pace each year.

    Obviously, this propels society in a more 'efficient' direction, but it also severely skews the wealth distribution. Is it appropriate to eventually say 'enough is enough' and end the ongoing march of technology, to preserve certain non-scalable jobs to maintain the size of the middle class? Is society better off when everyone is closer to 'average'? It could be said that more opportunity exists, if successful, in a more scalable economy -- but failure would also be far more drastic, as there are fewer scalable jobs to fall back on.

    On perhaps it is possible to live in a society where the distribution is skewed, without symmetric fat tails. Can we have the opportunity of scalable jobs while still maintaining a large, non-scalable middle class? Does a free market approach ever truly allow this where the goal is profit maximization? Or have we finally found an appropriate place for government regulation?

    What are your thoughts? What are we to do? Can we have it both ways? The extremes seem to be free-market capitalism, which brings us further and further into extremism, or communism, which caps the fat tails and forces everyone into perfect equality. Must we be black and white, or can we use concepts of both?
  2. faure


    You're basically saying that free-market capitalism leads huge inequality and communism leads to stagnant & inefficient economies. Am I right?

    You alluded that it might be argued here is a place for government. I think government might not be the best solution. Institution & structure might be the best way to go about it. As you rightly point out, the institution of copy right laws have helped the US substantially. The answer to the above question might also be found here.
  3. The fact of the matter is: there is more money in the idea than in the product. To Nike, the concept of the shoe is worth more than all the factories

    The concept of a MBS is worth more than all the houses. There is more money in the idea.
  4. Corey


    Well, at the very least, they seem to perpetuate two ends of the spectrum. Free-market capitalism tends to lead towards profit-maximizing efficiency, which favors those in scalable jobs, leading to huge wealth dispersion. On the other hand, the exact opposite side of the spectrum, where everybody would have equal wage, has often been argued to lead to lack of incentive. I have read arguments that 'respect' would replace monetary incentive, but I don't know if I buy it...

    Either way, my question would be: can a balance be achieved? If so, what is the mechanism?

    I typically never believe that government is the best solution. My question is, what sort of institutions would be of use here? The institution of patent laws and copyright have substantially helped those in scalable jobs, but have done nothing for those with non-scalable jobs.

    Is it possible to eliminate non-scalable jobs? It seems that with each new technology, new non-scalable jobs are created. For each new robotic platform, a mechanic is needed. Until true 'artificial intelligence' arrives, humans will always sit at the top of the chain.

    But that is a long term issue -- and not one we have to deal with in the near future (though, it would lead to an interesting philosophical conversation). So, what can be done in the next fifty years? Should we be doing anything at all? Is there even a problem?

    On a personal level, I prefer the move towards scalability, hoping that I can edge myself into the upper skew. For society, however, is it not better if there is a smaller variance in wealth distribution? These two ideas conflict ... especially since society is only the collective of individuals. How can I, on the one hand, want personal maximization, and on the other, want societal averaging? They are at odds with one another, are they not?

    In this country, we currently reward only success. But does failure not necessarily also tell us something? Imagine several competing drug firms, all trying to find a cure for cancer. Not wanting to give away any trade secrets, they close their doors and forbid employees from talking. They go around in circles for years, because they all fall into the same pit-holes the others fell into years before. If only they shared their notes, we would be light-years ahead! Would it not make more sense to have these groups work together? Is it not for the common benefit of society? One could argue that if the break-through occurs at one lab, then they deserve the benefit -- but didn't the failure at the other labs indeed help generate the success?

    Is it possible to have some form of cooperative capitalism?

    Most people cite that a situation like this might lead to 'coat-tail riders' -- people who do little or no work, and only take away from those who deserve the true benefits for their work. Is it possible to develop institution to prevent this?

    As I said -- must we be confined by either-or, or is it possible to have a large positive skew while maintaining a large middle-class? Imagine -- the ability to succeed to great heights with work (and a little luck) ... and in the worst case, no enormous risk? Is it possible for risk and success to be exclusive, or does one necessitate the other?
  5. An interesting, if somewhat flawed analysis.

    Shift from manufacturing economy to service based economy attempts to alleviate some of these problems as while a product's price is somewhat fixed (cost of raw materials +R&D+fixed capital costs+hourly worker+profit). However, a service can cost ... whatever the market is willing to bear.

    There's no doubt in my mind that inflated value from 'value added' services was running much of the economy for the last few years - real estate brokerage commisions, mortgage broker commisions, bank fees, interest costs, CDO, MBS, ABS fees, and so on and so forth. Furthermore, many costs are built into the service due to compliance issues which further raises price and profitability of the service market. Until... we get in a pickle like the one we are in. And these services are no longer affordable. But they can't be cut sufficiently due to compliance concerns and legal reprocussions of not meeting those concerns. So... everything stops.

    IMHO, much of our economy has been built on fluff in order to keep things going much longer than they should have been. And now the equation doesn't work any more and there will be much pain.

    Everything works. Until it doesn't.
  6. Corey


    I don't know why you call my analysis flawed -- we are essentially agreeing. The US has shifted from a manufacturing economy to a service based economy. I say for a couple reasons: 1) Intellectual property laws, 2) Free-market capitalism exports jobs, 3) Technology makes out-sourcing easier, and 4) America has (had?) the wealth to allow new ventures.

    And so what is the solution? Let it come crumbling down and rebuild from the bottom up? Can we find a way to transition away? The service jobs are still a necessary component to society -- and many of them are part of my 'non-scalable' definition. Must manufacturing support an economy, or can we exist without it?

    Everyone seems bold enough to call this 'the end,' but everybody seems to complacent to do anything about it. Isn't it complacency that got us into this mess in the first place?