Those who make technology worth 4000$ are not going to sell it sold at 2000$, making everyone better off. The gap between the value we find in things, and the value we pay for it, will be exploited by companies until it almost disappears.
This is not true, even if the company is a profit-maximizing monopoly. You can ask your favorite LLM if you want details. Claude spat out this interactive plot:
Competitive industries have much higher Consumer Surplus and much lower Producer Surplus. Grocery store profit margins are ~2%.
There is one way for the producers to suck out almost all the surplus while maximizing profit: Price discrimination. Which is, of course, difficult to do. In a market for easily transferable physical goods, the best they tend to be able to do is to make multiple, somewhat different versions of a product and sell one at a premium; but this is fairly crude. (Apple products are an example.)
Yes, I think we agree. One nitpick: I would say price discrimination is easy to do, but hard to do in a way that sucks out most of the surplus.
I looked up some studies. Courty (2009)[1] found that price discrimination on concert tickets increased revenue by around 5%. Leslie (2004)[2] estimated the same 5% revenue increase using data from a Broadway play. Shiller (2014)[3] found “Including nearly 5000 potential website browsing explanatory variables increases profits by … 12.2%” (for Netflix subscriptions). Waldfogel (2015)[4] estimated price discrimination would raise revenue by 9.0% in higher education (specifically, a public university grad school program). Namin (2020)[5] estimated price discrimination can increase revenue for cruise lines by over 4%.
The big outlier was Srivastava (2020)[6], which found up to an 82% increase in profits from price discrimination in informal markets in India. Basically, the seller looks at the buyer and tried to guess the buyer’s wealth level. If you look rich, you have to haggle: “Bargaining is found to have a strong downward effect on the final price markup”. Also note weasel words “can raise profits by as much as 82%”, so that is an upper bound.
Disclaimer: I only read the abstracts of these papers. They might have flaws that I am not aware of.
You can only price discriminate if you have a monopoly. (concert tickets, Disneyland admission). Or there is cooperation between sellers, and the government decides to allow it (senior discounts, airline discounts).
That sounds strange. The benefit is almost purely the customers, and yet wealth inequality keeps steadily getting worse? I’m working backwards from a conclusion that I’m still sure is true, and I probably do make mistakes, but I can’t tell where.
If grocery store profit margins are small, and the prices aren’t falling much, and the farmers also complain about their economic situation, then it seems like benefits are simply disappearing. Machines keep getting more efficient, doing the work of more people in less time. We make better crops, better fertilizers, and find better ways to prevent food from getting attacked by insects and from rotting.
Theoritically, everything should be getting better. Either the ratio between the cost of living and wages should increase, worked hours should decrease, or else the current lower-middle class should be living like the upper class of 30 years ago. Neither have happened, which is what I mean by zero-sum mechanics kicking in.
Richer people are generally happier, but what matters here is simply the relative amount of money, not the absolute amount of money. It seems that people who don’t understand this calls it a paradox. I may not be able to explain why it’s true, but people are naive in that things turn out much more zero-sum than expected. I know the general consensus is that the economics is far from zero-sum, but even if theory can back this up, reality seems unable to.
Here (source) is a historical analysis of subjective well-being over the past 200 years, by the way. I think the common opinion that things are getting better over time is a fallacy stemming from the belief that, since the past looks worse from our current moral values, the past must also have been experienced as worse by the people of the past. But that assumes that they had our current values, which is false. We are tempted to interpret people in a way which support our own values (e.g. neo-nazis who think that Hitler would have approved of them, and Christians who think Jesus would approve of them) and I think this leads us to mis-interpret the past.
Zvi had a great series of posts on why people complain about the economic situation today despite being vastly richer than in the past. People’s expectations have also risen, as have requirements (it is illegal to purchase the 1950′s basket of goods today).
The second and third articles seems more to the point, and Mike Solana is right. But the “intellectuals” with the graphs are overlooking many important things. I also doubt the legitimacy of a lot of this data, how exactly is food quality going up? There’s a clear trend of nutritional decline, added sugar and chemicals, and hyper-processed foods.
I know that life has generally gotten worse since 15 years ago, but I need a stronger argument to show that this is not just a local trend but a global one. For the same reason that “This year is colder than last year, therefore there is no global warming” wouldn’t be a valid argument.
I take issue with how so-called knowledgable people fixate on surface-level metrics and act like other aspects of life do not exist. Money is not a good metric for well-being, and while economics is relevant, psychology is much more so. I’m glad that Zvi at least talks about the cost of watching children like hawks, but that’s merely one important pattern. He refers to it multiple times because he rightly regards it as important, but he barely manages to see the shadow of the cluster to which it belongs, and he fails to notice that his modern values helped in creating this cluster.
I’d have brought up the difference between manifacturing and service if the article hadn’t. The change from “Buy something and you own it and it will work for 50 years” to “Buy a mere license to something which needs repairs after 2 years” means that things may appear cheaper despite being more expensive over time. But even if that is taken into account, people become miserable when you take away control and agency from them, and these psychological aspects account for a lot of the felt decline. It’s much easier to cope with failure when it’s because of ourselves or because of life, than when it feels like other peoples tyranny is to blame.
I have to disagree with the argument “We find the compromises of the past simply unacceptable”. The “we” refered to here are those who prefer the present over the past, and I’m arguing that things are getting worse because I find the past to be better in many aspects. The author then claims that anyone who prefers the present is “wise”, which is ridiculus. As if a societal collapse is worth a reduction in mean words. He doesn’t seem to realize it, but many of the problems he later identifies (like bureaucracy and overregulation) are replacements to traditional ways of doing things.
Zvi is in-between the position that I disagree with and the position I agree with. He knows that some things “adds to measured GDP but makes life harder” and that “People are very good at noticing when things suck. Not as good at figuring out why”. This is the tension between the intellectuals who only see the surface, and the people living in reality who lack the education to explain why they’re miserable. Many of my objections to his post point in the same direction as his own arguments, i.e. “Survival requires jumping through costly hoops not in the statistics.” Exactly, the ivory tower is too disconnected to the averge person. The objective metrics does injustice to the subjective life. The prefrontal cortex tyrannizes the older brain circuits. If Zvi takes his ideas further, I think he will converge towards my current position.
The customer’s benefit comes in the form of increased quality of life. The business’s benefit comes in the form of profit
This duality is excellent. It mirrors the trade-off between “Work to get resources but lack the time to play” and “Have the time to play but lack the resources”. A fundamental trade-off between utility and qualia. But the example misses something important, for well-being requires power (agency and freedom), and being exploited by the system leads to a reduction in these rather than an increase. The traps here feels like hedonism, or the “increased quality of life” being short-term rather than long term. You felt this too, since you mentioned junk food and gambling.
Finally, most of those who are miserable about the economy today tells me that they commute, work, eat, shower and sleep. They do not have time and energy for anything else. So this is an excellent metric! Has hours worked increased? Is free time left after necessary daily chores decreasing? If they’re not, then it must be that life has gotten worse psychologically, and that the decrease in mental energy, rather than time, makes life feel as if it’s nothing but a struggle. 4 hours of free time which would be spent socializing in the past might have turned into 4 hours of free time spend ruminating or on unfulfilling escapism.
Agreed that we have serious problems today. But I don’t think they are mostly economic in nature. The main new economic problem is that life is now full of traps that didn’t used to exist. High-quality nutritious food is much cheaper than in the 1950s, but junk food is even cheaper and tastes delicious. You can do sports gambling on your phone. You can doomscroll TikTok on your phone. This is a “skill issue”, but many people get hooked on junk food or TikTok as children and children are going to be unskilled. If you avoid the traps, things have never been better (from a purely economic perspective).
I think our main problems are social, cultural, and [redacted]. Unfortunately, a full discussion of them would require touching on some forbidden topics.
They both are and aren’t. Modern molochian problems stem from actions which maximize income, and with the death of god, materialism is winning against traditional morality. We don’t need more money in order to be happier, but on the other hand, living paycheck to paycheck is really hard on the psyche, and it often feels like everyone is out to bleed you dry.
I also think we have less alternatives to these traps than we used to. There’s less communities and family gatherings, less nature to walk in, less social activities around town. Many improvements require collective effort rather than individual effort. I’m immune to these traps, so I don’t think they’re solely to blame for the worsening conditions.
You don’t think that the million laws, regulations and paperwork requirements makes it more difficult than in the past to invent new things or start a business?
I agree about [redacted]. If you’re refering to ideas which aren’t just taboo in our current era, but in most or all eras, feel free to DM more about them. I like hearing such takes, but they’re anti-memetic so all search engines work against me.
> and yet wealth inequality keeps steadily getting worse
Disagree that wealth inequality is inherently bad. I think the rise in wealth inequality is downstream from a smaller fraction of people producing a greater fraction of value.
For example, J.K. Rowling has a net worth of around $1.2 billion. Her books have sold over 600 million copies worldwide, along with over 1 billion movie tickets. Her work provided an enormous amount of value to people. If you consider $1 per book and $1 per movie ticket to be reasonable compensation, then a net worth of $1.6 billion is fair. Such a large fraction of the global population reading the same books and watching the same movies, is not something that would have happened in the 1950s.
I suspect that people who provide lots of value are more likely to be undercompensated than overcompensated. Just because you provide a lot of value doesn’t mean you capture much of it. E.g., Linus Torvalds has probably done more good for the world than Bill Gates, but since Linus gives his OS away for free his net worth is far lower.
Some people become wealthy through corruption, or fraud, or by taking advantage of people with skill issues (junk food, sports betting, engagement-maximizing social media algorithms) but the problem there is the harm done, not the inequality itself.
I don’t think it’s inherently bad. It’s fine that many things in life follow a power-law distribution, but this inequality shouldn’t feed into itself. If you’ve ever played Monopoly you know that it’s so unsustainable that even the winner won’t want to continue.
But I strongly disagree that rich people provide value. Windows is not a good operation system, and the competition they prevented would have made for a better world. Most of what made Bill Gates rich was essentially stolen as well. It wasn’t just that you picked a bad example, most rich people are not the original creators of value. If it were people like Alan Turing and Neumann who became billionares, then I’d agree with you, but it’s actually companies like King (they made a clone of an old flash game called Bejeweled and made billions). Nikola Tesla died penniless and in debt.
You assume that more popular things are more valuable, but is that really the case? Most of what I enjoy is obscure, and most of what I dislike is common. You could counter that with “While gold is worth more than iron, it would hurt us more if all iron disappeared than if all gold did”. So if value = quality * quantity, then yes, all the most popular things are the most valuable, but should we really define value in this way?
A poor product which is well marketed often does better than a good product which is never marketed, so reach is rewarded more than quality. And the things which made us rich are often harmful to others (which is why money is considered the root of all evil). Chances are that if you are a good hacker, or good at finding loopholes in laws and such, then you’re also good at making money. There’s a Youtuber called The Spiffing Brit who breaks video games with exploits, but he does the same to the Steam market and the same to the Youtube algorithm, and this is because it’s the one and same ability. If we assume that richer people simple added more value to the world, then we can conclude that scammers are good for society and that people like Tesla were a waste of oxygen, but that conclusion is the opposite of the truth. Ideally, merit = reward, but we’re so far away from the ideal that the two hardly correlate (in my opinion).
This is not true, even if the company is a profit-maximizing monopoly. You can ask your favorite LLM if you want details. Claude spat out this interactive plot:
Competitive industries have much higher Consumer Surplus and much lower Producer Surplus. Grocery store profit margins are ~2%.
There is one way for the producers to suck out almost all the surplus while maximizing profit: Price discrimination. Which is, of course, difficult to do. In a market for easily transferable physical goods, the best they tend to be able to do is to make multiple, somewhat different versions of a product and sell one at a premium; but this is fairly crude. (Apple products are an example.)
Yes, I think we agree. One nitpick: I would say price discrimination is easy to do, but hard to do in a way that sucks out most of the surplus.
I looked up some studies. Courty (2009)[1] found that price discrimination on concert tickets increased revenue by around 5%. Leslie (2004)[2] estimated the same 5% revenue increase using data from a Broadway play. Shiller (2014)[3] found “Including nearly 5000 potential website browsing explanatory variables increases profits by … 12.2%” (for Netflix subscriptions). Waldfogel (2015)[4] estimated price discrimination would raise revenue by 9.0% in higher education (specifically, a public university grad school program). Namin (2020)[5] estimated price discrimination can increase revenue for cruise lines by over 4%.
The big outlier was Srivastava (2020)[6], which found up to an 82% increase in profits from price discrimination in informal markets in India. Basically, the seller looks at the buyer and tried to guess the buyer’s wealth level. If you look rich, you have to haggle: “Bargaining is found to have a strong downward effect on the final price markup”. Also note weasel words “can raise profits by as much as 82%”, so that is an upper bound.
Disclaimer: I only read the abstracts of these papers. They might have flaws that I am not aware of.
https://www.carloalberto.org/wp-content/uploads/2018/11/no.105.pdf
https://www.jstor.org/stable/1593706
Researchgate PDF link
https://onlinelibrary.wiley.com/doi/abs/10.1111/joie.12085
https://www.sciencedirect.com/science/article/abs/pii/S0278431920301493
https://econ.berkeley.edu/sites/default/files/Rishab_Srivastava_Final_Honors_Thesis.pdf
I think the parent meant an ideal form of price discrimination where the entire consumer surplus is instead claimed by the company.
You can only price discriminate if you have a monopoly. (concert tickets, Disneyland admission). Or there is cooperation between sellers, and the government decides to allow it (senior discounts, airline discounts).
That sounds strange. The benefit is almost purely the customers, and yet wealth inequality keeps steadily getting worse? I’m working backwards from a conclusion that I’m still sure is true, and I probably do make mistakes, but I can’t tell where.
If grocery store profit margins are small, and the prices aren’t falling much, and the farmers also complain about their economic situation, then it seems like benefits are simply disappearing. Machines keep getting more efficient, doing the work of more people in less time. We make better crops, better fertilizers, and find better ways to prevent food from getting attacked by insects and from rotting.
Theoritically, everything should be getting better. Either the ratio between the cost of living and wages should increase, worked hours should decrease, or else the current lower-middle class should be living like the upper class of 30 years ago. Neither have happened, which is what I mean by zero-sum mechanics kicking in.
Richer people are generally happier, but what matters here is simply the relative amount of money, not the absolute amount of money. It seems that people who don’t understand this calls it a paradox. I may not be able to explain why it’s true, but people are naive in that things turn out much more zero-sum than expected. I know the general consensus is that the economics is far from zero-sum, but even if theory can back this up, reality seems unable to.
Here (source) is a historical analysis of subjective well-being over the past 200 years, by the way. I think the common opinion that things are getting better over time is a fallacy stemming from the belief that, since the past looks worse from our current moral values, the past must also have been experienced as worse by the people of the past. But that assumes that they had our current values, which is false. We are tempted to interpret people in a way which support our own values (e.g. neo-nazis who think that Hitler would have approved of them, and Christians who think Jesus would approve of them) and I think this leads us to mis-interpret the past.
Zvi had a great series of posts on why people complain about the economic situation today despite being vastly richer than in the past. People’s expectations have also risen, as have requirements (it is illegal to purchase the 1950′s basket of goods today).
The $140,000 Question
The $140K Question: Cost Changes Over Time
The Revolution of Rising Expectations
> The benefit is almost purely the customers, and yet wealth inequality keeps steadily getting worse?
Why is that confusing? The customer’s benefit comes in the form of increased quality of life. The business’s benefit comes in the form of profit.
Also, there is a separate issue that some businesses make customers worse off. E.g., junk food, sports gambling, probably much of social media.
https://nitter.poast.org/CharlesFLehman/status/1902758037443444882/
Long response—feel free to skim.
The second and third articles seems more to the point, and Mike Solana is right. But the “intellectuals” with the graphs are overlooking many important things. I also doubt the legitimacy of a lot of this data, how exactly is food quality going up? There’s a clear trend of nutritional decline, added sugar and chemicals, and hyper-processed foods.
I know that life has generally gotten worse since 15 years ago, but I need a stronger argument to show that this is not just a local trend but a global one. For the same reason that “This year is colder than last year, therefore there is no global warming” wouldn’t be a valid argument.
I take issue with how so-called knowledgable people fixate on surface-level metrics and act like other aspects of life do not exist. Money is not a good metric for well-being, and while economics is relevant, psychology is much more so.
I’m glad that Zvi at least talks about the cost of watching children like hawks, but that’s merely one important pattern. He refers to it multiple times because he rightly regards it as important, but he barely manages to see the shadow of the cluster to which it belongs, and he fails to notice that his modern values helped in creating this cluster.
I’d have brought up the difference between manifacturing and service if the article hadn’t. The change from “Buy something and you own it and it will work for 50 years” to “Buy a mere license to something which needs repairs after 2 years” means that things may appear cheaper despite being more expensive over time. But even if that is taken into account, people become miserable when you take away control and agency from them, and these psychological aspects account for a lot of the felt decline. It’s much easier to cope with failure when it’s because of ourselves or because of life, than when it feels like other peoples tyranny is to blame.
I have to disagree with the argument “We find the compromises of the past simply unacceptable”. The “we” refered to here are those who prefer the present over the past, and I’m arguing that things are getting worse because I find the past to be better in many aspects. The author then claims that anyone who prefers the present is “wise”, which is ridiculus. As if a societal collapse is worth a reduction in mean words. He doesn’t seem to realize it, but many of the problems he later identifies (like bureaucracy and overregulation) are replacements to traditional ways of doing things.
Zvi is in-between the position that I disagree with and the position I agree with. He knows that some things “adds to measured GDP but makes life harder” and that “People are very good at noticing when things suck. Not as good at figuring out why”. This is the tension between the intellectuals who only see the surface, and the people living in reality who lack the education to explain why they’re miserable. Many of my objections to his post point in the same direction as his own arguments, i.e. “Survival requires jumping through costly hoops not in the statistics.” Exactly, the ivory tower is too disconnected to the averge person. The objective metrics does injustice to the subjective life. The prefrontal cortex tyrannizes the older brain circuits. If Zvi takes his ideas further, I think he will converge towards my current position.
This duality is excellent. It mirrors the trade-off between “Work to get resources but lack the time to play” and “Have the time to play but lack the resources”. A fundamental trade-off between utility and qualia. But the example misses something important, for well-being requires power (agency and freedom), and being exploited by the system leads to a reduction in these rather than an increase. The traps here feels like hedonism, or the “increased quality of life” being short-term rather than long term. You felt this too, since you mentioned junk food and gambling.
Finally, most of those who are miserable about the economy today tells me that they commute, work, eat, shower and sleep. They do not have time and energy for anything else. So this is an excellent metric! Has hours worked increased? Is free time left after necessary daily chores decreasing? If they’re not, then it must be that life has gotten worse psychologically, and that the decrease in mental energy, rather than time, makes life feel as if it’s nothing but a struggle. 4 hours of free time which would be spent socializing in the past might have turned into 4 hours of free time spend ruminating or on unfulfilling escapism.
Agreed that we have serious problems today. But I don’t think they are mostly economic in nature. The main new economic problem is that life is now full of traps that didn’t used to exist. High-quality nutritious food is much cheaper than in the 1950s, but junk food is even cheaper and tastes delicious. You can do sports gambling on your phone. You can doomscroll TikTok on your phone. This is a “skill issue”, but many people get hooked on junk food or TikTok as children and children are going to be unskilled. If you avoid the traps, things have never been better (from a purely economic perspective).
I think our main problems are social, cultural, and [redacted]. Unfortunately, a full discussion of them would require touching on some forbidden topics.
They both are and aren’t. Modern molochian problems stem from actions which maximize income, and with the death of god, materialism is winning against traditional morality. We don’t need more money in order to be happier, but on the other hand, living paycheck to paycheck is really hard on the psyche, and it often feels like everyone is out to bleed you dry.
I also think we have less alternatives to these traps than we used to. There’s less communities and family gatherings, less nature to walk in, less social activities around town. Many improvements require collective effort rather than individual effort. I’m immune to these traps, so I don’t think they’re solely to blame for the worsening conditions.
You don’t think that the million laws, regulations and paperwork requirements makes it more difficult than in the past to invent new things or start a business?
I agree about [redacted]. If you’re refering to ideas which aren’t just taboo in our current era, but in most or all eras, feel free to DM more about them. I like hearing such takes, but they’re anti-memetic so all search engines work against me.
> and yet wealth inequality keeps steadily getting worse
Disagree that wealth inequality is inherently bad. I think the rise in wealth inequality is downstream from a smaller fraction of people producing a greater fraction of value.
For example, J.K. Rowling has a net worth of around $1.2 billion. Her books have sold over 600 million copies worldwide, along with over 1 billion movie tickets. Her work provided an enormous amount of value to people. If you consider $1 per book and $1 per movie ticket to be reasonable compensation, then a net worth of $1.6 billion is fair. Such a large fraction of the global population reading the same books and watching the same movies, is not something that would have happened in the 1950s.
I suspect that people who provide lots of value are more likely to be undercompensated than overcompensated. Just because you provide a lot of value doesn’t mean you capture much of it. E.g., Linus Torvalds has probably done more good for the world than Bill Gates, but since Linus gives his OS away for free his net worth is far lower.
Some people become wealthy through corruption, or fraud, or by taking advantage of people with skill issues (junk food, sports betting, engagement-maximizing social media algorithms) but the problem there is the harm done, not the inequality itself.
I don’t think it’s inherently bad. It’s fine that many things in life follow a power-law distribution, but this inequality shouldn’t feed into itself. If you’ve ever played Monopoly you know that it’s so unsustainable that even the winner won’t want to continue.
But I strongly disagree that rich people provide value. Windows is not a good operation system, and the competition they prevented would have made for a better world. Most of what made Bill Gates rich was essentially stolen as well. It wasn’t just that you picked a bad example, most rich people are not the original creators of value. If it were people like Alan Turing and Neumann who became billionares, then I’d agree with you, but it’s actually companies like King (they made a clone of an old flash game called Bejeweled and made billions). Nikola Tesla died penniless and in debt.
You assume that more popular things are more valuable, but is that really the case? Most of what I enjoy is obscure, and most of what I dislike is common. You could counter that with “While gold is worth more than iron, it would hurt us more if all iron disappeared than if all gold did”. So if value = quality * quantity, then yes, all the most popular things are the most valuable, but should we really define value in this way?
A poor product which is well marketed often does better than a good product which is never marketed, so reach is rewarded more than quality. And the things which made us rich are often harmful to others (which is why money is considered the root of all evil). Chances are that if you are a good hacker, or good at finding loopholes in laws and such, then you’re also good at making money. There’s a Youtuber called The Spiffing Brit who breaks video games with exploits, but he does the same to the Steam market and the same to the Youtube algorithm, and this is because it’s the one and same ability. If we assume that richer people simple added more value to the world, then we can conclude that scammers are good for society and that people like Tesla were a waste of oxygen, but that conclusion is the opposite of the truth. Ideally, merit = reward, but we’re so far away from the ideal that the two hardly correlate (in my opinion).