Part 2
From #3
The “genie out of the bottle” character of technological progress leads to some interesting possibilities. If suppliers think that future demand will be high, then they’ll invest in research and development that lowers the long-run cost of production, and those lower costs will stick permanently, even if future demand turns out to be not too high.
Well, they might invest in r&d. If they can take adavatge to increasing returns to scale in meeting demand they’d likely just build more whatevers.
Assuming you like the resulting price reductions, this could be interpreted as an argument in favor of bubbles, at least if you ignore the long-term damage that these might impose on people’s confidence to invest.
Interesting, but I think the damage to willingness to invest would be too dear a loss and wouldn’t assume it away. Don’t know how much extra was gained through the tech bubble in terms of tech we wouldn’t otherwise have had. The bublle was in speculative financial market investment and not necessarily in in real economy actual stuff. I’ll grant there is probably some crossover. Still, if people see real value in production they will demand those goods. Did we get some gains in housing tech that we wouldn’t otherwise have had because of the housing bubble?
The crucial ingredient needed for technological progress is that demand from a segment with just the right level of purchasing power should be sufficiently high. A small population that’s willing to pay exorbitant amounts won’t spur investments in cost-cutting:
Won’t it? I think it will. Lower costs → higher accounting profits.
In a sense, the market segments willing to pay more are “freeriding” off the others — they don’t care enough to strike a tough bargain, but they benefit from the lower prices resulting from the others who do
I don’t follow this. Given that they are early-adopters, only other early adopters are present in the market at that point in time. How can they be freeriding off consumers who are willing to strike a tough bargain, as you say, if those bargain strikers are not present in the market by definition? You mean they benefit later when the later adopters enter? presumably the ealry adopters are at that time moved on to something newer and better.
Note, however, that if the willingness to pay for the new population was dramatically lower than that for the earlier one, there would be too large a gap to bridge.
This need not be the case especially in the face of further tech improvements in production or dramatically lower costs of factors of production, even for exogenous reasons.
In particular, the vision of the Singularity is very impressive, but simply having that kind of end in mind 30 years down the line isn’t sufficient for commercial investment in the technological progress that would be necessary. The intermediate goals must be enticing enough.
True enough it seems. And this is they way of things. The prospect of offering transcontinental flight to a european forager millenia ago would have been absurd. A hangliding tour, maybe not so much.
From #5
I can broadly support the segments you’ve categorised. But I disagree with the notion that “Progress in all three areas is somewhat related but not too much. In particular, the middle is the part that has seen the most progress over the last decade or so, perhaps because demand in this sector is most robust and price-sensitive, or because the challenges there are the ones that are easiest to tackle.”
What do you mean by progress? Does progress mean more stuff being made in that segment, as in, able to produce more of it? Production technology or the technology product itself? In either case I think the are inextricably linked from the top down.
From #6 and 7
When I first began using computers they were 16k. I was 7. I take your point about the lack of urgency for average PC users to have a great deal more ROM or RAM. But we use computers to do tasks not for their own sake and I take your point about complementary tasks. Where I disagree is “On either end, therefore, the incentives for innovation seem low”. If the tools are there, people will find ever more awesome ways of using them, and that is the history of tech progress!
Keep at it. Happy to go into more detail if it might be useful. I’ve been thinking a lot lately about the order of realisation of various ‘singularity’ techs and why it matters. Anyone interested? If so I’ll post up my thoughts.
Hi,
First contribution here but I’ve been lurking since the move from Overcoming Bias. Play nice :) I think this is an important subject matter which few people are giving attention to so I thought I’d offer some comments that might assist.
My comment was deemed too long so I’ve Split it up. If that’s bad form let me know. Considered removing quotations of the OP but it would make it too difficult to read.
If you are going to use pieces of standard microeconomics in future versions of this analysis it might be best to spend a bit more time defining them more clearly and explaining how they map to the subject. If there is any confusion in the assumptions contained in the theory it carries through to the analysis of the case in question. It may well all be clear in your mind but it doesn’t seem, at least to me, to unfold clearly in the text. But it might just be me...
Some examples From #1
As you point out, in the short run, producers cannot immediately alter their fixed cost inputs e.g. new factories (r&d is a subelty different in the way it reduces costs which I’ll return to), but in the long run they can—all costs are variable in the long run. So, if there is an increase in demand of good A, and production of good A is characterised by constant- or increasing-returns to scale or economies of scale (these concepts are different with the same result, one referring to a fixed proportion of inputs and the other to varying proportion of inputs) over time we end up with an increase in quantity produced of A and a decrease in the price of A. But there need not be a downward sloping supply curve. In the case of constant- or increasing-returns to scale you just make more A because more A is demanded. In the case of economies of scale you just select from an envelop of possible short run average cost curves along the long run cost curve that meets the quantity demanded and maximises profit.
A decreasing cost industry is something different. Let’s say industry (multiple firms) i produces good z. In producing z they use inputs c,d and e. Industry i is categorised by economies of scale and experiences an unexpected increase in demand for good z. Over time they ramp up with new factories and grew to a medium size industry. Their input e is a non-commodity input which, because they are now a large bulk purchaser of e they buy at a discount. All other inputs costs remain the same in real terms. The result is a lower average cost of production and downward sloping industry supply curve. They may in fact be gaining from increasing returns to scale from producers of input e. Car manufacturing is one example.
From #2
This again is economies of scale and not decreasing cost industry. Also, it’s just one form, not even an industry. To clarify what i wrote above a little, just because a firm experiences decreasing costs it does not make it a decreasing-cost-industry in the way that this special case is treated in microeconomic theory.
Your meaning is not clear to me here. A lot infrastructure is durable. By “costs will continue to stay low even if demand falls back” do you mean even if demand increases once again? It will definitely stay low if demand falls, but it’s not clear that that is your meaning. Why would prices go back up if the infrastructure has been re-purposed to some other market? Do you mean that because demand has decreased some firms will exit that market by re-purposing their gear and so those that remain will constitute a smaller market supply (supply curve shift) and therefore a new higher equilibrium price will emerge? I wouldn’t call the airline route change a re-purpose but simply selling to a different consumer in the same market. The hard-drive to chip flash memory chips I would be more inclined to call re-purposing, but that’s related to economies of scope and they’d probably be doing it already. There is already a huge body of theory on this stuff so maybe instead of using terms like ‘time-directionality’ and ‘efficiency of scale’ you could revist the theory and explain your hypothesis in very standard terminology?
I’m far from convinced of this, if by technology you mean modern cutting edge computation tech for example. ALL goods ARE technology. From programming languages to aircraft to condoms to corkscrews. Knowledge, for a very long time, has been easy to reproduce. The fixed costs of produces a dread-tree-book is huge but the marginal cost of another one, once it is written and typeset and at first printed, is tiny in comparison.
Again, this is simply how it goes and always has for almost all products that at any stage had any value. Where demand flags think of it as re-purposing knowledge.
This is often referred to as the learning curve in microeconomics. Think about a firm who’s production of a good is characterised by increasing returns to scale. Their average cost will decrease as they increase production. Over that same period they get better and faster—removing bottlenecks of various kinds through optimisation of their processes because they become more intimate with their production problems via experience and find ever more partial solutions. Whilst the decrease in average cost due to economies of scale is along the long run average cost curve, the decrease in average cost due to this learning is a shift in the long run average cost curve. This is also routine as one would imagine and a good example is a potato chip factory.