Do Economists Need Engineers?

Sometimes I post things I don't fully agree with. Though I agree in spirit with the idea that economic systems should be made robust, this essay is more interventionist than I am comfortable with, and, as you might expect, I don't fully agree with the negative characterization of economists.

This is from a much longer article in The American Prospect:

Why Economists Can't See the Economy, by Barry C. Lynn, American Prospect (alt. link):

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to avoid being deceived by economists. -- Joan Robinson, Cambridge University

On page one of The Wealth of Nations, Adam Smith illustrates the central principle of his economics with an example taken from, in his words, a "very trifling manufacture": the making of pins. Smith goes to some effort to describe the process. "One man draws out the wire," he writes, "another straights it, a third cuts it... In all, Smith counts 18 different "operations," then estimates that such specialization boosts productivity at least 240 times over what the same number of men, each working alone, could accomplish.

Smith's pin factory has served economists ever since as an organizing vision of what economics should work toward. ... And due to the immense influence of economics within our society, this vision has come to shape how we view our world and organize the industries on which we all rely. America's promotion of free trade, at the most simple level, is just the vision of the pin factory supersized into national policy. ...

Look closely at today's global production system and you will see shockingly high degrees of specialization, in terms of both geography and ownership. More and more activities take place in only one or a few places on earth, and within one or a few companies. This is especially true in electronics...

For America, this is a big problem. As Adam Smith understood 230 years ago, decisions on how to divide the tasks necessary to produce pins are based not merely on questions of efficiency but also of engineering. ... Americans would never ask an economist to design a suspension bridge or a new jetliner, though we wisely insist that engineers give the economists a seat at their table. Yet when it came time to design the most amazingly complex system ever devised by human beings--the global production machine--we relied only on principles that spring from the mind of the economist. We did not insist that economists offer the engineers a single stool at the table...

Our brand-new global factory does look awfully efficient. But it is an efficiency purchased through the destruction of all flexibility, and hence sustainability. What we should be fretting about now is what happens when, one day soon, we awake to find that war, revolution, disease, or natural disaster has cut us off ...; what happens when, for want of access to one or a few of the links that make up the global assembly line as a whole, our entire industrial system breaks--pins, electronics, pharmaceuticals, food, and all.

One of the more fascinating academic exercises in America these days is to sit down with an industrialist to discuss the growing brittleness of our production systems, then raise the exact same points with an economist.

The industrialist grasps the idea of fragility immediately, and often offers up fresh tales of production shutdowns and close calls. Indeed, industrial fragility has quietly emerged as perhaps the single biggest operational concern of business today, reflected in a boom in programs to study supply chain risk...

The economist, by contrast, just as swiftly rejects the idea of such fragility outright. Why? Because no industrialist, the economist will declare, would ever take such a risk. Industrialists who say that market pressures force them to take too much risk are simply seeking protection. They are selfish, or lazy.

To understand why economists will so audaciously dismiss ...[warnings of fragility] it helps to look at how ... today's global production system differs from the ... previous production system. Because to the extent that economists' thinking is based on the real world, it is the world that existed in mid-20th-century America.

Through most of our nation's history, ... industrial activity was doubly "compartmentalized." Production took place within discrete, vertically integrated firms, located within a largely self-reliant nation. This isolation of production--inside a box inside another box--made it relatively easy to identify risk and contain disaster. ...

Over the last generation, however, Americans busted open both these boxes. We merged our national industrial system with the industrial systems of many other nations, in the process we know as globalization. At the same time, we encouraged our vertically integrated firms to blend their operations together, through outright merger and through ... "outsourcing." Add these two processes together, and the result is a single, global, networked system of production marked by extreme and growing specialization of activity. More and more, certain things are made, and certain services located, only in certain places.

In theory, there is absolutely nothing wrong with a networked system of production. ... The catch is to understand that networks are not safe by nature, but by design. A network will organize into dispersed compartments that isolate risk only if humans program it to do so.

This is what we did with the Internet... This is true also of the global monetary system, which is compartmentalized by currency and regulated by central banks. Indeed, this is true of all complex systems built by humans. Sometimes by initial design, sometimes after a period of trial and error, human beings act to make a system resilient and flexible by building in some redundancy and compartmentalization. Human beings come to realize that a system can become too specialized, too efficient, to be really safe.

This is not, however, the path we have taken with our global production system. Over the past two decades, we have destroyed the old compartments and kept the engineers from building new ones. ...

Now let's consider how the most basic theory of economics compares with what exists in today's real world.

The most fundamental assumption of mainstream economics today is that the natural state of an economy is perfect competition among many small actors. The average marketplace is viewed as free, open, and politically neutral. For our purposes, this theory is especially important because it allows economists to assume away the exercise of power within the economy, and hence any need to understand the effects of how power is exercised...

Until recently ... there were still many real-world examples of open markets comprising small actors such as farmers, storekeepers, and garage owners. Economists could continue to claim that their theory was valid in the real world...

Such competition, though, is less and less the case in any major American marketplace. The radical changes in antitrust law imposed in the early 1980s by the Reagan administration unleashed forces that played out in the enclosure of many previously open markets. ... In market after market, private monopoly has returned...

Over the last 25 years, this concentration of the economy has resulted in the emergence of an entirely new hierarchy of power...

And so, every day, the divide between economist and engineer grows wider. The economist--reclining upon the ancient verities--remains supremely confident that the system is structured to identify and isolate risk, and to punish those people and firms who take too much risk. The engineer--who acts in the real world, ... grows ever more fearful.

Economists did not always live in the clouds. ...

Even after the academy began to emphasize the use of mathematics, it was by no means clear that economists would one day find themselves so completely divorced from the world. On the contrary, many in the profession seemed, in the early 1930s, to be developing the tools necessary to muck around in the real world... To understand what economics is now, take a moment to look at one of the more important pathways economics did not take.

In 1932, Adolf Berle ... at Columbia ... teamed up with Gardiner Means ... at Harvard ... to write The Modern Corporation and Private Property. This book showed that just a few firms dominated the U.S. economy... A year later, another Harvard economist, Edward Chamberlin, published The Theory of Monopolistic Competition, and the Cambridge economist Joan Robinson published The Economics of Imperfect Competition. Together, these works showed how such large firms hugely distorted basic market functions. At a time when the Depression had shattered the old certainties of laissez-faire economics, the effect of the near-simultaneous appearance of these three volumes was sensational, both within economics and among the general public.

For many economists, the works promised a future in which they would study and model the power of large firms and trace the effects of these concentrations of power on such factors as pricing and employment. This approach implied that markets are, at least indirectly, the products of law acting on or through the corporation and other institutions. It also implied that the concentration of economic power, especially through a public institution like the corporation, transformed the affected marketplace into a largely if not entirely political realm.

For mainstream economics, these works added up to nothing less than a direct challenge, from some of the most gifted economists and legal scholars of the era, to the core theory of economic dynamics: that all markets are perfectly competitive and perfectly neutral. ...

There are many reasons why this movement, often called "Institutionalism," did not become the branch along which the mainstream of economic thinking flowed. One was simple politics. Conservatives inside and outside economics rose in opposition to the new ideas, which, after all, did savor more than a little of Marxist analyses of "monopoly capitalism."...

A second reason was war. As the United States prepared to fight Germany and Japan, even many left-wing economists felt compelled to work more harmoniously with the nation's industrialists.

A third reason, and what proved perhaps the most damaging one over the long run, was the emergence of Keynesian economics, which swiftly attracted many of the economists most enamored of Institutionalism, including the young John Kenneth Galbraith. ...

Yet even without a platform within the academy, Institutionalism remained very much alive. It survived in law, especially in the philosophy and practice of antitrust. ...

What ultimately killed off Institutionalism was the rise of the Chicago School of economics, organized loosely around Friedman's political writings, in the 1960s and '70s. ... Rather than illuminate the political nature of market relationships, their aim was to push the politician entirely out of the realms of business and finance, and to push "market concepts" into the realm of politics.

Unlike the Institutionalists, moreover, the Chicago School was highly organized and very well funded. In public, members repeated ad nauseam their mantra that markets are perfect, and for that matter perfectly wise--which meant that politicians should never interfere... From behind this rhetorical cloud, in both Democratic and Republican administrations since the mid-1970s, members of the school oversaw the radical rewriting of the three main pillars of American economic regulation--the laws governing trade, competition, and the corporation--in ways that steered power and profit upward rather than down. ...

Mainstream economics today ... has degenerated into a purely materialistic and atomistic philosophy, fixed monomaniacally on the pursuit of efficiency as measured by the manufacture of objects... Mainstream economics today strives ... to replace the responsibility of the individual citizen to pursue ethical outcomes through politics with abject worship of an automatic mechanistic "market," which is really just a sham for private directorship of the political economy by the immensely rich.

Just how dangerous such a materialistic and deterministic way of thinking can be when applied to the real world is clear if we consider what ... radical globalists conclude from the fact that we have scattered our pin factories and all of our other factories across the face of the earth. Their line of reasoning is beautifully simple.

Once human beings understand that our production system is so specialized geographically that it will stop working in the absence of any one of a number of major industrial regions, all rational people and right-thinking nations will naturally avoid any actions that might disturb the functioning of the system. The inescapable ... result of making our industrial system fantastically fragile, they conclude, is a world of peace and harmony forever more. If anything, the more precarious the system, the more secure the peace.

To accept this global-market utopianism ultimately amounts to accepting the economist not merely as the engineer of our global industrial system but also as the engineer of an entirely new human nature. ...

[T]here is a wiser course, one that requires no radical shift in our politics. On the contrary, it requires merely a return to our nation's traditional approach to organizing government among human beings, which is to assume that human nature is deeply and irretrievably flawed, and that the best way to control such flaws is through the construction of carefully calibrated, interlocking, counterbalancing, and ever-evolving political institutions. ...

Most immediately, it requires recognizing that the average American economist is not fit to understand, let alone design, the complex networks of our 21st-century economy in ways that result in the most minimal amounts of redundancy, resiliency, flexibility, and survivability, and that we'd better act fast to put someone on the job who can. It requires doing just what Adam Smith would surely do: Turn the task back over to the engineer.

There is lots to disagree with here starting with the basic premise that "economists' thinking is based on the ... world that existed in mid-20th-century America," i.e. that we do not understand that individual steps in the production process are now outsourced to a much greater degree than in the past, etc. -- I think we get that.

And modern macro models do not assume perfectly competitive foundation as asserted. In these models price-setting behavior is important and since perfectly competitive firms are price-takers, monopolistically competitive firms are the atomistic unit (and the degree of market power can be varied parametrically). Thus, they are in the spirit of the Chamberlin and Robinson models cited above.

But rather than going through a point by point rebuttal of the many things I disagree with, I think I'll go in a different direction and recommend Hal Varian's "Avoiding the pitfalls when economics shifts from science to engineering" as evidence that economists are thinking about the issues raised in the essay.

Comments

[spencer]

Sorry, I 'm in the other camp. I believe that economics made a major mistake in neglecting imperfect competition -monopolistic competition. We stuck with the perfect competition model because the math tools we had would work with those assumption and not the imperfect competition assumption. But that has recently changed and it is time for the economics profession to return to the reality of the monopolistic competition models. We are starting to, but the "public" economics used in political debate or by the libertarian economists is a pure fanasty that is only used to support the economic interest of the wealthy.

[reason]

...we relied only on principles that spring from the mind of the economist.

Clearly this statement is false, the principles came from the study of real markets. But I don't think I reject his view point out of hand. I still find much economic discussion ignores the reality of power relationships, and in particular ignores the dangers inherent in a tendency towards monopoly. We managed in the 1980s to increase competition by opening markets, so that local monopolies were exposed to global competition. This trick works once, but when global monopolies or oligopolies start to arise we have a problem. (Should we start to open the planet to galactic competition now?)

But concerns about fragility (about for instance the loss of skill diversity) have occured to me as well. Investors don't place all their eggs in one basket, so should economies?

Lets put it another way, individual humans have to put all their eggs in one basket as specialist workers, but given the rate of change today that leaves them worrying about become redundant as they age. Humans are as animals not very specialised, we are really general purpose animals (apart from manual dexterity and intelligence we are nothing special). Ultimately, every specialised human activity is vulnerable to being taken over by a robot or machine at some stage. How do we go about encouraging the development of robust, human friendly economic systems? It still seems to be a question without an answer, or even a working paradigm.

[Lafayette]

BCL: "This (division of labor) is especially true in electronics..."

Perhaps, but electronics is a common example of manufacturing today, meaning that it is almost like making pins. It is dead simple and repetitive.

Take something a bit more complex, like a car that, on an assembly line, changes either colours or doors or motors - there, we have something altogether different. Volvo showed that, in fact, small teams responsible for more than one task, but limited to a number of finite tasks that interchanged amongst team members, actually improved productivity.

In other words, people are poorer at excessively rote work than machines. Still, in the Far East it is the women with nimble hands that sit for hours doing excessively repetitive work in assembling electronic products - which is the very reason why I think America can compete with robots in repetitive work that does not require much change. We must only put our minds to it (sic!) as robotic technology begins to compete seriously with human intelligence, albeit at the very lowest levels.

This will not stop the hemorrhaging of unskilled labor, but it will create some jobs at a higher level of manufacturing skill employing advanced robotic technologies.

As we become increasingly members of the Information Age, we'll find that the need of humans for diversity to maintain interest will expand. Anyone who has ever worked in a complex development project, whether mechanical or digital, understands how diverse are the individual competencies necessary to complete it.

Yes, Adam's neat example of pin making made him understand the division of labor. But he did not conceive of the fact that repetitive tasks are best left to non-thinking animals. It is not the most productive way to employ a cognitive biped, because the intellectual challenge is insufficient. Throughout the Industrial Age, it was, however, the only way to employ humans in production.

We are presently greatly regretting the loss of low or unskilled jobs to the Far East. Yes, this is a difficult hurdle for many workers to overcome, especially those who were once well paid for their work.

I sense, however, that it is a blessing in disguise as it forces us up the competency ladder to higher levels where, at each successive step, the usage of our intelligence will be challenged. And, being challenged, can only improve.

That is goodness for our species. Provided that we accept the challenge and master the skills necessary.

[robertdfeinman]

The point I found original in the article was the concept of fragile production. Many things are now made in just a few (or one place) and any disruption can cascade.

Many of us, I'm sure, have already had the experience that some item can't be fixed because a part is no longer available, or can't be used because the consumables have been discontinued.

There are cars in Cuba that are over 50 years old. When a part breaks a new one is machined to replace it. With modern cars much of the auto is controlled by specialized computer chips. These are particular to a given model and year and are made in a fixed quantity to cover the number of cars to be built and a small reserve for repairs. After this is gone the cost of making more and the existence of the original masks means that there will be no more.

Not all failures have to involve manufacturing. There are many stories of software running that is no longer supported because the handful of people who designed it are not around.

Supply chain failures can also be fragile. Just in time manufacturing and even retailing means that there is no cushion when something goes amiss. Walmart runs a one day supply chain. If the trucks don't get through or the ship doesn't arrive the shelves go empty. With 30% of the grocery market imagine what happens if this continues for any length of time.

The pet food recall is another example of fragility. One maker supplies dozens of brands and processes in such big batches that a single event causes huge problems. We keep seeing this with lettuce, spinach, beef patties, peanut butter, etc. but have not, yet, learned our lesson.

[reason]

In America you feed "lettuce, spinach, beef patties, peanut butter" etc to pets?-) What do you keep as pets?

[paine]

spencer
you seem to have missed the micro revolution of the 70's

yes the MSM acts and talks mid century gibberisk

and yes the corporate ideology needless to say
has its witch doctors screaming hands of the sacred market

but the stiglitz world and the krugman world
is as mark points out

every bit

the mathematical realization
of the just pre keynes
imperfectionists

the one thing that is true

keynes seemed to rescue the system
and dumping the old marshall micro paradigm
persisted
more or less till the young turks of the 70's blew it to bits

real question

why can't the MSM give us this now far from new view of
the firm the market and the global economy

btw

this fragile platform stuff gives me a hoot
fragile as in brake downs of supply lines

or subject to arbitrary gouges gorges and
other frolicks of private profiteers
like
wage and tax rate arbitrage
and
sudden new territory
green field invasions
whilst
back in the old brown field
flights continue apace

plenty of politics here
but the science to fight back
lies in books like
stigs
whither socialism

too bad stig is such a lambkins

and krug too much the terrier

to launch a real jobbler's assault
on the commanding heights

[kevin quinn]

One of the effects of social democracy - intended or not- is to, in effect, prevent specific human capital from being held up, and thus to encourage such investment. (Or so I have been thinking lately). A world increasingly less social democratic, as ours is, is then a world with potentially too little specialization, not too much. We invest in general skills, keep our bags packed, anticipate many jobs over a lifetime etc: the world of absolute, frictionless mobility has lousy incentive efffects.

[paine]

reason
"Ultimately, every specialised human activity is vulnerable to being taken over by a robot or machine at some stage"

hey thats creative destruction its progress its reducing the scope of necessary social labor
to provide the basic material substance of our communal existence

what is not creative destruction
and is just pure destruction
is replacing a job and its time
with the same job and its time
somewhere else where that time
is just cheaper
to buy

[reason]

Kevin Quinn...
yes and no. I was thinking of the problem from the point of view of the individual.
But in an extremely specialized world, you cannot train for the most specialized tasks. You need to learn by doing. The problem for employers is that after this investment is made the bird might fly. The problem for the employee is, he may end up with skills that are not needed anywhere else. Result - "skill shortage" - or "no jobs" and NOTHING IS DONE ABOUT IT. So right problem, wrong cause. But yes the incentive effects stink. Public-private partnership anybody? (In the past this problem was solved by the public sector training people and accepting the brain drain.) Could privatisation be hurting the private sector?

[Lafayette]

"There are many stories of software running that is no longer supported because the handful of people who designed it are not around."

You are talking about Windows, aren't you ... ?

Ever try to get ANYONE from MS to tell you how its kernel works? Nobody knows.

[M1EK]

I'd argue that the problem is only tangentially related to engineering - the real discipline that should have been consulted was a (realist) foreign policy one.

IE: what happens when India and Pakistan have a "hot war", and we've outsourced some critical infrastructure to Bangalore? Or, what happens when our economy is over-reliant on cheap oil and as a result, we cannot apply foreign policy leverage to bad actors (such as the country from which almost all the 9/11 hijackers and planners originated) because we're afraid of the economic leverage they can apply right back to us?

[Lafayette]

reason: "The problem for employers is that after this investment is made the bird might fly"

Which is why this particular factor (skills levels) should not be for industry to invest in.

The state should be doing this work free, gratis and for nothing. Intelligence and skills are infrastructural matters, like primary/secondary school and, once upon a time, trade schools. Whatever happened to trade schools?

They should be available for all. Not everywhere and not all at the same time, but somewhere scheduled during the course of a year. America is large enough to have a training course on any given subject in some school somewhere that is available to everyone - and programmed/financed by the federal government.

[Bruce Wilder]

Our host's demur, that "modern macro models do not assume perfectly competitive foundation as asserted", seems odd to me. A while back, Prof. Thoma used the example of a map, which might vary in its level of detail, depending on purpose. The map, which Mr. Lynn sketches, never addresses itself to such a level of detail, imo.

My own favored hobbyhorse, of course, is the economic theory of production, where "technical efficiency" is simply assumed to be maximized, the better to focus the attention of economic analysis on pure, allocative efficiency. I can spin out a narrative about how that foundational, theoretical choice shapes a whole theoretical worldview and the self-definition of the discipline. Inclusion of my hobbyhorse in Mr. Lynn's narrative, however, would not change the thrust and course of his able essay, however.

Perhaps, the difficulty is the offense taken at such an aggressive stance: "Most immediately, it requires recognizing that the average American economist is not fit to understand, let alone design, the complex networks of our 21st-century economy . . . " I can understand how ears might burn at that! But, I don't think Mr. Lynn was addressing himself to experts, say, in money and banking, but, rather to experts in industrial organization and economic development.

And, I don't think Mr. Lynn was addressing himself to economic esoterica, or the quality of advanced economic research. He was looking at how economics comes into the general, public discourse over general policy directions, referencing in particular the large influence of the Chicago School on the politics of deregulation, etc.

If Mr. Lynn's essay were to take particular notice of the late Milton Friedman, I doubt that it would be to take note of Friedman, the careful author of a monetary history, or the theorist, who advanced the permanent income hypothesis. Rather, it would be to criticize Friedman the Libertarian and sometime political partisan. For Paul Krugman, a professional economist, Friedman was doing a Jeckyll and Hyde act, in which he betrayed his professional obligations to further a political agenda with deceptive, but persuasive statements.

Is Mr. Lynn, a policy advocate, obligated to take note of the division between the sophistication of academic economics and the corrupt stupidities of libertarian advocacy?

Industrial organization is a field I once knew well enough. Some pretty smart people have worked in the field, and some interesting work has been done, trying to revive interest in it, especially applying the tools of game theory and the like. But, when the Dean of the MIT Business School, and one of the leading practitioners in the field was asked to give testimony in the Microsoft antitrust case, he trotted out a model of monopoly any first-year student would recognize (and probably and properly reject out of hand). In the most prominent case in recent times, the most prominent economist in the field presented total and complete crap!

So, what is the public policy face of industrial organization economics? Is it that fine, careful, creative and nuanced research? Or is it the corrupt and incompetent Schmanlensee? Is it permanent-income-hypothesis Friedman or libertarian Friedman?

When political discourse comes to discussing, say, trade policy, do the economists educate us with discussion of the policy implications of increasing returns, external economies and the like, drawn from the academic literature? Or, are we browbeaten with Economics 101 comparative advantage arguments?

When a former solicitor general of the United States is tasked to argue against the prohibition of resale price maintenance by antitrust law, he feels empowered to argue that "most" economists think this prohibition is unnecessary. As a matter of judgment, I can say that theory and evidence weigh overwhelmingly in the opposite direction. But, obviously, someone in the economics profession has managed to create a different impression, and it seems to me that Mr. Lynn is responding, critically, to the tendency of the economics profession to make itself amenable to such impressions.

Maybe, Mr. Lynn should have targeted, instead of economics, the libertarian ideology, which so many conservative economists favor. But, the libertarians Mr. Lynn encounters in the realm of political discourse and policy advocacy do not make that distinction.

[Bruce Wilder]

Here's a simple direct example from Kevin Drum, which, I think, directly addresses the question of whether economists need engineers:

http://www.washingtonmonthly.com/archives/individual/2007_04/011055.php

He's noting a particular innovation, widely adopted in administratively centralized health care systems, which has been "resisted" in the fractured U.S. private system.

Technology should not be left as a black box, unanalyzed, or brought in as an amorphous deus ex machina, as economists are inclined to do. Technology matters. Administrative management and organization matter. Allocative efficiency and price competition gets you so far, which is not nearly far enough.

[paine]

bruce wilder

i love your
--i assume ---lester t
using 101 economics story

but to be fair you and i know
the micro exists
to guide policy in progressive activist directions
and has so for a number of years now

again i think the proper direction of inquiry
is just how the MSM has kept this
a dirty secret
from the booboise

[Bruce Wilder]

Paine, whatever happened to lester t? I had forgotten about him.

Frankly, I think economics and the mainstream media have been corrupted by the same plutocratic money. As Mr. Lynn notes rather wryly, the Chicago School was well-funded. When I sat in the classroom with the Great Demsetz at UCLA, a Chicago School doyen whom I respected very much, it was, nevertheless not lost on me that he sat on not one, but two (2!) endowed chairs, the money given by plutocrats grateful for rationalizing favorable policy. Richard Mellon Scaife can buy himself a Whitewater scandal, and one John M. Olin can completely disrupt the upper reaches of the hierarchy of academic economics.

It is not the MSM's fault if two Olin fellowships propel Glenn Hubbard to the Deanship at the Columbia Business School, where he sits in a chair endowed by his boss, Russell L. Carson, trustee of Dartmouth as well as overseer of the Columbia Business School. It is not the MSM's fault, if Glenn Hubbard is appointed to the Council of Economic Advisers or if Glenn Hubbard feels it necessary to carry water for Wall Street interests closely identified with Russell L. Carson.

[Lafayette]

M1EK: "I'd argue that the problem is only tangentially related to engineering - the real discipline that should have been consulted was a (realist) foreign policy one"

India and Pakistan have been at one another's throats for decades but MAD will keep them apart. Besides, any software they sell and install will be supported in the US - any CIO would be out of their alleged mind to have it supported any other way.

Oil, as a key energy source, should have started to be displaced years ago, and that has begun. But, do tell us who let the American car industry allow SUVs (which are actually trucks) to be taxed as family vehicles so that Detroit could sell them to us at a reduced cost? The Saudis?

Our internal problems are OUR OWN making. "We have met the enemy and he is us."

[Lafayette]

BCL: "the Chicago School was highly organized and very well funded. In public, members repeated ad nauseam their mantra that markets are perfect, and for that matter perfectly wise--which meant that politicians should never interfere."

Oh, is that the reason why income inequality has remained a thorn in our side for over a century.

Because Friedman did not think that the accumulation of wealth was due to market distortion at the hands of corporate executives and financiers with their hands on the financial levers. (And a little help with a complacent Congress that reduced marginal tax rates on high incomes.)

Dear me, how did Milton ever overlook that little fly in his free market ointment? But, he did, didn't he ...

[James Killus]

Semi-Karma (A true Story)

Once upon a time there was a company that made a gizmo. We’ll call it Company A. It doesn’t matter what exactly the gizmo did, except to say that it was an essential part of another thing, a gadget, that was made by Company B, and the gadget was essential to the manufacture of semiconductor chips made by Company C.
In fact, the gadget contained more than one gizmo, and the gizmos were connected together in the gadget by a network. Unfortunately, sometimes the network in the gadget would fail, and neither Company A nor Company B knew why. Nevertheless, Company C was getting mighty unpleasant about the problem, because they had a new plant that they were trying to bring on-line and the problem was costing them money. Lots of money.

So Company A launched a major research effort, digging into the details of their networking setup and eventually they discovered that there was one particular chip that wasn’t always quite up to spec. About 20% of the chips developed thermal noise just a bit too quickly, and if you had two such chips in your network, the noise level would be enough to sometimes kill the network. Not always, you understand, just often enough to drastically cut throughput, but not often enough to have been easy to find. In fact, the effort took weeks. Once they’d done this work, they contacted the manufacturer of the chips to ask about the problem, and they were told, yes, there was a tiny quality problem on some of the chips, they hadn’t been annealed quite enough to get rid of all of a particular contaminant, and that could, under some circumstances, create noise. Oh, and by the way, all the “Tier 1” customers using those chips had already been notified, but Company A was not “Tier 1.”

You’ve probably guessed by now that the chip in question was manufactured by Company C.

I sometimes wonder whether or not those who made the decision to at first restrict the information to only their top customers ever learned of the consequences of that decision. My guess is that they did not, and even if they had, they probably did not change their behavior in the future. I suspect that they were the sort who believed that you can create the appearance of greater value to some customers by giving other customers short shrift. Everyone likes to think they’re special.

But what comes around, goes around. What you do comes back to you, and it’s not just bread cast on the waters that karma applies to. Some might say that matters of ethics and morality come down to a question of faith, but I think it’s more a matter of paying attention to the way the world works. But it's not clear to me that either economics or engineering have yet taken this into account.

[Lafayette]

BW: "Technology matters."

Yes, of course, Innovation matters. Investment matters. Hours worked matter. Good marketing matters. Efficient national infrastructure matters (a lot). Disposable income matters. Oil sourced energy matters.

Multiple factors matter. Let's not pump up disproportionately the importance of one because it is sexy and has blinking lights.

But, I agree with the article's central thesis. Economists DO NOT understand sufficiently technology and how it works in an economy. If they cannot regress the data in a model, they are at loss for words to explain an observed phenomenon.

To think that technology is central to productivity is over-simplifying its role, because it presumes that all individuals are more productive from the use of it. Having been around technology and its usages for a while, I've witnessed countless situations where this was not the case.

Technology is not a continuous variable. It behaves more like a step-function. It climbs the stairs from one level to the next in quantum jumps, each jump taking a period of time to be assimilated within the economy. Serendipity sometimes provokes the next leap upwards (Marie Curie comes to mind).

Most mysteriously, it is not predictable. When Tim Burners-Lee developed HTML, no one at the CERN in Geneva, who knew of his work, understood the import of that development.

Least of all to understand it was the IT company that sold CERN the computer on which he developed "hypertext", which when associated with TCP and DNS would form the backbone of the WWW. The company, called DEC (that no longer exists), was convinced at the time that THE generalized information access tool of mass usage would be a technology called "Videotex".

[Bruce Wilder]

L: "Videotex"

Browsing at Frys several years ago, I ran across a fancy coffee table book, which detailed IBM's forgotten candidate scheme, which came complete with equivalents of hyperlinks and home pages.

These things get invented over and over again, as the technology advances. Videotex had its day, even if that day was short, and already largely past, by the time of Tim Berners-Lee.

One remarkable thing about the Internet, exemplified by the contribution of Mr. Berners-Lee, is that what worked, worked in part because it was not proprietary. It is an example of creating a commons, by banning property rights, and getting an advancement in economic development.

[One Salient Oversight]

I believe in efficiency... and one of the strengths of economics has been its examination of efficiency over the years.

But there has been, I believe, an ideological blindness that affects many. The best example is the question "Which is more efficient? The Government or private enterprise".

About 99% of economists... and regular people... would argue that private enterprise is more efficient. Yet there are many examples of nationalisation that appear to work better than the marketplace. Our recent discussion about health care is a case in point. The US Health Care system is empirical proof that, in this particular sector of the economy, private enterprise an often be less efficient than government.

Or let's take public transport. A few years ago someone did a study into public transport in Sydney, Australia (I'm from Australia) and discovered that it was much cheaper to travel from A to B on trains and buses and light rail than it was to travel by car - taking all costs into consideration. Yet the majority of Sydney people preferred traveling by car. This was definitely a case of the market choosing a more expensive alternative because their perception of what was true was wrong.

I even think that, in the case of Sydney's public transport, that if the State Government made public transport free and raised taxes to pay for it, it would result in greater economic efficiency, since people would be spending less on cars and gasoline and spend less time stuck in traffic.

This is not to say that Private Enterprise is inefficient - I'm hardly a Communist! I just believe that in certain sectors of the economy, the government is better suited to provide certain goods and services than private enterprise is. We need to work out what these are so that the economy is balanced in the best, most efficient way.

[__earth]

well, i donno. But a trivia - the concept of consumer surplus was invented by a bridge engineer. I've forgotten his name though.

[Lafayette]

BP: "Videotex had its day, even if that day was short, and already largely past, by the time of Tim Berners-Lee."

Not really, methinks.

Both the UK and France had installed public videotex systems. Around a quarter of all French households had a "Minitel" (videotext) system installed in the 1980s, which was severely bound in terms of graphics and largely used to access Directory Information.

Ford had a major videotext platform and I can think of a few other very large installations of Videotext systems. But, it never really caught on - because though it was a data access system, easy to use, it was not "active" but passive, that is, it was "hypertext" linking that made the Internet come alive. And, let's give credit to the way the "network became the system", which hitherto had not been the case with the predominance of IBM and its pyramidal network architecture with a mainframe in the center.

Tim Burners-Lee is acknowledged as the "inventor of the Internet" (at least by Wikipedia) and was knighted by the Queen of England for his efforts. Sir Tim still runs the WWW Consortium that he founded in 1994, but has returned to his cherished English soil ... soggy as it may be.

[Lafayette]

BW: "is that what worked, worked in part because it was not proprietary."

Yes, this is a VERY good point.

I am not sure how important it is to market economists, but "open standards" are a gateway to quicker and larger adoption of systems than the proprietary variety. Gates imposed his MS-DOS on the world and then Windows, but anyone who ever had to work with it knows it for the less than perfect OS that it was. Apple’s was a far better operating system and I suspect that Gates knew that as a fact.

Torvalds gave Linux to the world by means of "open standards" and though this system should have trumped MS-DOS, it did not in the PC-market, though it is well employed in the server market. I suggest this is due to market dominance by MS. Even the ginormous IBM gave up with its efforts to impose its windows-based equivalent, and Apple’s Mac went on to garner a miniscule market share.

Open standards are what technologists call the level playing field. It provides a common platform from which to exploit technologies in different domains. Since it is not proprietary, it cannot be imposed monopolistically and therefore, in principal, its exploitation/usage should be like wildfire. However, the difference between this concept and reality is very wide indeed.

Gates was smart enough to understand that if he imposed HIS standard in a standard-less market he would come to "legally" dominate that market. So, in the eventual court case brought against MS by the Feds, MS was found guilty not of a monopolistic hold on PC operating systems market, but abuse of that market dominance. Very nuanced that message ... to anyone developing software today.

In other words, get there "firstest with the mostest" and you have, essentially, a legally protected market with virtually inelastic pricing.

[Lafayette]

BW: “It is an example of creating a commons, by banning property rights, and getting an advancement in economic development. »

Yes, precisely, in theory.

In fact, this simple notion with great significance requires assistance. It needs a leg up by the authorities who actually “promote” such common platforms.

Burners-Lee invented hypertext, but without ARPANET at the outset, what would that technology be today? A nifty tool to be used in context with a mark-up language for documents, that’s all.

ARPANET was run by the US DOD. I suggest that this role was essential towards developing the Internet. It should be provided in other technological domains as the need arises. Had this been the case with PC operating systems, MS would have never reached a monopolistic position. (And I am reluctant to debate whether that is good or bad.)

This analogy can be employed in a great many other technological domains and it should be. This is the role of a government “public service” to markets that need a bit of assistance to get a technology rolling.

Robotics would be another domain that is ripe for development in this manner.

[Ninjaplease]

As an engineer, please let me tell you:

Technology does not necessarily increase a worker's productivity in ways you assume it does:

In china, many factories that assemble electronic circuit board sub-assemblies (they "stuff through-hole parts" that is, parts that are difficult for machines to insert automatically,) use young people in their early 20s to assemble by hand. By hand. Because it is far cheaper to assemble by hand than to invest, or invent a better mousetrap that reliably installs the through hole parts.

I assure you that if you were to measure # of goods produced / hours worked, you would see a fairly large productivity increase by switching from a manual assembly line to an automatic machine one.

But at $0.60/hour full burdened labor rate, why on earth would you ever invest? For the $2,000,000 dollars that the machine would cost you could throw 10 people on that assembly line, working 40 hour weeks, FOR 22.83 YEARS.

Economic efficiency indeed!

Manufacturing efficiency has only to do with the question "How many goods can I produce with X dollars in Y time?" Where Y time is usually a year.

Companies shipping heavy products, such as thoughs that include a metal enclosure send their products from Asia to America by freight, as its the cheapest method of transportation. This involves 2 customs inspections and time at sea. This involves 45-60 days for some companies. Yet even with this extensively long supply chain, the MBA six-sigma people do their best to switch a business over to Just In Time processes. This would mean if a forecast is wrong, you're customer will not be doing business with you, even if he wants to.

Napoleon was defeated by his over extended supply chain, no?

Rommel was defeated by his over extended supply chain, no?

The British & Americans were specifically NOT defeated in the western front because of their supply chain management, no?

With a 60 day lead time on a company that is NOT the lowest priced in their market, whose customers' buying decisions include "You always have what I need in stock," I predict tough times ahead.

[Lafayette]

np: "why on earth would you ever invest? For the $2,000,000 dollars that the machine would cost you could throw 10 people on that assembly line, working 40 hour weeks"

If a company could amortize that machine in an accelerated period of, say, 3 years at 33% per year, that's why. In the fourth year the machine is cost-free (except maintenance).

[Ninjaplease]

Lafayette,

There is a Manufacturing engineer job waiting for you in Dongguan, China.

[Lafayette]

I prefer Duluth.

[Robert]

Here is a paper that is actually about globalization and the fragility of supply chains.

says...

Ninjaplease:

Your post was quite interesting, but that $.60/hr labor rate is not going to last long. As Chinese wages increase, capital-intensive manufacturing will become more sensible.

Already such cities as Shangai are quite close to Western wage levels: pretty soon, the entire population will find out what they're worth, and start demanding it.