I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
Doesn't this incentivize creators to make their products less durable or to hold back key features for future versions? Why wouldn't we prefer to incentivize the creation of the best products possible?
No, it would incentivize them to ensure that each version was better than the last and new and interesting I would think.
People buy new multihead razors as they come out, but do they leap to replace their straight edge razor? A good straight edge razor is a lifetime investment if cared for properly, and if the market for straight edges stayed small and there were enough being sold on the secondary market, the straight edge razor maker could go out of business because they produced a product that lasts. Do we want a world where only multi head monstrosity makers can profit?
Seriously? Is this a real argument you're trying to make?
Further, I'm not sure the argument you're trying to make.
We should expect shitty quality so that they can sell us stuff later on?
Fuck the consumer, these guys need to make a buck?
People are free to try and sell a shitty product to the consumer, just as the consumer is free to purchase from somebody that makes a better product. Some people may prefer to have the shitty product if it has a lower cost, in fact. It does feel weird to be arguing FOR the competitive market, but this is kind of its thing, isn't it?
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AManFromEarthLet's get to twerk!The King in the SwampRegistered Userregular
I guess, and I'm not saying we shouldn't stop people trying to market a shitty product.
But to actively encourage the marketing of a shitty product is an odd position to take.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
Doesn't this incentivize creators to make their products less durable or to hold back key features for future versions? Why wouldn't we prefer to incentivize the creation of the best products possible?
Planned obsolescence is A Thing
Hello pharmaceutical industry.
Hell, the computer industry's full of examples of hardware that's been intentionally nerfed by manufacturers so that they perform at a lower level and fill a mid-level performance slot in product lines. That is, they literally take a superior product, make it inferior, and sell it at a lower margin, so they can maintain a consistent product line and sell their top-end products at significant profit.
I can think of more than another handful of examples off the top of my head right now....
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
I guess, and I'm not saying we shouldn't stop people trying to market a shitty product.
But to actively encourage the marketing of a shitty product is an odd position to take.
I'm not arguing for the making of shitty products. Exactly the opposite. I am saying I would prefer a world in which it makes sense to make the best product possible, but the existence of the second hand market may prevent this, if making the best product at first means it is hard to justify buying the even better product new over the first product in the secondary market.
That maker of straight headed razors has provided a durable good, made a bunch of money doing it and can now go on to do other things, having effectively increased the wealth of everyone involved
But he also put himself out of business, right? Take away the secondary market, and he can keep making them, people will keep buying them, and everyone benefits (they get to have money or a great razor)
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AManFromEarthLet's get to twerk!The King in the SwampRegistered Userregular
I guess, and I'm not saying we shouldn't stop people trying to market a shitty product.
But to actively encourage the marketing of a shitty product is an odd position to take.
I'm not arguing for the making of shitty products. Exactly the opposite. I am saying I would prefer a world in which it makes sense to make the best product possible, but the existence of the second hand market may prevent this, if making the best product at first means it is hard to justify buying the even better product new over the first product in the secondary market.
That maker of straight headed razors has provided a durable good, made a bunch of money doing it and can now go on to do other things, having effectively increased the wealth of everyone involved
But he also put himself out of business, right? Take away the secondary market, and he can keep making them, people will keep buying them, and everyone benefits (they get to have money or a great razor)
Except that I think market histories have proven that people will still buy the better product even if there is a second hand market for it.
And the idea that we should get rid of the second hand market is just silly.
I guess, and I'm not saying we shouldn't stop people trying to market a shitty product.
But to actively encourage the marketing of a shitty product is an odd position to take.
I'm not arguing for the making of shitty products. Exactly the opposite. I am saying I would prefer a world in which it makes sense to make the best product possible, but the existence of the second hand market may prevent this, if making the best product at first means it is hard to justify buying the even better product new over the first product in the secondary market.
That maker of straight headed razors has provided a durable good, made a bunch of money doing it and can now go on to do other things, having effectively increased the wealth of everyone involved
But he also put himself out of business, right? Take away the secondary market, and he can keep making them, people will keep buying them, and everyone benefits (they get to have money or a great razor)
People simply don't value the newly produced goods at the price point offered over the old ones at the secondary rates. He could sell the new ones for less; if he can't or the market is truly saturated, then well, I guess he is out of business. But, there's no obligation on consumers to buy new products or keep businesses alive. He already profited by the initial sales he made. Everyone benefits regardless, people still get to either have money or what they perceive to be a razor of good value.
He is free to create a new business making something new, further increasing wealth
I guess, and I'm not saying we shouldn't stop people trying to market a shitty product.
But to actively encourage the marketing of a shitty product is an odd position to take.
I'm not arguing for the making of shitty products. Exactly the opposite. I am saying I would prefer a world in which it makes sense to make the best product possible, but the existence of the second hand market may prevent this, if making the best product at first means it is hard to justify buying the even better product new over the first product in the secondary market.
Competition is supposed to resolve this, but....
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
I guess, and I'm not saying we shouldn't stop people trying to market a shitty product.
But to actively encourage the marketing of a shitty product is an odd position to take.
I'm not arguing for the making of shitty products. Exactly the opposite. I am saying I would prefer a world in which it makes sense to make the best product possible, but the existence of the second hand market may prevent this, if making the best product at first means it is hard to justify buying the even better product new over the first product in the secondary market.
That maker of straight headed razors has provided a durable good, made a bunch of money doing it and can now go on to do other things, having effectively increased the wealth of everyone involved
But he also put himself out of business, right? Take away the secondary market, and he can keep making them, people will keep buying them, and everyone benefits (they get to have money or a great razor)
People simply don't value the newly produced goods at the price point offered over the old ones at the secondary rates. He could sell the new ones for less; if he can't or the market is truly saturated, then well, I guess he is out of business. But, there's no obligation on consumers to buy new products or keep businesses alive. He already profited by the initial sales he made. Everyone benefits regardless, people still get to either have money or what they perceive to be a razor of good value.
He is free to create a new business making something new, further increasing wealth
But he may also rationally react by making the razor with a weak hinge which he knows won't last, so that people can't keep trading them on the secondary market forever. It seems to me that is behavior we want to discourage.
But you pretty much can't. Anything valuable enough where resale is important, ie vehicles, houses, etc, will continue because the whole market depends on it.
Who is to stop me from selling my durable straight razor to someone else?
Functionally, what's the difference between a weak hinge and a super durable one you replace anyway just to keep this guy in business?
Doesn't the potential for resale increase the value of a product? Cars, houses, Macs, they have resale value and people would not pay as much for the initial purchase if they could not recoup the cost when they sold it later.
Eliminating resale would decrease the value of quality products. This whole argument seem based on zero competition or consumers who are not rational. I thought you weren't allowed to make economic arguments that require irrational consumers.
They moistly come out at night, moistly.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
But you pretty much can't. Anything valuable enough where resale is important, ie vehicles, houses, etc, will continue because the whole market depends on it.
Who is to stop me from selling my durable straight razor to someone else?
Functionally, what's the difference between a weak hinge and a super durable one you replace anyway just to keep this guy in business?
My point is that creators are incetivized to create products which either break or are feature poor in response to the secondary market and the need to compete against their own product on the secondary market. The end result seems to be multiblade cartridge razors that don't last or download only games which cannot be resold (but which also cannot be brought to a friends house or used on another xbox in your own house without taking the time to redownload it.
But you pretty much can't. Anything valuable enough where resale is important, ie vehicles, houses, etc, will continue because the whole market depends on it.
Who is to stop me from selling my durable straight razor to someone else?
Functionally, what's the difference between a weak hinge and a super durable one you replace anyway just to keep this guy in business?
My point is that creators are incetivized to create products which either break or are feature poor in response to the secondary market and the need to compete against their own product on the secondary market. The end result seems to be multiblade cartridge razors that don't last or download only games which cannot be resold (but which also cannot be brought to a friends house or used on another xbox in your own house without taking the time to redownload it.
Yes, and? Markets aren't perfect; they're rewarded for making the cheapest thing possible and selling it at the highest markup possible. From a best possible product standpoint, they're failing, but it's all about making the most money, not providing the best product
Even discounting a secondary market, if someone only needs one of a thing and you sell them a perfectly adequate thing that lasts forever... why would they ever buy another unless the next one you can put out is awesome by comparison?
I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
Doesn't this incentivize creators to make their products less durable or to hold back key features for future versions? Why wouldn't we prefer to incentivize the creation of the best products possible?
In an ideal market where all the players have the available information about the products, then the fact that the maker is selling something of inferior quality that is less durable would be taken into account by the consumers when it comes time to purchase it. So they'd be only be willing to pay something less for the crappy product due to the reduced expected utility from lower lifespan and lack of resale.
Now in the real world, yes this sort of thing can crop up, in cases where the company doesn't expect the customer to know better due to an imbalance of information and overcharge for an inferior product. That can be very destructive for their long term business prospects though, if that is what you care about, since the company will get a reputation through word of mouth of selling fragile crap. There are some types of CEOs that have a strategy of going into a company that has built up a good reputation for quality and service, then cutting corners everywhere to extract as much short term money as possible before the company's reputation is fully ruined and they are nothing but a shadow of themselves, if that. Think Gateway computers, if you want an example. I think an unethical portion of that strategy is how the CEO benefits from the arrangement, because usually they make a ton of money in the cost cutting downward spiral, but then leave all the stakeholders with a smoking crater once it is all done.
But back in the ideal world, you just need to think about your exceptionally durable widget in terms of supply and demand. Even with a high demand, by building a resellable indestructible widget eventually you are going to overwhelm that demand as the supply is ever increasing. So going into business making that widget you cannot expect to be able to profit indefinitely from it, just until you have saturated the market enough that the marginal costs of making the widget are no longer worth it. So it would be a firm that a clear eyed businessman would expect to only be in operation a finite amount of time, and then close shop and switch to do something else once that time is up. I don't see why you would expect him to be entitled to generating profits forever even if he made a wonderful widget, because eventually enough would be enough.
I had this typed and I know it's a little late perhaps to post it, but anyway, in response to SKFM and Goum's attempts to explain the 2nd hand market:
Goum I appreciate your efforts to explain this to SKFM (I’ve found them interesting too) but I think the root of his misunderstanding lies in a different direction.
Why does a second-hand market not lower economic efficiency?
There are a couple of reasons and ways to go about explaining it. Firstly I’ll state that it’s a fundamental of economics is that trade is always mutually beneficial.* It leaves both parties to the trade better off. One person gets the money (which they value more than the sold good, or else they wouldn’t have sold it) and one person gets the good (which they value more than the money, or else they wouldn’t have bought it). SKFM, you get this. Your concern though, is with the producer of the initial good, who ‘misses out’ on this transaction.
But it’s not enough to suggest that making more things is good everywhere and always, which is what you seem to be suggesting. To increase welfare we need the ‘right’ production mix. In the above, the buyer preferred the 2nd hand good to buying the new good (for whatever reason). You point out here, rightly, that the ‘initial producer’ didn’t get to sell and profit from a new sale. Fair enough. But I think what you’re missing is that this extra sale consumes resources that could be put to other uses. With the 2nd hand trade, the welfare of the consumers is in the same place, the initial producer doesn’t make a sale, but he keeps those resources that can be utilised in a different trade in a more efficient manner (theoretically speaking). The resources that would’ve been used up in the ‘lost sale’ don’t disappear into the ether. The resources that would be used in such a trade get put to other productive uses. Absent various structural inflexibilities the overall level of welfare should be higher when all resources are put to their most productive uses (as determined by people trading as they see fit), rather than determining that in the interest of ‘more jobs’ we should arbitrarily decide that resources will be consumed in one particular industry by disallowing 2nd hand trade of goods produced by that industry. This is just an opportunity cost explanation. Making more jobs by producing more stuff in one industry is all well and good, but if you’re forcing that by disallowing 2nd hand sales you’re removing those resources from what could’ve been another industry using them productively. Even if you consider this as a zero-sum transaction (making goods in one industry with the resources that could’ve been used in another) the consumers in our original example get shafted because they can no longer sell their unwanted good (reducing welfare) or purchase the wanted good at a 2nd hand price (reducing welfare).
Also (and someone else brought this up) it’s valuable to consider what a 2nd hand market does to the initial price of a good. Thought experiment: if you knew that you could not ever sell a car once you had bought it from a producer, would you be willing to pay the same price for one? (Answer: no, knowing you can sell it to someone else at some point raises the value of the good).
Tl;dr: An error creeps in by assuming that a new sale for an ‘initial producer’ is an unmitigated creation of wealth. Resources are used up, and those are resources that are not used up in the alternative of a 2nd hand trade. This affects the outcome of whether total utility is greater or lesser.
*Absent conjuring an example that jumps through quite a few specific hoops.
As for where the discussion has moved to: as Savant says above, yes, someone can plan to build a product that will break in order to diminish any 2nd hand market. But if we're already assuming a competitive market here, then why is no other person seeing the opportunity to make a profit with a better and more durable good, and filling that niche? Yes, that second person will not be in business forever (assuming he does in fact produce a product that lasts forever and saturates the market), but that's not a problem. Once the market is saturated, he can take the resources he was using to produce that good (labour and capital, presumably) and do something else. No market opening exists forever. Nor should it. If there's no longer a market for something, we shouldn't discourage businesses, entrepreneurs, producers, whoever from moving on to something else. That may be hard. But that's not to say it's not efficient for them to transition.
Solvent on
I don't know where he got the scorpions, or how he got them into my mattress.
I sense a confusion regarding a perceived incomplete market/pecuniary externality/price effect, but I have yet to read the discussion closely enough to pinpoint it.
Why wouldn't we prefer to incentivize the creation of the best products possible?
No, you don't. You want to incentivize the creation of surplus value, more output for less input, and where (as defined here) the superior widget does in fact cost more to make, then there is no a priori reason why would we should prefer it to drive out the inferior widget. In fact, holding other things equal we should actively desire that it produce the inferior widget, for the superior widget costs too much.
To borrow an outdated anecdote from M. Friedman:
The defect in this rationalization is a common one, and one that is destructive of a proper understanding of the operation of an economic system, namely, the failure to distinguish between technical efficiency and economic efficiency.
...
Would it not, he said, be absurd if the automobile industry were to argue that no one should drive a low quality car and therefore that no automobile manufacturer should be permitted to produce a car that did not come up to the Cadillac standard.
Pick Intel processors, etc. as appropriate.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
What a series of excellent posts! I am convinced that the secondary market is not destructive now.
The one question I still have is how, if at all, manufacturers should distinguish between secondary market sales and theft or piracy. It seems to me that the only differences are that secondary market sales are of goods that were all sold by the manufacturor, and that the existence of the possibility of secondary sales may increase the initial purchase price (personally I would prefer a world where secondary sales of consumer goods were not possible since I almost never sell things, and would benefit from reduced prices ).
I guess that how I ultimately feel is that I would choose a world in which secondhand transactions among consumers did not exist as a matter of pure preference and out of the belief that creators should profit from their work (I can't help but hate situations like the $55 preowned games at GameStop, for example, and the idea that someone can put in time and money to learn a trade and then be put out of business because I secondhand sales of his own product is disconcerting to me) but I understand the reasoning behind and benefits of allowing a secondary market to exist, even accepting that the result will be intentionally producing lower quality or feature poor products.
What a series of excellent posts! I am convinced that the secondary market is not destructive now.
The one question I still have is how, if at all, manufacturers should distinguish between secondary market sales and theft or piracy. It seems to me that the only differences are that secondary market sales are of goods that were all sold by the manufacturor, and that the existence of the possibility of secondary sales may increase the initial purchase price (personally I would prefer a world where secondary sales of consumer goods were not possible since I almost never sell things, and would benefit from reduced prices ).
I guess that how I ultimately feel is that I would choose a world in which secondhand transactions among consumers did not exist as a matter of pure preference and out of the belief that creators should profit from their work (I can't help but hate situations like the $55 preowned games at GameStop, for example, and the idea that someone can put in time and money to learn a trade and then be put out of business because I secondhand sales of his own product is disconcerting to me) but I understand the reasoning behind and benefits of allowing a secondary market to exist, even accepting that the result will be intentionally producing lower quality or feature poor products.
Copyright and intellectual property are their own separate can of worms, and they have oddities which make them different from a lot of other goods. The big thing is that while it may cost a lot to produce the initial copies of a work, now in the digital age it is trivial for anyone to create further copies after that (unless they try to lock down heavily on that reproduction, but even then as you may know that can only go so far). The physical goods that are somewhat close to digital goods in that price mismatch are pharmaceuticals, where the initial research and testing is very expensive compared to the marginal cost of making another pill in the factory. And those typically fall under patents.
Copyright and IP are more complicated to deal with than just the ideal free market examples, since you need explicit government provisions for copyright and patents to exist in the first place. Without them you have the patronage model like back in the olden days, where a lord or the church or a wealthy burgher or whoever would commission an artist to do a work for them. I guess kickstarter is sort of like that nowadays. The other end of the spectrum is perpetual copyright, where an exclusive monopoly to reproduce a work lasts well beyond the lifetime of the author, and that model is what we've been moving closer and closer to, but would be considered anything but a pure free market.
Anyways, perhaps someone else could speak better to the economics on that if you are so interested.
The one question I still have is how, if at all, manufacturers should distinguish between secondary market sales and theft or piracy.
Piracy in terms of goods that have production costs tends to be an issue with hanging onto someones good name. They sell original products and make it themselves, but since they didn't spend the effort the company did they don't have costs.
This is damaging to the company since it will cause people to purchase the inferior good not knowing its not from the company and attribute its quality to what the company did. Other than that we don't really care about people selling Bolexes. Its not different than them selling any kind of watches.
Theft in terms of theft physically removes the product from the company and so causes them direct economic harm
Piracy in terms of goods that don't have production costs is special. Since we are trying, as Ronya points out, to maximize surplus value the way in which we do that is to set the price equal to the marginal cost. But the marginal cost of software is zero dollars. If the cost of the good was actually zero dollars then no one would ever design goods that can be copied [after all they could not get paid].
Thus copyright law is a tradeoff between the ability to copy more and so get lots of surplus value now and the surplus value from new products that are created later. We could think of this as a maximization problem across time of all value. If laws are too loose then we get the most value out of stuff today, but less stuff gets made in the future and so we don't get any value out of it. If laws are too tight then we get lots of new works, but not that much value is extracted from each.
That of course is a very simple description of the problem, because various aspects of the laws make new creations easier/harder [E.G. the current lack of a real public domain makes creating things harder since there are fewer ideas which can be safely modified or used in a commercial space]
Even more problematic is what happens when goodwill is factored in. Let us assume that some people would purchase your product at a reasonable price because they think supporting artists is valuable enough and that they will get stuff in the future if they do it[because you can make more]. Then, people who want to buy your product below that price point, if they get your product for free, cause no harm and are simply extra value for the system.
The short answer is that the optimal policy is a complicated mess of discount rates, binding, and non-binding constraints and is not easy to work out under the best of situations.
The thing with the secondary market is that often the buyers there probably weren't going to buy the product first hand anyways. Yeah, they lose some potential buyers because those people are really frugal with their money and they figure it's a better use of their money to buy second hand if they can. Honestly, the secondary market is probably better than people either pitching the item into the trash where people then scavenge it out or giving it away to people. The secondary market at least provides a means to generate additional jobs and taxable income. I'd also argue that it also makes some frugal buyers more likely to buy something first hand in the future if they get it second hand and are reasonable satisfied with the product.
Can someone explain to me how cutting marginal tax rates and offsetting the loss in revenue by removing deductions such that ΔT=0 has any significant macroeconomic effect?
The only answer I can come up with is a reduction in deadweight loss and lower compliance costs, which roughly translates to "some numbers move around and some accountants lose their jobs but on the whole everything stays pretty much the same."
Can someone explain to me how cutting marginal tax rates and offsetting the loss in revenue by removing deductions such that ΔT=0 has any significant macroeconomic effect?
The only answer I can come up with is a reduction in deadweight loss and lower compliance costs, which roughly translates to "some numbers move around and some accountants lose their jobs but on the whole everything stays pretty much the same."
It doesn't, which is how you know he's full of shit. Well, also arithmetic.
Colbert asked basically this question in his last formidable opponent.
Self-righteousness is incompatible with coalition building.
Can someone explain to me how cutting marginal tax rates and offsetting the loss in revenue by removing deductions such that ΔT=0 has any significant macroeconomic effect?
The only answer I can come up with is a reduction in deadweight loss and lower compliance costs, which roughly translates to "some numbers move around and some accountants lose their jobs but on the whole everything stays pretty much the same."
So the short answer is that empirically no. I am sure you could create a model that would show macroeconomic effects, but I am not sure that they would mean anything.
Microeconomically there should be utility effects (which is to say, so long as we don't specifically want to promote many of the things we have tax breaks for its better to not do so)
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
The most obvious immediate advantage is that those clerks and truckers remain employed and don't need foodstamps themselves.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
The most obvious immediate advantage is that those clerks and truckers remain employed and don't need foodstamps themselves.
@V1m - I moved away from defending this hypothetical a while ago, but people don't need money in their hands to have the whole chain stimulated. You just need government buyers to go into the store, buy food, and burn it. Exact same impact on the store as giving people money to use to buy food.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
As a purely practical matter, the lower rate will probably sunset in 10 years unless reuppes by congress, and that uncertainty will accelerate activity that would have occurred later to the period right before the rate ends. Happens all the time.
The effect is intended to be microeconomic in nature, by shuffling around marginal tax rates. So it falls under a combination of "reduction in deadweight losses" and "increased relative desire to do things which are taxable".
Easy way to visualize it is to invoke the Slutsky equation: effect of a marginal change equals income effect plus substitution effect. Assume, for the sake of argument, that all individuals are identical. Then if ΔT=0, then the average amount of tax raised must be the same, so the income effect is zero. So the entire marginal change is translated to a substitution effect.
In practice all individuals are not identical, so it is worth additionally keeping an eye on who gains or loses in a given "broaden the base" proposal. We generally acknowledge that deductions disproportionately benefit those with income to deduct, i.e., the relatively rich. It does follow, by the same argument, that abolishing deductions generally disproportionately harms those with income to deduct. But do keep an eye on whose taxes get cut and raised: income plus sales plus payroll tax rates are not equal across the entire spectrum.
Empirically the effect is liable to be small, simply because people adapt to deductions; behavior is already liable to be near-optimal given the average tax rate, so to speak. People pick lifestyles with their concomitant marginal rates and deductions, and so make decisions over marginal rates plus MTRs as a whole already, and American politics favour deductions that themselves favour lifestyles, not particular activities.
Macroeconomically, there are some similar-sounding proposals (e.g., the constant-revenue Keynesian multiplier. ΔT=0, but one lowers the tax on those with higher marginal propensity to consume and raises the tax on those with lower marginal propensity to consume, so in the short-run, national demand increases).
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AManFromEarthLet's get to twerk!The King in the SwampRegistered Userregular
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
The most obvious immediate advantage is that those clerks and truckers remain employed and don't need foodstamps themselves.
@V1m - I moved away from defending this hypothetical a while ago, but people don't need money in their hands to have the whole chain stimulated. You just need government buyers to go into the store, buy food, and burn it. Exact same impact on the store as giving people money to use to buy food.
Except for all the people who need food who still exist and are now have to buy food you could have given them instead of burning it. That's a big part of the return on investment from food stamps.
The biggest problem I see is consumer debt. Classical stimulus like a tax refund is less effective because even the middle class has larger debts now and instead of buying a new TV or a new car, they're going to pay down their credit card bill or student loans.
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MayabirdPecking at the keyboardRegistered Userregular
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
The most obvious immediate advantage is that those clerks and truckers remain employed and don't need foodstamps themselves.
@V1m - I moved away from defending this hypothetical a while ago, but people don't need money in their hands to have the whole chain stimulated. You just need government buyers to go into the store, buy food, and burn it. Exact same impact on the store as giving people money to use to buy food.
Except for all the people who need food who still exist and are now have to buy food you could have given them instead of burning it. That's a big part of the return on investment from food stamps.
This is also essentially what foreign food aid is - agricultural subsidies, same as food stamps. Instead of dumping it in the ocean or burning it, you buy up grain and dump it into some kids in [insert third world country here]. A little more effort, but you get to pat yourself on the back a bit and other people might be impressed by the good deed.
Hallo. This seems like the most appropriate thread, I've gotten into a friendly argument with a friend, and I wanted to refer to a video I've seen on these forums. It was a female law professor (Columbia?) who dealt with bankruptcy law. She was giving a talk that had to do with how family finances had changed over times. There were lots of facts and trends (talking about how household spending in real terms had changed on clothes, and restaurants, etc...) and it gave the impression that while real incomes had risen, discretionary spending had fallen and families which were now two income had much less room for adustment when they ran into financial issues (sickness, parent out of work, etc...)
Anyone recognize what I'm referring to, knows the link or more details?
Thanks
Hic Rhodus, Hic Salta.
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AManFromEarthLet's get to twerk!The King in the SwampRegistered Userregular
Hallo. This seems like the most appropriate thread, I've gotten into a friendly argument with a friend, and I wanted to refer to a video I've seen on these forums. It was a female law professor (Columbia?) who dealt with bankruptcy law. She was giving a talk that had to do with how family finances had changed over times. There were lots of facts and trends (talking about how household spending in real terms had changed on clothes, and restaurants, etc...) and it gave the impression that while real incomes had risen, discretionary spending had fallen and families which were now two income had much less room for adustment when they ran into financial issues (sickness, parent out of work, etc...)
Anyone recognize what I'm referring to, knows the link or more details?
Resurrecting this and paging @ronya@enc0re and whoever else need paging because apparently one of the two intellectual foundations of the modern austerity movement was discovered to be... well... bad at Excel, which mistakenly created a result that indicated that high debt to GDP ratio = lowered growth.
Link is to Krugman, Krugman links to the papers documenting the finding.
Self-righteousness is incompatible with coalition building.
Honestly, it feels like we need a threshold level of consensus (i.e. more than two papers) before politicians are allowed to know about a given hypothesis.
But you pretty much can't. Anything valuable enough where resale is important, ie vehicles, houses, etc, will continue because the whole market depends on it.
Who is to stop me from selling my durable straight razor to someone else?
Functionally, what's the difference between a weak hinge and a super durable one you replace anyway just to keep this guy in business?
My point is that creators are incetivized to create products which either break or are feature poor in response to the secondary market and the need to compete against their own product on the secondary market. The end result seems to be multiblade cartridge razors that don't last or download only games which cannot be resold (but which also cannot be brought to a friends house or used on another xbox in your own house without taking the time to redownload it.
While this is true in digital space, the perceived lost value of most goods in 'real' space is enormous. The only reason for producing a lower quality product is to increase profits at the cost of the consumer.
In the world of jeans for example, many manufacturers use soft denim combined with very rigid thread. The rigid thread costs more than the soft thread would, and actually cuts the fabric during washing accelerating seam failure. So the goods quality is lowered and the unit price is INCREASED to make the customer purchase jeans more often than they would want.
This is the problem with the economy. If someone makes a top quality long lasting product, sells 100K of them, and then quits because noone needs any more then that is a HUGE success. Society will no longer need to spend money and resources solving that problem. It is now done.
Resurrecting this and paging @ronya@enc0re and whoever else need paging because apparently one of the two intellectual foundations of the modern austerity movement was discovered to be... well... bad at Excel, which mistakenly created a result that indicated that high debt to GDP ratio = lowered growth.
Link is to Krugman, Krugman links to the papers documenting the finding.
I read the paper earlier. Pretty damning. But let's give R-R a chance to respond first.
@ronya : Shouldn't this be done as a panel VAR to begin with? WTF is going on that they are averaging growth rates in Excel?
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Seriously? Is this a real argument you're trying to make?
Further, I'm not sure the argument you're trying to make.
We should expect shitty quality so that they can sell us stuff later on?
Fuck the consumer, these guys need to make a buck?
But to actively encourage the marketing of a shitty product is an odd position to take.
Hello pharmaceutical industry.
Hell, the computer industry's full of examples of hardware that's been intentionally nerfed by manufacturers so that they perform at a lower level and fill a mid-level performance slot in product lines. That is, they literally take a superior product, make it inferior, and sell it at a lower margin, so they can maintain a consistent product line and sell their top-end products at significant profit.
I can think of more than another handful of examples off the top of my head right now....
I'm not arguing for the making of shitty products. Exactly the opposite. I am saying I would prefer a world in which it makes sense to make the best product possible, but the existence of the second hand market may prevent this, if making the best product at first means it is hard to justify buying the even better product new over the first product in the secondary market.
But he also put himself out of business, right? Take away the secondary market, and he can keep making them, people will keep buying them, and everyone benefits (they get to have money or a great razor)
Except that I think market histories have proven that people will still buy the better product even if there is a second hand market for it.
And the idea that we should get rid of the second hand market is just silly.
People simply don't value the newly produced goods at the price point offered over the old ones at the secondary rates. He could sell the new ones for less; if he can't or the market is truly saturated, then well, I guess he is out of business. But, there's no obligation on consumers to buy new products or keep businesses alive. He already profited by the initial sales he made. Everyone benefits regardless, people still get to either have money or what they perceive to be a razor of good value.
He is free to create a new business making something new, further increasing wealth
Competition is supposed to resolve this, but....
But he may also rationally react by making the razor with a weak hinge which he knows won't last, so that people can't keep trading them on the secondary market forever. It seems to me that is behavior we want to discourage.
Who is to stop me from selling my durable straight razor to someone else?
Functionally, what's the difference between a weak hinge and a super durable one you replace anyway just to keep this guy in business?
Eliminating resale would decrease the value of quality products. This whole argument seem based on zero competition or consumers who are not rational. I thought you weren't allowed to make economic arguments that require irrational consumers.
My point is that creators are incetivized to create products which either break or are feature poor in response to the secondary market and the need to compete against their own product on the secondary market. The end result seems to be multiblade cartridge razors that don't last or download only games which cannot be resold (but which also cannot be brought to a friends house or used on another xbox in your own house without taking the time to redownload it.
Yes, and? Markets aren't perfect; they're rewarded for making the cheapest thing possible and selling it at the highest markup possible. From a best possible product standpoint, they're failing, but it's all about making the most money, not providing the best product
Even discounting a secondary market, if someone only needs one of a thing and you sell them a perfectly adequate thing that lasts forever... why would they ever buy another unless the next one you can put out is awesome by comparison?
In an ideal market where all the players have the available information about the products, then the fact that the maker is selling something of inferior quality that is less durable would be taken into account by the consumers when it comes time to purchase it. So they'd be only be willing to pay something less for the crappy product due to the reduced expected utility from lower lifespan and lack of resale.
Now in the real world, yes this sort of thing can crop up, in cases where the company doesn't expect the customer to know better due to an imbalance of information and overcharge for an inferior product. That can be very destructive for their long term business prospects though, if that is what you care about, since the company will get a reputation through word of mouth of selling fragile crap. There are some types of CEOs that have a strategy of going into a company that has built up a good reputation for quality and service, then cutting corners everywhere to extract as much short term money as possible before the company's reputation is fully ruined and they are nothing but a shadow of themselves, if that. Think Gateway computers, if you want an example. I think an unethical portion of that strategy is how the CEO benefits from the arrangement, because usually they make a ton of money in the cost cutting downward spiral, but then leave all the stakeholders with a smoking crater once it is all done.
But back in the ideal world, you just need to think about your exceptionally durable widget in terms of supply and demand. Even with a high demand, by building a resellable indestructible widget eventually you are going to overwhelm that demand as the supply is ever increasing. So going into business making that widget you cannot expect to be able to profit indefinitely from it, just until you have saturated the market enough that the marginal costs of making the widget are no longer worth it. So it would be a firm that a clear eyed businessman would expect to only be in operation a finite amount of time, and then close shop and switch to do something else once that time is up. I don't see why you would expect him to be entitled to generating profits forever even if he made a wonderful widget, because eventually enough would be enough.
Why does a second-hand market not lower economic efficiency?
There are a couple of reasons and ways to go about explaining it. Firstly I’ll state that it’s a fundamental of economics is that trade is always mutually beneficial.* It leaves both parties to the trade better off. One person gets the money (which they value more than the sold good, or else they wouldn’t have sold it) and one person gets the good (which they value more than the money, or else they wouldn’t have bought it). SKFM, you get this. Your concern though, is with the producer of the initial good, who ‘misses out’ on this transaction.
But it’s not enough to suggest that making more things is good everywhere and always, which is what you seem to be suggesting. To increase welfare we need the ‘right’ production mix. In the above, the buyer preferred the 2nd hand good to buying the new good (for whatever reason). You point out here, rightly, that the ‘initial producer’ didn’t get to sell and profit from a new sale. Fair enough. But I think what you’re missing is that this extra sale consumes resources that could be put to other uses. With the 2nd hand trade, the welfare of the consumers is in the same place, the initial producer doesn’t make a sale, but he keeps those resources that can be utilised in a different trade in a more efficient manner (theoretically speaking). The resources that would’ve been used up in the ‘lost sale’ don’t disappear into the ether. The resources that would be used in such a trade get put to other productive uses. Absent various structural inflexibilities the overall level of welfare should be higher when all resources are put to their most productive uses (as determined by people trading as they see fit), rather than determining that in the interest of ‘more jobs’ we should arbitrarily decide that resources will be consumed in one particular industry by disallowing 2nd hand trade of goods produced by that industry. This is just an opportunity cost explanation. Making more jobs by producing more stuff in one industry is all well and good, but if you’re forcing that by disallowing 2nd hand sales you’re removing those resources from what could’ve been another industry using them productively. Even if you consider this as a zero-sum transaction (making goods in one industry with the resources that could’ve been used in another) the consumers in our original example get shafted because they can no longer sell their unwanted good (reducing welfare) or purchase the wanted good at a 2nd hand price (reducing welfare).
Also (and someone else brought this up) it’s valuable to consider what a 2nd hand market does to the initial price of a good. Thought experiment: if you knew that you could not ever sell a car once you had bought it from a producer, would you be willing to pay the same price for one? (Answer: no, knowing you can sell it to someone else at some point raises the value of the good).
Tl;dr: An error creeps in by assuming that a new sale for an ‘initial producer’ is an unmitigated creation of wealth. Resources are used up, and those are resources that are not used up in the alternative of a 2nd hand trade. This affects the outcome of whether total utility is greater or lesser.
*Absent conjuring an example that jumps through quite a few specific hoops.
As for where the discussion has moved to: as Savant says above, yes, someone can plan to build a product that will break in order to diminish any 2nd hand market. But if we're already assuming a competitive market here, then why is no other person seeing the opportunity to make a profit with a better and more durable good, and filling that niche? Yes, that second person will not be in business forever (assuming he does in fact produce a product that lasts forever and saturates the market), but that's not a problem. Once the market is saturated, he can take the resources he was using to produce that good (labour and capital, presumably) and do something else. No market opening exists forever. Nor should it. If there's no longer a market for something, we shouldn't discourage businesses, entrepreneurs, producers, whoever from moving on to something else. That may be hard. But that's not to say it's not efficient for them to transition.
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No, you don't. You want to incentivize the creation of surplus value, more output for less input, and where (as defined here) the superior widget does in fact cost more to make, then there is no a priori reason why would we should prefer it to drive out the inferior widget. In fact, holding other things equal we should actively desire that it produce the inferior widget, for the superior widget costs too much.
To borrow an outdated anecdote from M. Friedman:
Pick Intel processors, etc. as appropriate.
The one question I still have is how, if at all, manufacturers should distinguish between secondary market sales and theft or piracy. It seems to me that the only differences are that secondary market sales are of goods that were all sold by the manufacturor, and that the existence of the possibility of secondary sales may increase the initial purchase price (personally I would prefer a world where secondary sales of consumer goods were not possible since I almost never sell things, and would benefit from reduced prices
I guess that how I ultimately feel is that I would choose a world in which secondhand transactions among consumers did not exist as a matter of pure preference and out of the belief that creators should profit from their work (I can't help but hate situations like the $55 preowned games at GameStop, for example, and the idea that someone can put in time and money to learn a trade and then be put out of business because I secondhand sales of his own product is disconcerting to me) but I understand the reasoning behind and benefits of allowing a secondary market to exist, even accepting that the result will be intentionally producing lower quality or feature poor products.
Copyright and intellectual property are their own separate can of worms, and they have oddities which make them different from a lot of other goods. The big thing is that while it may cost a lot to produce the initial copies of a work, now in the digital age it is trivial for anyone to create further copies after that (unless they try to lock down heavily on that reproduction, but even then as you may know that can only go so far). The physical goods that are somewhat close to digital goods in that price mismatch are pharmaceuticals, where the initial research and testing is very expensive compared to the marginal cost of making another pill in the factory. And those typically fall under patents.
Copyright and IP are more complicated to deal with than just the ideal free market examples, since you need explicit government provisions for copyright and patents to exist in the first place. Without them you have the patronage model like back in the olden days, where a lord or the church or a wealthy burgher or whoever would commission an artist to do a work for them. I guess kickstarter is sort of like that nowadays. The other end of the spectrum is perpetual copyright, where an exclusive monopoly to reproduce a work lasts well beyond the lifetime of the author, and that model is what we've been moving closer and closer to, but would be considered anything but a pure free market.
Anyways, perhaps someone else could speak better to the economics on that if you are so interested.
Piracy in terms of goods that have production costs tends to be an issue with hanging onto someones good name. They sell original products and make it themselves, but since they didn't spend the effort the company did they don't have costs.
This is damaging to the company since it will cause people to purchase the inferior good not knowing its not from the company and attribute its quality to what the company did. Other than that we don't really care about people selling Bolexes. Its not different than them selling any kind of watches.
Theft in terms of theft physically removes the product from the company and so causes them direct economic harm
Piracy in terms of goods that don't have production costs is special. Since we are trying, as Ronya points out, to maximize surplus value the way in which we do that is to set the price equal to the marginal cost. But the marginal cost of software is zero dollars. If the cost of the good was actually zero dollars then no one would ever design goods that can be copied [after all they could not get paid].
Thus copyright law is a tradeoff between the ability to copy more and so get lots of surplus value now and the surplus value from new products that are created later. We could think of this as a maximization problem across time of all value. If laws are too loose then we get the most value out of stuff today, but less stuff gets made in the future and so we don't get any value out of it. If laws are too tight then we get lots of new works, but not that much value is extracted from each.
That of course is a very simple description of the problem, because various aspects of the laws make new creations easier/harder [E.G. the current lack of a real public domain makes creating things harder since there are fewer ideas which can be safely modified or used in a commercial space]
Even more problematic is what happens when goodwill is factored in. Let us assume that some people would purchase your product at a reasonable price because they think supporting artists is valuable enough and that they will get stuff in the future if they do it[because you can make more]. Then, people who want to buy your product below that price point, if they get your product for free, cause no harm and are simply extra value for the system.
The short answer is that the optimal policy is a complicated mess of discount rates, binding, and non-binding constraints and is not easy to work out under the best of situations.
TylerJ on League of Legends (it's free and fun!)
The only answer I can come up with is a reduction in deadweight loss and lower compliance costs, which roughly translates to "some numbers move around and some accountants lose their jobs but on the whole everything stays pretty much the same."
It doesn't, which is how you know he's full of shit. Well, also arithmetic.
Colbert asked basically this question in his last formidable opponent.
So the short answer is that empirically no. I am sure you could create a model that would show macroeconomic effects, but I am not sure that they would mean anything.
Microeconomically there should be utility effects (which is to say, so long as we don't specifically want to promote many of the things we have tax breaks for its better to not do so)
The most obvious immediate advantage is that those clerks and truckers remain employed and don't need foodstamps themselves.
@V1m - I moved away from defending this hypothetical a while ago, but people don't need money in their hands to have the whole chain stimulated. You just need government buyers to go into the store, buy food, and burn it. Exact same impact on the store as giving people money to use to buy food.
As a purely practical matter, the lower rate will probably sunset in 10 years unless reuppes by congress, and that uncertainty will accelerate activity that would have occurred later to the period right before the rate ends. Happens all the time.
Easy way to visualize it is to invoke the Slutsky equation: effect of a marginal change equals income effect plus substitution effect. Assume, for the sake of argument, that all individuals are identical. Then if ΔT=0, then the average amount of tax raised must be the same, so the income effect is zero. So the entire marginal change is translated to a substitution effect.
In practice all individuals are not identical, so it is worth additionally keeping an eye on who gains or loses in a given "broaden the base" proposal. We generally acknowledge that deductions disproportionately benefit those with income to deduct, i.e., the relatively rich. It does follow, by the same argument, that abolishing deductions generally disproportionately harms those with income to deduct. But do keep an eye on whose taxes get cut and raised: income plus sales plus payroll tax rates are not equal across the entire spectrum.
Empirically the effect is liable to be small, simply because people adapt to deductions; behavior is already liable to be near-optimal given the average tax rate, so to speak. People pick lifestyles with their concomitant marginal rates and deductions, and so make decisions over marginal rates plus MTRs as a whole already, and American politics favour deductions that themselves favour lifestyles, not particular activities.
Macroeconomically, there are some similar-sounding proposals (e.g., the constant-revenue Keynesian multiplier. ΔT=0, but one lowers the tax on those with higher marginal propensity to consume and raises the tax on those with lower marginal propensity to consume, so in the short-run, national demand increases).
Except for all the people who need food who still exist and are now have to buy food you could have given them instead of burning it. That's a big part of the return on investment from food stamps.
The biggest problem I see is consumer debt. Classical stimulus like a tax refund is less effective because even the middle class has larger debts now and instead of buying a new TV or a new car, they're going to pay down their credit card bill or student loans.
This is also essentially what foreign food aid is - agricultural subsidies, same as food stamps. Instead of dumping it in the ocean or burning it, you buy up grain and dump it into some kids in [insert third world country here]. A little more effort, but you get to pat yourself on the back a bit and other people might be impressed by the good deed.
Anyone recognize what I'm referring to, knows the link or more details?
Thanks
Was it Elizabeth Warren talking about the death of the American middle class?
Problematic.
Link is to Krugman, Krugman links to the papers documenting the finding.
While this is true in digital space, the perceived lost value of most goods in 'real' space is enormous. The only reason for producing a lower quality product is to increase profits at the cost of the consumer.
In the world of jeans for example, many manufacturers use soft denim combined with very rigid thread. The rigid thread costs more than the soft thread would, and actually cuts the fabric during washing accelerating seam failure. So the goods quality is lowered and the unit price is INCREASED to make the customer purchase jeans more often than they would want.
This is the problem with the economy. If someone makes a top quality long lasting product, sells 100K of them, and then quits because noone needs any more then that is a HUGE success. Society will no longer need to spend money and resources solving that problem. It is now done.
I read the paper earlier. Pretty damning. But let's give R-R a chance to respond first.
@ronya : Shouldn't this be done as a panel VAR to begin with? WTF is going on that they are averaging growth rates in Excel?