My country is dying

[Gimmi]

I added that video to my favorites Kuzmich.

Just kidding.

 

[Uncle_Vanya]

Okay?

 

[Tipsy]

Or the whole industry can die altogether, one way or the other we're gonna find out. In either case you were originally trying to make a point that self-interest is good for everyone, current economic conditions show that self-interest can be a very bad thing. Car companies, the banks, etc. are just examples of that.

If Im not mistaken, giving out loans to people who couldn't pay them is what put the banks in the position they are in now and thus put the whole country's economy into that position. The crisis is due to more than one reason, but the banks are definitely one of the main ones.

But what you have to consider is would the banks have done it if it wasn't profitable? What made it seem profitable? Due to the housing bubble created by interest rates pushed down to insanely low rates for an extended period of time, speculation was encouraged as was giving out loans that could be repaid if the growth rate in housing stayed steady (which it couldn't, because we were in a bubble and everyone who warned we were was a 'lunatic'). There were a number of causes true, but they were all rooted as a result of our monetary policy.

And my question sticks to the point; would the firms dying off (ie Would you say it would be a bad thing for their problems to force them to move to a more efficient business model or get out of the way for some firm that can make one?) be a bad thing?

 

[Uncle_Vanya]

Well you kind of spin the question in a way that its hard to not agree with you. Yes, if the industries actually learn from this and become more efficient, its a good thing. However, if history repeats itself (as it does) and they don't learn anything and the new guys will somewhere down the road end up in the same exact situation as we have right now, then no this is not a good thing. More so, for thousands of people who lost and are about to loose their jobs its not a good thing whichever way you look at it. So let me put my own spin on the question, if self-interest of certain CEOs reduces quality of life nationwide, is that a good thing?

 

[Tipsy]

Well you kind of spin the question in a way that its hard to not agree with you. Yes, if the industries actually learn from this and become more efficient, its a good thing. However, if history repeats itself (as it does) and they don't learn anything and the new guys will somewhere down the road end up in the same exact situation as we have right now, then no this is not a good thing.

There is no spin - the only way for a new firm to enter the market would be to have a more efficient business model, better product, etc; the only way for the firms in the market to stay in will be to do the same thing. It's how the market works, through the process of creative destruction. What does creative destruction cause - "sustained long-term economic growth."

You're right, history will repeat itself - "In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics of industrial change: the transition from a competitive to a monopolistic market, and back again." What is being repeated is either firms are innovating or they are being pushed out of the market by those who innovate - it is the constant cycle that has raised the standard of living of people across the world since the industrial revolution.

More so, for thousands of people who lost and are about to loose their jobs its not a good thing whichever way you look at it.

It's bad either way, but we have two options - either we pay for them by giving money to outdated inefficient failing firms or we can pay for them with unemployment benefit and allow more efficient firms to enter the market (or remain if the firms now in it innovate).

So let me put my own spin on the question, if self-interest of certain CEOs reduces quality of life nationwide, is that a good thing?

That's a bad thing and the market will punish them for it, provide incentives for 'the CEOs' who will not to enter the market, and correct the situation with more efficient firms under better leadership.

 

[Uncle_Vanya]

There is no spin - the only way for a new firm to enter the market would be to have a more efficient business model, better product, etc; the only way for the firms in the market to stay in will be to do the same thing. It's how the market works, through the process of creative destruction. What does creative destruction cause - "sustained long-term economic growth."

Or what could happen is the companies adapting temporarily and then going back to their old ways once things settle down, until the next time shit hits the fan.

It's bad either way, but we have two options - either we pay for them by giving money to outdated inefficient failing firms or we can pay for them with unemployment benefit and allow more efficient firms to enter the market (or remain if the firms now in it innovate).

What innovative firms are you talking about in this case, specifically?

That's a bad thing and the market will punish them for it, provide incentives for 'the CEOs' who will not to enter the market, and correct the situation with more efficient firms under better leadership.

What incentives? They're still giving themselves bonuses, now thats self-interest at its purest.

 

[Darkmatter]

If this thread gets anymore debatable, to AS it will go.

 

[Gimmi]

All of his threads end up with him in some retarded debate about Russia, nothing new.

 

[Dragnskull]

In Soviet Russia, Youtube watches you!

 

[Uncle_Vanya]

All of his threads end up with him in some retarded debate about Russia, nothing new.

If you learn to read you will see that right now its actually a debate about the current state of economy in US and how it came to be. If you don't like my threads, why post in them? Its not like anyone values your half arsed opinions.

 

[Tipsy]

Or what could happen is the companies adapting temporarily and then going back to their old ways once things settle down, until the next time shit hits the fan.

What innovative firms are you talking about in this case, specifically?

What incentives? They're still giving themselves bonuses, now thats self-interest at its purest.

I'm going to stop dancing around and put what I'm saying in as simple terms as possible without a nitpicky example:

In the very basic theory, Marginal Cost (MC) = Marginal Benefit (MB) because otherwise other capital will enter the specific market because capital flows according to opportunity cost (ie economic profit, not to be confused with accounting profit).

For example, what that means is that if there is a more efficient way to do things there is economic profit in that specific market (for example, if the CEO is being paid an amount above the market value of their skills, there is an economic profit and someone else will enter without doing this in the long run because MC < MB; this cycle will continue until MC = MB).

The government getting involved is essentially giving a subsidy to the current firms in that it is a benefit given to current firms but would not be given to entering firms. This means that point at which MB = MC (where economic profit = 0) is set artificially high so that new firms cannot enter the market because their MB can't include the benefits offered by the government. The result of this is that the welfare of society is not maximized, or put in fancy terms, there is a deadweight loss.

 

[Uncle_Vanya]

I'm going to stop dancing around and put what I'm saying in as simple terms as possible without a nitpicky example:

In the very basic theory, Marginal Cost (MC) = Marginal Benefit (MB) because otherwise other capital will enter the specific market because capital flows according to opportunity cost (ie economic profit, not to be confused with accounting profit).

For example, what that means is that if there is a more efficient way to do things there is economic profit in that specific market (for example, if the CEO is being paid an amount above the market value of their skills, there is an economic profit and someone else will enter without doing this in the long run because MC < MB; this cycle will continue until MC = MB).

The government getting involved is essentially giving a subsidy to the current firms in that it is a benefit given to current firms but would not be given to entering firms. This means that point at which MB = MC (where economic profit = 0) is set artificially high so that new firms cannot enter the market because their MB can't include the benefits offered by the government. The result of this is that the welfare of society is not maximized, or put in fancy terms, there is a deadweight loss.

The way I understand it, it looks good on paper but it doesn't take into account the human factor. CEOs can get and hold their position based on personality as well as their efficiency/professionalism, long run is a vague term, in the long run a CEO is bound to die of old age. Thats speaking of your example.

I agree with your second paragraph, however, if the government didn't give anyone any help at all and the playing field would be completely equal how exactly does that mean that everything will be more efficient? The big corporations are already established and have the capital to buy out any new contenders if necessary. Unless the new companies bring something completely innovative the old companies are already way ahead of them in convincing the market those product to buy because the older companies have an established brand name and the money to market their product to a much larger consumer group. Sometimes innovation doesn't even matter and people just go for the already established brand. So as far as small vs. big is concerned for the small companies its an uphill battle.

Now if the government helped the smaller corporations to give them a fighting chance against the big ones that would create more competition and through it more efficiency. The government intervention is still necessary, otherwise we'd end up with a bunch of counterproductive monopolies. An even playing field doesn't seem to work even in concept.

 

[Tipsy]

The way I understand it, it looks good on paper but it doesn't take into account the human factor. CEOs can get and hold their position based on personality as well as their efficiency/professionalism, long run is a vague term, in the long run a CEO is bound to die of old age. Thats speaking of your example.

Answered in last post: for example, if the CEO is being paid an amount above the market value of their skills, there is an economic profit and someone else will enter without doing this in the long run because MC < MB; this cycle will continue until MC = MB. As for long term, that was an omission on my part, sorry, long run is roughly defined as 10 months - 2 years (there are some exceptions and those numbers are generalizations, but it's there to give perspective).

I agree with your second paragraph, however, if the government didn't give anyone any help at all and the playing field would be completely equal how exactly does that mean that everything will be more efficient?

Because in that situation MB = MC; the equilibrium (aka the point at which MB = MC) is set artificially high (aka there is economic profit and there is obstruction from new firms from entering the market because new firms can't enter the market because their MB can't include the benefits offered by the government. The problem is that when the market isn't in equilibrium (aka MB = MC) there is a deadweight loss.

So why is it more efficient? Because a deadweight loss is inefficiency: (from the wikipedia link) "In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who would have more marginal benefit than marginal cost are not buying the good or service or people who would have more marginal cost than marginal benefit are buying the product."

The big corporations are already established and have the capital to buy out any new contenders if necessary. Unless the new companies bring something completely innovative the old companies are already way ahead of them in convincing the market those product to buy because the older companies have an established brand name and the money to market their product to a much larger consumer group. Sometimes innovation doesn't even matter and people just go for the already established brand. So as far as small vs. big is concerned for the small companies its an uphill battle.

Now if the government helped the smaller corporations to give them a fighting chance against the big ones that would create more competition and through it more efficiency. The government intervention is still necessary, otherwise we'd end up with a bunch of counterproductive monopolies. An even playing field doesn't seem to work even in concept.

This idea is embodied in what I brought up earlier as creative destruction (aka (from wikipedia) "successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants").

As for big versus small, the idea that there is only economies of scales is a misperception, there are economies of scale (benefits to big firms), however there are diseconomies of scale (problem with being a big firm) as well.

What you're saying is possible, but history points away from it being the norm; to quote from the creative destruction wikipedia page:

"Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs. Wal-Mart is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, Kmart, Sears) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat. Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction.

Other examples are the way in which online free newspaper sites such as The Huffington Post are leading to creative destruction of the traditional paper newspaper. The Christian Science Monitor announced in January 2009[3] that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.[4]"

What I'm trying to say is that if small firms have something innovative, they don't need the government help. In fact, government help tends to distort confidence (and therefore investment) because when the government props or helps firms people believe them to be stronger than they actually are and even when there is trouble they keep investing because they think the government will bail them out (aka moral hazard).

 

[Uncle_Vanya]

Answered in last post: for example, if the CEO is being paid an amount above the market value of their skills, there is an economic profit and someone else will enter without doing this in the long run because MC < MB; this cycle will continue until MC = MB. As for long term, that was an omission on my part, sorry, long run is roughly defined as 10 months - 2 years (there are some exceptions and those numbers are generalizations, but it's there to give perspective).

Thats just a theory, like I said it looks good on paper, but in reality thats just not how things work all of the time, there is a human relations factor that the theory can not account for.

Because in that situation MB = MC; the equilibrium (aka the point at which MB = MC) is set artificially high (aka there is economic profit and there is obstruction from new firms from entering the market because new firms can't enter the market because their MB can't include the benefits offered by the government. The problem is that when the market isn't in equilibrium (aka MB = MC) there is a deadweight loss.

So why is it more efficient? Because a deadweight loss is inefficiency: (from the wikipedia link) "In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who would have more marginal benefit than marginal cost are not buying the good or service or people who would have more marginal cost than marginal benefit are buying the product."

This idea is embodied in what I brought up earlier as creative destruction (aka (from wikipedia) "successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants").

As for big versus small, the idea that there is only economies of scales is a misperception, there are economies of scale (benefits to big firms), however there are diseconomies of scale (problem with being a big firm) as well.

But the situation is still inefficient if the government isn't helping anyone. Like I explained previously the big companies aren't motivated to compete unless the government gives money to the small businesses so they can try to get their product on the market in a manner in which it can compete with the bigger businesses.

What you're saying is possible, but history points away from it being the norm; to quote from the creative destruction wikipedia page:

"Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs. Wal-Mart is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, Kmart, Sears) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat. Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction.

Other examples are the way in which online free newspaper sites such as The Huffington Post are leading to creative destruction of the traditional paper newspaper. The Christian Science Monitor announced in January 2009[3] that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.[4]"

What I'm trying to say is that if small firms have something innovative, they don't need the government help. In fact, government help tends to distort confidence (and therefore investment) because when the government props or helps firms people believe them to be stronger than they actually are and even when there is trouble they keep investing because they think the government will bail them out (aka moral hazard).

For every small firm with something innovative that makes it there are many more that don't.

 

[Tipsy]

Thats just a theory, like I said it looks good on paper, but in reality thats just not how things work all of the time, there is a human relations factor that the theory can not account for.

But the situation is still inefficient if the government isn't helping anyone. Like I explained previously the big companies aren't motivated to compete unless the government gives money to the small businesses so they can try to get their product on the market in a manner in which it can compete with the bigger businesses.

This is ironic. The damage done by monopolies/oligopolies (either the one big firm or a few big firms) is deadweight loss [see here]. So, according to your claims, deadweight loss both exists and monopolies/oligopolies are inefficient (since the reasoning behind the inefficiency of monopolies/oligopolies is deadweight loss) and deadweight loss doesn't exist and monopolies/oligopolies are efficient (since if deadweight loss does not exist there is no reason in which monopolies/oligopolies are inefficient). If you take both sides of a topic I don't know which side to respond to. All I'm looking for is this basic econ 101 theory is the norm that markets tend to go to in the long run.

For every small firm with something innovative that makes it there are many more that don't.

And yet the big firms nearly always fail (or innovate) in the long run as my last post showed so many examples of it.

 

[Uncle_Vanya]

This is ironic. The damage done by monopolies/oligopolies (either the one big firm or a few big firms) is deadweight loss [see here]. So, according to your claims, deadweight loss both exists and monopolies/oligopolies are inefficient (since the reasoning behind the inefficiency of monopolies/oligopolies is deadweight loss) and deadweight loss doesn't exist and monopolies/oligopolies are efficient (since if deadweight loss does not exist there is no reason in which monopolies/oligopolies are inefficient). If you take both sides of a topic I don't know which side to respond to. All I'm looking for is this basic econ 101 theory is the norm that markets tend to go to in the long run.

You could just drop the terminology and just respond to what I stated.

And yet the big firms nearly always fail (or innovate) in the long run as my last post showed so many examples of it.

Big firms like Ford, Heinz, Intel, etc., etc., etc. in most cases they don't fail, they just get more money and buy out anyone innovative.You gave 3 examples. Btw, CD players were mostly walkman, walkman makes MP3 players now, big companies have the resources to adapt to any new trend even if they're not the ones who brought it forward.

 

[Tipsy]

You could just drop the terminology and just respond to what I stated.

The problem is what you say contradicts itself; the justification of what you said second requires the theory that you say 'looks good on paper...but in reality thats just not how things work all of the time'. Either this specific economic theory is so weak that monopolies/oligopolies aren't a problem and the markets won't act accordingly (and they won't need to since monopolies/oligopolies aren't a problem) or it's strong enough that monopolies/oligopolies are a problem and the market reacts accordingly - you can't have it both ways.

Big firms like Ford, Heinz, Intel, etc., etc., etc. in most cases they don't fail, they just get more money and buy out anyone innovative.You gave 3 examples. Btw, CD players were mostly walkman, walkman makes MP3 players now, big companies have the resources to adapt to any new trend even if they're not the ones who brought it forward.

Merrill Lynch
Lehman Brothers
Montgomery Ward
Kmart
Sears
Circuit City
Looking at facts like the turnover rate in S&P 500 is 10% a year
If my ability to come up with names off the top of my head isn't to your liking, look at the many papers/books that support Schumpeter's claim. Like here where there are '1,000 companies over four decades' that fit what you want.
Is 1000 examples and models that predict life cycles of firms not enough?

Firms either innovate or the market will push them out; and what does it matter if the some big firms don't fail? What fails are parts of the big firms that they close down and the invest in the parts they buy up. Those are the firms that do innovate, those that don't are in or beyond that list of 1000. Either way, it's a win win win win for the consumer, the firm, the creator of the innovation, and welfare maximization in the economy; either way, it's under creative destruction. I realize you may not know much about investment banks, but if Lehman Brothers can fail (as it did recently) then anything can fail.

 

[Uncle_Vanya]

The problem is what you say contradicts itself; the justification of what you said second requires the theory that you say 'looks good on paper...but in reality thats just not how things work all of the time'. Either this specific economic theory is so weak that monopolies/oligopolies aren't a problem and the markets won't act accordingly (and they won't need to since monopolies/oligopolies aren't a problem) or it's strong enough that monopolies/oligopolies are a problem and the market reacts accordingly - you can't have it both ways.

Where did I contradict myself? I said that an even playing field doesn't work so the government should give money to the small companies in order to avoid formation of monopolies, period, thats it.

Merrill Lynch
Lehman Brothers
Montgomery Ward
Kmart
Sears
Circuit City
Looking at facts like the turnover rate in S&P 500 is 10% a year
If my ability to come up with names off the top of my head isn't to your liking, look at the many papers/books that support Schumpeter's claim. Like here where there are '1,000 companies over four decades' that fit what you want.
Is 1000 examples and models that predict life cycles of firms not enough?

Firms either innovate or the market will push them out; and what does it matter if the some big firms don't fail? What fails are parts of the big firms that they close down and the invest in the parts they buy up. Those are the firms that do innovate, those that don't are in or beyond that list of 1000. Either way, it's a win win win win for the consumer, the firm, the creator of the innovation, and welfare maximization in the economy; either way, it's under creative destruction. I realize you may not know much about investment banks, but if Lehman Brothers can fail (as it did recently) then anything can fail.

People loosing jobs is not a win, win for anyone, not for the consumer, not for the economy and if it happens all at once (as it is happening right now) it can bring a country's economy down to its knees. Constant search for efficiency ruins lives, production gets moved to China, foreign nationals are brought in to do jobs that the unemployed Americans can do (if we're talking about US).

 

[Tipsy]

Where did I contradict myself? I said that an even playing field doesn't work so the government should give money to the small companies in order to avoid formation of monopolies, period, thats it.

Here:
(your post in regards to MC/MB/Deadweight loss)

Thats just a theory, like I said it looks good on paper, but in reality thats just not how things work all of the time, there is a human relations factor that the theory can not account for.

and here:
(considering the only reasoning for "big ones" being inefficient is because of MC/MB/Deadweight loss)

Now if the government helped the smaller corporations to give them a fighting chance against the big ones that would create more competition and through it more efficiency.

People loosing jobs is not a win, win for anyone, not for the consumer,

Once again:
Paying for people via bailout by keeping inefficient firm afloat is worse than paying for their structural unemployment both in terms of the economy (the economy will be stronger with a more efficient allocation of skills) and money wise (for example, GM is requesting 30 billion to avoid failure (which will save 1.5 million job); that's $20,000 a person). When comparing opportunity cost, the way real world decisions are made, letting them fail is the better option.

not for the economy and if it happens all at once (as it is happening right now) it can bring a country's economy down to its knees.

Constant search for efficiency ruins lives,

It's either take it now or take it worse in the future; propping up firms as we've done with fiscal and monetary policy makes the problem worse the next time and there's a point at which the cycle is either ended by us or is ended by the 'it being worse the next time' being too bad the last time. This is more a question of morality - should we make our lives easier and our children's worse or ours a bit harder so our children can have a better future? That question of morality is something we can't answer empirically. Though, economically, a smaller hit sooner is better than a bigger hit later in the long run.

production gets moved to China, foreign nationals are brought in to do jobs that the unemployed Americans can do (if we're talking about US).

Do you have an economics argument against any of this?

Edit: Just as a fun fact about the Lehman Brothers failure I talked about earlier; to give perspective, the total assets of Walmart is about $200 billion and the total assets of Lehman Brothers at the time of their failing was $600 billion.

 

[Uncle_Vanya]

--edit--

On the other hand I concede, I disagree with you but this isn't worth continuing.