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[–]ReaperReader 9 points10 points  (0 children)

I think the article mistakes what large firms do versus what markets do.

Predicting future demand is quite different to the calculation problem in a totalitarian dictatorship.

Take raincoats. I have a city raincoat, which is long enough to go down to my knees. This is good for keeping me mostly dry on even the windest wettest days. I also have a raincoat for tramping (hiking) because a long raincoat would keep getting caught on trees and rocks and interfere with climbing up hills.

But there's not just "raincoats for tramping". There's all sorts of options within that category. E.g. a special pocket by the chest for carrying a map in. Under arm zips for ventilation on warm wet days. Cuffs velcroed, or elasticised? And each of these options needs additional labour and resources to make. The calculation problem is not so much the number of raincoats but "do underarm zips bring enough benefits to trampers to make up for the costs of putting them in?" And so forth for all the other potential features.

And the cost of each feature depends on the other resources available. If choosing "under-arm zips" means skipping breakfast that's less attractive than if it means forgoing a takeaway coffee. If the world's biggest zip factory just got wiped out by a tsunami then economizing on zips somewhere is necessary.

Companies do market research into what their customers want, but they don't know the whole context of customers' needs, indeed customers don't know all our needs ourselves, they are partly formed/revealed through our decisions.

Firms also don't act like totalitarian producers on the production side. There's a big difference between Wal-Mart or Amazon running a distribution system and them making everything they sell, or making everything they use. Does Wal-Mart make the pens that its office staff use? Does it own a factory to make the ink in the pens? And another factory to make the machines used in manufacturing ink? And a steel smelter to make the steel used in the machines used to make the ink? And so forth?

[–]whenihittheground 1 point2 points  (0 children)

"We are not setting the price. The market is setting the price," he says. "We have algorithms to determine what that market is."

This part was great and resonates with some thoughts I've been having lately. I'm not sure how to think about it so when it comes to AI/ML or some other prediction tool I am simply worried that layering these tools on top of what we call capitalism will simply codify the current economic standings. This might be OK since hell places that were prosperous in the year 1500 seem to be prosperous today so there might be something to that but consequences of bad prediction(s) seems larger somehow.

I worry that the current biggest markets will remain top dogs not because people are choosing to live and work there because there are true economic opportunities but because some small subset of Elites are using economic data from 1970-2000 and baking into their prediction economic opportunities from 1970-2000 which may or may not be present today. I guess I worry about where the future dynamism/risk will come from. What happens when yelp controls your new restaurants destiny and you can buy positive reviews via bots for thousands of dollars and everyone knows this is simply what you have to do if you're going to open another restaurant? I guess I worry about the abstraction of it all. Taleb is a controversial figure but he's definitely right about some things for example his mantra about letting reality test you. It's definitely important since we want to create value and wealth not bubbles. I worry about the abstraction and "historic determinism" of the prediction tools. How much of the past to capture? Previously I'd reckon people had 2-3 generations of historical precedent to tap into but with AI/ML we can far exceed that.

Thanks for making me think OP! Sorry for rambling.

[–]themountaingoat 0 points1 point  (9 children)

Coarse's theory of the firm is pretty hillarious. The obvious reason why firms exist is because increasing returns to scale are a thing. But economists are so reliant on constant or decreasing returns to scale in their theories that the existence of firms becomes a puzzle that needs explanation.

But of course that isn't a reason to actually take increasing returns seriously.

[–]lunaranusmade a meme pyramid and climbed to the top 7 points8 points  (4 children)

Why is there more than 1 firm?

[–]themountaingoat 0 points1 point  (1 child)

Excellent question I am glad you asked. The most common model used in economics says that there can be more than one firm because customers want a variety of products.

Of course that answer ignores the fact that companies can benefit not only from increasing returns to scale but from increasing returns to scope ie the same company can produce multiple similar products at the same time and still benefit from doing things at a large scale.

However we don't really have that serious of a problem, since we only get the result that the market would be dominated by a single firm in the case of increasing returns to scale if we have the other assumptions of economics. Since we know most firms face increasing returns to scale, if we get the wrong answer from models incorporating increasing returns to scale and other simplifying assumptions like perfect information, rational actors and the like, the obvious conclusion is that one of our other simplifying assumptions needs to be changed.

[–]themountaingoat 0 points1 point  (0 children)

Sometimes I think the end result of capitalism might be one firm producing and selling everything but that the time it takes for us to get there is much longer than occurs in standards economic theories. While in standard economics people can calculate all the future and immediately figure out that that is the efficient outcome in the real world companies proceed slowly due to not knowing the full market conditions.

Of course the fact that the process is so slow allows things like government, social changes, and technology to disrupt the process. Also obviously the whole market structure would obviously collapse far before we got to one company running everything.

[–]tailcalled 2 points3 points  (3 children)

But bilateral market deals would be able to handle increasing returns to scale too. For example, if some expensive tool improved the production rate beyond what one person needs, then this person could simply rent it out during the time they're not using it. The reasons this doesn't work in practice are what Coase describes; things like transaction costs makes it too expensive compared to just having a firm that owns the tool and hires employees.

[–]themountaingoat 1 point2 points  (2 children)

I find it tough to imagine an assembly line working as a bunch of independent contractors.

[–]tailcalled 0 points1 point  (1 child)

But that's because of concerns like those Coase suggested, no?

[–]themountaingoat 1 point2 points  (0 children)

It depends on exactly how you define your terms. But I can only see assembly lines working with independent contractors if the contracts are written in such a way they they look exactly like modern wage labour.

[–]whenihittheground 0 points1 point  (0 children)

This was definitely thought provoking. I have come to a similar view but from a different angle.

One defense of free markets notes the inability of non-market mechanisms to solve planning & optimization problems. This has difficulty with Coase’s paradox of the firm, and I note that the difficulty is increased by the fact that with improvements in computers, algorithms, and data, ever larger planning problems are solved.

It is true that ever larger planning problems are solved but is the solution due to overcoming computational hurdles or due to solving some other more foundational structural problem?

It is generally assumed that:

idealized competitive markets are optimal for allocating resources and making decisions

But how much more optimal are they? My favorite way of thinking about this issue is through the "Price of Anarchy" idea. The question I always have about efficiency / optimums is "compared to what?" The PoA allows us to compare proposed schema to the simple greedy / decentralized alternative. My favorite example of this is looking at self driving cars. According to Tim Roughgarden and Eva Tardos selfish routing i.e. greedy decentralization where each individual only ever does what's best for them at any given instant has a PoA of 4/3 meaning that it is only ~33% worse than a perfectly coordinated God like level of computation and execution. There are probably more up to date estimates of this but my point will still stand.

In the above example it seems that the greedy approach is the low hanging fruit for high pay off and little energy. Surely there are better strategies but at what cost?

I suspect a similar outcome for the game of economics so that depending on the size of the network and the number of variables/rules then decentralization is favored due to the energy costs of prediction and the varied rewards. In this case we can call the "greedy selfish routing" idealized competitive markets.

One might wonder why there is such a thing as a firm, instead of everything being accomplished by exchanges among the most atomic unit (currently) possible, individual humans.

Perhaps the fact that we see small groups and firms operating is because that's a structural advantage over more decentralization. Of course any number of advantages could explain it including shared risk and rewards, negotiation costs, specialization costs and trade secrets etc but IMO the simplest explanation is that time is the ultimate currency when we optimize, yes of course money is important too but at the end of the day money is used to buy other people's time. An individual simply does not have enough time to do what a group of people can do no matter how intelligent, or dexterous or whatever niche specialty they may have. At the end of the day most of what we call economics is very easy and ordinary insofar that anyone can do it, it's that last 1% that's the difference between a mom and pop and a Google. I'm not saying any group of people calling themselves a company can be a Google I'm saying that your economics can only be as complicated as your median end user.

So the fun next question to ask is what's the next level of structure? Is the Firm really the most basic unit? If time is really that important why don't firms simply gang up to be more efficient? Sometimes they do and sometimes they benefit from Economics of Scale but sometimes they all go off in the "wrong" direction. Perhaps the firm is the best trade off for risk / reward.

Finally there are always biological, geographical and otherwise unavoidable constraints to actually achieving any optimum. Time is very important, we only have so many "healthy" years to remain strong, mentally sharp, fertile or whatever. The time your typical "professional" spent in school used to be very little supplemented by on the job training to now some industries requiring a master's degree simply to get in the door. This takes time away from being in the "decentralized" zone exploring/exploiting and transfers it into the "centralized" bucket. What effect could this have on economic growth? It's unlikely that we have an optimum strategy currently so I'd expect slower growth especially if decentralization is the nature of the game. On the flip side how much more economic growth could we achieve if we could extend the "healthy" years?