Tuesday, October 27, 2015

Scale: Some Rival and Non Rival Considerations

Long term growth and progress - particularly what has overcome Malthusian limits - results from gains in scale, as Paul Romer noted in a recent post. However, many gains in scale are the result of tradable goods. Whereas non tradable sectors still compensate knowledge use and asset formation in ways which mostly take little advantage of gains from scale. While "exclusive" strategies for wealth creation in non tradable sectors (and luxury tradable sectors) work well up to a point, problems arise when artificially derived scarcity crowds out the gains of scale from tradable goods sectors.

Carried too far, wealth generation - without sufficient allowance for scale - can limit human progress. Even though monetary policy may closely adhere to aggregate spending capacity (as is presently the case), a lack of options for scale access can limit long term growth potential. While it is not possible to open up non tradable sectors to scale across the board, it is possible to retrieve growth at the margins, through symmetric knowledge use and the application of technology potential for building components.

Consider how scale has been limited in terms of human capital, for instance. Paul Romer envisions human capital as purely rival, but notes that it can be useful to treat human capital as temporarily non rival, if doing so allows (tradable goods) product scaled to generate new wealth. For long term growth - however - it is not enough to limit non rival human capital utilization, to gains in scale for tradable goods.

For one, the Malthusian dilemma has been overcome (thus far) through scale applications wherever they are possible. One reason that wealth disparities result in developed nations, is the reluctance of non tradable sectors to allow scale innovation to continue (for low income levels), when it is possible instead to capture wealth from previous or already existing applications of scale. In other words, developed nations inadvertently introduce unnecessary fragility into their systems by capitalizing on non scale wealth.

Scale - as applicable to tradable goods and commodity wealth - is not utilized as the dominant form of wealth on the part of governments. Instead, government wealth is connected to non tradable sectors which benefit from signalling (exclusive labeling) for both naturally and artifically restricted product. And then they attempt to "force" income in general to purchase these exclusive settings! Carried too far in relation to the wealth which results from scale, specialty non tradable wealth can override gains in scale, and lead to negative growth.

Human capital needs broader application on symmetric or non rival terms, which would mean gains in scale for time use aggregates as a whole. Even though compensated time value would scale up purely in relation to itself, human capacity should be central to our economic realities. Doing so would help to overcome the problems of imbalance which are developing between non scale and scale approach to wealth building. Even though Romer's above linked post referenced speeded up growth, economic growth slows quickly when nations purposely choose rival knowledge and artificial scarcity, to generate wealth on closely held terms.

Update: I may have spoken prematurely about a reasonable following of aggregate spending capacity, on the Fed's part. Even as market monetarists have grown more confident, Lars Christensen just observed that an earlier 4% level is gradually drifting downward: http://marketmonetarist.com/2015/10/27/did-bill-gross-get-some-insight-from-this-blog-maybe-but-it-might-unfortunately-be-outdated/

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