Saturday, April 14, 2018

Centralization or Decentralization? Scale is Important

When long term growth potential is discussed, differences in scale also matter. Is the economic activity in question, primarily centralized, or decentralized? For today's advanced economies, the reality of too much centralization, now means too many limits to growth as well.

It wasn't always this way. Tradable sector growth, due largely to its internal wealth generation, meant it included economic characteristics which were simultaneously exogenous (related to global commodity and product value) and decentralized, in relation to the nominal value and nature of a nation's general equilibrium. Still, the growth of tradable sector activity (in recent centuries) allowed advanced nations to substantially centralize economic frameworks, often in the form of secondary or general equilibrium dependent markets.

Once tradable sector activity finally experienced crowding (1981 was a tipping point) by the present organizational capacity of non tradable sector activity, it became more difficult to transmit gains from tradable sector wealth into more inclusive markets for the knowledge use of non tradable sectors. Part of the problem is that much of the latter can't presently scale, and asymmetric compensation for specific skill sets (skills arbitrage), only functions efficiently up to a point. This reality has not only posed issues for today's (knowledge product dependent) entitlement systems, but also democratic governance as a long term political framework.

Only consider how recent non tradable sector dominance also affects the density potential for productive agglomeration in desirable urban regions. When factories were a major component of urban activity in advanced nations, they contributed to endogenous output gains which translated into demand for more local employees. Urban employment demand on the part of private industry, further translated in local greater worker density, which was consequently reflected in real estate patterns that were formerly less inclined to place NIMBY limits on social mobility. Retail settings (and their associated employment levels) have provided an indirect, less reliable revenue source for maintenance of density patterns, by comparison.

Today, supply side scale limitation in non tradable sector activity, is reflected by limits in urban densities as a component of experiential product. Even though physical aspects of housing could readily scale if exposed to marketplace innovation, such potential still requires a geographic land use equivalent - such as decentralized non tradable sector productive agglomeration for instance - in order to gather economic momentum. One way to achieve decentralized productive agglomeration, would be walkable communities which internally design for shared non tradable sector coordination. This organizational capacity would tap into wealth creation via locally defined equilibrium, instead of the secondary market revenue dependence of general equilibrium.

Meanwhile, the revenue dependent status of today's non tradable sectors, has limited knowledge participation so as to boost income - a strategy reflected in the higher income limitations of building requirements in our most sought after urban regions. What's more, when central bankers get anxious to "reduce" high housing prices in closed access areas, they neglect the direct correlation of these housing prices with the high incomes that approximate the closed access of knowledge production participation, in general equilibrium conditions.

When knowledge and skill are mostly utilized as secondary markets in general equilibrium, time based production tends to take on rival characteristics, hence losing the ability to benefit from gains in scale. This, even as technology gains and tax structure continue to augment the professional income of time based product. Understandably, there's little incentive to increase the supply of secondary market non tradable sector knowledge production, given today's general equilibrium restraints. Given this circumstance, where do scale gains for the application of vital knowledge, actually exist?

Non rival knowledge use would require a decentralized form of organization, capable of building revenue in defined equilibrium settings instead of requiring the taxation or subsidies of general equilibrium. In other words, decentralization for high skill knowledge would not function as markets that are dependent on general equilibrium revenue.

Via a local equilibrium "blank slate" for time based product, there's two means of replication for scale gains: First, when time purchases symmetric time, the compensation process sets up a sustainable pattern, whereby non rival knowledge would disperse as one "lit torch" (individual) to the next. Second, there's the greater utilization of time aggregates as a whole, via recorded knowledge use memory structure. Time arbitrage, unlike skills arbitrage, need not depend on non rival status for economic sustainability.

A new institution for this process, the equilibrium corporation, would no longer remain compelled to "harvest" the best skills of today's formal education while abandoning the rest. Instead, a new corporate structure could (finally) generate an internal, informal education structure, which utilizes the multi skill capacity of all who take part. Only recall that the expectations and requirements of asymmetric compensation, all but force the signalling process which many now find so dispiriting.

Among the first rules of specialization in equilibrium corporate activity, would be to "spread around" not just the challenging skills utilization which so many seek, but also a wide array of "leftover" tasks and divisions of labour. Indeed, people too often face a lifetime of "leftover" economic activities, once the "good" (well compensated) activities are taken, should they somehow "fail" the requirements of today's formal educational settings. For instance, one may know how to cook a great meal, but get little appreciation for doing so unless they happen to operate a profitable restaurant! Just by integrating multiple skill levels for all participants, many of life's most basic tasks and duties, could finally regain some much deserved respect.

One reason economic dynamism is no longer a simple matter in advanced nations, is the fact that differences in scale are not well understood, either in terms of how they have affected workplace density or national budgets. Just the same, understanding how differences in scale affect long term growth is important. Doing so would make it simpler for nations to determine, when it is helpful to let go of micromanagement of economic activity, versus the economic activity that could still be profitably encouraged at national levels.

Again, it helps to remember that national government works best when it utilizes its resources to encourage what is capable of scaling up. Representative democracy functions well when citizens vote to influence broad and national infrastructure decisions. On the other hand, direct democracy works best when time "votes" (use) are utilized on symmetric terms. When time purchases time, it becomes possible to regain forms of scale which are intricately tied to human potential and aspiration. When time purchases time, technology is better able to align with what people want to do, instead of the other way around.

Presently, some national governments are still capable of tapping into revenue for strong infrastructure commitments which dwarf what advanced nations can now provide, given their already existing commitments to secondary markets. With a little luck, national governments of the future, will be better able to build their economies in ways which require less non tradable sector general equilibrium dependence at the outset.

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