Sunday, November 25, 2018

Does Price Making Affect Total Output and Investment?

Could extensive price making affect investment potential, for revenue which otherwise would have generated output gains? In particular, does price making in non tradable sector activity, lead to quicker diminishing returns in aggregate for capital investment, than would otherwise be the case? If so, this could be one of the ways in which some aggregate revenue claims on the part of non tradable sector activity, negatively impact total factor productivity.

One often hears arguments, how government spending crowds what private sector activity could otherwise achieve, in terms of economic dynamism. Alas, it's not quite so simple. Much crowding also results from price making in non discretionary private sector activity which is further compounded by the fact supply side potential can be limited at the outset. If there were less price making and more price taking, aggregate investment and output for all sectors could become more pronounced. Meanwhile, once low income discretionary income is shifted towards non discretionary "requirements", less revenue remains for the output enhancing potential of discretionary spending in tradable sectors.

Nevertheless, recent corporate tax cuts were extended to tradable and non tradable sectors alike, in hopes of generating fiscal stimulus. Did this help economic conditions, overall? With total (and business) investment rising at about 8% per year, Scott Sumner opines "The data suggests it has, unless I'm missing something."

Of course, short term boosts aren't comparable to permanent gains. For instance, Sumner recently stressed as well, how most growth initiatives boost the level of GDP without actually increasing the long run growth rate. By way of example, capital investments in general are only useful up to a point, in part due the diminishing returns highlighted by the Solow growth model. Once market saturation is reached, further capital investments no longer provide sufficient dividends. Importantly, this same market saturation (at least within a desired price range) applies for extensive investment in human capital as well, consequently limiting supply side knowledge production regardless of demographic change.

Fortunately, a broader economic context for price taking in time based services, could ultimately delay that market saturation point for all concerned. Plus, the price taking symmetry of time arbitrage could provide additional organizational means for knowledge preservation. With a more dynamic and independent form of services capacity, our knowledge based economy might gain much needed economic stability, well into the future.

However: In fairness to the prevailing system, knowledge providers have created a form of quality product requiring extensive human capital investment, as a defensive means of ensuring services coordination with individuals who are among the most valuable contributors to society. The problem? There are societal expectations of standard methods and relatively standard or "single" time based service prices. This in turn has worsened the Baumol effect, so that societies are no longer able to effectively coordinate wide income variance. Even though it's feasible to organize time based services activity differently to address income divergence, we still need a carefully thought through response - one which doesn't pose a threat to the expected human capital investments in general equilibrium services generation.

It's possible to create symmetric economic options, whereby knowledge can be utilized and dispersed via price taking means. A combined group approach in defined equilibrium conditions would allow new knowledge based services generation. Such an approach could even make it unnecessary to be the recipient of extensive family support, in order to have the freedom to take part in knowledge based activity so long as one desires to do so - instead of waiting till retirement, for instance. Sometimes a mind - or body - can't wait that long!

A price taking services approach could eventually lead to increased societal demand for tradable sector activity, once more. After all, this is the activity which historically provided investing dividends due to high levels of output. It was the simple pleasures of the Main Street material world many of us remember from youth, which created such high hopes for the pursuit of knowledge in the first place. Yet the pursuit of knowledge can be its own reward, and not every intellectual challenge has to take place on extensive monetary compensation terms.

Much of today's investment potential is in a holding pattern. Excessive non tradable sector claims on what should have been discretionary income, have made it difficult to generate a level of output gain which could restore economic vitality to a higher level. And should a higher level of output become possible, diminishing returns would not set in near as fast for personal investment, as has been the case of late. Perhaps a price taking option for non tradable sector activity, could even increase the long term growth rate as well.

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