Wednesday, September 9, 2015

So Izabella Kaminska and Adam Smith Walk Into a Pin Factory

I hated the pin factory story, hated it. 
I'd yell and scream "I don't want to know about the pin factory!"

And then I found Ricardo, who became the richest economist in history*, and I thought, "Saaay, maybe I should look into this economics stuff".

From Dizzynomics August 29:

Scaling and why it matters
Adam Smith never talked about scaling per se. But he did say this: 
When the division of labour has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes, in some measure, a merchant, and the society itself grows to be what is properly a commercial society. 
Which is to say that you can’t have civilisation without division of labour. The two are inseparable. Indeed, it is only when we specialise in certain sectors or develop expertise that we can achieve the sort of efficiencies that allow civilised existence to manifest. 
Trust and centralised distribution are essential ingredients in that set up because without them there is no point in being a specialist. The benefits of specialisation would not be able to flow further because nobody would be able to trust you had done your job properly, thus eliminating the scaling advantage. Hence civilisation would not follow. 
Look around. Structural specialisation based on trust in centralised process is everywhere around us. From the food we consume — mostly produced, slaughtered or prepared by other specialists — to the energy we depend on, or the entertainment we enjoy. Even when we cook our own meals, the ingredients, hardware or recipes we use are all the product of many other people’s specialised activities. And what makes all that specialised delegation possible is trust in the units that entitle specialists to the product of other specialists. 
The way capitalism organises itself, those who specialise in sectors that are most demanded by society or which are most difficult to dislodge competitively  — because of years and years of necessary investment and specialisation — gain the greatest social rewards, which are mostly distributed to them in varied claims on the product of other people’s specialisation. 
This can cause resentment, tiering and inequality — especially if the specialism is inherited rather than earned. That’s not good for society because it prevents new generations acquiring the skills or knowledge necessary to deploy in useful specialisations of their own and develops a dependency on the primary specialist at the cost of other specialisations and diversity. 
Scaling in the digital economyThe digital economy, like the financial industry, has been profoundly useful in encouraging smarter distribution and matching of other people’s specialisations vis-a-vis their wants and needs. When done well, this becomes a service that allows society to organise itself more efficiently, growing the pie for everyone. It — the service — even becomes a specialist activity in its own right. 
This works great for as long as these specialists, whose core product is trust in themselves to better distribute product, don’t demand excessive returns, don’t abuse the trust and society as a whole doesn’t grow too dependent at the cost of its own knowledge, capacity or expertise.
Sadly, in both the digital and financial industry the temptation to abuse this trust can be significant. In some cases, just as per the real economy, powerful monopolies can emerge squeezing the fruits of other people’s specialisation beyond their entitlement. It’s arguably more malicious in finance and information technology, because their returns are based on allocating other people’s goods and services not even their own. Consequently, if and when there’s a major breach of trust, the implications for the real economy can be significant. 
Critically, trade related scaling is impacted because vendors/producers have to once again supervise distribution directly, almost on a back to barter basis. But that’s not sustainable for a world economy which has structured itself to take advantage of scaled up services....MORE
And from the Financial Times, September 4:

Other local factors besides schools influence house prices in any postcode, writes Izabella Kaminska
If houses near good English state schools fetch an average extra payment this big, perhaps the invisible hand of the market is trying to send a signal.What’s that? 
They say an investment in knowledge pays the best interest. People think a good education is worth paying for, and if there is a deficit of good state schools perhaps the public purse or even the private market should be investing more in education.But this signal should not necessarily be taken entirely at face value. 
How do you mean?Well, let’s take a closer look at the schools analysis by Lloyds Bank. They say homes near England’s best performing state schools have an average price of about £345,000 — more than nine times annual average earnings. Homes near Beaconsfield High School in Buckinghamshire, in particular, fetch a 186 per cent premium compared with the average price in neighbouring areas where the state schools do not score so well. 
Proves my point.Well, they also note that good state schools are not always in pricey areas. In fact, the same survey says more than half of England’s top 30 state schools are in locations that are cheaper than the neighbouring area. So the conclusions are a little circumstantial. 
There are many local factors that influence the price of houses in any postcode, whether they are transport links, schools, high streets or general atmosphere. Would people pay £41,000 more for a house near a good park or with a good view? Of course they would. 
I live in an ex-council house in north London and send my kid to a private school with monthly fees that amount to more than my mortgage.So why don’t you take on a bigger mortgage and move to a location near a good state school? That way, you’d save loads on the fees....MORE
*Investing Tips from the World's Richest Economist