Sunday, June 5, 2016

"Supermodels And Other Productivity Measures"

Following up on the Marc Andreessen piece (seriously), the bit where he says:
“It has become absolutely conventional wisdom in Silicon Valley that the way to succeed is to price your product as low as possible and then, under the theory that if it’s low-priced everybody can buy it, and that’s how you get to volume,” he said. “And we just see over and over and over again people failing with that … They don’t charge enough for their product to be able to afford the sales and marketing required to actually get anybody to buy it.”

“By the way,” he added, “it’s like, is your product any good if people won’t pay more for it?” 
From ZeroHedge, May 7:
Submitted by Nick Colas of Convergex
Supermodels And Other Productivity Measures
One of the livelier debates in economics at the moment relates to the intersection of productivity growth and the role of technology in modern society.  At its core, the problem is a simple one: for all the smartphones, Internet access, apps and other technological advancements of the last decade, productivity growth is close to zero (0.3% in Q4 2016).  One popular rebuttal from tech land is essentially “You economists are doing it wrong – missing critical items like free apps and other benefits of an interconnected world.”

Today we look this problem through a novel lens, measuring the inflation adjusted price of productivity-enhancing consumer items from the 1920s. The idea is that these products – cars, washing machines, electric refrigerators, sewing machines and typewriters – helped play a role in forming the golden age of U.S. productivity growth (1939-2000).  Our conclusion: if current day technology is so helpful to productivity, why is it so cheap?
* * *
Audrey Munson was the world’s first supermodel, but unlike her modern day counterparts, hers was a life of genuine trouble and suffering.  She worked in the first years of the 20th century, modeling primarily for sculptors who were creating works for both public display and private homes.  She had three things going for her which made her an extremely popular model with the artists of the day:
  • She closely resembled the classical Greco-Roman ideal of beauty, with a symmetrical face and what was deemed at the time an appropriately proportional body type.
  • She was very entrepreneurial, going from door to door looking for work with New York’s very best artists.
  • She would work in the nude but purely in a professional capacity, which engendered tremendous respect among her peers.
Sadly, as modernism shifted artistic tastes away from classical forms she eventually fell on hard times.  By her 40s, mental illness set in and she was committed to a psychiatric hospital.  She died at the age of 104, in 1996, having spent the majority of her life in the St Lawrence State Hospital for the Insane in upstate New York.

There is a recent book out about Audrey’s life – aptly called “The Curse of Beauty” – which I can recommend if you want to learn more.  If you want to see a few images of the sculptures she inspired, here is a small sample:
We know what Audrey made as a model: $0.50/hour, or $12.03 adjusted for inflation today.  Compare that to Linda Evangelista, who once famously proclaimed “I don’t get out of bed for less than $10,000/day”, and you have a bit of an economic conundrum.  Why are models worth so much more today?  After all, they aren’t any more “productive”…

The answer, or at least “an” answer, is that photography is a more scalable medium than sculpture and less open to the artist’s interpretation of the model.  Audrey was famous in her time, to be sure, but Kate Moss and Adriana Lima have the benefit of thousands of photographic images to build and maintain their brands on a global basis.  And while a good photographer can help, in the end “The camera never lies”.

All of this reminds me of the current debate in economic circles: why is U.S. productivity growth so slow (all of 0.3% in Q4 2014, and well below post-War trends of 2% since the Great Recession) when we have so much new technology around?  This puzzle even has a name – Solow’s paradox – after Nobel Prize winner Robert Solow’s offhand comment “You can see the computer age everywhere but in the productivity statistics”.  Explanations from Silicon Valley, who aren’t fans of this line of reasoning, range from “You’re measuring productivity incorrectly” to “wait for it, it’s coming” to “it’s concentrated in the services sector”.

You can read a good review of the debate here, in a 2014 article in The Economist:

One way to consider the question is to look at what productivity-enhancing technology cost in the 1920s and compare it to popular consumer products today.  The idea is simple: technology that truly boosts productivity should be expensive since buyers will happily pay a price premium for that benefit.

Take one nearly antediluvian example: the sewing machine.  In the 1850s one of these devices cost $100 – about $2,700 in today’s dollars.  Why so much? First, they increased household productivity dramatically since most clothes were homemade. Second, the better designs enjoyed strong patent protection. Fun fact, and not surprising given these numbers: sewing machines were the first product sold in the U.S. on an installment plan.  After all, who could afford $100 all at once?
Fast forward a bit to the 1920s, and consider the prices of other household appliances:
  • A washing machine for $81.50. That is $970.39 today. Actual current price of a nice GE or Whirlpool top loading washer (courtesy of PC Richard’s website): $450.
  • A vacuum cleaner for $28.95, or $344.70 today. Actual current price of a Shark Navigator on Amazon: $179.00
  • An electric refrigerator for $285.00, or $3,393.38 today. A nice chrome one from Best Buy today: $899.99.
  • If you are feeling nostalgic, here are the ads:
As for office productivity, the typewriter was all the rage at the turn of the 20th century, costing all of $39.80 around 1915.  That is $627.66 today.  Funny enough, a medium range Dell desktop with screen costs $699 today on Amazon.

Now, if we are getting so much productivity out of the current range of offerings from Silicon Valley, I have a question: why aren’t these products really expensive, as the technology of the 1920s clearly was?  In fairness, a cell phone is costly – good monthly deals from major carriers usually make you pay about $600 for the phone. Which, funny enough, is what the typewriter cost (inflation adjusted) exactly 100 years ago....MORE