SB -
..., i say we really increase the productivity of the us. let's mak all computers worth a penny. sales would explode. just think of all those chained dollars added to gdp b/c alan.com *knows* those computers are actually worth a couple grand each.
gdp would skyrocket. *productivity* would dramatically increase...
Your point is worth pursuing. What does determine the price of a computer? A IBM compatible computer could cost $10M
or it could cost $1.
To begin with, assume only a single manufacturer exists. There is some price for which there is a demand for only one computer. If lowering the price will increase the total revenue by increasing demand then the price will be lowered, and there will always be a price that maximizes total revenue (think of a Laffer curve plotted with price on the vertical axis and total revenue on the horizontal axis). This would be the point of production for a locked- in monopoly supplier as long as his marginal revenue at this point is at least as large as his marginal cost. The key point to remember is that this point of maximum revenue is also the point of maximum contribution to an honest GDP measurement.
If the locked -in monopoly supplier can now increase his productivity, and reduce his costs, he would still not lower prices or increase production, but rather just reap higher profits. In this case the contribution to GDP remains the same as the total revenue has not changed even though productivity has increased.
If the monopoly (sole) supplier is not locked-in, he can attempt to maintain his monopoly by lowering his price. At some price, assuming that the existing supplier has reduced his costs and increased his productivity sufficiently, no competitor will be induced to enter the market and the existing supplier will continue to be profitable at the margin. However, to do this, even though the lowering of price has increased unit demand, the total revenue is now lower and therefore the contribution to an honest GDP is reduced as a result of increased productivity, if this increased productivity is also available to potential competitors. But productivity continues to increase even without deliberate efforts, and competitive entry is more and more likely. This mandates that the existing supplier must continue to increase his productivity and lower his prices.
The net result, even with a monopoly supplier, is that the unavoidable increase in productivity results in a product that continually decreases in price and reduces its contribution to an honest GDP. The process only stops when non-labor inputs limit the cost reductions. In the case of a non-monopoly, the results are only faster and worse.
Summary -
Increases in productivity contain the seed of their own destruction and are not only self-limiting, but actually negative in contributing to overall economic measures such as GDP.
In addition, the prices of the computer have been driven to a very low price and a much reduced total revenue. However, this total revenue must be larger than the total of profits, and wages, and non-labor factor payments. This indicates that increasing productivity is no unmixed blessing at all, but simply drives the product to become an insignificant part of the economy in terms of its own manufacture. The above argument also tends to indicate that the idea that all the arguments that monopolies are bad is the result of placing all importance on low consumer prices, and ignoring the importance of profits, wages and other production factors to the economy. Any given product has the most contribution to the economy when it is produced at the maximum revenue point, which is, in and of itself, determined by consumers in choosing how much of one product they want versus all the others.
Regards, Don |
