The Fundamental Rules of Economics

Back when I worked on a farm, we would buy a truckload of expired bakery products. We would back the truck up to the pig pen and spend twenty minutes unwrapping the bread and pastries and throwing it in to the pigs.

Not many farms left in Silicon Valley, which is where this place was. I suspect a lot of the bread gets donated to food banks, etc., which is good, but still represents waste.

Your Google-Fu seems to be lacking.

Pretty much exactly what I said. And what happened after the subsidies ended? Pain, for seven years. That’s the price for subsidizing uneconomic behaviour. But then…

Here’s another:

And another…

Yes, that’s what happens when you subsidize an industry, wait for it to adapt to the subsidies, then yank them away. About 1% of farms failed, and it took time to re-adapt to a reality-based farming system. But after the damage and over-production was cleared away, it set the stage for a much better, more diverse, and more profitable farming system. Subsidies hurt, they didn’t help. The lesson to,be learned should be ‘don’t subsidize stuff if you can avoid it.’

One more link for you:

That link points out that the hit to agriculture after the reforms was only partly because of subsidy loss - they coincided with a tight money policy (necessary because New Zealand spent itself into a mess), which meant farmers had to oay high interest rates on loans to restructure. And still… Farmers now say they are better off wothout subsidies.

All of those links were on the first page of my Google search for “New Zealand Farm Subsidy problems”

Implicit in that is that either farmers are using more fertilizer than needed, and fertilizer use can be substantially reduced without impact to food production (i.e, they know better than farmers how to use fertilizer), OR that they can replace lost production with ‘food innovation hubs’ or other centrally planned agriculture, or, I suppose, that it’s okay for the #1 food provider in Europe and #2 in the world to just reduce its output by 30% when there is already a serious concern about food security in the next few years. And Canada and New Zealand and Germany can do the same, but somehow everything will just work out okay.

This is reckless, irresponsible behaviour. If they do it and the result is famine or serious price spikes in food, it will be on the heada of everyone who thought this was a good idea, just as Europe’s energy woes are on the heads of the idiots who thought it was a good idea to shut down coal and nuclear plants and ban fracking without first having a viable alternative in place.

This isn’t the pit, so I don’t have to put up with this. After I respond to your next message, you’ll get no more responses from me in this thread.

This is a different argument - that it’s dangerous to do JIT because you might run out of stuff quickly when things go south.

The way complex systems handle this is through diversity. Ever see how a slime mold works? It can solve the ‘traveling salesman’ problem, and does. Its connections to food are optimal. Slime molds survive because they have many connections, and cross connections to make sure that if one branch dies, the food still gets transported.

Free markets are the same way. They evolve with redundancy. Take the energy grid. We have many grids, so if one goes down the others stay up. Furthermore, we have a mix of electricity, gas, natural gas and coal in the energy system. You can optimize each one and run it close to maximum efficiency, but you are safe because if one fails others can take their place. Couple that with disparate grids that interoperate through defined interfaces, and you have a robust system.

Unfortunately, the new plan seems to be to build a new energy system from intermittant sources, create one big grid to minimize variance, and to power everything with electricity from that grid.

And we’re going to tear down an organic, complex system that took a century of hard work by millions of people to build and optimize and make safe, and replace it with a new planned system in a decade.

Talk about systemic risk! I’m imagining a winter storm taking down a nationwide grid when all the cars, home heat, rescue vehicles, and everything else are powered from that grid. Can you say mass casualty event?

If you support that plan, you have no business talking about the systemic risk of Just In Time Manufacturing.

And… we’re done.

One more thing. Here is a graph of a supply chain:

The first thing to notice is that it looks more like an ecosystem web than a human-planned thing. Also notice how many lines connect between suppliers.

Every single line on that graph represents information and created value.

Manufacturers don’t just pick suppliers from a phone book. They send out RFPs, they order samples and test them for conformance to their specs, and they work with suppliers to improve materials, eliminate inefficiencies, and create software the two of them can use to share information constantly. They use messaging systems and standards like ISA-95 to transmit information about processes, inventories, materials and specifications. Over time, a graph like the one above emerges. Highly efficient, with lots of redundancy. Each link in it was part of a planning process, but the entire structure was emergent. And if you think that is complex, consider that if you could drill down to any supplier, you’d see an underlying graph just like this one.

Think about the complexity of that. Now imagine millions of businesses, each with its own supply chain graph, with overlapping supply chains between businesses. It is hellishly complex, evolved, and no one understands it just like we don’t understand neural networks or ecosystems.

I will give you an example of how these systems get more efficient over time. A factory I was at had a problem with a packaging line for a product. Specifically, the boxing line. Once in a while a machine would jam or a box would get torn on the line or something. So some process control engineers came in and analyzed the aituation, and found that the jams only happened when paper from certain suppliers were used. (They use many suppliers for each material for redundancy, @Kimstu)

The problem turned out to be that the specifications for the paper were too loose. The paper was supposed to be 20 lb, but since no one makes perfect products the specification was 20 lb ± .5 lb. Every single supplier was in spec. However, the suppliers that never had jams had tighter specs, say ± .2 lb (from memory, may not be exact but doesn’t matter). This was determined because factories track every product back to the suppliers of the raw material and do periodic testing for specification adherence.

Anyway, the paper that was in spec but over a limit (say, 20.4) would cause jams some times. Not often, but enough that it was worth fixing. So they released new, tighter upper specifications. Say, 20lb -.5 +.2. The paper manufacturers who couldn’t meet the new specs dropped off the supply chain.

Now here’s the cool part: The company that had the tightest tolerances realized that they could consistently produce thinner paper and stay in spec. So their average thickness, was more like 19.7lb ± .2 This saved paper, increased their profits, and everyone was happy.

But then other paper suppliers saw their market share being eroded, and also realized they too could make thinner paper and make more money. So they put in the work to improve their own processes, and got back into the supply chain.

The end result of this was thinner boxes for cereals and other goods. Perhaps you’ve noticed that such boxes are a little thinner these days. Think about how much material has been saved, fewer trees cut down, etc. A huge environmental and economic win across many sectors of the economy. All because some engineers in a plant had a small problem to solve.

In a free market, this happens all the time. Millions of peoole serving their own interests by making things better for everyone. This is the hidden world of economic growth that central planners can’t see, and that people who want to tear things down and ‘build back better’ have no appreciation for.

And you think central planners can do better? Do you think macroeconomists who analyze economies with aggregates like ‘production’ and ‘labor’ can possibly suss out what might be going on when growth slows or speeds up? Do you think the behaviour of that complex thing can be predicted over 10 years when a policy change happens?

The answer is no, and the evidence for that is that central planning on a large scale has never worked well, and economist’s predictions of the future have proven to be no better than a simple model like regressing from the present to the mean, or throwing darts at a board.

Here is a picture of a CDO-cubed deal put together by Merrill Lynch


The first thing to notice is that it looks more like an ecosystem web than a human-planned thing. Also notice how many lines connect between derivatives.

Every single line on that graph represents information and created value.

Merrill didn’t just pick mortgages from a phone book. They depended on rating agencies, who themselves were paid by the very entities they were rating. They ordered reports and tested the models for conformance to Black Sholes methods of valuations, and they worked with AIG to insure these things for the very, very unlikely event this CDO-cubed deal goes south. Highly efficient, with lots of redundancy. Each link in it was part of a planning process, but the entire structure was emergent. And if you think that is complex, consider that if you could drill down to any derivative, you’d see an underlying graph just like this one.

Think about the complexity of that. Now imagine millions of derivatives, each with its own CDOcubed graph, with overlapping obligations between contracts. It is hellishly complex, evolved, and no one understands it just like we don’t understand neural networks or ecosystems.

And you think central planners can do better? Do you think macroeconomists who analyze economies with aggregates like ‘production’ and ‘labor’ can possibly suss out what might be going on when growth slows or speeds up? Do you think the behaviour of that complex thing can be predicted over 10 years when a policy change happens?

The answer is no, and the evidence for that is that central planning on a large scale has never worked well, and economist’s predictions of the future have proven to be no better than a simple model like regressing from the present to the mean, or throwing darts at a board.


…there is a substantive difference between the things that you have said and the percise things that your citations say. That isn’t a problem with my “google-fu.” That appears to be a problem with your google-fu.

Because when you say stuff like this:

And your first cite says this:

And what we are dealing with now is this:

And the government is moving towards completely revamping how we manage our water in a scheme called “Three Waters” which will cost 500 million to implement and billions in infrastructure upgrades and it is currently being opposed by the farmers, we can see how the removal of farming subsidies nearly half-a-century ago didn’t prevent our rivers from being polluted by the farming community right now.

The problem you’ve got here is that merely googling “New Zealand Farm Subsidy problems" won’t tell you anything about how little or how much help the farming sector has had from the government over the last 45 years.

And it also misses the larger context. What happened with farming was only a small part of a whole host of reforms called “Rogernomics”. Those policies were introduced by a handful of zealots who held fast to the “fundamental rules of economics” and it resulted in New Zealand becoming a world leader in income inequality. It nearly destroyed our healthcare system. It put public utilities into the hands of private corporations. It has been devastating for many at the margins.

We were only stopped from going “over the cliff” when the Prime Minister David Lange famously said they would “take a pause for a cup of tea.” Rogernomics was about as clear an example of policy driven by “the fundamental rules of economics” as you could get. And while some things worked out…most of them didn’t. Because when the “fundamental rules” collided head on with reality, reality won more often than not.

… wrong thread

That’s great. Keep your understanding of me to yourself. I’d rather talk about issues and ideas than be personally psycho-analyzed on the internet.

I don’t want you or anyone else deciding what is or isn’t desirable for other people. I’d rather let them choose.

I’ve always been baffled by people who sneer at ‘excessive choice’. And yes, that aspect of freedom is ‘desirable’. I’d rather have a world with 18 different types of mustard and 20 different small cars and lots of choice in clothing and everything else than live in a world where our ‘betters’ decide what mustard we will eat and what car we must drive. Choice is freedom. It’s also what keeps brands competing with each other and striving for constant improvement.

Better to be dominated by one government purchaser? Or have my choices made for me by voters who don’t like how I live? No thanks.

Also, you neglect that there is not just choice within supermarkets, but choice OF supermarkets. Where I live, there is an Asian supermarket across the street from the mainstream supermarket, and I’ve never even heard of most of the brands they carry. There is an Italian bakery in the same mall. About a block away is an Italian food store. There is also an upmarket supermarket with premium brands if you don’t want the other stuff. Plenty of choice for all, at all price points.

But I’m not sure why being ‘dominated’ by ten companies bothers you. If they aren’t acting as a monopoly, who cares? That factory I mentioned with the paper box problem is owned by one of those ten companies. They dominate because they are super-efficient, and economies of scale keep their prices down and make them more competitive. There is nothing wrong with that, especially since if you don’t like their products there are a lot of alternatives.

So what? If Charmin is inferior to what is available elsewhere, Walmart will lose some market share. If it isn’t, it doesn’t matter. But I suspect that what’s really going on is that the ‘big’ manufacturers are the only ones who can manufacture and deliver products on the scale required by Wallmart, and do it with the low margins Walmart demands.

Walmart’s efficient supply chain management was responsible for cutting about a half point off of inflation in the 2000’s, benefiting everyone and the poor especially. And all of it was to the benefit of customers who could buy decent goods at lower prices than had been achieved before. Poor single mothers in particular have found Walmart a godsend. Walmart is a great example of capitalism helping the poor.

Well, duh. Walmart is a gigantic international chain. Any company that can supply goods to 10,500 stores across the world is by definition not a ‘small player’. How could it be otherwise? Good thing capitalism allows for Walmarts and for smaller stores that can and do provide local goods. Isn’t choice wonderful?

Walmart’s brand is high efficiency delivery of low cost goods to lower income peoole. Why should they have to complicate their business model to carry more expensive local brands in each store? Because you think more local goods should be there at higher prices? If you don’t like Walmart’s mix of goods, don’t shop there. If enough people agree with you, Walmart will shrink and alternatives will grow.

And if they don’t and enough people want products they don’t carry, they can go to a store that does. Do you have a Whole Foods in your area? Any other boutique grocers? Why do you demand that Walmart change their entire business strategy to suit you?

The great thing about capitalism is that it is democratic in a very literal sense. You ‘vote’ every time you buy something. Unlike government, it’s not exclusionary. It’s the ultimate in ranked-choice voting. People can vote for two different products, and both can still exist in the ratio that people voted for. Your choice doesn’t stop me from having my own choice.

It sounds like you’ve decided that some people’s choices are bad (Walmart is very popular, but you don’t like it), and so you’d rather have a world where government is powerful enough that people like you can stop other people from making the choices you don’t like and force them all to adhere to your standards for where they should shop and what mustard they should buy.

You think there should be more local food on shelves, so you would force Walmart to provide it, even if it drives up prices for others. I would tell you to just shop somewhere else and leave other people alone to decide for themselves.

Yours is a world -I- do not want to live in. The difference is that the world I want doesn’t stop you from living the way you want, but your chosen world takes away my choices.

I worked in a supermarket for three years in Jr. High School, stocking shelves, wrapping produce and yes, throwing away expired food.

The waste in supermarkets is due to the end delivery nature of the business. When you bring in perishable goods to a thin market (the neighborhood), you expect some spoilage. It happens in open air markets, food collectives, etc. But trust me, supermarkets go to great effort to avoid waste as much as possible. It’s just a very difficult problem. Are you suggesting that government could deliver food more efficiently? Or that government planners could force the system to change in a way that would reduce spoilage? Do you not think that supermarket owners have a great incentive to not throw away products? That they don’t try their level best to reduce spoilage while still being able to stock shelves on time? Or that they are better judges of how their store runs than some distant bureaucrat with an idea?

But the waste I was talking about is in manufacturing. You have no idea how much effort goes into eliminating every tiny bit of waste in production. I mentioned the paper boxes - that type of analysis and re-invention of process to improve efficiency goes on constantly, everywhere. There is a massive industry of software, consulting engineers, and machine makers working constantly to eliminate waste and improve efficiency wherever it can be done. I spent my career in that industry, and wrote some of the software. I even wrote a chapter in a book on data standards for communicating material and specification information across suppliers for OEE (Overall Equipment Effectiveness).

A key characteristic of capitalism and competition is that it drives a never-ending cycle of efficiency improvement. And it does it from the bottom up, where the problems are and where the people who can solve them live.

This is why your mold example shows the opposite of what you pointed out. They optimize for them only. There is less freedom coming from the ones that ‘are our betters’ unless government intervenes (not all the time, but enough to prevent monopolies or duopolies), as it is clear that the ones controlling the market do optimize things for their own benefit, then they do not have an incentive to do the right thing.

Yet another “Susanita” argument, in this case it is a willful omission of the point being made, assuming for a moment that yes, Wallwart saves a lot of money for poor people, that should not be a reason to look away from the corruption being reported. The corruption that was pointed out when Charmin does that with the shelf space, while the store may lower prices, the point is that lack of competition eventually does keep prices up. Point being that the prices then would be even lower if there were better chances given to the competitors of Charmin.

Have YOU ever worked in a supermarket? The one I worked at had a manager who made purchasing decisions. We counted inventory constantly (pre-bar code days), and there were formula for how much stock to order based on how,quickly it was depleted. Sometimes the manager would go with his gut based on experience and local knowledge central planners don’t have.

Inventory management is complex. Sometimes corporate buyers make decisions from head office, sometimes local buyers do. But even when the company is ‘centrally planned’ and send the same product to every store, they will have their decisions informed by local conditions. No buyer worth his salt is going to keep sending Kosher fish to a store that never sells any. The data on demand comes back quickly, and plans are modified.

But as I said earlier, companies are not immune to the fallacy that central planning is ‘efficient’. Companies that centralize decision making wind up at a competitive disadvantage. I mentioned Boeing. I could also mention GE Digital’s failure with their move to a ‘center of excellence’ rather than letting decision-making happen by engineers in the field. Being a corporation doesn’t stop you from being stupid. Luckily the market does. Boeing is losing market to SpaceX and others. GE Digital went downhill after their attempt to centralize, and competitors like Siemens and Allen Bradley and smaller software players grew.

That’s just wrong. See my supply chain chart above. Modern supply chains evolve redundancies in part to handle surges in demand. But the important point is the coordination mechanism. Here’s what happens:

A surge in demand for tires occurs. If tires are in short supply, the price goes up. This reduces demand for tires in other areas where demand has not increased, while stimulating production of tires where there is excess demand.

If the tire manufacturing industry is short of rubber, the price of rubber rises. This stimulates production of rubber, while also signalling to,other users of rubber to conserve or move to alternatives.

This force propagates through the economy. An increase in car demand can, through the rippling of prices through the economy, change demand for elastic bands, which can stimulate the use of alternatives, which leads to more zip-loc bags, or whatever. Demand is increased or decreased in industries no planner ever could have thought of, while production, mining and all other aspects of production change to match the new reality.

This is because prices are the information bus of capitalism. Prices are a miracle - they distill everything you need to know about supply and demand for your specific thing into one number, constantly changing, affecting behaviour of millions of people in a gigantic, complex computing system called the economy. The emergence of a price is the result of millions of calculations by individual free agents with their own cost functions. Almost like a neural network.

This is also why one of the worst interventions a government can make is to fix prices. Price fixing destroys the information needed to make economic calculations.

That’s what Gosplan tried to,do. They had thousands and thousands of such people trying to determine the right amount of production for everything. Theynwere dedicated professionals trying to,make it work, and they utterly failed. Central planners in China are failing hard. There are entire enpty cities as monuments to the failure of Chinese central planning.

And again, try to imagine the complexity. That one single factory I mentioned has 50,000 suppliers. Each one of those suppliers has its own supply chain. Do you really think a person can go through that and assign production numbers to every,one of those in a coherent fashion that won’t lead to shortages and gluts of material? And then somehow make sure they all get the raw material they need to mke those quotas - and also manage the changes to other industries caused by the re-allocation of materials?

Now do it for the thousands of other factories and every company in their supply chain. And re-do it constantly, because demand is fluidmand ever-changing.

Oh, and since you’ve done away with prices and competition, forget about efficiency improvements, because no one will have a vested interest in putting in the work.

We need government. We need rational, stable rules. Complex systems only function against a bedrock of universal, simple rules. We need someone to watch for predatory monopolies, for externalities like pollution, and for national security. We need a civil society, and a social safety net. We need law courts to settle torts and police to prosecute fraud and other economic crimes.

But their activities should always be for the purpose of improving the functioning of the market, not to replace it. Industrial policy is a big NO. Nationalization is terrible. Central planning by coercive government is the last thing we should want.

No, it doesn’t. It’s a circle of things with straight lines connecting them. It’s logical and orderly. It’s exactly what I would expect a human planner to make.

Look again at that supply chain graph, and see if you can spot the differences. The supply chain graph looks like a spontaneous network, like the world wide web or a brain network or an ecosystem. They are vastly different things.

Sam, I will address your earlier post later. But the difference between these 2 graphics is how the artist chose to represent the information being portrayed. That is all.

Of course, but the issue now is that clearly the ones controlling what fuels we should use are corrupting the system so as not needing to ever respond to the externalities.

“The documents I released today as part of my investigation into Big Oil’s efforts to deceive the American public about the climate crisis are explosive,” said Subcommittee Chair Khanna. “Internal emails and messaging guidance show that Big Oil’s climate pledges rely on unproven technology, accounting gimmicks and misleading language to hide the reality. The documents also show a culture of intense disrespect towards leading climate activists like Bill McKibben and influential climate groups like the Sunrise Movement. Big Oil executives are laughing at the people trying to protect our planet while they knowingly work to destroy it.”

The Committee’s memo found:

Contrary to their pledges, fossil fuel companies have not organized their businesses around becoming low-emissions, renewable energy companies. They are devoted to a long-term fossil fuel future.

Despite BP previously rebranding itself as “Beyond Petroleum,” internal documents highlighted how carbon capture and storage (CCS), one of the energy technologies touted by the company, could “enable the full use of fossil fuels across the energy transition and beyond.”

An internal Shell email discussing carbon capture, utilization, and storage (CCUS) warned an executive, “We want to be careful to not talk about CCUS as prolonging the life of oil, gas or fossil fuels writ large.”

Chevron pays lip service to a “just transition” to cleaner fuels but provided talking points to an executive asserting that “[o]il and gas” are the “lower carbon solutions that ensures a just transition.”

Big Oil’s climate pledges and green advertising focus on unproven technologies the companies admit are decades away from implementation.

No, the problem is that you have massively shifted the goal posts. I was talking about the effect of subsidies, and what happened after they were removed. You’ve now tried to shift to 45 years of agriculture policy, modern income inequality, etc.

The cites I gave you backed up every single thing I said. Subsidies caused uneconomic over-fertilizing, over-feeding, over-grazing, etc. The quality of ovver-fed veal declined, and the government was reduced to buying them and destroying them for fertilizer. All documented in my links.

When the subsidies were removed, the farms that were built on subsidies failed, but eventually the entire farming sector improved and waste was reduced. This whole cycle happened before 1995, but somehow you think that modern dairy practices and complaints about them are some sort of defense of 1985 farm subsidies that failed.

It sounds like we are in agreement then. I have no problem with regulating true externalities. I suspect we differ on how many there are and what should be done, but in principle we are on the same page.

In short, it’s okay to regulate externalities, both morally and practically. Morally because an externality is a cost imposed on someone against their will. Practically, because externalities make markets less efficient.

The line is drawn when someone says, “Oh, screw the oil industry and their executives. Let’s nationalize it. We’ll make it fairer and make it run better, because we are smart and good.”

Or, “The poor shouldn’t have to pay that much. Let’s fix the price at an affordable level.”

Or, “People don’t need that much choice for mustard. We should have the government mustard board pick the mustard we all should use.”

If we can agree on a fundamental difference between government action used to fix market failures and government action used to replace markets in favor of a command structure, then we only differ on specifics of what needs fixing, which can be debated.

It may or may not be. It has an ‘inner ring’ of CDOs that invest with each other, an ‘outer ring’ of additional CDOs. Lines are drawn between the CDOs that invest with each other. Now, the graph represents the relationship between CDOs. How were those relationships established? What made one CDO decide to invest in another? Did a central planner make all those decisions? Someone in a head office decided that CDO X should invest in CDO Y but not CDO Z? Are all of those connections part of a grand central office design, or do they represent individual decisions of traders or managers over time?

Whatever value those lines represent has to do with the decisions made in establishing that line. A connection made for no reason has no value. How much value is in each line really depends on that decision-making.

The point I tried to make is that a supplier connection can represent years of work making that connection efficient. It can be the result of engineering analysis of a precise problem leading to a choice of supplier, or work with an existing supplier to make a material usable. Supply chain management is a huge field, and intense effort is made to improve the supply chains over time. The complexity of them arises not from one factory choosing suppliers, but that the suppliers can also choose suppliers. It’s even common for loops to happen. Company A can be a supplier to company B for one product, while company B uses company A as a supplier for their own products. Happens all the time.

The complexity can have negative effects. For example, a supply chain manager can pick two different companies to supply raw materials for redundancy. But unknown to the manager is that the two companies are inter-related through a third company, and if the third one fails, both of the others do. Or the common failure could be many levels and thousands of connections down.

The graph I showed is very simplified. It only shows the first level of supply for one company for a single line of products. If I tried to show all the secondary and tertiary links, etc, you might get something more like this:

That’s actually a partial map of the internet, but it’s the result of the same ad-hoc, bottom-up organizational process. I have seen supply chain diagrams that look just like that. Each one of those bright ‘supernodes’ might be a huge factory, or a common supplier. It’s all completely unpredictable, complex, and dynamic. It changes by the minute.

They are both examples of Complex Networks.

From Wikipedia:

Sam, I’m sorry, I don’t think you got my point. My post regarding the CDO chart was literally a direct lift of sections of your supply chain chart & post, modified to fit my example. In both posts, we literally make the same argument, but yours is about food and mine is about Buffet’s ‘financial weapons of mass destruction’.

In short, Sam, the post was a parody meant to highlight how the same argument can lead to wildly different outcomes depending on the example being discussed.

My apologies, I perhaps should have tagged the post or something. I genuinely thought you would recognize your own words, not argue against them.

I recognized my own words. I thought you were using that graph to say it was identical to the other one in concept, so all my words should apply equally to it. I’m simply saying that the critical information about the graph wasn’t in evidence, which is how the connections were established in the first place.

But I’m happy to drop it.