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Piketty says something in a way that sounds like he takes it, as so many do, as axiomatic:

“…growth always includes a purely demographic component and a purely economic component, and only the latter allows for an improvement in the standard of living.”

The nit I’d like to pick with this received trusim is marginal relative to its broad accuracy, but is still worth noting – there are economies of scale to absolute population. These manifest in two interrelated ways – consumption and investment choices that are only “unlocked,” if it were, when total population crosses certain thresholds, and future per-capita-growth that results from past choices that were contingent upon absolute population.

I can illustrate these by giving three examples – one purely the former, one purely the latter, one a mix.

A purely “unlocked” choice would be a more specialized service that could not achieve scale relative to fixed costs without a large enough absolute population given a fixed share of population interested in the service. Think “shop that only sells customized meeples” or more conventionally “Latverian restaurant.” This doesn’t affect to the level of per-capita income or output, now or in the future, but improves living standards by providing a greater diversity of quality consumption options.

A purely future-oriented choice might be an aircraft carrier. Today, nobody benefits. But in the long term, if an aircraft carrier in the most optimistic framing maintains peace, security, and a stable order, this allows for greater per-capita growth (and fewer destabilizing interruptions) in the future, though in the present it registers as output that brings little utility to the public at large. Obviously two things must be noted –  military investment does not always increase peace, security, and stability; and even assuming it does, there are many, much more cynical, interpretations of how military power projection leads to future per-capita growth for the projectors.

A mixed choice would be cet bruyant objet du désir, a large subway system. It both increases consumption options and quality available to present individuals – lots of people prefer riding trains! – while also being an investment that increases long-term per-capita-growth rates.

This is not the most important point in the world, but since Piketty made it I found it a good time to quibble with it.


Kevin Grier, the sufferable half of Kids Prefer Cheese, writes this about AirBNB:

I used to think AirBNB was cool, but now that Thomas Friedman has slurped it in the Times, I’m not so sure. One interesting thing in the piece was how the AirBNB founder confuses his company’s revenue with new economic activity.

Surely most of AIRBNB’s revenues are actually just diversion, no? I’d guess that at least 75% of their revenue is just diverted from hotel/motel revenue.

This is a common mistake. “look how much NAFTA increased trade”, “Look how much the new stadium will boost the local economy” are examples of this kind of erroneous thinking.

Creation vs. diversion is an important and often overlooked distinction.

I just had a great stay in an AirBNB property in Brooklyn, but the Staten Island Hilton Garden Inn lost the revenue that AirBNB generated.

He’s right about Tom Friedman, of course, but wrong about everything else. But wrong for interesting reasons!

The first, and simple reason, is that on the margins AirBNB, by creating cheaper, unique, higher-quality, or differently-located lodging options, may result in more overall travel. I may choose to take that why-the-heck-not weekend trip to FunTown if I know I can book a super-cheap night in someone’s apartment, or stay in the cool gentrifying neighborhood that doesn’t have any formal hotels.

Secondly, and more importantly, it is certainly the case that AirBNB is more often than not “diverting” trips that would have otherwise occurred in hotels. But that doesn’t mean it’s not creating new economic activity!

A house or apartment is capital, a machine that provides a flow of services, primarily “comfortable shelter.” When you own a house, you can choose to consume those services however you want – entirely for yourself, rent them out to others, occasionally donate a share of those services to friends or relatives (for example, my in-laws just stayed with us the past week, and next week a friend is staying with us). However, until recently, was difficult and uneconomical to rent out one’s residence for simply a day or weekend or week because of issues relating to information, trust, payment mechanisms, and insurance.

But these are all problems that AirBNB, a new technology, has effectively and efficiently solved, making renting out a portion or the whole of one’s home like a hotel or B&B go from “extremely challenging” to “extremely easy.” This makes houses more valuable. To quote the master, Paul Romer:

Economic growth occurs whenever people take resources and rearrange them in ways that make them more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Basically, the combination of AirBNB + house = hotel is a new recipe that makes existing resources more valuable than they once were. If AirBNB really takes off, what we’ll see is that, as more people elect to take trips and stay in people’s homes (as my wife and I have done before and will do again, thanks to AirBNB) the existing stock of homes become more valuable, there will be substantially increased efficiency in the hospitality industry and there will be more efficiency in urban land use since the hotel-to-overnight-stay ratio will decline and thus valuable land downtown can be used for other purposes, like offices, residences, entertainment or commerce.

I’m not a shill for AirBNB, but it’s a great example of how the combination of information exponentiation and aggregation economies of scale that the internet enables can substantially increase economic growth and human welfare by making all the stuff we already had more valuable. My wife and I got an espresso maker on Freecycle, so we didn’t buy one. We bought something else instead (probably a couple of board games). So in one sense that was just consumption diverted from one thing to another, but comparing the equilibria that’s clearly a net increase for human welfare. In the pre-internet days, that espresso maker goes to a landfill. Instead, it goes to us. So the original owners are unaffected, the public waste burden is reduced, and we get the espresso maker we wanted and other stuff. Someone else went on Craigslist and bought a board game for $5 that cost $60 new, and used the savings to help buy a new espresso maker. It’s all about increasing efficiency, and just because it doesn’t always increase GDP doesn’t mean it doesn’t increase welfare and, eventually, growth.

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