Thursday, December 14, 2017

Economics lessons, part 1

It shouldn't take an Advanced Degree(™) in Economics to figure out how the economy works, but it sure seems like it does.

"We're going to bring back coal" -- what a ludicrous thing to say. Does anyone think this is going to happen ? Why? It's not. Coal is nearly dead. And you don't want it to come back. Those are nasty dangerous jobs, with illness and reduced life expectancy for everyone involved or nearby. Mine collapse, black lung disease, polluted drinking water. Where coal is burned, polluted air. No good.

Why is coal going away?

Basic lesson: old business models are replaced by new ones that are more efficient in some way. Old tools are replaced by new ones. You could call this economic Darwinism if you're aren't afraid of evolution. If you are, well, you're going to get rolled under by those who aren't, and no amount of stupid from the current federal government/administration will stop it.


Cases in point:

1) Horses. up to 1900, personal transportation was either on foot or on horse. Neither goes very far or very fast, so your travel is very limited. Well, okay, since 1840 there WERE places you could go on a train. But not to the grocery store.

A horse is more efficient that walking, if for no other reason than something besides YOU is doing the work, and the cargo load is greater.

But what's worse is the pollution aspect of horses. Imagine that you are in 1890 New York City. Four million people live there. There are a LOT of horses. Horses poop everywhere. It's probably less bad in the winter than the summer, but it's still bad. And you can't turn it off. (Imagine if the car you drove in the 1950s, 5mpg and high-pollution, could never have the engine turned off…not then an improvement over a horse.) Horses drop dead in the streets; then they rot: flies and disease. You can't hook a horse on the back of a tow-truck and take it to the dealer for repair.

So the revolution here is when an automobile becomes possible, and priced right, it eliminates horses as transportation almost overnight.

(Remember a good Henry Ford quote here: "If I'd asked people what they wanted, they'd have said 'better horses'" because most people's vision extends only just beyond their front door. Well, he gave us a better horse, and a better business model along the way. (Yes, I know Ford didn't really say that.))


2) Shopping. about the time I was born, your standard shopping experience was to go to a department store, let's call it "Sears", and you could talk to someone who actually had expertise/knowledge about how to do something and what tools to use, and they could sell you those tools.

Now, well, Sears is slowly going out of business. With the increased competition that Sears faced, and the willingness of stores to compete on price, the American consumer reached a point where purchase price was the critical aspect. That resulted in a need to cut costs at Sears (and everywhere else), and one of the costs that got cut was labor. Reduced pay because of cheaper workers means reduced purchase prices which means customers don't go elsewhere. It also means that workers are less knowledgeable. Turning those workers into part-timers to avoid paying benefits also keeps costs low, but you still only get the lesser workers. And those workers are the ones that interact with customers. Retail customers don't like trying to deal with dumb employees, but it's not like that's not true everywhere else too. And because aggregately we have decide that cost beats all, this was inevitable.

When you are forced to compete on price, rather than product or service quality, you get a race to the bottom. That always results in a shakeout where some close, some are bought, and a couple limp along getting slowly worse and worse.

As Sears has gone downhill, so have others, putting people out of work.

What's the business model that accelerates this? Well, Sears itself started it back in the 1800s. Remember the "wish book" ? Yeah, that was it, combined with Wells Fargo wagons (remember the song from The Music Man?). The model: send a catalog to a customer, let the customer place a written order with a paper check, box items and put them onto a Wells Fargo Wagon, wagon delivers to customer. Customer doesn't have to visit a store, in fact CAN'T because it's too far away. The process isn't fast, but it means you have access to thousands, millions of customers who don't live in town, or live on the other SIDE of town. Remember that transportation back then was horseback.

Back in the day, you could even buy a house, as a kit, from Sears.

So what was that? It was a new and more efficient business model. Enabled because of reasonably efficient postal service, banking service, and transportation service. Those things were, of course, still fairly limited, but still a giant leap over 100 years before.


3) Amazon. Now the equivalent model is Amazon.com + Paypal + FedEx/UPS. Instead of a turnaround time of weeks, it's now days, and perhaps only hours if you live near an Amazon distribution center. So those Sears jobs are turning into Amazon jobs. At least you don't have to interact with dumb employees or customers.


A theoretically perfect market is like this: you as customer have access to the advertising service, which has access to the payment service, and the delivery service, and all of that can turn around with minutes to hours. That sounds like today, with one exception: in a perfect market ALL possible goods and services are available for purchase at all times. I want to buy an "X" and the advertising service shows me who has that for sale. Our current market is imperfect in that some things are not for sale when you want to buy and go looking, but it's awfully damn close.

The old business model of "brick-and-mortar" stores is just about dead. Yes, there are still a lot of stores around. But that's going away. an old business model that is no longer efficient enough. One of the other reasons why the newer model is more efficient is that if you buy pants that don't fit you can just send them back and order a different size. Soon as you know you wear 34x32 pants, that's the only size you order. No need to try them on at at store.


4) 3D printing. This is going to replace a bunch of manufacturing flavors, over time. You will do it yourself at home. It will be more efficient to own a printer, and order a design, which it then makes for you. There is ZERO shipping cost, beyond raw-material refills. Eventually this is the Star Trek synthesizer. Make-on-demand. No need for a store, because there's no need for inventory.


5) Delivery via drones. Amazon is working this. It will have limited range, but be more efficient for small things, and nearly fully automated: this will reduce vehicle traffic at ground level. Just wait until the air is full of these things, tho.


Back to why coal can't come back…it's an old business model. It worked at the time because it was very low-tech, and because of that there weren't any competitors. You could dig it out of the ground with a pickaxe and haul it home with a horse-cart. But it was still nasty. At large scale, it was also dangerous. Oil is high-tech, but there aren't any mine collapses or explosions. (well, you get oil spills, those are nasty too.)

The coal competitors involve a bit more advanced technology, in varying amounts. Oil/etc require special transportation, special processing, special handling at your house. Natural gas is similar. Electricity puts the most dangerous parts far from your house, and you can do a lot more with it. Solar can bring power generation right back to your house again, and the fuel source is free, but the tech to create solar panels isn't trivial.

Here, too, tho, coal itself displaced a predecessor: trees. Much higher energy density, same transportation methods. Problem: non-renewable. You can grow trees in your yard.

Coal is nasty from the get-go. Oils is too. NatGas not so much. Solar is nasty only at manufacturing time (I imagine that disposal time will be too, but I haven't heard about much of that going on, the wear out age of solar panels is still probably well into the future).

But very little of that involves human work any more. And that is why coal is going away.

Automation.

All of these advances are the result of automation. Improved tech is a kind of automation. Both are better business models.

Which all result in job losers. Job winners, too, but the jobs are different, and the people are too. 50 years ago cars were still largely hand-made. Assembly lines, yes, but human workers. Now they are almost fully automated. Competition and therefore cost pressures forced this to be true. You want to buy a human-made car? Who still does that? Rolls Royce. Bentley. Morgan. Ferrari. Lamborghini. What's the sales price? Yeah: quarter-mil+

(look here: http://www.madehow.com/Volume-1/Automobile.html for a fascinating explanation)

Coal production, such as it still is here in the US, is not guys in mines with pickaxes. It's giant earth-moving trucks scraping a mountain flat out west. The mining jobs are gone. Automation has killed them. Not coming back. Waiting for them to come back because some knucklehead presidential candidate says they will is foolish in the extreme.

Automation has already killed a lot of jobs here in the US. Cost pressures moved a lot of jobs outside the US, and automation will kill them too.

Winners and losers. Economic Darwinism. Survival of the adaptable.

Inevitable. And scary.

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An afterthought or two:

1) the coming "AI" revolution is already changing things, and that will accelerate. I don't know how or where. I used to work in that area, when it was still primitive. It was great fun, but inevitably came the pullback of "this is still too hard".

2) electric cars. If I live another 30 years I will see the end of the internal-combustion-engine-driven car. Gasoline will go away. What is currently a gas station hasn't been solely a gas station for years. It's a convenience store where one product is gasoline. Don't plan on keeping your current car forever. Or your antique.

3) self-driving cars and the Uber/Lyft equivalents will eliminate private ownership of vehicles for the most part. Self-driving trucks are in the near future (test vehicles are already in use). This will be one disruptive use of AI. Taxis are doomed; well, the ones driven by humans are. Uber service with self-driving cars will be the new thing--you won't even own a car.

4) There are plenty of historical occasions where the upheaval of new tech replacing old tech causes social unrest and rioting/vandalism.

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