[Pen-l] RE: The Mirage of Economic Efficiency

["Marshall Feldman" <marsh@xxxxxxx>]

Nelson & Winter make virtually the identical case, complete with biological
analogies, in _An Evolutionary Theory of Economic Change_ (Harvard UP, 1982)
pp. 158-62.

> 
> Message: 6
> Date: Tue, 26 Aug 2008 21:37:40 -0700
> From: Michael Perelman <michael@xxxxxxxxxxxxxxxxx>
> Subject: [Pen-l] The Mirage of Economic Efficiency
> To: pen-l@xxxxxxxxxxxxxxxxxx
> Message-ID: <20080827043740.GA13434@xxxxxxxxxxxxxxxxxxxxxxxx>
> Content-Type: text/plain; charset=us-ascii
> 
> Almost 70 years ago, George Stigler introduced the
> concept of flexibility. A business might be highly
> efficient, but it may not have the flexibility to meet
> changing conditions. Stigler.s point is largely
> ignored. I would prefer that other parts of his work
> were ignored, but I do not have much say in such
> matters.
> 
> Stigler, George. 1939. .Production and Distribution in
> the Short Run.. Journal of Political Economy, 47
> (June): pp. 304-27.
> 
> Stigler. point is fairly simple. Nuclear power plants
> are often used to explain what he meant. Assume, for
> the sake of argument only, that a nuclear power plant
> can produce electricity much cheaper than other forms
> of generation (by the way, I do not believe this
> assumption is correct). The problem is that demand
> shifts. The capacity to produce for peak demand might
> not be needed 90% of the time, making it an
> economical.
> 
> A coal fueled plant might be far less efficient, but
> it can be brought online relatively quickly when it is
> needed. Even though the engineering efficiency of the
> coal-fired plant might be low, it might be appropriate
> for handling peak loads.
> 
> Uncertainty makes Stigler.s theory even more
> compelling. A biological example from my book, The
> Perverse Economy, might be appropriate:
> 
> .Biologists of all stripes acknowledge an amazing
> ability of various plants and animals to adapt to
> specialized niches. For example, scientists have
> recently discovered a new species, wholly unrelated to
> any previously known species, which survives on the
> lips of one particular type of lobster (Morris 1995).
> Although this form of evolution is remarkable, it also
> leaves the creatures vulnerable to even a slight
> change in the environment. The same specialization
> that made these creatures so dependent on the success
> of a relatively small group of lobsters makes them
> less adaptable to relatively small changes in the
> global environment. For example, this particular group
> of lobsters may decline or migrate to a less desirable
> location, threatening the existence of their tiny lip
> dwellers..
> 
> In the Perverse Economy, I used another example,
> regarding a glue shortage . not glue in general, but a
> particular kind of glue. A computer chip is a silicon
> wafer, which is useless without the capacity to send
> and receive signals from a circuit board. A plastic
> package allows the chip to make the connection between
> the chip and the board. The industry uses specialized
> epoxy glue for fabricating these packages.
> 
> During the 1990s, a single Sumitomo Corporation plant
> manufactured the majority of the world.s supply of the
> epoxy resin. About 60% of all memory modules depended
> on the product of this particular factory, when in
> July 1993 a fire destroyed this factory.
> 
> Ordinarily, an event like a fire in a glue factory not
> be of very much interest except for the people close
> to the event, but this fire ravaged the chip market.
> Dealers had been paying about $33 for a megabyte of
> memory before the fire. By the end of the month, the
> same memory commanded $95. The industry feared that
> prices would go even higher.
> 
> Bill Clinton.s trade policy with Haiti illustrates a
> similar danger. Clinton forced Haiti open up its
> agricultural markets. Heavily subsidized US rice
> destroyed Haiti.s capacity to produce rice. In terms
> of conventional economic theory, some economists might
> have seen Clinton.s policy as efficient, following the
> laws of conventional economics (subsidies are ignored
> in this logic, especially the heavy water subsidies
> given to California rice growers). Relatively
> unproductive rice farmers would give up that activity
> to participate in the modernization of Haiti,
> presumably in some sweatshop.
> 
> Unfortunately, when agricultural prices began to soar,
> Haiti was unable to quickly resuscitate its previous
> capacity to grow rice. Food riots soon followed.
> 
> The recent sawdust shock is relevant here. Here is
> what the Wall Street Journal reported about sawdust:
> 
> .The price of sawdust has soared since 2006, up from
> about $25 a ton to more than $100 in some markets.
> Blame the housing slump: Fewer new homes mean fewer
> trees cut for use in construction, which leads to less
> sawdust and other wood waste, driving up the price..
> 
> .Farms use sawdust and wood shavings as cozy and clean
> bedding for horses and chickens. Particle-board makers
> devour it by the boxcar to fashion a cheap building
> material. Auto-parts manufacturers blend a finely
> pulverized sawdust called .wood flour. with plastic
> polymers to make a lightweight material to cover
> steering wheels and dashboards..
> 
> .Wineries use oak sawdust as a flavoring agent for
> some wines. Perdue Farms, which raises broiler
> chickens, goes through seven million cubic feet of
> wood shavings a year. Oil-rig operators in Wyoming and
> Colorado pour sawdust into the caverns they find deep
> inside rock formations as they hunt for pools of
> petroleum. Sawdust gives drill bits something to grind
> through..
> 
> .The housing slump has devastated sawmill production
> across the country..
> 
> Millman, Joel. 2008. .Sawdust Shock: A Shortage Looms
> As Economy Slows.. Wall Street Journal (3 March): p. A
> 1.http://online.wsj.com/article/SB120451039119406735.html
> 
> -- Michael Perelman
> Economics Department California State University
> Chico, CA 95929
> 
> Tel. 530-898-5321
> E-Mail michael at ecst.csuchico.edu
> michaelperelman.wordpress.com
> 
> 

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