Ludwig Lachmann on Income ‘Inequality’

by Don Boudreaux on June 23, 2011

in Complexity & Emergence, Creative destruction, Economics, Inequality

At lunch yesterday, Tom Palmer mentioned to me a 1956 essay by the late Ludwig Lachmann entitled “The Market Economy and the Distribution of Wealth.”  It’s in a collection of Lachmann’s essays, edited by Walter Grinder, that I’ve owned now for more than 30 years and read cover-to-cover long ago – but, I confess, I had no recollection of the essay when Tom mentioned it to me yesterday (and none when I re-read it just now).

But, oh my, what a splendid piece of analysis!  Here again is a link to it, with my strong encouragement that you read it carefully.  It’s quite short, yet original and deeply profound.

In this essay Lachmann argues that the market is constantly redistributing wealth far more productively and fairly than any government efforts on this front.  But that’s not the really profound part.

What’s most profound is Lachmann’s clear and compelling explanation of just why it’s the case that wealth in a market economy has constantly to be created and re-created; that it’s never fixed – never an inexhaustible fund that pays out goodies to lucky passive owners.

I’ll perhaps write more about Lachmann’s 1956 essay later; for now I want to further reflect on it, digest it more completely, and share it with you.

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{ 68 comments }

DG Lesvic June 23, 2011 at 4:02 pm

I don’t have to read Lachmann’s piece to know that he missed the point, that taking from the rich to give to the poor doesn’t reduce but increases income inequality. But I’ll read it anyway, and, if I’m wrong, and it’s in there, I will never darken this site again.

Methinks1776 June 23, 2011 at 4:06 pm

I wish I were as clairvoyant as you. I had to print it out and we’ll be reading it tonight.

Don Boudreaux June 23, 2011 at 4:09 pm

Why do you, DG, insist that there is only one point worth making on this question? You are forever offering this assertion and, for the life of me, I can’t see why you suppose that the point that you happen to be obsessed with the only point on this matter worth making.

It’s as if someone who understands that, say, rent-control causes developers to build more owner-occupied units (and fewer units for rental) than otherwise, tiresomely berates those who wish to discuss other consequences of rent-control for allegedly being so dim-witted as to miss The Point.

By doing so, DG, you cause people to take you less seriously than they otherwise would.

DG Lesvic June 23, 2011 at 4:36 pm

Why do you, Prof. Boudreaux, insist that there is only point not worth making on this question? You and the rest of the Austrian School will make every other point, but not the best one. Now, I am not asking for it to the exclusion of all the rest. I just ask that it not be excluded, that there be one little place among the weakest for the strongest, beyond what this obscure commenter can provide for it, just one little place in the profession for the strongest possible moral as well as economic argument against redistribution.

Don Boudreaux June 23, 2011 at 4:54 pm

Are you the only person in history to make The Point?

And why does your assessment of how much time I (or anyone else) should spend today addressing one of your pet-peeves rise to the level of a criticism of the fact that Ludwig Lachmann (1906-1990) might, perhaps, maybe (you don’t know because you haven’t yet read the essay) not have made that Point in an essay written in 1956?

DG Lesvic June 23, 2011 at 5:17 pm

I don’t claim to be the only person who has made that point, but simply that I’m the only one I know of. And while I didn’t see it in my cursory reading of Lachmann’s piece, if you say it’s there, I’ll take your word for it, and, likewise, that it could be found in many other sources.

But, obviously, if they have been hidden from one who has studied this problem as diligently as I over the last forty years, there ought to be a major effort to bring them forth.

So as not to minimize the importance of doing so, these words from The End of Political Economy at http://econotrashtalk.org/#The_End_of_Political_Economy

All of the other arguments against redistribution still leave the economic arguments for it. And even the other economic arguments leave the argument that it reduces inequality. Only the argument that it doesn’t reduce but increases inequality would wipe out every moral, social, and political as well as economic argument for it.

And only then may there be an end to aggression, to war, genocide, and the terror in the night, for only then may the majorities bent on looting agree to the most essential human right, the right to be let alone.

Gary June 23, 2011 at 5:06 pm

DG: Is there a paper/essay that argues this point in detail?

DG Lesvic June 23, 2011 at 5:20 pm

Gary,

Here is a link, I hope, to The Forbidden Theory of Redistribution

http://econotrashtalk.org/#The Forbidden Theory of Redistribution-New

DG Lesvic June 23, 2011 at 5:23 pm

Gary,

Sorry but the link didn’t go directly to the essay but only to the front of the book, from which you could scroll down to Book Two in blue color and then to the Table of Contents and click on The Forbidden Theory of Economics.

vikingvista June 23, 2011 at 6:43 pm

1. Draw a supply-demand curve with a high income equilibrium, drop a high tax on it, and look at the new equilibrium.

2. Draw a supply-demand curve with a low income equilibrium, drop a low tax on it, and look at the new equilibrium.

3. Compare the pretax income (equilibrium) differences to the post-tax differences, and tell me whether those differences increased or decreased after the progressive tax.

Scott June 24, 2011 at 9:11 am

Viking: is this a highly progressive or a flat tax?

vikingvista June 24, 2011 at 10:42 am

Scott,

The effect, as revealed by the approach I explained, is present with any income tax more progressive than a flat dollar amount. And the more progressive, the greater the effect, c.p.

C.p. includes identical S-D slopes/elasticity for the two types of employment. A relatively higher S (labor) slope, or lower D slope, diminishes the before-taxes income on that job, which would exacerbate the effect on the lower income, and diminish it on the higher income.

Notice also, that nobody but the government avoids losing income to taxes, and total income generated declines. The before tax incomes (what equality fiends report) grow relative to the nontaxed state, but the after tax incomes fall.

Seth June 23, 2011 at 5:40 pm

DG – Why is income inequality a bad thing?

vikingvista June 23, 2011 at 6:11 pm

Those who think it is bad advocate policies that increase it.

DG Lesvic June 23, 2011 at 6:13 pm

Thank you Vike

You answered Seth’s question for me.

Seth June 23, 2011 at 7:01 pm

For those of us who don’t think income inequality is bad, why should we care if their policies increase it?

vikingvista June 23, 2011 at 7:04 pm

He thinks the revelation will get those who do care to stop pushing progressive taxation on income.

Seth June 23, 2011 at 7:49 pm

I do understand that. I think it’s a good point for people who think income inequality is bad.

But, I think the better point is that income inequality is not necessarily bad. If you convince someone of that, then you need points to convince them that markets distribute wealth more effectively than force.

vikingvista June 23, 2011 at 8:36 pm

“But, I think the better point is that income inequality is not necessarily bad.”

Yep. That’s why nobody else harps on it, even though nobody here has ever disagreed with it.

tdp June 24, 2011 at 5:17 pm

People erroneously assume that there is a fixed amount of wealth and that if income becomes unequal, conditions approach Ancien Regime France. In reality, in developed countries it means that as the amount of wealth in the population expands, the distribution of people on the scale of wealth fans out with it, so instead of Joe making $50,000 and Bob making $60,000, Joe makes $70,000 and Bob makes $200,000. Neither Bob nor Joe is poor or relegated to the underclass of society, especially since Joe is perfectly able to work his way up the ladder and earn more money. Leftists fail to understand this and rail about social justice, enacting policies that make it harder everyone to make money.

kyle8 June 23, 2011 at 6:17 pm

Income inequality is only a bad thing to those who are ruled by emotion and not by logic. And not a very noble emotion either.

I could not give a rat’s ass if Bill Gates, or Warren Buffet, or Jimmy Buffet all get even richer than they are, I don’t even care if the percentage of the income superiority they have to me increases. Just as long as the economy is growing, and my own modest income and investments are also growing.

Anyone who thinks that those sort of things matter is someone who is susceptible to the worse types of economic and social psychobabble and demagoguery that has ever existed.

Purpendicular June 24, 2011 at 6:47 am

Unfortunately all of us are ruled by emotion a large part of the time. Brain research shows that without emotions, humans are incapable of making choices. “rational” or not.
“Thinking rationally” is thus much rarer than one likes to admit. Our emotions are formed by 2 million years of hunter-gatherer existence and by our culture. And as Hayek would probably say, emotions is a store of inherited collective wisdom. That does not mean that they are not often wrong, but it means that it is very hard to change them.

Jonathan M. F. Catalán June 23, 2011 at 7:03 pm

DG,

No Lachmann makes the more meaningful point that market-produced income inequality is a good thing.

Don Boudreaux June 23, 2011 at 7:11 pm

Yep.

DG Lesvic June 23, 2011 at 8:58 pm

Vike, Seth, Kyle, Jonathon, and Don

First Vike,
All that supply demand curve and high and low income equilibrium stuff will sure shut the Democrats up.

Kyle,

You complained that others were ruled by emotion rather than logic Well, if you have no use for logic, what are you doing here?

Jonathon and Don,

Apparently you now both agree that Lachmann did not make my point, but, supposedly, made a better one. Kyle said the same thing, and about pretty much the same point, Lachmann’s, that inequality is necessary, Kyle’s, that it isn’t really such a bad thing. But there is no conflict between Lachmann’s point and mine. They’re both part of the same chain of reasoning, Lachmann’s at an earlier stage of it and mine at the culmination. Why omit the pinnacle any more than the foundation?

DG Lesvic June 24, 2011 at 9:45 pm

Here’s the bottom line.

Would it kill you to say that redistribution can’t reduce but only increase inequality?

Would God strike you dead? Would your teeth all fall out of your mouths? Or would you just have to admit that an insignificant little upstart knew more than the “experts?”

DG Lesvic June 24, 2011 at 9:56 pm

And, while we’re at it, would you like a list of the matters on which he knows more than the “experts?”

Just for starters, he knows more about the cornerstone of economics than your revered Prof. Lachmann, and about the business cycle than your namesake.

This is directed especially to you, Don and Jonathon.

DG Lesvic June 24, 2011 at 9:59 pm

And even more about competition and monopoly and about redistribution than his own idol, Mises, but which still doesn’t change the fact it is only because he has their giant shoulders to stand upon, all of them, Lachmann, Hayek, and especially Mises, and is still a pygmy next to giants.

I’d like to see a few more giants and few less pygmies around here.

DG Lesvic June 25, 2011 at 8:27 am

Don and Jonathon,

Even with the best theory, real scientists never rest content. For, as Mises explained,

“The most elaborate theory that seems to satisfy completely our thirst for knowledge may one day be amended or supplanted by a new theory. Science does not give us absolute and final certainty.”

That’s why there’s more than one economic theory and more than one argument for freedom, but a vast arsenal of them, all of them arrayed against the foe. Whether my argument is the best or second best of 66th best, you still haven’t given us a good reason for excluding it from the arsenal.

And I still say that it’s the culmination of political economy, and not the 66th nor even just the 2nd but the best weapon in freedom’s arsenal, and that the question is not whether or not it should be deployed but whose side you’re really on.

DG Lesvic June 25, 2011 at 8:34 am

Sorry, but I need to rephrase that.

Don and Jonathon,

Even with the best theory, real scientists never rest content. For, as Mises explained,

“The most elaborate theory that seems to satisfy completely our thirst for knowledge may one day be amended or supplanted by a new theory. Science does not give us absolute and final certainty.”

That’s why there’s not just one economic theory and one argument for freedom, but a vast arsenal of them, all of them arrayed against the foe. Whether mine is the best or second best or 66th best, you still haven’t given us a good reason for excluding it from the arsenal.

And I still say that it’s the culmination of political economy, and not the 66th nor even just the 2nd but the best weapon in freedom’s arsenal, and that the question is not whether or not it should be deployed but whose side you’re really on.

DG Lesvic June 25, 2011 at 8:54 am

And since you’ve given us a ranking of economists (without Mises, as I recall) why don’t you give us a ranking of economic ideas and of arguments in the fight for freedom, and where you draw the line between the included and excluded.

It would have to be a pretty long list, because I’ve seen an awful lot of them since I’ve been coming here, and about the only one I haven’t seen was mine.

What was so uniquely terrible about it?

Mao_Dung June 24, 2011 at 10:21 am

You are a one-trick pony, who should be sent to the glue factory as soon as possible. As much as I like real equines, it’s the horsey human versions that I find offensive and redundant to decent society. I’m not sure even Wal-Mart would hire someone as dense as you. What department would you be assigned to? You’d frighten the kids in the toy department.

Dan H June 24, 2011 at 10:31 am

Nice counter-argument. You must have been near the top of your class at public school. Maybe even one of the 94 students “tied” for valedictorian from your class.

Mao_Dung June 24, 2011 at 10:41 am

“I will never darken this site again.”

Is that a threat?

Please don’t deprive us of your insights. Please reconsider. I feel safer knowing that you are off the street and out of trouble.

Tom G. Palmer June 23, 2011 at 4:09 pm

A slightly abridged version will appear in “The Morality of Capitalism,” in time for distribution (100,000 copies are being printed) on college campuses this Fall: http://atlasnetwork.org/blog/2011/02/the-morality-of-free-enterprise/ To get copies for college groups, here’s the link: http://studentsforliberty.org/college/the-morality-of-capitalism/
(One of the videos that will accompany the campaign to explain markets is here: http://www.youtube.com/watch?v=SnHQammdwGQ&feature=player_embedded )

Slappy McFee June 23, 2011 at 4:24 pm

My favorite paragraph:

“Confronted with this situation, the opponents of the market economy have shifted their ground; they now oppose it on “social” rather than economic grounds. They accuse it of being unjust rather than inefficient. They now dwell on the “distorting effects” of the ownership of wealth and contend that “the plebiscite of the market is swayed by plural voting.” They show that the distribution of wealth affects production and income distribution since the owners of wealth not merely receive an “unfair share” of the social income, but will also influence the composition of the social product: Luxuries are too many and necessities too few. Moreover, since these owners do most of the saving they also determine the rate of capital accumulation and thus of economic progress.”

The arguments he is referring to are the same arguments I heard a month ago from family. I believe they referred to it as common sense.

I wish I had this paper then.

Dan June 23, 2011 at 6:54 pm

Yet, I fail to see ‘necessities’ in the US a being in ‘too few’ anywhere. I know that it isn’t sitting at your door shtoop when you open it up, but that does not mean it is not readily available. Unless, someone would care to equate penguins as a necessity and that we don’t have them in plentiful supply for all Americans to have one of their own.

Stone Glasgow June 23, 2011 at 4:33 pm

Wow, this author is brilliant. I can’t believe I have never heard of him before. It’s a shame that brilliant men have been lucidly describing the nature of an economy for so long and yet today we have more of the same; we barely survive the onslaught of collectivist thought and tread water just long enough to keep the gears of free exchange rolling along.

I love this:

“The owners of wealth… are like the guests at a hotel or the passengers in a train: They are always there but are never for long the same people.”

tdp June 23, 2011 at 4:45 pm

They don’t have the same media access because the MSM outlets are
1) Pinko or
2) Fox News
If Free Market Libertarianism had a single nucleus for spreading information it would be a lot easier to get people to learn about it. Have one website that links to every major Free Market Think Tank, the best Libertarian Blogs, and has papers on economics by Classical and Austrian luminaries. Advertise on TV, radio, and online, get a few people to check it out, and let it spread by word of mouth.

vikingvista June 23, 2011 at 5:02 pm

Fox Business is in a category of its own.

Ken June 23, 2011 at 5:19 pm

VV,

And they’re very good at that business indeed, beating the pants off all other competitors. Not just beating the pants off, but spanking those bare bottoms once the pants come off.

I’m sure many here dislike FNC, as I’m sure you were sneering at it, VV, which is fine, but that’s not my point. The point is that FNC knows it’s business, delivers on it, and makes tons of money. Everything a business should be.

Regards,
Ken

vikingvista June 23, 2011 at 5:37 pm

Do you realize that I am referring to the Fox Business channel? Stossel, Napolitano?

Ken June 23, 2011 at 9:43 pm

Them too.

muirgeo June 24, 2011 at 2:47 am

I love this:

“The owners of wealth… are like the guests at a hotel or the passengers in a train: They are always there but are never for long the same people.”

Yeah because like when Sam Walton died four people coincidentally with the same last name became rich running stores with the same name as the stores Sam had… This guy WAS deep… he realized that people do die and REALLY can’t take it with them.

Ken June 24, 2011 at 1:33 pm

muirgeo,

Of course you focus on Sam Walton’s children, but completely ignore Thomas Walton’s children. Thomas Walton was a farmer and mortgage lender who didn’t amount to much financially, but his son Sam became one of the richest people in the world. If you knew either Sam Walton in the 30′s you certainly wouldn’t have expected this.

I understand why you deny that people like Sam Walton exist, people who can come from very modest lives to one of the wealthiest. If you acknowledged this, you’d have to change your mind about most things. But as usual, you want to live in your little fantasy world.

Regards,
Ken

Stone Glasgow June 25, 2011 at 1:16 am

Yeah but Sam only became rich by standing on the shoulders of society and he owes society a debt for that favor, and for the economic rents that he extorted from the people, blah, blah, blahbidy blah blah. Blah.

brotio June 25, 2011 at 1:51 am

Yasafi,

You didn’t mention politicians named Kennedy. Why not?

Scott G June 23, 2011 at 4:48 pm

“What’s most profound is Lachmann’s clear and compelling explanation of just why it’s the case that wealth in a market economy has constantly to be created and re-created.”

I would read it, but I’m at work creating wealth right now.

No seriously, it sounds interesting. I’ll have to read it, but first, in typical Cafe-Hayek-commenting fashion, let’s comment about it without having read it.

Everyday I consume food, therefore everyday I must produce enough food or enough other wealth so I can trade for the food.

Of course there are other things I’m driven to do in my life, such as attract a marriage partner, have children, feel a sense of satisfaction and happiness about the way I spend my time. All of these activities take wealth to carry out.

Okay, I wonder what he says because I’m not coming up with anything profound.

By the way, what does it mean to re-create wealth?

For the last 5 minutes, I’ve not created as much wealth as my managers would like for me to have created.

Mao_Dung June 23, 2011 at 6:36 pm

“never an inexhaustible fund that pays out goodies to lucky passive owners.”

How can you say that with a straight face? This old lady recluse never lifted a finger in her long life except to play with her dolls, thanks to her copper baron daddy. At least she didn’t leave her hundreds of millions to her pet ferret. She left a sizable chunk to her nurse.

http://www.nytimes.com/2011/06/23/nyregion/huguette-clark-left-wealth-for-art-charity-and-to-nurse.html?_r=1&scp=3&sq=Huguette%20Clark&st=cse

Russ Nelson June 23, 2011 at 10:58 pm

“never an inexhaustible” doesn’t mean that you can take a long time to exhaust it if you are a frugal passive owner. As my mother used to say “Never is a long time.” What did your mother tell you about saying “never”?

Stone Glasgow June 23, 2011 at 11:03 pm

The old lady’s money has gradually been moved back into the economy or put at risk in order to benefit others, who need money in order to create wealth. Is there a problem with that?

Scott June 24, 2011 at 9:39 am

Lucky? I get to choose what I do with my money that I earn and if that means giving it to my children or grandchildren what gives you the right to stop me?

Mao_Dung June 24, 2011 at 10:01 am

Prove to me that you’re virile, and not sterile. Are you circumcised? What is your sperm count? What sane woman would voluntarily bear you a child? She would need to have her head examined. The feeble-mined children would need to have their heads examined. Everything you say and do is dangerous and suspect. You need to be stopped from harming others.

Whiskey Jim June 23, 2011 at 8:01 pm

“…The main fact we have stressed in this paper, the redistribution of wealth caused by the forces of the market in a world of unexpected change, is a fact of common observation. Why, then, is it constantly being ignored? … That the mode of the distribution of wealth is a result of the operation of economic forces is the kind of proposition which, one would think, would appeal to them (economists). Why, then, do so many economists continue to regard the distribution of wealth as a “datum” in the second sense mentioned above? We submit that the reason has to be sought in an excessive preoccupation with equilibrium problems.”

Perfect.

We take ‘pictures’ of economic data. But the answers to an economy’s real mysteries is in the moving bits. Like any changing and evolving complex system.

Don, thank you for introducing me to Mr. Lachmann.

RC June 23, 2011 at 8:34 pm

Don,

Thank you for bringing up this excellent essay. However, it would be better if you refrained from your propaganda, as nowhere in the essay does Lachmann argue that “the market is constantly redistributing wealth far more fairly than any government efforts on this front”. “Fairness” does not appear in the essay. Rather, Lachmann is pointing to unexpected changes as the source of market redistribution and the problem of imperfect and unevenly distibuted knowledge of those changes.

Regards,
RC

Don Boudreaux June 23, 2011 at 10:46 pm

RC,

You interpret this paragraph from Lachmann differently than I do:

“The market process is thus seen to be a leveling process. In a market economy a process of redistribution of wealth is taking place all the time before which those outwardly similar processes which modern politicians are in the habit of instituting, pale into comparative insignificance, if for no other reason than that the market gives wealth to those who can hold it, while politicians give it to their constituents who, as a rule, cannot.”

Fair enough.

RC June 23, 2011 at 11:16 pm

Don,

Thanks for replying. I think one has to look at this paragraph from the context of the entire essay. I think the paragraph you just brought up should be complemented with this one:

“This process of redistribution of wealth is not prompted by a concatenation of hazards. Those who participate in it are not playing a game of chance, but a game of skill. This process, like all real dynamic processes, reflects the transmission of knowledge from mind to mind. It is possible only because some people have knowledge that others have not yet acquired, because knowledge of change and its implications spread gradually and unevenly throughout society.”

I think it is fair to acknowledge that accessing knowledge requires both skill and luck, i.e. being at the right place at the right time.

Regards,
RC

Methinks1776 June 24, 2011 at 2:55 pm

And will.

Will, I think, is the most important factor. Acquiring knowledge is not a passive act, a simple function of aptitude, time and place. It requires work on the part of the acquirer and that thirst for knowledge and success will propel a person who is not in the right place at the right time to move. Immigrants do that all the time. Simple access isn’t enough.

RC June 24, 2011 at 5:24 pm

Methinks1776,

Of course you are right. There are many factors that determine whether one will succeed or fail in the economy. No point in singling out any specific one, IMO. For example, risk-taking is useless – or even harmful – if one does not have skills or insight to complement it.

Regards,
RC

Methinks1776 June 25, 2011 at 12:40 am

Agreed, RC. Success is wonderfully complicated. So complicated as to escape a standard formula.

I am happy to know ridiculously wealthy entrepreneurs who never finished high school and ones who have Ph.D.’s. All started with nothing. The only other commonalities I have been able to identify are tenacity, an appetite for failure, the ability and desire to learn from it, a large capacity for personal sacrifice and eternal optimism.

Gil June 23, 2011 at 11:24 pm

Of course it should be said in the free market there is no redistribution because that implied taking from someone only to give it to someone else. Rather people compete with one another for others’ income.

indianajim June 24, 2011 at 9:40 am

From the article:

“There is in reality no such thing as A production function. On the contrary, the task of the entrepreneur consists precisely in finding, in a world of perpetual change, which combination of resources will yield, in the conditions of today, a maximum surplus of output over input value, and in guessing which will do so in the probable conditions of tomorrow, when output values, cost of complementary input, and technology all will have changed.”

The “today” versus “tomorrow” play on words is powerful, but its literal (today vs. tomorrow, literally 24 hours) relevance to particular circumstances varies broadly. The “real” non-existence of a production function to the convenience store/gas station owner (whose operation is on a highway where traffic has been fairly stable for years) is probably less important than for an owner of such a venture facing along a road whose status quo continuance is in doubt (perhaps it is a state road controlled by a legislative regime that is debating a variety of alternatives: closure, conversion to a toll road, expansion, minor repair. Uncertainty about the future, and hence production function, depends on the particular circumstance of place. I’m not sure for what fraction of entrepreneurs the idea of “A Production Function” makes absolutely NO sense on a day to day basis. Few is my biased opinion (I’ve been teaching students about production functions for years), but I’d be happy to learn from others who can do better than just guess.

Methinks1776 June 24, 2011 at 2:43 pm

Indianajim,

I didn’t read it a non-existence of a production function. I read it as a non-existence of a singular production function over time. The longer the time horizon, the greater the probability the production function will change. I don’t know about students fed contrived examples in a classroom, but a constantly changing production function made perfect sense to me.

In an ever changing world, the production function changes constantly in response not only to changing market conditions but also in response to what entrepreneurs think market conditions will look like in the future. It doesn’t matter where that change might come from – regulation, legislation, consumer preferences, technology, etc. Even as we deploy people and technology in a specific way today, we are always searching for better ways to employ resources in the future based on guesses about the future conditions.

Dan H June 24, 2011 at 3:02 pm

That’s why economic textbooks always use the catch all “ceteris parabis”. One could make the argument that “ceteris parabis” could never apply, since market conditions change every day. Whether it’s laws and regulations or new technology that increases efficiency, things are constantly changing.

indianajim June 24, 2011 at 9:42 pm

But the “today” vs. “tomorrow” is hyperbole in the extreme in some cases and in others it is apt; again, I have no priors about the frequency when it is hyperbole vs. apt. Probably no one does.

Methinks1776 June 25, 2011 at 12:31 am

The author clearly didn’t mean literally today and tomorrow, though. It was not hyperbole on his part. All he said was that markets are forward looking and things are always changing – a circumstance entrepreneurs are forced to adapt to and to anticipate. All businesses change, none change at the same rate. All businesses will be different tomorrow than they are today – but, obviously not literally “tomorrow” and “today”.

Even the stodgy gas station on a road with stable traffic you spoke of will upgrade its pumps, employ computers, change the mix of its convenience store inventory, employ more efficient inventory purchase and tracking methods, etc. – all to maximize profit margin. Obviously, no successful company ever stops seeking to maximize return. My hypothesis is that you’ll see the biggest difference in frequency between successful and less successful businesses.

indianajim June 25, 2011 at 11:55 pm

Some WILL be different literally tomorrow, but not the stodgy station. Some businesses will also find it useful NOT to change prices continuously; particularly some will resist raising prices when it has a good chance of keeping return customers from seeking alternative vendors. There is a really good paper about this in Economic Inquiry by McChesney and a co-author whose name escapes me; truly one of the best analyses I’ve read.

Methinks1776 June 26, 2011 at 12:58 am

I don’t disagree with you, but I thought we were talking about production functions. That is, inputs. A change in the profit margin does not necessarily derive from a change in prices charged. Efficiencies in operating costs can improve margins and that’s specifically what I was talking about.

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