From: doli@troi.cc.rochester.edu (David Oliver)
Newsgroups: sci.econ
Subject: Re: Unpredictable economics (the heart of the matter)
Date: 19 Nov 92 21:55:35 GMT
Organization: University of Rochester (Rochester, NY)

In article <1992Nov18.122236.20953@hellgate.utah.edu> tolman%asylum.cs.utah.edu@cs.utah.edu (Kenneth Tolman) writes:
>
>   Any economic system is going to undergo unpredictable evolution.  
>Unfortunately classical economics largely ignores this reality because
>of its unsettling implications for economic predictions as a whole.  The
>result is that our country (with classical economists behind the scenes)
>makes poor economic long term decisions, namely with a laissez faire approach
>to high technology.

In fact, classical economics does not "largely ignore" this reality, and it
certainly does not ignore them for it's implications of economic predictions.
Classical economics would say that given the uncertainty of future events
(i.e. in this case the returns from various investments in technology)
resources are devoted most efficiently to those that will give the highest
expected return net of investment.  Whether or not a long-term decision is poor
depends on when we are going to evaluate the success of the decision.  If
decision ex-post turns out to have been poor, you can't say that ex-ante of
the outcome the decision was wrong.  Economic theory simply states that
ex ante decisions will be efficient, in the sense that they are the best that
can be made given the inherent uncertainty of the situation and the incomplete
information available before the outcome.

>  An economy with two or more competing businesses may fall into a 
>self amplifying cycle where one business dominates over the other. For
>example, in the personal computer market a buyer is more likely to buy
>a machine that has lots of software and that is compatible with the
>machines he already owns, EVEN if this computer is slightly inferior
>(in price or quality) to another competitor.  Thus in the beginning of
>the competition, one of the two businesses will luckily have more
>software written for it, and then a self amplifying chain begins.  More
>buyers will buy this machine, and then more software is written for it,
>and so forth until this machine comes to dominate the market.  The
>economy suffers a lock in from increasing returns.  The economy settles
>into a state of affairs which is not necessarily optimal!

What you are describing is not what I think most economists would consider
increasing returns, which is a situation where (in a nutshell) you get more
for less. But this is beside the point, what do you mean by optimal.  If
The one computer is "better" in that it "better" meets the needs of those
who are buying the computer.  All sorts of factors go into determining
the purchase of a computer, including price and "quality" as well as software
support. You may argue that there are externality effects, but even then
I'm quite certain that classical economics has something to say about it.

>  Our government makes economic decisions based on the classical approach
>of economics: every person purchasing freely within a market will lead
>to the optimal growth of the system as a whole.  Thus the government is
>unwilling to "pick favorites" and help out any special industries even
>when these same technologies will be the economic foundations for the
>future of our country.  The result is that there is a non optimal state
>of affairs which the country will tend... we move continuously out of
>high technology and into the service area.  Other countries are effectively
>investing and researching high technology which give them increasing returns
>on high tech markets, which locks the United States out!

Now you're confusing me.  How can the government make better ex ante decisions
in an inherently uncertain world? What special knowledge do they have in
order to pick winners? The situation is uncertain! They can "pick favorites"
but I'm not sure as to why the government should know what the favorites are.
(Maybe you congressman has a favorite industry located in his/her district)
In fact, The much vaunted MITI of Japan is well-known to have tried to 
descourage Japanese industry from making cars and instead devote resources to
makin ships.  They picked a real winner there!  What is optimal, what are the 
"winners" can't be determined, so the government can't send us on the 
"optimal" path to the "optimal state" unless they get lucky.

The statements "we move out of high technology and into the service area."
just doesn't cut it either.  Number one, hi-tech and services are not mutually
exclusive. Computer programmers are involved in hi-tech service jobs, for 
example.  Number two, services are not a problem, they are not low-paying
jobs, in fact they pay at about the same rate if not more than the median
manufacturing job.  As for being "locked out",  as you say things are
always changing, maybe we can come up with something and knock them off their 
pillar (see Japan auto industry).

>  Economics needs to incorporate the realities of increasing returns and
>inherint unpredictability.  The decisions of our government should reflect
>these economic realities, and support high technology through tax breaks
>and economic leverage.  Currently we are living in the dark and making
>poor economic decisions which will leave us sucking our thumbs.

================================================================================REPORTER: Mr Gandhi, what do you think of Western Civilization?
MR GANDHI: I think it would be a good idea!
================================================================================
Newsgroups: sci.econ