Economies of scale. It is basically as easy for me to produce 20 sheets of paper as to produce 1 ; after paying the set up costs the marginal costs are much smaller in comparison. So all in all I would rather specialize in paper-making, have somebody else specialize in pencil-making, then trade.
Investment. often I need A LOT of capital to get something started, more than I could reasonably accumulate over a lifetime. So I would rather trade the starting capital for IOUs I will get from profit.
Insurance. I may have a particularly bad harvest this year and a very good one the next one, while my neighbour might have the opposite problem. All in all I would rather we pool our harvests each year, so that we can have food both years. So we are “trading” part of our harvest for insurance.
Isn’t 2 just a product of 1? If 1 were not true, couldn’t you just get started at small scale? This may be understood, but if not, it seems useful to point out the entanglement.
Also, another aspect of the insurance is spoilage: some goods preserve better than others, so it makes sense to convert excess into something stable so that you can “self insure”.
Investment is independent from efficiencies of scale. Example:
Given a supply of 1-foot ropes and a scissors, producing one 1⁄2 foot rope takes the same amount of effort as producing two 1⁄2 foot ropes.
Carving The David required immense human and other capital investment, but didn’t have any economy of scale
Wait, isn’t that an example of efficiency of scale being dependent on investment? You have to get a 1-foot rope and scissors, but once you have, you can create two 1⁄2 foot ropes? I think the “given a 1-foot rope” is doing more work than you realize, because when I try to apply your example to the world above, I keep getting hung up on “but in the imaginary world above, when we account for economy of scale, if you just needed one 1⁄2 foot rope, you would just create a 1⁄2 foot rope, and that would take you 1⁄2 the time as creating 1 foot of rope.” And for The David, I feel like “sure, but that doesn’t explain why someone wouldn’t just carve their own David if they wanted one”. I think I’m bypassing some of the issue here, but I’m not entirely sure what it is.
It does, however, bring up another interesting reason for trade (and this may be part of how investment can be independent from efficiency of scale): shared resources. If a pair of scissors does not scale according to how often I use them, and I only use them once per day, I can increase efficiency/decrease required investment by trading their use so others can use them when I’m not. This applies to the the David as such: utility gained from the David is not zero sum, multiple people can utility from it without decreasing the utility the others gain; therefore it does not make sense for everyone to carve their own. So any time a resource or product produces non-zero sum benefits if it exists, we have a reason for it’s use to be traded/trade to be involved in sharing it.
Applying this, if 5 people each carve a statue and put them in a sculpture garden in exchange for access to the garden, they can each enjoy five statues (alternatively, they could collaborate to build the statue in 1/5th the time and share in the enjoyment of it).
Not sure this is what you were getting at, but I think I’ve talked myself into thinking that when investment has independence from efficiency of scale it’s because of the non-zero sum nature of some shared resources.
You are quite right that 1 and 2 are related, but the way I was thinking about them I didn’t have them as equivalent.
1 is about fixed costs; each additional sheet of paper I produce amortizes part of the initial, fixed cost
2 is about a threshold of operation. Even if there are no fixed costs, it would happen in a world when I can only produce in large bulks and no individual units.
Then again, I am struggling to think of a real-life example of 2, so maybe it is not something that happens in our universe.
Trying to think a bit harder about this—maybe companies are sort of like this? To manage my online shop I need someone to maintain the web, someone to handle marketing, etc. I need many people to work for me to make it work, and I need all of them at once. Let’s suppose that I pay my workers directly proportionally to the amount of sales they manage to make it more obvious.
As I painted it, this is not about amortizing a fixed cost. And I cannot subdivide the task—if I tell my team I expect to make only 10 sales and pay accordingly they are going to tell me go eff myself (though maybe in the magical world where there are no task-switching costs this breaks down).
Another try: maybe a fairness constraint can force a minimum. The government has given me the okay to sell my new cryonics procedure, but only if I can make enough for everyone.
Hmm. I feel like it’s relevant that your example relies on trade, which we’re trying to eliminate. Therefore, if all of the other reasons for trade go away, this example would be irrelevant.
But can we recreate it elsewhere? Perhaps there is some task which is time sensitive, but cannot be done by one person (in their remaining marginal time) at a speed which does not decrease marginal gains. Information sharing comes to mind, but that seems to have already been accomplished by the society outlined above.
Other magical powers of trade:
Economies of scale. It is basically as easy for me to produce 20 sheets of paper as to produce 1 ; after paying the set up costs the marginal costs are much smaller in comparison. So all in all I would rather specialize in paper-making, have somebody else specialize in pencil-making, then trade.
Investment. often I need A LOT of capital to get something started, more than I could reasonably accumulate over a lifetime. So I would rather trade the starting capital for IOUs I will get from profit.
Insurance. I may have a particularly bad harvest this year and a very good one the next one, while my neighbour might have the opposite problem. All in all I would rather we pool our harvests each year, so that we can have food both years. So we are “trading” part of our harvest for insurance.
Isn’t 2 just a product of 1? If 1 were not true, couldn’t you just get started at small scale? This may be understood, but if not, it seems useful to point out the entanglement.
Also, another aspect of the insurance is spoilage: some goods preserve better than others, so it makes sense to convert excess into something stable so that you can “self insure”.
Investment is independent from efficiencies of scale. Example: Given a supply of 1-foot ropes and a scissors, producing one 1⁄2 foot rope takes the same amount of effort as producing two 1⁄2 foot ropes. Carving The David required immense human and other capital investment, but didn’t have any economy of scale
Wait, isn’t that an example of efficiency of scale being dependent on investment? You have to get a 1-foot rope and scissors, but once you have, you can create two 1⁄2 foot ropes? I think the “given a 1-foot rope” is doing more work than you realize, because when I try to apply your example to the world above, I keep getting hung up on “but in the imaginary world above, when we account for economy of scale, if you just needed one 1⁄2 foot rope, you would just create a 1⁄2 foot rope, and that would take you 1⁄2 the time as creating 1 foot of rope.” And for The David, I feel like “sure, but that doesn’t explain why someone wouldn’t just carve their own David if they wanted one”. I think I’m bypassing some of the issue here, but I’m not entirely sure what it is.
It does, however, bring up another interesting reason for trade (and this may be part of how investment can be independent from efficiency of scale): shared resources. If a pair of scissors does not scale according to how often I use them, and I only use them once per day, I can increase efficiency/decrease required investment by trading their use so others can use them when I’m not. This applies to the the David as such: utility gained from the David is not zero sum, multiple people can utility from it without decreasing the utility the others gain; therefore it does not make sense for everyone to carve their own. So any time a resource or product produces non-zero sum benefits if it exists, we have a reason for it’s use to be traded/trade to be involved in sharing it.
Applying this, if 5 people each carve a statue and put them in a sculpture garden in exchange for access to the garden, they can each enjoy five statues (alternatively, they could collaborate to build the statue in 1/5th the time and share in the enjoyment of it).
Not sure this is what you were getting at, but I think I’ve talked myself into thinking that when investment has independence from efficiency of scale it’s because of the non-zero sum nature of some shared resources.
You are quite right that 1 and 2 are related, but the way I was thinking about them I didn’t have them as equivalent.
1 is about fixed costs; each additional sheet of paper I produce amortizes part of the initial, fixed cost
2 is about a threshold of operation. Even if there are no fixed costs, it would happen in a world when I can only produce in large bulks and no individual units.
Then again, I am struggling to think of a real-life example of 2, so maybe it is not something that happens in our universe.
Yeah, I think we’re in agreement. I can’t think why there would ever be a minimum, except to exceed the break-even point on fixed costs.
Trying to think a bit harder about this—maybe companies are sort of like this? To manage my online shop I need someone to maintain the web, someone to handle marketing, etc. I need many people to work for me to make it work, and I need all of them at once. Let’s suppose that I pay my workers directly proportionally to the amount of sales they manage to make it more obvious.
As I painted it, this is not about amortizing a fixed cost. And I cannot subdivide the task—if I tell my team I expect to make only 10 sales and pay accordingly they are going to tell me go eff myself (though maybe in the magical world where there are no task-switching costs this breaks down).
Another try: maybe a fairness constraint can force a minimum. The government has given me the okay to sell my new cryonics procedure, but only if I can make enough for everyone.
Hmm. I feel like it’s relevant that your example relies on trade, which we’re trying to eliminate. Therefore, if all of the other reasons for trade go away, this example would be irrelevant.
But can we recreate it elsewhere? Perhaps there is some task which is time sensitive, but cannot be done by one person (in their remaining marginal time) at a speed which does not decrease marginal gains. Information sharing comes to mind, but that seems to have already been accomplished by the society outlined above.
I don’t think any of these are a problem in the magical world posited by the end of this post