Obsolescence: Economic and Technical

The language of economists is often fraught with confusion for a simple reason: we use common words and use them in a precise manner that is different from what many people think.  We inherited a language and our words don’t quite fit into others mouths easily.

One such word is “obsolescence.”  People tend to think of “obsolescence” in a technical sense, that is as something that is old and thus no longer needed.  The horse and buggy was made obsolete by the automobile.

Economists think of the term in a different manner, that is to describe a method of acting that is no longer economically practical given the change in costs/benefits.  This may include adopting a new technology, but it may not.  By way of example, consider the following: why do some people still take the train when we can fly everywhere?  In a technical sense, the airplane has made the passenger train obsolete.  But people still ride the train because the costs of riding are lower than the benefits of riding versus the same calculus of flying.  For some people, the act of flying is obsolete.

Ian Fletcher makes this very mistake in responding to Pierre Lemieux’s new monograph What’s Wrong with Protectionism?  Fletcher writes:

You [Lemieux] attack a protectionist straw man. For example, contrary to what you [Lemieux] say on page 48, reasonable opponents of unilateral free trade do not advocate protecting “obsolete manufacturing.”

Fletcher is confusing technical and economic obsolescence.  Protectionists do indeed advocate protecting obsolete manufacturing; they are obsolete in that they are no longer serving people’s needs since people are now choosing imported products.  If this were not the case, then protectionism would not be needed.  These firms might be at the top of the tech world, but that does not mean they are successfully serving a need.  To protect them is indeed to protect an obsolete industry.

Imperfect Competition: Liquor Edition

Over the weekend, I had the great opportunity to meet a local distiller, Alex Laufer of One Eight Distilling, a company in Washington DC.  Alex’s operation was fascinating to learn about from the perspective of an economist.  He also provided some excellent insight into the nature of competition.

Being a distilling company that makes gin, bourbon, rye, and vodka, One Eight is competing against big companies like Jim Beam, Jack Daniels, Stolichnaya, Beefeaters, and the like.  His prices, like other craft distillers, tend to be higher than these big brands.  Alex knows he cannot compete solely on price; his scale and operation do not allow for that.  Instead, he competes on uniqueness and quality.  His gin uses more peppery ingredients than the competition.  His bourbon and rye are similarly peppery.  He produces a unique product.  One Eight is able to (ably) carve out a niche in the liquor market and successfully compete against the Big Boys.

What’s interesting is, from a purely theoretical perspective, One Eight’s behavior is not, strictly speaking, competitive.  In a “perfectly competitive” market, all firms compete on price and price alone.  Only by lowering marginal cost can they compete.  In a sense, the theory of perfect competition is not one of competition at all.

One Eight’s form of competitive behavior, that of product differentiation, is deemed “imperfect competition.”  It’s considered “monopolistically competitive” and, in straight theory, may be frowned upon as being economically inefficient compared to the perfectly competitive model.  But, in a “perfectly competitive” world, One Eight would not exist.  It would not be able to price low enough.  We, as consumers, would be denied uniquely flavored gin, bourbon, rye, and vodka.  In short, there’d be less diversity in the market, leading to fewer people being able to satisfy their preferences.  I like Jim Beam, but I like One Eight even better.  In a perfectly competitive world, I’d still be better off consuming Jim Beam than nothing, but I’d not be as well-off as I am in the “imperfectly competitive” world of One Eight.

The perfectly competitive market is often touted as some golden standard of competition; regulation is used to try to move the market to this idea (eg, antitrust regulation).  But, ironically, such regulation tends to reduce real competition.