Having a surplus is essential to creativity. Without a surplus there would be no new products or new processes of production, some of which can lead to lower costs and prices.
Typically when we think of “efficiency” we imagine that the product was made in the simplest, most direct, least expensive way — avoiding any waste. Certainly, new products and processes of production can be more efficient than the old ones.
However, that is part just of what we, as economists, mean when we talk about efficiency. When we call a society efficient there is a second and very important component: that the society produces the mix of goods and services that the people want most at a price that just covers the cost of production.
While the existence of a surplus makes that possible, it also creates circumstances that make it less likely. Surplus puts money into the hands of the innovators — both the companies and those at the upper-end of the income distribution. They can use that extra surplus to reinforce a company’s market position and promote the recipients political agenda. When the innovation is widely adopted the significant addition to surplus makes that outcome more likely. It reminds me of the old adage ‘Money talks’.
Let’s take a closer look at how the increased surplus can lead to greater inefficiency.
Initially there is strong incentive to inform potential customers about the new product and to get it to market as soon as possible. Other considerations fall by the wayside. The Boeing 737 Max is an example. Effectively the company took over the government’s role and responsibility for ensuring plane’s safety.
Continue reading “Surplus: Inefficiency”
As we discussed in the earlier blog posts about surplus, our primary responsibility is is to use some of our limited time, energy, resources and funds (TERF) to take care of ourselves and fulfill any commitments and obligations that we have taken on. The balance of our disposable TERF is our surplus. Not only is that true for us as individuals and for households, it holds true for any aggregation of them and for the society as a whole as well. The groups of individuals to which the concept of surplus applies include: families, extended families, teams, tribes, communities, villages, churches, clubs, firms, organizations, towns, the district, states, nations, international organizations and the world’s population.
Just as with individuals, first and foremost, the group must produce or have enough goods and services available to sustain itself over time. The decision of how to use the balance of their surplus is not only the aggregate decision of the single individuals and households, it also depends on the aggregate decisions of the group.
Regardless of how a decision is arrived at, a group decision on what projects to undertake and how to use their surplus is effectively a joint decision. Furthermore, in order to transform any idea into a reality, collective, coordinated, collaborative action is required. Depending on the size of the project, it can take a considerable amount of the limited TERF, and sometime years, decades or even longer to make it happen. Continue reading “Surplus: Collective Decisions”
Changes in technological and economic conditions is the primary underlying cause for the income redistribution. In 1945 at the end of World War II things were a lot different than they are now. TVs had just come on the market. Planes had propellers. There were no Jets. With the exception of Bakelite, there were no plastics. Nylon, the first of the synthetic fibers, had just come on the market. Microwave ovens had not arrived yet. Business machines used punchcards. The IBM machines, with 90% of the market, used cards with rectangular holes. Remington Rand’s, with the remaining 10%, had circular holes. We did have adding machines and desktop calculators, but no computers. They had not yet come into existence.
In 1952 I was an economist at the Federal Trade Commission. At the time there were five computers in the world. They were powered by cathode-ray tubes, not transistors, and each filled a large room. IBM, the National Bureau of Standards, MIT, the University of Illinois and the University of Pennsylvania each had one. The U of P computer was developed by Eckert and Mauchly. In order to get into the computer business Remington Rand acquired their company. Continue reading “Surplus: The Changes”
Let’s talk about the concept of surplus. As adults each of us has the primary responsibility of taking care of ourselves, first and foremost. That involves providing the goods and services necessary to survive on a day-to-day, week-to-week, month-to-month basis — the air, water, food, sleep, clothing, shelter, etc. Over and above that it is necessary to use our limited time, energy, resources and funds (TERF) to fulfill any obligations and commitments that we have taken on. Let’s call that our primary objectives. Either we produce the goods and services required to satisfy those objectives ourselves or we purchase them with the income received from the goods and services we provide to others.
Here is how an individual and the aggregation of individuals — what economists call the household — can decide to use its disposable TERF (the amount left over after satisfying the primary objectives). Some of it can be used in the following ways: to increase the consumption of goods and services; be put aside for future consumption — into saving; used to pay off previous loans; or assist other individuals and households that do not have sufficient disposable income to survive long-term. Some of the funds can be set aside to cover unexpected expenses. Or can be devoted to the attempt to develop new products or processes of production — innovations (some of which may be successful) or used to create works of art, or anything else the individual or household may decide to do with its remaining TERF.
Any income that we have left over after fulfilling the primary objectives is our disposable discretionary income — the surplus. The left over funds can be used for anything else we choose to do with them. How we choose to use the surplus is up to each of us. For those at the lower-end of the income distribution—almost all, all and sometimes, even more than all of their disposable income is used up just to survive. The more of our income that we are able to withhold from current consumption, the greater the surplus.
Continue reading “Surplus: The Concept”