When does a new product displace an old one?

Suppose someone has invented a new product that is better than one already in the market. Will people start buying the new product instead of the old one?

It depends on what is meant by better. If “better” means that whenever the new product has the same price as the old one it has a higher quality, or alternatively whenever it has the same quality as the old good it is cheaper, then it will displace the old good completely when purchases occur.

“Same quality” or “higher quality” are precise in their meaning here too. Same means identical in every way, while higher quality means better in every way. Quality includes consumer knowledge of the good, so that the two products are equally well known and trusted. For a new product, the level of consumer awareness may be lower than for the old product.

If the new product is not as good as or better than the old one in every way, then there will be some criteria other than price determining the choices of consumers in favour of the old product. The products are not perfect substitutes, so the old product and the new product will both be bought in the market with relative proportions depending on how many points the new product is better than the old one.

Mathematically inclined readers may find the model used in some economics papers informative. The choice between goods is modelled by a constant elasticity of substitution between the old and new goods, which is combined with Shephard’s lemma to calculate a demand for each type of good. The specification is helpful in connecting the demands for new goods domestically and internationally since the same type of choices drive both.

Does economic growth create goods from nothing or take them from someone else?

An economy grows at a certain percent per year; the extra or better quality goods must have come from somewhere. If the goods cannot be newly created by some method, they must have been taken from someone else, so that an economy’s growth comes at the cost of someone else’s impoverishment.

An economy can be considered as a machine powered by energy from the Sun and other raw energy sources. The machine produces goods. Some of the goods are broken down (consumption). Some of the goods are put aside to make new goods (accumulation), so that the future stream of new goods is higher. Other goods are used to try different arrangements of the machine’s mechanics to see if the different arrangements increase the stream of new goods (technological improvement).

These last two steps create new goods from the raw energy sources, not from nothing. When they lead to economic growth, what is measured is the extent to which rearrangements of resources in the last year have caused the energy to be used in a particular way. Growth can be viewed as a measure of change in use, not of creation.

How productive is a machine?

Productivity in economics measures the amount of output for a certain amount of input. So a machine may have a productivity of, say, two kettles or televisions for every machine employed.

Companies and people are not born tied to a fixed machine that they can never exchange; generally, they can buy and sell machines at market. So the value of the input machine can be compared to the value of the output. The two kettles might be worth $50 and the machine might be worth $40, so we can measure the productivity as $10. There are a variety of ways of measuring productivity in numbers, such as saying it is $50 divided by $40 instead of the $50 minus $40 here.

The value of the machine is decided in market exchanges, and hence so is the productivity of the machine. It depends not just on the cost of raw materials used to make the machine, but also on the market power of the buyers and sellers. So a machine in a monopoly market may be less productive than the same machine if the market was competitive. The cost of the outputs is the same, but the cost of the inputs is different.

World and DR Congo book publications

I looked again at the book publication data mentioned in my post-before-last, and drew up a table of world publications from 1995 and compared them with DR Congo publications from the same year. The table is below.

The Congolese publications are in subjects involving much less physical capital or formal education in their preparation than the world publications, and consequently leading to less transfer of the knowledge about subjects involving them. I am not sure how much of the division is due to supply (writing interest and expertise) or demand (reader interest) in the DR Congo.

Is mining investment the right sort of FDI?

Many governments look to promote foreign direct investment in their countries. It could create employment while it is there. However, if its only contribution to the economy is a temporary inflow of cash and it does not leave any long term benefits, then perhaps it is not leading to any real development. A potential long term benefit of fdi is through the skills imparted to employees and local partners, and exposure to foreign methods and technologies. When the fdi stops, these benefits may remain. They may even spread further through the economy while the fdi is still present.

Economists have looked at what sort of companies bring such long term benefits. One prominent paper finds that Western business research and development - a major source of commercial innovation - is highest in the chemical, machinery and electrical machinery, and transportation industries. Looking at European companies with many patents (the data is here - the database is very large), we can find that the most patents are owned by Siemens, Philips, BASF, and Bosch. These companies are prominent in the industries just mentioned.

Africa gets much of its fdi in the form of mining investment, and the extracted minerals are often processed outside the continent. So it may not be exposed to advanced technologies through its inward fdi. In that sense, its fdi is the wrong sort. The problem is compounded by the high capital to labour ratios in some forms of mining, since contact with the local population and opportunites for learning and technology diffusion are limited.

A caution is that concentrating too much on patent ownership may be misleading. Some forms of technology are not patentable, such as industrial organisation techniques and these can be present in any company inside or outside the high-research industries. They may diffuse outside the company. Some companies invest in schools and similar projects as local goodwill, and smart governments can maximise local involvement in projects. Mining investment may not be the best form of fdi for generating long term development, but its benefits do not have to stop when the minerals run out either.

What type of books are being published in Africa?

UNESCO published figures on book publications by country and theme, with the most recent data from the late 1990s. The data is over at the UN data site here.

A dozen African countries are included. For those countries, I rearranged the data a bit to list what types of books were published most in the countries. It is a crude indicator of national interest in books; many books may be imported, but publishers have spotted a strong interest in a particular type. The results are shown below. A few small-publishing countries emphasised literature, while the other nine led on scientific publications.

Africa's consumption distribution by country

Courtesy of the African Economic Outlook website here, the table below shows the consumption share of the richest ten percent of the population in African countries. Southern African and English speaking countries tend to be among the more unequal, while Francophone countries tend to be more equal. English speaking countries worldwide are often less concerned with inequality; I am not aware of any English speaking country which has had a communist government, for example. If the link is robust, it may be due to colonial heritage or possibly post-colonial links with other Anglophone countries.