Home > Uncategorized > The invisible hand and computer chips

The invisible hand and computer chips

from Gary Flomenhoft and the RWER’s current issue.

We are first looking at items produced for sale on the market, and in particular a competitive market. The conditions for maximizing consumer surplus are approached in some industries. The most obvious one is the microelectronic industry, where Moore’s law has prevailed for many decades since first stated in 1965, doubling computing power at the same price every 18-24 months. Competition between Intel, Samsung, Qualcomm, Micron, etc. is fierce, dropping prices, while improving performance. The Top 10 manufacturers in 2013 from Wikipedia with market share are:

1 Intel Corporation USA 14.8
2 Samsung Electronics South Korea 10.5%
3 Qualcomm USA 5.5%
4 Micron Technology USA 4.5%
5 SK Hynix South Korea 4.2%
6 Toshiba Semiconductor Japan 3.9%
7 Texas Instruments USA 3.6%
8 Broadcom USA 2.6%
9 STMicroelectronics France Italy 2.5%
10 Renesas Electronics Japan 2.5%

No company has a majority of market share, so monopoly is avoided, and the industry remains competitive. Competition may not be perfect but it is substantial, and entry and exit is limited mainly by investment capital. Many of the products are homogenous and interchangeable, for example processors on mother boards. Globalization has resulted in extreme factor mobility as companies move factories and resources around the world for the most favourable location, mainly to reduce labor costs. Information may not be perfect, but the technology for producing microelectronics is widespread. Therefore the pre-requisites for maximizing consumer welfare are present in microelectronics and the facts support it.

Many electronics-based products have declined in price. According to Yahoo finance[2] the following reductions have occurred: televisions (down 77.9 percent); computers (down 88.3 percent); audio equipment (down 39.3 percent); and videocassettes, video discs and other media, including rentals (down 20.4 percent). Over the last decade they also document a 6.6 percent drop in the price of new cars and trucks, 44.4 percent drop in the price of toys, 11 percent drop in clothes, and the cost of a timepiece fell 6.2 percent. Reducing prices result in individuals having greater income to spend on other items, which from a purely consumption standpoint increases their welfare. In these cases the “magic of the market” actually works to create greater consumption and prosperity. Polanyi conceded that even though commodification of labor imposed severe cultural and social costs to workers and their families, it also contributed to economic “improvement” and growth.

[1] Moore, Gordon E. (1965). “Cramming more components onto integrated circuits” (PDF). Electronics Magazine. p. 4. Retrieved 2006-11-11.

[2] http://finance.yahoo.com/news/pf_article_106259.html

http://www.paecon.net/PAEReview/issue74/Flomenhoft74.pdf

 

 

 

  1. April 12, 2016 at 4:10 am

    Missing the obvious seems a commonplace among economists. Often, especially in such areas as consumer electronics “efficiency” simply translates to lowering labor and manufacturing costs by moving production to the countries where workers are paid the least, mistreated more, and where impacts on the health of workers and the physical and cultural environment are of the least concern. If this is what’s wonderful about capitalism I’ll take socialism.

  2. April 14, 2016 at 6:11 am

    I don’t have any inside knowledge of this industry that is current; but, I have a hard time believing that labor costs would be a cost driver for determining where chips are produced.

  3. Gary Flomenhoft
    April 15, 2016 at 6:28 am

    Ken, I’ll ignore the snide comment. I didn’t ignore the obvious. If cost was the only issue, then outsourcing the US electronics industry to low wage Asian countries would explain it. But there is also the “doubling computing power at the same price every 18-24 months”, which is NOT explained by lower labor costs, but by increasing knowledge. Also, France, Italy, Japan, and South Korea are not especially low-wage countries, and until recently computer chips were still made at IBM in Vermont and elsewhere in the US. You are right that companies seek absolute advantage through the race to the bottom, and that is a very ugly fact. That was not the point of the Polanyi article I wrote. I was contrasting a competitive commodity: computer chips, with the fictitious commodities of land, money, and labor. Read the article, you might like it. :-)

    • April 15, 2016 at 8:27 pm

      Sorry. The statement was not meant to be “snide.” Just an observation. As to consumer electronics I point you to the title of Moore’s article, “Cramming more Components onto Integrated Circuits.” The doubling of performance of computers per “Moore’s Law” has a lot to do with following the same path rather than inventing a new one. Once the notion of integrated circuits was invented and linked to the notion of digital machines the path was set. Then it was a matter as Moore says of cramming more components onto the circuits. Miniaturization and building machines to make the machines became the focus. As more components are added to the circuit the circuit can process more, perform more functions. Then you focus on such things as cooling the circuit and making it reliable and resilient. This is not particularly difficult to achieve or expensive. So it can be done in places not particularly advanced scientifically and on a per unit basis for low cost, especially if labor and processing costs are lowered. As to manufacturing Intel is in the process of moving most of its circuit manufacturing to Vietnam. It’s competitors already manufacturer mostly in Asia. And China of course has its own manufacturing in place.

      As to your article I agree that making and selling integrated circuits is different in terms of products from making and selling land, labor, and money. But all can be and have been commoditified. So all can be sold and purchased via the same processes and price setting mechanisms. And right now none have substitutes. If that’s important to economists.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s