Examining Inflation

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JCD
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Examining Inflation

Post by JCD »

Being fascinated with the finance side of the world, I read/watch way too much around finance and have been interested in the inflation/deflation debate. Those who quote CPI often get responses like "inflation is 5 or 10% unlike what the government says."  Then those who defend the government stats say things like "it is near enough" or "tech has really deflated" or some such comment. I've listened to plenty of back and forth discussion like this or this and felt like it would be worth my time to get a feel what inflation is really like. I know of the various alternative inflation indexes to CPI, but again they might be just as dishonest about reality as the official CPI numbers. I realize I'm not going to build anything complex like the "billion products" index, but I decided I'd do a little personal survey of a handful of semi-random products from semi-random eras. If anyone (besides the indexes) has already done this, I failed to find it on the forum or via google.

Rather than trying to calculate the actual inflation rate, I thought I'd look at what an estimated static inflation model would look like at 2-5% and 10% as well as CPI's numbers and judge if things were nearer the 5-10% numbers or nearer the 2-3% the government claims.  I grant that inflation is a personal thing and that this method is subject to the bias of the person picking the products, hedonic adjustments and a whole slew of other problems.  This also doesn't create a "basket" but rather is just an effort to examine the narrative to see if there is any reality to the varying claims.  Rent for example has a bigger impact than does the cost of bananas, even if you eat lots of bananas.  However, anyone can take this idea and run their own set of products though the machine and come up with their own conclusion or even add in "basket" logic to create an overall inflation estimation.

Let me cut to the chase:

Image
(Click to view in google sheets)


In my observation, two things become obvious quickly. The first is, for the average person whose lifestyle is "typically American" you can see the "required" things like health care, cars and "average" rent have gone up a great deal more than you might expect.  The second thing is that butter, milk and tech have all inflated at really low rates, if at all.  I just don't see the "grocery store prices have gone up" narrative being particularly valid, nor is it obvious utilities have gone up a great deal.  Tangentially related, I thought it was interesting that CPI tracked so well with the 1920s budget to the federal poverty line ($26,200 today).  While I'm not sure if CPI and 1920s budgets really relate, it certainly made me think of Jacob's "live like your grandparents" advice.

Once I added some custom formatting, coloring prices within a +/- 25% range of the "actual" price, I found it interesting how poorly any estimate of inflation actually is, as inflation strongly varied.  It almost seems like if you say "2-3% inflation for cheap things we all need" you will be near enough.  If you say "3-5% inflation for expensive things that are optional", you'll probably capture most pricing accurately. If you say "deflation for things invented/popularized in the 70s or 80s" that too seems accurate. My hypothesis of why Jacob's ERE system works so well is that expensive things are minimized, deflated things are acquired for free and thus the last 100 years of compounding of CPI have less impact on the items purchased.  While I don't believe this is enough data (to say nothing of how the future might be different, YMMV, etc.), the data I do have does imply that Jacob's JAFI estimate is probably overstating a true JAFI inflation level. One area that may invalidate this inflation-avoiding hypothesis is government taxes, one of the budget items Jacob has noted as a large portion of his expenses. That budget line item is something I didn't do much examination on. I'm not sure how to generalize it to compare eras as it really is very situation specific. If others have ideas on how to tackle it, I'm open to suggestions.

Technical details:

I used primary sources or well researched claims when possible, such as:
https://www.pinterest.com/tobyradloff/v ... ocery-ads/
https://witness2fashion.wordpress.com/t ... ngle-iron/
https://www.pinterest.com/pin/3940718407650648/
https://www.forbes.com/sites/chrisconov ... 8-vs-2012/

In some cases, I used more general single statistics like "average gas cost in x was y".  I tried to generically cite all sources but I didn't feel like grabbing every URL I hit since it was more an experiment than a proper study.  I also found that the rental "average" estimate to be criminally high, but given NYC and San Fran rent prices, maybe it is a legitimate national average, like how the moment Bill Gates enters a bar the average wealth of the patrons jumps into the millions. To add to that, a "room" in the past is not exactly the same thing as a room today. I recall my grandmother discussing how multiple families shared a single bathroom in the late 50s. I don't have enough experience or historical knowledge to judge when that changed or even how to evaluate differences in lifestyles. Nor was the price generalized, instead I used ads from one single source, not a national average. That being said, I did see other ads and analysis that seemed to agree with the rough 5% inflation my estimate came out with.

The "actual price" I list for many of the items is debatable as what you get may vary.  Take the washing machine in the 1930s is not the washer of today. Nor is the S&P the same 500 stocks (to say nothing of dividends). A modern Mustang (which is what I priced) is also not equal to buying a used 1969 Mustang. If you instead choose to buy a 69 Mustang today, depending on which car you buy, may actually be nearer a 10% inflation rate. I did not try to adjust for these or many other sorts of concerns.  These are just efforts to give a feel for the "real" inflation.

Last but not least, I suppose it is worth noting this spreadsheet is very hacked together.  I calculated inflation by a lookup table that only goes back to 1920.  I'm sure someone could extend it further back or change it out from dollars to pounds (and perhaps go back to the 1700s!).  If anyone is interested in playing with the spreadsheet, just make a personal copy and enjoy.
Last edited by JCD on Fri Feb 26, 2021 5:01 am, edited 1 time in total.

Qazwer
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Re: Examining Inflation

Post by Qazwer »

You are willing to not buy a computer from 1983 but you are willing to buy healthcare from then?
So you do not want a reasonable CT scan, MRI - medications against most cancers or debilitating joint disease. There is also Baumol’s argument of lack of productivity gains in fields that require humans. A string quartet would in terms of how many computers you could buy would be more expensive today than 50 years ago.
You can absolutely live just like 1950’s at 1950’s work or close to it. The real question is do you want to. You can live better than that using ERE principles. But there are always trade offs even if you optimize what you have control of to minimize monetary requirements.

The problem with any inflation calculation is comparing like to like. It does not get into why we do or do not value such - again my distant poor interpretation of what ERE excels at. we set are values based on what we grew up with. We do not have to do that. That can go in multiple directions. We optimize different inputs to reach those values - sometimes blindly, sometimes deliberately.

If you are looking for a personal rate of inflation, you have to first define the basket of goods that you value. Then compare that baskets cost over time. Details of that basket can get very complicated quickly.

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

This is really interesting. I'm only at the very, very beginning of my journey down the inflation and macroeconomic rabbithole. I don't want to derail this thread, so please ignore this if it's off-topic, but how does wage/salary factor into this? On CHS's blog today (https://www.oftwominds.com/blogfeb21/oil-debt2-21.html) he says the following:
Right now the average fulltime wage in the U.S. is about $19/hour, and the average cost of a gallon of gasoline is $2.25. So a mere 7 minutes of (pretax) labor will buy a gallon of gasoline.
I don't know where he is getting the $19/hour figure, and I'd think taking the median would make more sense than the average here. But just for fun, the census records show that the median income for families in 2019 was $68,703/year, which is $1,321.21/week, $33.03/hour, and $0.55/minute. And if the average retail price for a gallon of gas in 2019 was $2.60, that's about 4.7 minutes* of labor. For 2000, the median household income was $42,14/year, which is $810.54/week, $20.26/hour, and $0.34/minute. So that's about 4.4 minutes of labor for 1 gallon of gas at the $1.51/gal. price in your chart. And for 1963, the median household income was $6,200/year, which is $119.23/week, $2.98/hour, and $0.05/minute. So that's actually 5.8 minutes of labor for a $0.29/gal. of gas.

Not sure if that really tells us anything useful, as just one metric that presumably is heavily affected by taxes and production levels, but it's an interesting exercise.

*Edit to correct typo.
Last edited by Hristo Botev on Thu Feb 25, 2021 9:15 am, edited 1 time in total.

Qazwer
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Re: Examining Inflation

Post by Qazwer »

Not an economist but per my limited understanding. Wages are the big key to why we care about inflation. Wage inflation might or might not be similar to general inflation (including wages and everything else). If wage changes, simply matched the changes by all other goods than current workers would not care (different for net savers). In the 1970’s, wages were lagging that of goods showing how important it was to consider inflation in salary. In effect with higher inflation, your annual ‘raise’ negotiation with your boss was an attempt to at least stay even.

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Re: Examining Inflation

Post by jacob »

Qazwer wrote:
Thu Feb 25, 2021 8:31 am
You are willing to not buy a computer from 1983 but you are willing to buy healthcare from then?
So you do not want a reasonable CT scan, MRI - medications against most cancers or debilitating joint disease.
Much of that (CT, MRI, chemo) was first introduced in the 1970s. I'd totally go for 1980s style healthcare. As well, I'm trying to converge on a housing setup that is more 1940s than 2020s with minimal/selective/deliberate use of electricity/high tech. If a low-tech alternative exists, I choose that instead. This is perhaps a strawman but in terms of what you ultimately can/get, life is not much different now compared to what it was 50 years ago. A time traveler would fit right in.

To the larger point, I think @HB is heading in the right direction by including the time component. To quote
Thoreau wrote: The price of anything is the amount of life you exchange for it.
which YMOYL turned into life energy=(cost-associated expenses)/time. In that regard, the 1980s computer with a dial-up to usenet would have produced cheaper knowledge than the current internet. Likewise, filling a prescription in 2021 can sometimes take hours being on hold on the phone with the doctor, the insurance company, and the prescription company to sort out the codes compared to walking over to the drugstore with a slip of paper. Or just consider self-checkout lines.

By pushing the work unto consumers, there's an added time-component that is not accounted for in the inflation numbers.

Personal inflation is easy to track (if you want to). Just note how much you pay and how much time you spend. That's all that matters.

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

jacob wrote:
Thu Feb 25, 2021 9:15 am
Or just consider self-checkout lines.

By pushing the work unto consumers, there's an added time-component that is not accounted for in the inflation numbers.
That's really interesting. From an efficiency standpoint, what's it look like to compare 1 actual human person checking out X number of people at a grocery store by handwriting a receipt (or perhaps using a low-tech cash register that types out a receipt) and accepting physical cash and giving physical change, vs. the self-checkout line system with digital payments to check out the same number of people? I suspect it's an economies of scale sort of thing; but isn't that self-checkout line system also vulnerable in a million different ways that the 1 actual human person checking out people isn't? Is it kind of similar to bicycle technology vs. whatever sort of more modern transit/transportation system you want to choose for comparison, be it mass transit, or modern cars and the highway system, to trains, to planes, etc.? Measured both from an efficiency standpoint and a resiliency standpoint, the bike wins every time, right?

ETA: As someone who started in retail jobs in the 90s, I'm always reminded of how the SHTF every time someone wanted to make a purchase with a credit card and the credit card system was down, for any number of reasons (and those stupid carbon copy credit card sliding things that it seemed like no one every really knew how to use). We're not relying on dial-up lines anymore to process CC transactions, but it seems like many of those vulnerabilities are still there, except now we don't/can't/won't have physical cash as an alternative.

Qazwer
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Re: Examining Inflation

Post by Qazwer »

If you are truly willing to accept 1983 healthcare (and can get it), it is cheaper today. Pay cash for prescriptions (most - insulin is an outlier) are cheaper. GoodRx is helpful, and some generics at some pharmacies are even free. Can get special pricing for delivered primary care especially as a motivated consumer. Hard to find it though if you have a more expensive event. You would need to find an oncologist willing to accept price as part of your consideration for treatment. Surgery would likewise difficult. CT and MRI were around but the images were vastly different (compare pong to latest video game). A lot of the issue with healthcare is it is hard to not buy bundled goods if you want 1983 or 1970 level of care for unfortunate outcomes - cancer, injury etc. From professional standards issues (internal logic of the ethics of those providing the service) and where the general market is, it is just really hard to do. For basic healthcare and preventative stuff, it can be done just hard to navigate.

You have to preplan what you will do in an emergency to get the amount of care you want. What imaging center, what medical provider etc. Otherwise if you go to the ER you are not only paying for the care you do receive but the potential care that is available and the training and resources of the people there.
Last edited by Qazwer on Thu Feb 25, 2021 9:45 am, edited 1 time in total.

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

jacob wrote:
Thu Feb 25, 2021 9:15 am
As well, I'm trying to converge on a housing setup that is more 1940s than 2020s with minimal/selective/deliberate use of electricity/high tech. If a low-tech alternative exists, I choose that instead. This is perhaps a strawman but in terms of what you ultimately can/get, life is not much different now compared to what it was 50 years ago. A time traveler would fit right in.
On this point, I was lamenting yesterday with a friend about planned obsolescence, as I lost my headphones for my iphone SE (1st gen), and before clicking the "buy" button on Apple's website (the replacement headphones with the 3.5mm jack are still being sold there, but just barely), I asked around among friends as I figured someone probably has an old set of Apple 3.5mm headphones sitting around that they don't use b/c they upgraded phones. Turns out I was right and I got the used headphones for the price of 1 homebrew. BUT, as I was lamenting to my friend I noted that I have a 40-year-old rotary phone in my attic that probably works just as well today at doing what it was designed to do as it did 40 years ago. Whereas super-pricey iphones are designed to need to be replaced every couple or few years. I understand why this is the case. And I know Apple wouldn't have just posted the most profitable quarter in the history of capitalism if this wasn't the case. And I know that my index account retirement savings would take a nose drive if somehow we went back to a time before planned obsolescence. But, I guess my point is that is something that needs to be factored into the inflation thing. I remember in the Two-Income Trap book Elizabeth Warren wrote with her daughter they talk about how the price of most things have gone down, perhaps even WAY down, since the 1950s or whenever (I believe their book was written in the early 00s); EXCEPT things like education and housing (among other things), which are related. BUT, I don't know if that's necessarily true. Yes, I can buy my son a pair of shoes for a lot less today than I could have 50+ years ago. But today's shoes are designed to fall apart (if I'm lucky) around the same time that my son would grow out of them. Whereas the 50+ years ago shoes would have been made of leather, could be repaired and maintained, and could be passed down to the next kid or the cousin or someone else in the community when my son grew out of them. So now, if you have 5 kids, you're buying 5 pairs of shoes every year or sometimes 2/3x/year. Whereas in the past, it may have been possible (and certainly it was often the case) that you were just buying your oldest child new shoes (if you weren't getting them from other family or community members), and those shoes were being passed down and down and down. That's got to factor into talk of inflation.
Last edited by Hristo Botev on Thu Feb 25, 2021 9:45 am, edited 1 time in total.

Campitor
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Re: Examining Inflation

Post by Campitor »

Per the Bureau of Labor Statistics (https://www.bls.gov/cpi/questions-and-a ... uestion_22)
One limitation is that the CPI may not be applicable to all population groups. For example, the CPI-U is designed to measure inflation for the U.S. urban population and thus may not accurately reflect the experience of people living in rural areas. The CPI does not produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly or the poor. Note that we do produce an experimental index for the elderly population that is available upon request; however, because of the significant limitations of this experimental index, it should be interpreted with caution.

Another limitation is that the CPI cannot be used to measure differences in price levels or living costs between one area and another as it measures only time-to-time changes in each area. A higher index for one area does not necessarily mean that prices are higher there than in another area with a lower index. Instead, it means that prices have risen faster in the area with the higher index calculated from the two areas' common reference period. Additionally, the CPI is a conditional cost-of-living measure; it does not attempt to measure everything that affects living standards. Factors such as social and environmental changes and changes in income taxes are beyond the definitional scope of the index and are excluded.
Let the above sink it for a bit. The CPI ignores rural populations. Inflation rates may not be experienced the same because those providing the milk and dairy products used in the CPI may have increases that are never reflected in CPI inflation rate, i.e., farm equipment which is estimated at 7-9% between 2017 and 2019 per the Univ. of Illinois Department of Agricultural and Consumer Economics. There aren't many farms in urban areas.

And some of the products used in CPI have much lower prices than they should because of government subsidies. And since taxes are not factored into CPI, the cost of these subsidies to the taxpayer isn't captured. It seems excluding taxes from CPI (taxes are unavoidable) is really a glaring omission.

And the elderly do reduce consumption in retirement but their purchasing patterns are not segregated. Most elderly sell their homes. They tend to move into smaller homes or perhaps even rent. If they are living in a major metropolitan city, they are likely incentivized to move to a lower cost of living area such as a non-urban environment so their purchasing patterns are removed from the CPI calculations. The US Census Bureau estimates that in some states more than half of the elderly live in rural areas (source: https://www.census.gov/library/stories/ ... an%20areas).

CPI appears to be a smoke and mirrors calculation to convince the uninformed citizen that inflation is low in order to stimulate consumer spending. :evil:

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Re: Examining Inflation

Post by Alphaville »

1980s primitive computers required first world citizens to go on an installment plan, and they were rarities outside of usa/europe/japan

today's computers fit in your pocket can be had for $30 and are accessible to multitudes of 3rd world folks.

one such pocket computer would let me access telemedicine for free/no copay and $5 prescriptions by mail.

i'll take the present if those are the terms.

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Re: Examining Inflation

Post by Qazwer »

@HB
Planned obsolescence goes back to at least 1920’s and cars.
https://carro.sg/blog/cars-designed-fai ... olescence/

From an inflation, like to like comparison of providing phone service. The question is why did you want to use your iPhone and not that perfectly good rotary phone in the attic. The phone plan would have even been cheaper today than when the phone was built with improvements in technology transmission and break-up in monopoly.
@Jacob though nailed it - it is about life hours trade, what you are willing to pay for and tracking how much you spend a year

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Re: Examining Inflation

Post by Alphaville »

forget about the iphone which is a luxury good

my dad has a $40 zte and loves it

i call him for free on whatsapp

anybody here ever racked up huge long distance bills?
Last edited by Alphaville on Thu Feb 25, 2021 10:12 am, edited 1 time in total.

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

Campitor wrote:
Thu Feb 25, 2021 9:43 am
CPI appears to be a smoke and mirrors calculation to convince the uninformed citizen that inflation is low in order to stimulate consumer spending. :evil:
This is all making me realize I definitely need to tackle McConnell's Economics textbook once I finish Bodie's Investments. I'm reading a lot of doomsday blogs and listening to doomsday podcasts, and I'm realizing that I really lack the baseline knowledge to digest it all beyond sheer infotainment value.

BUT, as to the what I'll call the Luddite theme that appears to be emerging in this thread, I agree the apples-to-apples distinction is really important when you're looking at inflation. It's kinda the whole ERE thing, to a point, that once you separate out the wheat from all the chaff of modern living, there's some truth to the fact that most of what we've gained in terms of stuff and services over the past 30-40 years or so really has been almost entirely chaff. And if you boil down to just the wheat (I'm mixing my idioms), it probably does take a lot less "life energy" needed to get the wheat than was the case in decades past.

Qazwer
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Re: Examining Inflation

Post by Qazwer »

@HB consider this thread has both Thoreau and comments about the past 50 years
The logic of the past 50 years had more chaff than wheat is common in this culture for a long time. We just identify what parts given when we were born. Or this time it’s different - dunno

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Re: Examining Inflation

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Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

@Qawzer: I'm thinking more of the wastefulness of all the stuff we've got now vs. 50 years ago or even vs. Thoreau's 1800s New England. I was born in the late 70s and I'm certainly not saying we had everything we needed in the late 70s/80s and nothing really that we didn't; but I was never one for video games or computers, or even really talking on the phone (and I'm still not one for texting or social media, and yet I maintain a very active IRL social life). I point only to the 50s/60s because, 1, that's where Warren focused in her book, IIRC, and, 2, my (uneducated) guess is that may have been around the point where the efficiencies of new technology brought diminishing returns when viewed in terms of comfort and convenience. A small washing machine is kinda nice, from a time-savings standpoint. A dishwasher and a microwave and a dryer and frozen TV dinners are all kinda self-defeating from a life energy standpoint.

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Re: Examining Inflation

Post by Qazwer »

@HB I am wondering though whether we always have that view. We choose what we value. I like having a computer in my hand that can access more knowledge than in most libraries. I do not care about the camera filters. I do not like Instagram. By things improving, we have a larger set we can choose between. You clearly value your iPhone. Another post talks about a cheaper variant but still same concept. You did not value the computers of the Bill Gates era though - they could not do what these marvelous things can. The part I am struggling with (although probably goes more in journal than detailing this conversation) is that we have to prepay for technology that we do not even know is there yet. Human capital takes time to develop so we have to prepay with life energy for something that we cannot predict.

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Re: Examining Inflation

Post by jacob »

Our time traveler from 1970 would probably be astounded to learn that movies like The Martian or Gravity were made on a computer while at the same time being somewhat bitter that the scenes weren't recorded in actual space.

Seriously though, the difference between 2020 and 1970 is <<< the difference between 1920 and 1870 and so on (pick most periods). This is unexpected given that technological improvements should be exponential. Much of the answer lies in the fact that the effort has largely gone into computing where it has been used to improve efficiency ("productivity") of existing systems rather than effectiveness in creating new systems. Compare to the roll-out of electricity, the automobile, or flying commercial. A smartphone is vastly more efficient in terms of replacing a telephone, a fax, a small and somewhat crippled computer, a cd player, a VCR, a radio, GPS, ... but this dinosaur is not aware of anything that a smartphone can do that one couldn't already do on other devices in 1980.

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Re: Examining Inflation

Post by Qazwer »

The 1870 to 1920 shift was huge. Plumbing, electricity, transportation etc 1970 to 2020 not so much. Economist look at it through the viewpoint of individual productivity. That has not really increased that much. The time traveler story is a good metaphor frequently used. I could do pretty much anything I want to in 1970 that I could in 2020 with just a little more effort. Economist talk about productivity stagnation actually. But there are a couple of pieces. Technology takes time to get mature and spread. The advances of 1870-1920 were founded on advances from 1820-1870. Someone living in 1870 could live pretty easily on 1820 standards.
So are we finally getting ready for computing power to actually change how we live? Or internet? Or biotechnology? They have about 50 years or so.
Will it be like the difference of living in a small town that requires equine based movement with no information except local friends. Food limited to what you can grow etc then 1920
Or will 2020-2070 just be a cell phone now that you can balance on your nose? Dunno

BTW @Riggerjack rightfully called me out on focusing on my field as being unique and dynamic -as we all do focus on what we know - may be doing that here too in my earlier posts on this thread - you’re not taking into account the amazing critonomicali- expeladotious invention that I spent 20 years learning about ... when in reality only someone spending 20 years can tell that from supercalafragilistic which was the previous go to

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Re: Examining Inflation

Post by Alphaville »

jacob wrote:
Thu Feb 25, 2021 11:14 am
but this dinosaur is not aware of anything that a smartphone can do that one couldn't already do on other devices in 1980.
it can take those devices out of the ivory tower and from the upper classes and large institutions and put them in the hands of the people is what.
Andy Warhol wrote:“What's great about this country is America started the tradition where the richest consumers buy essentially the same things as the poorest. You can be watching TV and see Coca-Cola, and you can know that the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke, too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking. All the Cokes are the same and all the Cokes are good.”
we have a bit more market segmentation since the days of andy warhol but his take on the american genius is essentially correct.

this idea has now spread of course to other parts of the world so now the cokes are from china.
Last edited by Alphaville on Thu Feb 25, 2021 11:46 am, edited 1 time in total.

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