Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

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jacob
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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by jacob »

7Wannabe5 wrote:
Sun Aug 18, 2019 12:43 pm
Q = C(K^a X L^b)
Cobb-Douglas, eh? The problem with [using] that is that it reduces technology and those who implement/execute it to something that has no cost to develop; can be instantly implemented; and suffers no production delay, has no technical limits, or start-up/recovery (goose/golden egg) problems. Basically, it reduces STEM to two independent variables. Wouldn't it be nice if the real world also behaved like that... well, maybe it has (after all, CB is a thing), but I don't think it works on a personal/smaller level.

(Not that STEM doesn't do the same to the fields of economics and politics everytime they pull the "there's still time if only we start now"-card. They too presume that those "other fields" reduce to instantaneous cost-free magic.)

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by Jin+Guice »

@jacob:

IMO, the contribution of minimalism is it's rejection of mainstream consumer culture. It's my opinion that the challenge of our current time is that we have too much stuff. We have too many physical things, too many distractions, too many obligations, too many (at least potential) activities, too much stimulation. The most obvious way to combat this is do the opposite, focus on how few things you can have. While I don't think this is the best solution, I think it's a great place to start. Get rid of all your stuff and then only purchase back what you need. Get rid of all your obligations and take on as few as you can. Taking this too the extreme, as so many are fans of doing, will eventually break down. Eventually you're going to want to add an activity, that is beneficial to you, which will require some "technical capital." A staunch minimalist would shame you for adding another activity AND more material possessions. Shockingly, optimizing for one dimension fails again. It still beats the shit out of the, buy-the-fanciest-gadget-for-your-new-hobby technique of consumerism.

I realize you have a method for getting rid of most of your stuff on the blog (and possibly in the book?), but like a lot of ERE ideas that aren't: save a bunch of money -> invest that money for a 3% return -> retire forever, I don't think it gets enough airplay.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by 7Wannabe5 »

@jacob:

I'm not married to Cobb-Douglas or even a production function. I agree an algorithmic simulation of complex interdependent relationships would be more realistic. I just started with Cobb-Douglas, because Picketty and Hall both started with Cobb-Douglas, and Frey started with Engels' Pause.
...neoclassical economists often used Cobb-Douglas(and similar) production functions. These attributed the generation of wealth to some combination of capital and labor, while occasionally considering (although not in the formal equation) land and technology. Technology was considered especially important, as it could compensate for any possible depletion of resources. This perspective was bolstered by an influential paper by Barnett and Morse who found that inflation-adjusted prices for most raw materials tended not to increase over time, which they interpreted as technology compensating for any depletion. Thus with resources seemingly less important, land (and hence natural resources) was never part of the Cobb-Douglas equations. In the 1950s the important neoclassical economist Robert Solow dropped even labor from the equations and said that wealth was generated mostly from capital. Technology remained important but no one knew how to measure technology directly.- "Energy and the Wealth of Nations"- Hall
So, I put Labor back into the function in accordance with Frey ( and Engels, as opposed to Solow) and I described "a" as being a function of both technology and energy density which are not independent and meant to be inclusive of some measure of something like natural resources/land. Also, more importantly, I declared that "b" was greater than "a" if Q = Quality of Lifestyle not Q = Wealth. So... not really Cobb-Douglas anymore.
The problem with [using] that is that it reduces technology and those who implement/execute it to something that has no cost to develop; can be instantly implemented; and suffers no production delay, has no technical limits, or start-up/recovery (goose/golden egg) problems. Basically, it reduces STEM to two independent variables. Wouldn't it be nice if the real world also behaved like that... well, maybe it has (after all, CB is a thing), but I don't think it works on a personal/smaller level.
I think that maybe it works even better on a personal/smaller level because it's not like you are counting on some super-smart kid in China to invent something new. Any skill that is new-to-you and can be learned by checking out a book from the library or taking apart something somebody else already put together would bump up Q for you. IOW, any action you take to fast forward yourself through Engels' Pause (or maybe Engels' Lapse for forgotten skills) will have exponential effect on your Quality of Lifestyle.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by jacob »

7Wannabe5 wrote:
Sun Aug 18, 2019 3:36 pm
I think that maybe it works even better on a personal/smaller level because it's not like you are counting on some super-smart kid in China to invent something new. Any skill that is new-to-you and can be learned by checking out a book from the library or taking apart something somebody else already put together would bump up Q for you. IOW, any action you take to fast forward yourself through Engels' Pause (or maybe Engels' Lapse for forgotten skills) will have exponential effect on your Quality of Lifestyle.
Yes, and this is why ERE is a thing and why C-D is not appropriate to describe it #whatIwastryingtosay

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by IlliniDave »

7wb5, in your equation, production (Q), which we seem to be equating with quality of life(style), is maximized when all the term on the RH side are maximized. But since quality of life is an individual thing, and how production happens, not just how much, can affect its quality, one is free to modify one's own equation to discount K if desired (seems the favored framework in this discussion, and more in line w/ere), or L, or both, or neither. What seems to be missing is consideration of the cost in one's own human capital of investing in a particular labor/skill versus alternate ways to invest that same human capital. That's where K has a lot of flexible utility, and a non-abstract concept of quality of lifestyle for an individual seems like a necessary starting point. For some the ideal lifestyle will be that of the fabled Renaissance Man, others (like me) will be more inclined to hold up a narrower list of what's important. I suspect the latter group can more easily find ways to employ financial capital productively towards maximizing their lifestyle, and are likely more dependent on it. Still, seems like the optimum is to have a healthy supply of both capital and skill.

Of course, as is commonly the case, I might be entirely missing the point. :)

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Ego
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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by Ego »

How are you defining skill? Wikipedia has it as the ability to carry out a task with determined results often within a given amount of time, energy, or both.

I think you and I might broaden that definition a bit. The Bedouin cook may broaden it more.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by 7Wannabe5 »

jacob wrote:Yes, and this is why ERE is a thing and why C-D is not appropriate to describe it #whatIwastryingtosay
I know. I am mostly just talking to myself using the keyboard; trying to figure out which critique/revision/rebuttal of Solow (infinite or indefinite extension of mid-20th century growth) is most relevant, and also why this discussion is taking place at this juncture in history. Kind of like a curious street urchin eyeing the pocket of Petronius as low hum of "What's the Buzz?" breaks through crowd.
IlliniDave wrote:7wb5, in your equation, production (Q), which we seem to be equating with quality of life(style), is maximized when all the term on the RH side are maximized.
Okay, putting aside for the moment the extent to which I am wishing to stake flag upon this equation, one concept which it serves to communicate is that some of these imagined-as-independent terms are exponents --> more important. IOW, your level of skill and the level of technology/natural-resources-energy-density of your environment/socio-economic-system is more important than your stock of $$ or labor hours in wealth creation moving forward. Consider the example of human with extremely limited skills dropped in the desert (or maybe endless abandoned strip mall parking lot) vs. highly skilled human dropped in NYC. Doesn't matter so much whether you give each of them only 10 days vs. 10,000 days to work towards creating more wealth starting with $10 or $10,000.
IlliniDave wrote:What seems to be missing is consideration of the cost in one's own human capital of investing in a particular labor/skill versus alternate ways to invest that same human capital. That's where K has a lot of flexible utility, and a non-abstract concept of quality of lifestyle for an individual seems like a necessary starting point.
Well, it kind of goes both ways, because one criticism of the C-D production function is that unless you restrict the definition of K to land/natural resources, which is pretty much the opposite of what happens in neoclassical economics, every unit of Capital, inclusive of the systems that make money "real", has units of Labor embodied within. Given belief in the theory of evolution, Labor must precede every form of Capital except for Natural Resources. IOW, CNC lathes do not grow on trees.
For some the ideal lifestyle will be that of the fabled Renaissance Man, others (like me) will be more inclined to hold up a narrower list of what's important. I suspect the latter group can more easily find ways to employ financial capital productively towards maximizing their lifestyle, and are likely more dependent on it. Still, seems like the optimum is to have a healthy supply of both capital and skill.
I don't disagree. I was just noting that IF the Generalist Polymath (Benjamin Franklin) or Focused Extreme Mastery (Mozart) Lifestyle is your ideal (you find that hedonic adaptation to the pleasure of skill acquisition is low or negative) then you will by definition choose to maximize "b" over "a." This is apparent even when you consider Q holding steady or increasing as E = lifestyle spending declines. Obviously, Q = Quality of Life is complex and difficult to measure, but not impossible, and it is like pornography in that we tend to recognize it when we see it. If you admire other people who are Polymaths or Extreme Masters more than you admire people who accumulate a great deal of Capital (not to say that there is no overlap) then that is equivalent to believing that they conducted their lifestyle in a manner more in alignment with your own values or ideals.
Ego wrote:I think you and I might broaden that definition a bit.
I agree. Added the book you linked to my list. The definition of skill which you gave is like the one used in the O-Ring production function. I have a lot of admiration for people who acquire skills through the process of tinkering, because I am locked into mostly reading. However, I in good part assign this to the fact that other people tend towards bothering more when I try to tinker than when I try to read, because tinkering is inherently more messy and visible to others than the furrowing of gray matter resulting from reading. Also, definite, although increasingly slight, level of sexism applies. For instance, when I found it convenient to pretend like my husband was doing projects for which I had to purchase lumber.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by 7Wannabe5 »

In particular, stress will occur when one or more variables of the system are pushed to their extreme values, which induces increased rigidity throughout the system. Temporary stress is an essential aspect of life, but prolonged stress is harmful and destructive to the system. These considerations lead to the important realization that managing a social system- a company, a city, or an economy- means finding the optimal values for the system's variables. If one tries to maximize any single variable instead of optimizing it, this will invariably damage the system as a whole. - "The Systems View of Life" - Capra and Luisi
So, if you start from the premise that unless you are the super-smart Chinese kid who is going to invent the new technology that will change the paradigm, you might decide that your optimal spending on personal lifestyle should approximate level that would prevent pretty much completely burning through planetary natural resources within great-grandkids lifespan = approximately $8000 USD PP. The only way to marginally improve your personal stock of L would obviously be health/vigor improving activities. So, once you have store of K$$ adequate to provide/insure $8000 USD 2019 PP for rest of your life and you are in reasonably good shape health-wise (to the extent it is within your control), all that's left to optimize/improve is "b" and any realm of natural resources to which you have access.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by IlliniDave »

7wb5, yes I think we're in agreement that capital and skill/labor are very difficult to disentangle, and I'd add are potentially synergistic. Similar to capital accumulation requiring labor/skill, I think skill accumulation typically requires capital/labor. I'm not sure I follow entirely with the "b" over "a", but it's not important as there's a fundamental philosophical difference I think. Using myself as an example, I developed skill/mastery and combined it with labor to efficiently accumulate capital which is now increasingly employed to preserve residual human capital for the most enjoyable things, many of which fall under the heading of skills, just not dropped in the desert alone survival skills (though past leisure pursuits have allowed me to pick up a few of those kind of skills). I'm perfectly happy with choosing which resources to throw against an obstacle based on the state of my value hierarchy at the moment. I get that there's a whole universe of other valid ways to approach things--equally valid as mine, but not more. Seems I'm approaching this more from an individualist perspective versus more of a social engineering perspective.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by 7Wannabe5 »

IlliniDave wrote:7wb5, yes I think we're in agreement that capital and skill/labor are very difficult to disentangle, and I'd add are potentially synergistic. Similar to capital accumulation requiring labor/skill, I think skill accumulation typically requires capital/labor.
It seems like it varies a good deal. Here is some information about present day salary equivalents of famous scientists and composers (skill least like dropped-in-desert-survival-skill):

https://www.adzuna.co.uk/blog/2016/04/1 ... arn-today/

https://www.adzuna.co.uk/blog/2016/05/2 ... an-mozart/
I'm not sure I follow entirely with the "b" over "a", but it's not important as there's a fundamental philosophical difference I think.
Possible, but part of what I am trying to convey is simply a belief or observation that high value self-education is available at bargain prices these days. But, it is also true that I think it would be super-cool to start with nothing but wilderness and be able to use your skills to make something like a radio, even though I could probably buy a radio for $2 at the Salvation Army or even find one in a dumpster.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by 7Wannabe5 »

Castells points out that it is important to distinguish between two kinds of labor. Unskilled, "generic" labor is not required to access information and knowledge beyond the ability to understand and execute orders. In the new economy, masses of generic workers move in and out of a variety of jobs. They may be replaced at any moment, either by machines or by generic labor in other parts of the world, depending on the fluctuations in the global financial networks.

"Self-educated" labor, by contrast, has the capacity to access higher levels of education, to process information, and to create knowledge. In an economy where information processing, innovation, and knowledge creation are the main sources of productivity, these self-educated workers are highly valued. Companies would like to maintain long-term, secure relationships with their core workers, so as to retain their loyalty and make sure that their tacit knowledge is passed on within the organization...(1)

This notion of growth which enhances life is what is meant by qualitative growth- growth which enhances the quality of life. In living organisms, ecosystems, and societies, qualitative growth includes an increase of complexity, sophistication, and maturity. Unlimited quantitative growth on a finite planet is clearly unsustainable, but qualitative economic growth can be sustained if it involves a dynamic balance between growth, decline, and recycling, and if it also includes the inner growth of learning and maturing.(2)- "The Systems View of Life"- Capra and Luisi
You are in a unique position: very few people wake up in the morning and decide that today they want to invent civilization from scratch. Historically, most people wake up in the morning, discover that they're hungry or thirsty or bored or horny, and while trying to solve those problems for themselves only end up inventing civilization by accident, if at all (3).- "How to Invent Everything: A Survival Guide for the Stranded Time Traveler" - Ryan North
1) I think this speaks to the common fear of the early retiree related to "having to return to the general employment market, because ran out of money, can only get job as greeter at Wal-Mart." Maintaining your stock of "self-education" while "retired" is the answer.

2) I think this speaks to the common fear of anybody who believes that the planet is reaching carrying capacity and we are all either going to see our own quality of lifestyle go down the toilet and/or spectate on complete catastrophe elsewhere. Once again, self-education is a good part of the answer.

3) I think this speaks to the common fear of the early retiree related to "too much time on my hands; found myself dozing on sofa, surrounded by Cheetos crumbs, watching "Walker Texas Ranger" re-runs. Once again, self-education is the answer.


My theory is that the way to get the most bang for your buck or life-energy unit in self-education/skill-acquisition is to go for a mix of hot new bleeding edge and cool core classic. Not coincidentally, this is also the least expensive way to create a stylish, attractive wardrobe and also roughly analogous to anti-fragile investment advice. So,for instance, my default (because switched major 6 times while acquiring 120 credit hours) B.S. in Mathematics, although 30 years old, is like a gray wool suit that just needs a bit of airing out of moth-ball smell and application of lint roller to look good with data science certificate purchased on the internet for less than $200.

OTOH, I can keep the suit-skirt in the closet, and just use the math skill jacket to add a layer of complexity when I go out looking for the minerals I need in order to start constructing a radio using only the wilderness and a book I bought for less than $10, entitled "Modern Rockhounding & Prospecting Handbook." One cool thing about this book is that it includes a "Wheaton Scale" for rockhounding which goes all the way from "pebble pub" to "field geologist" or "mining engineer" with "prospector " being the level where you might tip over into making some money through trade.

The first point I am trying to make is that even if you never or rarely tip over into skill-level that allows you to make some money through trade, your own quality of lifestyle will be improved in due proportion as you acquire new skills, and one of the best ways to acquire a truly unique/valuable set of skills is to mix classic-archaic-core with hot-new-cutting-edge. The second point I am trying to make is that the amount of $$ you have to invest in order to acquire extremely valuable skills these-a-days is minimal and not to be confused with the growing cost of conventionally acquired educational degrees, although these are still usually a reasonably good deal over not too many years of use in spite of frequently heard griping about student loans.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by classical_Liberal »

@7WB5
That basically reads like a solution to all of my personal fears regarding the future. Very interesting and helpful take.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by Ego »

7Wannabe5 wrote:
Tue Aug 20, 2019 8:55 am
1) I think this speaks to the common fear of the early retiree related to "having to return to the general employment market, because ran out of money, can only get job as greeter at Wal-Mart." Maintaining your stock of "self-education" while "retired" is the answer.
The word 'retire' is so poisoned because it implies the linear: Educate > Do > Retire > Die.

Successful early retirees must either make it circular: Learning while doing while learning while doing while learning......

Or they must completely erase the lines between learning and doing entirely.

See also: https://seths.blog/2019/06/the-learning-doing-gap/

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by Bankai »

7Wannabe5 wrote:
Tue Aug 20, 2019 8:55 am
1) I think this speaks to the common fear of the early retiree related to "having to return to the general employment market, because ran out of money, can only get job as greeter at Wal-Mart." Maintaining your stock of "self-education" while "retired" is the answer.
The choice between spending time maintaining knowledge Vs doing simple work is interesting. Say you need 8h per week to keep your qualifications up to date for 50k net job. On the other hand, you could spend those 8h working simple job for 15/h while enjoying all the social benefits of work. One day of 15/h/week work is equivalent to 200k at 3% wr. Maintaining skills would still require going back to work for 4 years to make up for lost 200k on top of 8h per week of learning. I guess the choice boils down to personal preference of learning Vs social interaction.

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Re: Elasticity of Substitution of Skill for Capital Investment Towards Production of Quality of Lifestyle

Post by 7Wannabe5 »

classical_Liberal wrote:That basically reads like a solution to all of my personal fears regarding the future. Very interesting and helpful take.
Glad you found it useful. Mostly based on recent re-read of "The Renaissance Soul: How to Make Your Passions Your Life - A Creative and Practical Guide" combined with all the systems-theory and econ stuff I've read since the first time I read it. I would nominate Margaret Lobenstine to be Jacob's Vicki Robin. Interesting note would be that there is only this brief, rather dismissive mention of anything approximating FIRE in this book:
When you're ready, we'll look at an issue I've asked you to set aside up until now: money. None but the independently wealthy can afford to buy into a life-design concept that doesn't address the problems of income and education.
She makes a number of useful suggestions, but the one that stands out is the concept of the J-O-B, which is any form of employment which passes systems test in relationship to the projects which you are currently passionate about working on. A very good J-O-B should provide you with 2 or 3 of the following: income or benefits, energy, time, training/equipment, social connections related to one of your passions.

My observation is that even the independently wealthy can't afford to buy into a life-design concept that doesn't address the problems of income and education. Of course, Jacob also makes that point in "ERE", does NOT recommend purely passive rest upon laurels, but this is sometimes ignored. if you aren't at least somewhat passionate about continuing self-education in the realm of finance/investment, and developing your other skill sets, then don't go crying boo-hoo to Jacob 'cause your feet hurt after a long shift at Wal-Mart when you are 55.
Ego wrote:Successful early retirees must either make it circular: Learning while doing while learning while doing while learning......

Or they must completely erase the lines between learning and doing entirely.
Exactly, except I would rub out "early retirees" and replace with "21st century human." Good article. At this point in my life I find that I can barely tolerate conventional education except as a bit of a tether attached to very long leash. Also, my abilities in the realms of test-hacking and speed-reading often subvert my learning curve if I don't expand the experience out with my associated interests, towards core with original works, and with eye on eventual application to creative personal project at horizon.
Bankai wrote:The choice between spending time maintaining knowledge Vs doing simple work is interesting. Say you need 8h per week to keep your qualifications up to date for 50k net job. On the other hand, you could spend those 8h working simple job for 15/h while enjoying all the social benefits of work. One day of 15/h/week work is equivalent to 200k at 3% wr. Maintaining skills would still require going back to work for 4 years to make up for lost 200k on top of 8h per week of learning. I guess the choice boils down to personal preference of learning Vs social interaction.

Based on my experience, I would suggest "Do both" or, at least, leave both options open for future exploration. OTOH, I did NOT mean to imply that the primary purpose of "cutting edge self-education" should be maintaining your current resume. It's more about maintaining your own internal edge or hustle. Also, the possibility of self-employment is important third leg of stool. You always have to be asking yourself whether you could directly market valuable skill or product created with skill. Unless you go completely Emily Dickinson with your skills, the juncture between your skills and your social interactions with other humans will almost always create some form of resource flow.

Let me offer an example of a clear fail on my part to illustrate. Last summer I took a J-O-B at a big-box home-improvement store garden center during spring planting rush. Although the pay rate was terrible, almost not worth the social cost of bumming a ride home in the evening from paramour, at first the social benefits of chatting and offering advice to other gardeners, small learning curve in being trained on tasks such as best practice for securing lumber to car roof, physical exercise, and free snacks in break room seemed to be in alignment with my core objectives. However, after the busy season passed, and I was offered permanent part-time position, and found myself engaged in the task of endlessly restocking gallons of Round-Up and contemplating my participation in the eradication of the honeybee in clear violation of core values system, I kept at it out of pure inertia or misguided application of work ethic for at least a month longer than was optimal. So, once you've granted yourself free agency over your human capital/life-energy/skill-time, you have to keep your eye on your book just like you are trading or investing in the stock market. When you are employed-by-other, it is especially important to follow-the-money related to who benefits if/when you don't quit. Leverage should always be a two way street, but taking your pay and sticking it in the stock market is not the only way to achieve this balance.

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