Golden Rule Savings/Revenue vs. Number Employees

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7Wannabe5
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Golden Rule Savings/Revenue vs. Number Employees

Post by 7Wannabe5 » Sun Apr 15, 2018 5:11 am

http://www2.econ.iastate.edu/classes/ec ... HMODEL.htm

Image


I happened upon the above graph in "Scale" by Geoffrey West, and the Golden Rule concept in my continuing advanced beginner level reading in economics. I was wondering if anybody could do a better job than me at relating these two concepts to each other and ERE?

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by jacob » Sun Apr 15, 2018 8:38 am

You can think of each skill you command/have learned as a virtual ERE-employee. Each of those virtual employees (e.g. plumbing, cooking, mechanics) comes with capital (tools and supplies) that depreciate. By increasing your skill-level (technological improvement) you require less capital (tools) to do the same job.

As you keep adding virtual employees, the required capital grows accordingly (green line).

However, you can only add the most revenue generating virtual-employees once and ultimately the ROI of adding another virtual employee adds no faster than adding the capital alone => you're working that virtual employee at market rates. E.g. I could acquire the capital to roof houses ... but since I only need to reroof my home every 20-30 years, that stuff would be sitting idle (depreciating) unless I start using it to roof other people's home---but that would not pay me more than market rates ... unlike rooting my kitchen sink myself instead of paying a plumber $80 for a 10 minute job.

tl;dr - Once you have more than 50 DIY skills (probably much lower since you're limited on time) the rate of capital depreciation(*) starts to outrun your ability to keep up by working smarter and harder. There is IOW a finite upper limit to the standard of living you can produce single-handed; and this depends on your skill level and your skill count.

(*) For example, I have a few hundred dollars worth of bicycle supplies that has been sitting around for the past 5+ years because I haven't been repairing any bikes since we moved to Chicago.

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by 7Wannabe5 » Sun Apr 15, 2018 1:43 pm

@jacob:

I think I understand. For instance, if the next good I wanted to produce was a sandwich, and I wanted to make it from scratch, like Andy George in his "How to Make Everything" youtube series, I could think of all the steps in the process as being performed by different employees. Practically infinite regress would be possible if requirement was also that each required tool also had to first be made from natural resources, like in the youtube series "Primitive Technology."
However, you can only add the most revenue generating virtual-employees once and ultimately the ROI of adding another virtual employee adds no faster than adding the capital alone => you're working that virtual employee at market rates.
Right, but the market rate you might set for your own labor would depend on subjective measures of utility. So, if you could pick your own personal mix of 40 hours/week worth of self-employment/home production during which you might wear 40 different hats, some might pay $100/hr at the margin only occasionally , but other activities might pay only $2/hr more frequently. And, I guess you would end up with the equivalent of a private business providing you with the equivalent of a $40,000/yr lifestyle, if the average of all your hat jobs was $20/hr market rate?

So, one of the things I am having trouble wrapping my head around is the huge amount of capital investment/worker in the U.S. and how this would scale to small potatoes solo-preneur or home production?

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by jennypenny » Thu Apr 19, 2018 9:04 am

I'm reading Scale today. FYI ... The Santa Fe Institute he mentions has a good YouTube channel. West has probably given some of the lectures.

eta: Yes, here's one he did on Scale.

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by 7Wannabe5 » Thu Apr 19, 2018 12:27 pm

@jp:

I think you will like it. West is a physicist applying his skill set to biology and sociology, in manner somewhat similar to Jacob's take on personal finance.

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by jennypenny » Thu Aug 02, 2018 9:02 am

@7W5--West was a guest on Sean Carroll's podcast recently. Pretty good ... https://www.preposterousuniverse.com/po ... e-of-life/

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by 7Wannabe5 » Fri Aug 03, 2018 3:41 pm

@jennypenny:

Thanks for the link. I am currently reading "The Age of Stagnation" by Das, which was recommended by Jacob on some other thread, and I have been thinking a lot about "Scale" in relationship to "Stagnation." I am most intrigued (or confused) by what each author has to say about innovation.

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by daylen » Sat Aug 04, 2018 8:53 am

+1 Sean Carroll's podcast.

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by daylen » Sun Aug 12, 2018 5:51 pm

@7W5 Have you updated your view on the relationship between Scale and Stagnation? They are next on my reading list, so perhaps we could make a thread at some point if there is an interesting connection to explore.

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Re: Golden Rule Savings/Revenue vs. Number Employees

Post by 7Wannabe5 » Mon Aug 13, 2018 12:30 pm

@daylen:

I would like to discuss this relationship. I think it relates to the concept of the Renaissance man as well as general systems theory. It seems to me that a lot of recently written books I've been reading arrive at the same dead end in the middle of a thicket.

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