Sunday, May 8, 2011

The Value of Cutting Costs

Recently, I took an online course that focused on economic development and poverty. One of the discussions we had questioned whether technological innovation benefited the rich, the poor or both.  One of the conclusions was that, because of the cost of innovation, initial benefits tended to gravitate to the rich because they could pay a price that would compensate the producer.  But over time, as the cost structure changed, the benefits were realized by those at lower income levels, as well. One of our classmates even noted that, because of the passage of time, the technology was actually better quality as well as cheaper by the time it became available at lower prices.

Yesterday, there was an opinion piece in The Wall Street Journal that dealt with that topic. It reinforces the point that the real value in innovation may not come in the initial stages - many innovations don't last very long.  But for new products and technology that does last, the real benefit comes as producers find ways to reduce the cost. And I will add, improve the quality and reliability in the process.

This relates to my post from one week ago which linked to a discussion of poverty and choice.  It also reminds me of a quote from Joseph Schumpeter who once said "The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses. . . . It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls."

I welcome your thoughts.

No comments: