Saturday, February 22, 2014

Income Inequality, Opportunity Cost and Efficiency on the Farm

Why do we have 'income inequality'? Adam Smith, in 1776, answers the question: 

In Book Five of Adam Smith's Wealth of Nations: "...that in the hunter-gatherer stage, the first stage of society, all are equally impoverished and hence all have equality [equality of poverty]. That once man enters the shepherd stage inequality occurs and it is associated with birth [inherited traits] and good fortune (the more one practices, the luckier one gets)."



John and I have been talking about "start-up" companies the last few weeks. Here is a new start-up company created on "opportunity cost"? Postmates is billing itself as 'Everyone's favorite delivery service' and promises to get any product from a store or restaurant to you in under one hour. Now fast delivery is not something new. Most of us can call up for a pizza and get it to our door in 20 to 30 minutes. Generally these delivery are very limited in scope while Postmates promises to deliver 'any product'.

What makes Postmates interesting to me, in an economic way, is that they are using the concept of opportunity cost in their advertising. Opportunity cost is the difference in return between something you spend your money/time on and what you did not spend your money/time on. One example is the money you would have earned by working full-time instead of going to college. You lose four, or more, years of salary, your opportunity cost, but you hope to make up for that loss during your job life by having a degree. You are forgoing job advancement and profit now for something that may pay off at a later date. A second example is if you have a garden and grow carrots the opportunity cost is the other crop that you might have grown but did not (tomatoes, corn, etc.). The gardener is saying that he will grow carrots for his dinner plate at the loss (cost) of tomatoes for his sandwich. 

Back to Postmates. Their ads say that “We give you something priceless: time. Delivery fees start at $5. An hour of your time is worth way more than that.” 

Remember there is a cost associated with every decision. A cost for getting something and a cost for not getting something else.

I wonder how many of us consider 'opportunity cost' when we decide to do anything. Back in school, from kindergarten to graduate school, we all made opportunity cost decisions and probably, if like me, did not know we did. To study or to play. The number of hours studying would, I hope, increase my grade but would cut into my leisure time.

I should have studied more.....



I get discouraged by the growth of Big Government and its inherent inefficiency. And the trend seems to be more government involvement in the economy rather than allowing free enterprise to solve the world’s problems.

But this New Yorker article (from last Fall) is quite encouraging.

The Climate Corporation is one of at least a handful of companies that are using satellite monitoring, GPS tracking, and the analysis of Big Data to help the American farmer squeeze more yield from his/her farmland. It also uses this capability to offer customized crop insurance that supplements that offered by the US Department of Agriculture.

In an era of shrinking water resources (especially in the Western US) and ever-changing weather and climate, our ability to plant the right crop at the right time in the right place adds greater efficiency to the American farm.

Monsanto purchased the Climate Corporation last October for $930 million. In this case, Big Data is big business and getting bigger.


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