Saturday, June 03, 2017

More economic nonsense from David J. Anderson

"The driver actually picking up the machine at the warehouse, driving at your home, and unpacking it for you is a transaction cost. Perhaps the same person, or another person, a plumber, installs it for you... All of this time and effort for delivery and installation is part of the transaction cost of buying the washing machine... The net effect of all these costs it is to inflate the final price paid by the consumer without actually increasing the value delivered." -- Kanban, p. 94

Right, so an uninstalled washing machine sitting in a warehouse is just as valuable to me as the same washing machine installed in my basement and ready to use. It's a wonder anyone bothers delivering and installing anything! Amazon could sell me books, and just leave them in the warehouse, with a note on them saying I own them. That would forestall "inflating" the price of my books quite a bit!

The funny thing is that on some level, Anderson knows he is spouting nonsense, since on the very next page, he acknowledges "It is true that the washing machine without delivery or installation is of little value..." Exactly: that is why delivering and installing it adds to its value.

I suspect that what is confusing Anderson is his notion that certain parts of the manufacturing process "add value," while others don't. But that is looking at things as though the Marginal Revolution of the late 1800s had never occurred. There is no substance called "value" that is ladled into products as they are manufactured. Instead, the materials being worked upon are transformed at each stage of the production process, and those transformations either result in the consumer of the product valuing it more highly, or they do not. If they do, then speaking loosely, we could say that they "add value." If they do not, then they simply should not be performed.

And since I, as a consumer of washing machines, most definitely value a machine in which I can actually wash my clothes inside my house much more than I value one sitting in a warehouse in which I cannot wash anything, then the delivery and installation steps "add value." In fact, that is why people pay for those steps to be performed.

7 comments:

  1. Value = pi * caloric

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  2. Btw, isn't he also technically wrong, i.e. Wrong in his terminology, about delivery being a transaction cost? It seems that aside from spouting nonsense, he is spouting misdefined nonsense.

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    1. Yes, I have never seen transportation or installation counted as "transaction costs": those usually include search costs (finding the seller or buyer) and bargaining costs.

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  3. Wow -- that really IS a stupid way of looking at things.


    Reducing "transaction costs" is certainly a good thing. I was involved in implementing JIT practices in a manufacturing environment. It allowed the factory I worked at to drastically reduce the need for additional warehouse space and for more forklifts and drivers to move things more times from material truck to finished product truck, etc. And that in turn allowed lower prices on the final product, "adding value" to that product from the final consumer perspective (e.g. the company still turned its profit with a bottle of mustard costing $1 instead of $1.50 at the store).

    But this guy seems to think, to paraphrase you, that the mustard seed, vinegar, turmeric, etc. is just as "valuable" before going through the manufacturing and delivery process as it is once it's in a bottle in a customer's refrigerator. The whole point for everyone is that that's not the case.

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    1. 'Reducing "transaction costs" is certainly a good thing.'

      Yes: reducing *any* cost is good!

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  4. Changing the form of your materials or changing their location (transformed or not) were both productive and valuable. I think Harry Stottle knew that back in the day.

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    1. Changing the location of the washing machine could be looked at as a transformation in the machine. Advertising also transforms it: from one you didn't know about to one you do know about. (Kirzner made this point.)

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Old-fashioned excuse: "The dog ate my homework."

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