If you were to make a list of the wealthiest nations of the world you'll notice that in general they have their economies geared towards the production of finished products (consumer goods) and not commodities.
A lot of people think there must be some economic law which states most of the money has to be made on the finished product end. That of course is false. Just because it happens to be that way for longer then anyone can remember doesn't make it true. I believe the law of supply and demand dictates where the profit margins will be at.
If there is a huge amount of production capacity of commodities then the price must go down. On the other hand if the excess production capacity instead lies on the finished product end then the situation would be reversed.
It is my observation (maybe I'm biased) that the profit margins seems to be shifting towards the commodity side. Take note, that the production of commodities is limited by BOTH capital and geological constraints. However the production capacity of finished goods is simply limited by the availability of capital.(something that the world is flooded with right now) PO is of course also about geology not just economics.
I think PO will continue to reinforce this trend.
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PO - commodities vs finished products
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PO - commodities vs finished products
by cube » Sun 11 Mar 2007, 16:14:56
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Re: PO - commodities vs finished products
by pup55 » Mon 12 Mar 2007, 22:37:26
Let me say it a slightly different way:
Wealth is generated by adding value.
If you earn your money by resource conversion, or by agriculture (which is converting land into a commodity) you might earn a living, but you will not build too much wealth. Example: Peru.
If you take the commodity and add value to it to increase its usefulness, you have a chance to build a lot of wealth. Example: turning some SiO2 into a microprocessor makes the material much more useful. Examples: the USA in 1960 with cars, or China today with cheap plastic stuff.
As it applies to oil, the extractors and sellers of the commodity make a reasonable amount of money, but the nations that use the oil to generate economic value make far more money. Example: Right now, Saudi is making $60 per barrel or so to sell the oil to the US. The US is making something on the order of $250 per barrel by using it to generate GDP. Italy and Japan are doing much better. Maybe they are about $1000. This is the very reason that idiot countries like Nigeria stay so stupidly poor even though they are sitting on all of that oil. They are better off selling their oil because they cannot add enough value to this material domestically.
When the US is no longer able to generate more than $60 of value out of a barrel of oil, we will quit buying it. Or when oil exceeds $250 per barrel, the same thing.
A minor point: If you take a piece of paper and sell it to somebody else for some other pieces of paper, you may have built apparent wealth, as measured by the number of pieces of paper you have, but the actual value added to society in this transaction is zero. Example: you sell insurance to somebody. There is an exchange of paper from one person to another, and if there is no disaster, which is the case 99% of the time, you have added no value. You can make the argument that you have reduced somebody's risk, but that is no substitute for adding value to society.
In the economy, you might be able to get by, temporarily, doing activities without adding any value, however, over the long run, non-value-added activity drains resources from somewhere and ends you up in trouble.
Wealth is generated by adding value.
If you earn your money by resource conversion, or by agriculture (which is converting land into a commodity) you might earn a living, but you will not build too much wealth. Example: Peru.
If you take the commodity and add value to it to increase its usefulness, you have a chance to build a lot of wealth. Example: turning some SiO2 into a microprocessor makes the material much more useful. Examples: the USA in 1960 with cars, or China today with cheap plastic stuff.
As it applies to oil, the extractors and sellers of the commodity make a reasonable amount of money, but the nations that use the oil to generate economic value make far more money. Example: Right now, Saudi is making $60 per barrel or so to sell the oil to the US. The US is making something on the order of $250 per barrel by using it to generate GDP. Italy and Japan are doing much better. Maybe they are about $1000. This is the very reason that idiot countries like Nigeria stay so stupidly poor even though they are sitting on all of that oil. They are better off selling their oil because they cannot add enough value to this material domestically.
When the US is no longer able to generate more than $60 of value out of a barrel of oil, we will quit buying it. Or when oil exceeds $250 per barrel, the same thing.
A minor point: If you take a piece of paper and sell it to somebody else for some other pieces of paper, you may have built apparent wealth, as measured by the number of pieces of paper you have, but the actual value added to society in this transaction is zero. Example: you sell insurance to somebody. There is an exchange of paper from one person to another, and if there is no disaster, which is the case 99% of the time, you have added no value. You can make the argument that you have reduced somebody's risk, but that is no substitute for adding value to society.
In the economy, you might be able to get by, temporarily, doing activities without adding any value, however, over the long run, non-value-added activity drains resources from somewhere and ends you up in trouble.
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Re: PO - commodities vs finished products
by cube » Tue 13 Mar 2007, 01:15:56
$this->bbcode_second_pass_quote('pup55', 'L')et me say it a slightly different way:
Wealth is generated by adding value.
If you earn your money by resource conversion, or by agriculture (which is converting land into a commodity) you might earn a living, but you will not build too much wealth.
...
hmm? There is probably much truth to that theory. However lets throw a new variable in which didn't exist before the advent of Globalization.
Wealth is generated by adding value.
If you earn your money by resource conversion, or by agriculture (which is converting land into a commodity) you might earn a living, but you will not build too much wealth.
...
Back in the days when manufacturing was almost the exclusive domain of the western world, the profit margins on say sewing a shirt was actually quite profitable. Now that we have "free" trade, Asia/China has practically flooded the globe with cheap apparel. The profit margins are razor thin now. But it's not just finished goods on the low end of the technology chain...it goes all the way up to high tech goods like cars and computers too. The profit margins are not as sweet as they used to be. But still the trend is to shift even more of the manufacturing to Asia or whatever manufacturing that the western world has left over. The world is a washed in liquidity and the money has to go somewhere. That's why manufacturing plants are still being created even though the profit margins are sinking even further.
Wealth may be generated by adding value....but what do you do when there's somebody out there who can undercut you?
This is one of the reasons why I think the economic balance of power is shifting in the favor of commodity based nations. There is a glut of manufacturing capacity. But the production of commodities is a different animal. Even if you have someone who's willing to work for $100/month (Vietnam) and bucket fulls of money to invest you can NOT produce a commodity unless the geological factors are favorable.
you can't have agriculture without water
you can't drill for oil if you have no oil
etc, etc.....
I think the 21st century is going to be very interesting.
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Re: PO - commodities vs finished products
by TommyJefferson » Tue 13 Mar 2007, 13:26:05
$this->bbcode_second_pass_quote('cube', ' ')that the production of commodities is limited by BOTH capital and geological constraints. However the production capacity of finished goods is simply limited by the availability of capital.
The production capacity of finished goods is also limited by geological constraints.
BTW, organic chemical-free tobacco is far better than commercially produced tobacco.
Conform . Consume . Obey .
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Re: PO - commodities vs finished products
by cube » Tue 13 Mar 2007, 18:07:49
$this->bbcode_second_pass_quote('TommyJefferson', '.')..
The production capacity of finished goods is also limited by geological constraints.
...
Technically true.
The production capacity of finished goods is also limited by geological constraints.
...
However.....
To give an example suppose you wanted to create auto manufacturing plants, which of course requires metals. Obviously this planet has a finite supply of metals so there is your "geological limit". But realistically you will run out of money MUCH sooner then the planet's supply of resources. This is why I said the production capacity of finished goods is limited to capital.
However commodities are a completely different animal. It's perfectly possible to have more money then you know what to do with but still not be able to produce due to geological constraints. For example Scotland cannot produce tropical fruit.
Getting back to energy, the oil majors: Exxon, Shell, Chevron, etc.. They're making money hand over fist now with the bull market in oil. But what are they doing with the money? Where's all the new oil wells that were suppose to be built? The mainstream media practically spent then entire year of 2006 saying: "Don't worry folks next year there will be a flood of non-OPEC oil supply coming online."
If the US weekly inventory numbers are any clue..then something is not adding up.
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Re: PO - commodities vs finished products
by pup55 » Tue 13 Mar 2007, 22:08:05
$this->bbcode_second_pass_quote('', 'w')hat do you do when there's somebody out there who can undercut you
in the world of economics that we now inhabit, the people that are best at adding value eventually win, and the people that are not so good at adding value will lose.
So if the Chinese can convert 2 tons of steel into a car in a less costly way than we can, they will win.
So we either have to learn how to do a cheaper job of conversion (by lowering wages or putting in fancier equipment that can do the job faster) or get into another line of work.
Over the long run, the chinese will run into problems of their own. Maybe their raw material stream will dry up. Maybe their labor costs will get too high. This very thing has happened to South Korea, apparently. From what I understand, the manufacturing wages are high enough over there that it is cheaper to farm this activity out to Alabama.
Eventually (in theory), given a perfectly porous system the wages in China and the wages in the USA will be the same, and this will eliminate the competitive advantage. Unfortunately it means that American auto workers will be making $4 per day or the equivalent, though, so this will be painful.
The European approach to this is to protect local industry by offering tax advantages for putting in productive equipment and also by protectionism, protective tarrifs which keeps the cheap stuff out of the country. This keeps the middle class happy (relatively). Protectionism (like "liberal" and "isolationism") have become negative buzzwords in US politics, for now. The economists will tell you that this comes at a cost to society of slightly lower efficiency than would otherwise happen (deadweight loss).
There are also some gaps in this system, which to a large extent in the US we did away with in the 20th century, but are still around in China: Workplace safety, for one, environmental rules, for another. The least costly way to deal with industrial waste is to dump it into the nearest body of water. Until the playing field is level on that issue, there will be pressure for the US companies to start to cut corners again on these issues to stay competitive, because apparently China is nearing catastrophe on this issue.
If you over-regulate the economy, you get something that looks like the USSR, which despite being a so-called global superpower militarily, had a major mass-dieoff event in the mid 20th century because they could not produce enough food. Also, they ended up with an economy that at the end, was not capable of producing a practical refrigerator.
If you under-regulate the economy, it's probably also bad because it causes a race to the bottom, and environmental mayhem.
Now the oil thing has a chance to throw everything out of whack. Lack of an increasing energy supply has the opportunity to turn the whole thing on its head. The nations like Japan and Italy that can do their raw material conversion more cheaply from an energy standpoint will win. Maybe this means getting rid of the high-tech equipment and starting to do things by hand again. Maybe it means getting even more super-sophisticated technically.
You can make the argument that what we are going through right now, with the disassembly of our manufacturing base is an artifiact of our oil supply peaking in 1970. Our ability to use energy as a proxy for manpower has, or will, reached a limit. The only reason China is able to do it at the moment is their practically unlimited supply of practically slave labor to run these manufacturing operations. It will be interesting to see how the chinese adapt to this problem.
So, in theory the land directly to our south, Mexico, which had abundant oil supplies and also lots of cheap labor, should have been a Utopia by now, but instead, it is sufficiently hellacious that 1/10 of its population has checked out. Reason: governmental idiocy leading to idiotic planning, and a society that tolerates an uneven income distribution.
I do not know the best way on this. The free marketers will say "let the market decide" but as long as we have a system where giant corporations control the government and markets, it is not a true "free market" in any real sense. Government action, which causes inefficiency but also protects the public and workers is popular, but excessive action or stupid government can cause an even worse problem.
I am not smart enough to figure out a way to make it better.
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