03-31-13 - Market Equilibrium

I'm sure there's some standard economic theory of all this but hey let's reinvent the wheel without any background.

There's a fundamental principal of any healthy (*) market that the reward for some labor is equal across all fields - proportional only to standard factors like the risk factor, the scarcity of labor, the capital required for entry, etc. (* = more on "healthy" later). The point is that those factors have *nothing* to do with the details of the field.

The basic factor at play is that if some field changes and suddenly becomes much more profitable, then people will flood into that field, and the risk-equal-capital-return will keep going down until it becomes equal to other fields. Water flows downhill, you know.

When people like Alan Greenspan try to tell you that oh this new field is completely unlike anything we've seen in the past because of blah blah - it doesn't matter, they may have lots of great points that seem reasonable in isolation, but the equilibrium still applies. The pay of a computer programmer is set by the pay of a farmer, because if the difference were out of whack, the farmer would quit farming and start programming; the pay of programmers will go down and the wages of farmers will go up, then the price of lettuce will go up, and in the end a programmer won't be able to buy any more lettuce than anyone else in a similar job. ("similar" only in terms of risk, ease of entry, rarity of talent, etc.)

We went through a drive-through car wash yesterday and Tasha idly wondered how much the car wash operator makes from an operation like that. Well, I bet it's about the same as a quick-lube place makes, and that's about the same as a dry cleaner, and it's about the same as a pizza place (which has less capital outlay but more risk), because if one of them was much more profitable, there would be more competition until equilibrium was reached.

Specifically I've been thinking about this because of the current indie game boom on the PC, which seems to be a bit of a magic gold rush at the moment. That almost inevitably has to die out, it's just a question of when. (so hurry up and get your game out before it does!).

But of course that leads us into the issue of broken markets, since all current game sales avenues are deeply broken markets.

Equilibrium (like most naive economic theory) only applies to markets where there's fluidity, robust competition, no monopolistic control, free information, etc. And of course those don't happen in the real world.

Whenever a market is not healthy, it provides an opportunity for unbalanced reward, well out of equilibrium.

Lack of information can be particularly be a factor in small niches. There can be a company that does something random like make height-adjustable massage tables. If they're a private operation and nobody really pays attention to them, they can have super high profit levels for something that's not particularly difficult - way out of equilibrium. If other people knew how easy that business was, lots of others would enter, but due to lack of information they don't.

Patents and other such mechanisms that create legally enforced distortions of the market. Of course things like the cable and utility systems are even worse.

On a large scale, government distortion means that huge fields like health care, finance, insurance, oil, farming, etc. are all more profitable than they should be.

Perhaps the biggest issue in downloadable games is the oligopoly of App Store and Steam. This creates an unhealthy market distortion and it's hard to say exactly what the long term affect of that will be. (of course you don't see it as "unhealthy" if you are the one benefiting from the favor of the great powers; it's unhealthy in a market fluidity and fair competition sense, and may slow or prevent equilibrium)

Of course new fields are not yet in equilibrium, and one of the best ways to "get rich quick" is to chase new fields. Software has been out of equilibrium for the past 50 years, and is only recently settling down. Eventually software will be a very poorly paid field, because it requires very little capital to become a programmer, it's low risk, and there are lots of people who can do it.

Note that in *every* field the best will always rise to the top and be paid accordingly.

Games used to be a great field to work in because it was a new field. New fields are exciting, they offer great opportunities for innovation, and they attract the best people. Mature industries are well into equilibrium and the only chances for great success are through either big risk, big capital investment, or crookedness.

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old rants