Labor + Capital + Raw Materials = Finished Goods

[Note to Readers: This year, approximately 500,000 high school seniors applied to the Ivy League and highly selective schools like Stanford (my alma mater), MIT, and the University of Chicago. Around 475,000 of them (95%) — including my hard-working, ridiculously talented 18 year-old son — were rejected.

The following post is for them — not just as they decide amongst dozens of other stellar colleges and universities by the May 3 deadline, but as they approach their undergraduate studies the next four years, and hopefully beyond. P.S.: To my 21 year-old, pre-med college son: if everything you’re learning now turns out to be wrong . . we’re in big trouble! (and a lot of debt). 🙂]

I spent four years learning economics at Stanford.

I’ve spent (going on) the last forty years unlearning it.

It’s not that Stanford failed me.

It turns out that the entire field of modern economics was built upon not one but two outmoded ideas, if not conceptual San Andreas faults.

It’s All Software Now

Fundamental flaw #1 was economists’ presumption that people are utility-maximizing, rational actors.


As demonstrated by psychologists like Daniel Kahneman and Amos Tversky (in the latter case, literally across the Stanford quad from the Econ department**), people are nothing of the sort.

They’re frequently irrational, unpredictable actors who contradict themselves and behave inconsistently all the time (OK, maybe not engineers).

See, “Flushing Two Centuries of Economic Theory, or, Never Mind About Human Rationality.”

Forget “Marginal Cost”

Which leads to misconception #2: the nature of capitalism’s traditional building blocks: Capital, Labor, and Raw Materials.

That model made sense in a manufacturing world whose sole output consisted of (material) widgets.

But, it simply doesn’t apply to a technology and service-driven economy.

To pick just one example, what is the marginal cost of today’s quintessential product, software (essentially, computer code)?

Answer: “zero,” because it can be reproduced infinitely, for free.

So much for Raw Materials.

Embattled Labor, Blurred Capital

Similarly, in a world where machines and robots are destined to produce our goods, drive our vehicles, pick our investments, and diagnose our illnesses, what exactly is “Labor,” anyways — at least, the human kind?

Gradually if not suddenly, its role would seem to shrink to the point of disappearance.

Which means the sole, supporting leg of capitalism’s 3-legged stool is Capital.

But, what qualifies as “Capital” today?

Is it the same as money?

If so, new, digital (“virtual”) currencies like Bitcoin and Ethereum threaten to explode classical economics’ accepted definition — not to mention loosen monetary authorities’ (read, government) control over the spigot.

21st Century Economics

None of this is to suggest that academe — and society — would be better off not studying economics.

On the contrary, what’s needed is see to the subject with continuously fresh eyes, and to be ready to cast off models and ideas that no longer fit, just as a snake sloughs its skin.

P.S.: Thomas Kuhn coined the term “paradigm shift” to describe this phenomenon.

**Want to guess where the impetus for “Interdisciplinary Studies” comes from??

See also, “Is Shiller Right About Trills, GDP?”; and “Why They Call it GROSS Domestic Product.”

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

Leave a Reply