Economic Wargames

by Dal Timgar

Continued

The fourth edition of Macroeconomics by Robert J. Barro of Harvard University defines depreciation as:

The wearing out of CAPITAL goods over time, often expressed as a fraction of the stock of capital.

When a car rental company buys automobiles, it contri- butes to the GNP and therefore NNP. The same applies to cars purchased by consumers. However, as consumer autos deteriorate over the years the depreciation is ignored, while that of capital goods is registered on the income tax forms of businesses. Although economists have no direct method of obtaining Depreciation of Consumer goods (Dcon), to pretend it doesn't exist when it must be a rather large amount is absurd. How many billions of dollars worth of cars, refrigerators, stoves, air-conditioners, etc., etc. have American consumers trashed since the end of World War II? So the equation should be:

NNP = GNP - (Dcap + Dcon)

Our economists are pulling a "Bill Clinton" on us. Limiting the definition of depreciation in a way that makes economic losses to the average man disappear into space. Since economists used to use GNP, now GDP, to measure economic growth on the grounds that Dcap was small enough to ignore, including Dcon means they would have to use Net instead of Gross. Every competent businessman knows it is the Net that really matters not the Gross. How economists have made this blunder and in- stitutions of higher learning have taught it for fifty years is beyond me. I figured this out in 1976 when they were still using GNP and have yet to hear Net Domestic Product mentioned on television, that's why I still use NNP.

We live in a culture that has used complex machines for 300 years. The first patent on a steam machine, number 356, was issued in 1698. Engineers can test, measure and specify the failure rate of mechanical and electronic devices. A graph of the failure rate over time of a machine follows a pattern known as a bathtub curve.

\ Infant Mortality                                      _-~
\                                                        _-~ wear
\              Useful Life                   _____-~ out
\__----------------~~~~~~~~~~~~~~    period
MTBF
                  time ------->

The curve gets its name from the obvious similarity to the cross-section of a bathtub cut lengthwise up the middle. It starts with a high failure rate dropping rapidly to a minimum. This is when the machine is new and has a high probability of manufacturing defects. The failures during this time are similar to birth defects and are also known as infant mortality. The low point on the curve is where the device is least unreliable and the Mean Time Between Failure (MTBF) is computed. The failure rate remains low for an extended period then rises quickly when the device begins to wear out.

So what does the failure rate of machines have to do with depreciation of durable consumer goods? In classical economics it is common to assume that consumers are rational, possibly for simplicity's sake. But how can rational decisions be made with incomplete information? The only consumer products for which I have ever seen MTBF data are disk drives for computers. Since computers have been primarily used in businesses and losing data from hard disks causes serious problems, supplying reliability data on hard drives is traditional. Where is the reliability data on other consumer products? What about cars, televisions, VCRs? How are we supposed to make these rational decisions? The best information I've seen is in Consumer Reports. They show graphs of failure rates by brand name based on surveys of subscribers. They do not give break-downs by model within brand and usually only cover about eight brands of a product type. Are manufacturers trying to maximize the useful life of their products? If not, are they engaged in planned depreciation, usually called planned obsoles- ence?

In 1937 engineers at Lockheed began designing a new fighter plane. In January 1939 the first P-38 took to the air for testing to begin eliminating design flaws. The P-38 Lightning began service in WWII in April '42, it had two supercharged 1400 horsepower, counter rotating engines, a cruising speed of 350 mph, a maximum of 414 mph and a ceiling of 44,000 feet. The German's nicknamed it "The Fork-tailed Devil". A squadron of Lightnings shot down Admiral Yamamoto over the Pacific in 1943.

Another child of Lockheed was conceived in 1958. It became the SR-71 Blackbird, a spy plane instead of a war plane. Its maximum speed is still classified but is acknowledged as being capable of 2350 mph at 80,000 feet.
 
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