Nailing the X-Ray and Gutting “The Law of Supply and Demand”

You can observe a lot by watching.
Yogi Berra

Dante Autullo went to a hospital complaining of nausea and a headache. A passing diagnosis might have been that he had the flu. But when his doctors asked him about what he had been doing, X-rays showed that as he was using a nail gun, a nail he thought whizzed past his head went into it instead (A). They operated; he’s okay.

Easy answers have a lure. After all, who wants to dive deeply into a flu case? But details matter. Easy answers aren’t always right. Just ask Dante.

The draw to misguided and overly simplistic phenomena applies to “The Law of Supply and Demand.” As we see in (B), given their postulates (i.e., flawed assumptions), they propose a single market equilibrium point. Every time they show such an example, it never has real-world data. It is always all made up.

I’m not going to stand for it. Neither should you.

Readers of this column know actual market behavior, based on verifiable data, looks more like (C), where buyers pay for aircraft cabin volume and speed (in the left-hand Value Space) as limited by their available funds (on the right-hand Demand Plane). Upcoming posts will give you more reasons to listen to reason.

The Law of Value and Demand: Not Your Grandfather’s Economics

To reject one paradigm without simultaneously substituting another
is to reject science itself.
Thomas S. Kuhn

No rejection of science here. But we can dismiss an ineffective paradigm.

Paul Samuelson wrote that the law of supply and demand, the root paradigm of economics, meant that “the equilibrium price, i.e., the only price that can last…must be at this intersection point of supply and demand curves.” That model works for commodities such as gold, silver, or iron.

But what about jets and jet engines? They use iron. You’ll only gain deep insight into these markets by substituting economics with Hypernomics.

Its fundamental principle, The Law of Value and Demand, states that:

  1. Features define Value,
  2. Value determines Price,
  3. Price limits Quantity Sold, and
  4. Quantity Sold is a Feature.

You can study this new field in my upcoming book with Wiley, entitled Hypernomics: Using Hidden Dimensions to Solve Unseen Problems, in January 2024. In the meantime, have a look at my paper called “8D Cost Trades with Entanglement,” published in the April 2023 edition of the Journal of Cost Analysis and Parametrics,” to see how markets work.

Proper Production Possibility Curves

There are no solutions; there are only trade-offs
Thomas Sowell

Forget the “classic” choice model between guns and butter with its single imaginary frontier. Such notions offer no basis for action. Never settle for heuristics when you can have analytics. To reveal true alternatives, we’ll need to do some heavy lifting.

In 4D.

No, really.

In A, we find an aircraft Demand Frontier in yellow. If we want to make 100 units (Quantity – Dimension (Dim) 1), we find our price limited to $393M (Price – Dim 2). For 55 copies, our price could rise to $610M (purple lines). In A’s Value Space, the sustainable price goes up with range (Dim 3) and velocity (Dim 4) but down with added units; thus, the angled Value Response Surface for 55 units is higher than that for 100 units. They form straight lines in log space where they intersect their respective price ceilings (the horizontal yellow and purple planes in Value Space). In B’s linear space, those intersections form multiple curves revealing the proper trade-offs. The yellow line shows us we could build a plane with 10K in range, with a max V of just over 1400 KPH.

It takes work to find Demand and Value, but in the end, we get insight available nowhere else.

Markets Across Seven Dimensions

One should concentrate on getting interesting mathematics.
Paul Dirac

Let’s examine how markets work together across 7 dimensions.

Far from being some exotic mathematical anomaly, such arrangements occur daily across many markets. Please feel free to offer some feedback.

To make a pencil, given wood, you’ll need graphite.  Making a bike takes a frame and tires.  These markets are bonded—you can’t make a final product without some key pieces.  How do bonded markets such as jets and their engines interact across 7 dimensions?

Let’s look.

In the 7D diagram below (with log scaling in all directions), turbofan engines use Dimensions (Dims) 1-4.  As Specific Fuel Consumption (SFC, Dim 1) goes down and Max Thrust goes up (Dim 2), turbofan prices, reflecting their Value, moves up as well (Dim 3), with Quantities sold (Dim 4) limited by the market’s demand frontier (yellow line on the red, right-hand Demand Plane).  Making a new engine with a specified level of SFC and Max Thrust yields a value of the large green sphere, marked by “T,” at left.

That engine supports a new business aircraft model and accounts for a portion of the plane’s cost, marked by the large green sphere labeled “B.”  Aircraft Value goes up (Dim 3, shared with the engines) with Max MPH (Dim 5) and Cabin Volume (Dim 6), as limited by their Demand Frontier (Dim 7).  Such entanglements exist in all bonded markets.  They must be studied thoroughly to be optimized.

#hypernomics #markets #innovation #economics

The Value And Demand For Taxpayer Dollars

Don’t Worry, Be Happy – Bobby McFerrin

In May 2020, CA Gov. Gavin Newsom said he wasn’t worried about Tesla leaving the state.  Last month, when Elon Musk announced he was moving Tesla to TX, the Gov. changed his tune.  It seems he felt he helped create the company, citing the tax breaks he gave them.

Hypernomics has seen this argument before.  Breaks in CA usually amount to slight and temporary reductions in the business-crushing tax rates CA has compared to other states.  That’s why companies by the thousands have been leaving CA.  A legislative “solution” to lost tax revenue is to have CA tax requirements follow businesses and individuals once they leave the state.  But that 1) denies some tax monies to other jurisdictions and 2) makes it less likely for new companies to enter CA.

CA has the best weather in the US, but the Tax Foundation ranks it next to last in its business climate.  As hypothesized below, the Value to taxpayers increases with the physical and business environments. Increasing the latter’s Value makes it more appealing to taxpayers – if they are attracted enough to come into the state, they offer more Ways for CA to get needed tax dollars.  At the same time, all mature markets have Demand Frontiers, which deliver the Means by which they must abide.  It’d take lots of work to learn these forces in detail. But avoiding that effort leads to unpleasant surprises.

And worry.

#hypernomics #innovation #taxpayer #taxanalysis #markets #economics

Chasing the 8th Dimension

“May I pass along my congratulations for your great interdimensional breakthrough? I am sure, in the miserable annals of the Earth, you will be duly enshrined.”
Lord John Whorfin, The Adventures of Buckaroo Banzai

In the film named for him, rockstar, brain surgeon, and test pilot Buckaroo Banzai drives a pickup through a mountain and enters the 8th Dimension. That geometry seems impossible to imagine.

Or is it?

Hypernomics studies nonnegative market and mathematical dimensions. Without needing to navigate negative regions or physics, new coordinate systems open up for us.

As we see in A, we can portray missiles in a 4D system like the one we used for general aviation planes in the last post. Separately we can do the same in B for bombers. But, are they separate? The 4 dimensions portraying the missile market match the number needed for bombers. But since both share price as a nominally vertical axis that links them (Dimension 3), we can reuse that line, as in C. Here 4 + 4 = 7 dimensions.

How do we get to 8 dimensions? Figure C represents a snapshot in time. If we trace a path through several such views at different intervals, we add time to the mix, reaching the 8th Dimension.

#innovation #hypernomics #economics #markets

3 + 2 = 4

No one is so brave that he is not disturbed by something unexpected
Julius Caesar

It’s disturbing to think that 3+2 won’t equal 5. Or that markets are unlike space and begin with four dimensions. Or that we might discover images that disagree with paradigms held for over 100 years. But what happens if we use Hypernomics to take a new look at an old problem?

Let’s see.

Suppose we want to see how customers value products. Specifically, let’s consider the three aircraft models in Figure A. We’ll want to examine features that might be important to customers, here, Max MPH and Seats. Those features mandate a pair of horizontal axes; their combined effects drive a third vertical axis, that for Price, making three ordered triples.

At the same time, we may want to plot each model’s quantity sold as a horizontal dimension and couple it with its associated Price on the vertical dimension for three ordered pairs, as we see in Figure B.

But the three dimensions of Value Space are not straight additions to the two dimensions of the Demand Plane. Instead, as C reveals, 3D Value Spaces and 2D Demand Planes share the Price Axis, forming 4D structures, thus 3+2=4. Four dimensions offer more insight. Time adds a fifth dimension.

#innovation #hypernomics #economics #markets

Worth Every Penny – Not Enough Pennies

There are several ways to sink a new project.  A common method is to ask potential customers about their willingness to buy an offering and then suppose some fraction of the resulting sum is viable.  In the 1960s, surveys indicated there was a market for 200-300 supersonic Concorde airliners.

They built 20.

Decades later, multiple companies are entering this market again. One of them, Aerion, is building its AS2 bizjet (A), selling for $120M.  Suppose we compile and analyze a dataset of all business aircraft that cruise at 400 MPH or more.  We’ll then find a production possibility curve for planes worth $120M as shown in B (that curve has an adjusted R^2 of 97.5%, a standard error of $10.1M, and P-values of 6.11E-43 and 1.02E-19 for Cabin Volume and Max MPH, respectively).  By this measure, the AS2, over ten standard deviations above the line, is worth every penny.

However, in C, we find that the market only supported 55 business aircraft worth $80M or more for a decade, up only slightly from a like study done for the same duration done five years earlier (with 46 planes over $80M).

Five years ago, Aerion announced an order for 20 units. They have the same number today.

#innovation #markets #future #economics

Economic Entanglement

Inventors need manufacturers who require operators. The fate of each depends largely on the others. If just one player fails, an entire enterprise could sink; this is economic entanglement.

Such arrangements are highly intermeshed. Revenue to the inventor, 2, is a cost to the manufacturer, who pays license, technical development, and royalty fees to gain access to technology, 1. After a manufacturer finishes development and begins production, it wins sales, and their revenue from that, 3, is a cost to operators who buy it.

An operator may agree to pay for part of the manufacturer’s development costs to be among the first to gain access to the latest tech. Once it begins to receive and use the new products, it earns revenue from its users, 4.

Key to the success of such operations is satisfactory financial metrics, 5 and 6, as determined by each participant’s performance and Return On Investment (ROI) parameters to which the parties agree, 1. In this case, under the Manufacturer Costs & Loan, we see their build costs have ballooned to 200% of their original prediction, which might sink the program, if not for exercising a significant portion (87.3%) of an available USG grant.

#innovation #entrepreneurship #economicentanglement #partnerships

Economic & Social Distancing

We’re in the middle of a global COVID-19 pandemic.  We’ve heard about social distancing.  It sounds bad. What if we could use such measures to our advantage?

In the mid-1800s, miasma theory dominated disease transmission thinking.  It said, “bad air” caused most disorders.  Dr. John Snow didn’t buy it. As cholera hit home, he decided to see for himself.  He made dot plot A, with one dot on a Soho, London map for every cholera death.  They centered near the Broad Street Pump.  The opposite of distancing, clustering, proved cholera a water-borne disease.

Distancing and clustering both figure into market success.  In B, the 2018 electric car market had many players offering 5 passenger capacity with up to 250 horsepower.  New entrants may want to provide unique combinations to create separation.  We observe open market spaces.  In 2016, Tesla placed multiple Model 3 versions in then-existing like regions.  It became the best-selling US plug-in car.  Economic distancing can help sales.

In 2018, buyers agreed within about features for which they’ll pay. As shown in C, they cluster to the added value they assign to seats and horsepower (P-Values of 0.59% & 9.80E-11).  How else can we use Figure C? See the next post.

#socialdistancing #economicdistancing #markets