On this post. I will summarize the questions as (1) don’t marginal costs really fall when a sector goes through a structural shift, which should lead to a drop in prices? and (2) why don’t investment booms cause dislocation?
1. In microeconomics, I tell my high school students that price discrimination explains everything. Almost every real-world business case finds firms facing very low marginal costs but needing to recover fixed costs. So you see many efforts to segment the market and charge a higher price to the customer with less elastic demand. For your question, the relevant point is that firms always face very low marginal costs–in either booms or recessions. They choose their price structure so as to maximize revenue. A recession does not fundamentally alter their pricing problem.
As a side note, you give several examples of industries that you argue have mostly production workers. I am not convinced. Take health care, for example. If a hospital or a medical practice experiences a 15 percent decline in demand, which workers become expendable? You still need all the administrative staff–accounting folks, the insurance-billing folks, the IT folks. You can lay off some of the folks who touch patients, but that is not an overwhelming proportion of the health care work force.
2. In the Schumpeterian story of PSST, an investment boom is what you observe when the new opportunity arrives but the legacy industry does not recognize it. So Borders keeps investing in stores while Amazon undertakes expansion. This is unsustainable, since the market is not big enough for both of them. When Borders closes, investment declines. The causal factor is technological change. In the short run, investment and employment rise, because the legacy industry is in denial. When they get the memo, investment and employment fall. It seems to me that the pattern in the legacy industry is for firms to hang on as long as possible, and then crash. You might think that they would decay gradually, but that does not seem to be the pattern.
My understanding is that monopolists (and price discrimination implies monopoly power) increase their quantity supplied in response to a drop in marginal costs. So a big drop in marginal cost should come with a change in quantity. Even if it isn’t a huge one. In fact, if we know something about the elasticity of demand (or ideally the demand curve more broadly) for a good we can predict what the monopolist’s supply response should be to a change in marginal cost. Therefore, this ZMP worker / PSST story has fairly strong predictions that follow from industry competition and demand elasticity.
You wrote a while back, PSST is a different way of looking at the world than AS-AD.
Could you please define PSST, and AS-DS?
Thanks
See the papers at arnoldkling.com/essays/papers/
Private money markets have a similar problem when the central banks keep treasury rates lower than market rates for very long periods. Eventually the private money market has to deal with low rates and must be more efficient. They drop the low income customers and serve customers with large volumes to gain efficiency by scale. The lower income customers then have no efficient retail banking and use government as their banker by increasing transfers, until the fraud is uncovered and we crash.