We Are Now (And Always) In A Transition From Quantity To Quality

"It's getting better . . ." - Mama Cass

The argument I am making is that we go from answering the question "How can I make more of this?" to answering the question "How can I make this better?", and we do this over and over again.

Notice, though, that the next iteration of making more of this is generally a lower magnitude of quantity expansion. We go from new tech to mass production to better tech (in that same product) to mass production of the better tech, etc. But the second and later iterations of mass production (quantity advancements) are not as big since the tech improvement makes the market smaller either through specialization (branching out into sub products) or niche advancements (version x.0 offers way more than what the typical consumer of this product ever wanted/needed).

This can be thought of as a theory sculpted out of the punctuated equilibrium theory¹ of evolution informed by the law of diminishing returns and lessons of specialization from economics. Illustratively, I see it like this:

In a way this is a matter of illusion or perspective. It is in this sense I say “and always”. This is because at any point in time the expectation of future improvements (in any good or service or bundle of such or activity otherwise) is along the dimension of quality improvement while past improvements are along the dimension of quantity.

Yet in another way this can be said more absolutely as a inflection point. The transition from the post-WWII era of mass consumer production to the era of mass personalization and craftsmanship (only the dawn of which I predict we are in) is a static and one-time inflection point. The same can be said of specific goods and services. Think of these transitions as mini versions of the bigger phenomena occurring in the broad economy. And yes, individual cases will fall well outside of the larger picture, and some will experience counter transitions (regressions). Many individual cases will come in waves repeating the cycle with new quantity gains achieved from newly reached quality plateaus. Automobiles seem to follow this path.

Implications

So what's the point? There are many. For one, as we look at opportunities for growth, the law of diminishing returns is always at play. The further along the product lifecycle one is, the more one must consider settling for small, incremental improvements mostly in quality or seek out the development of a true breakthrough—a generally daunting endeavor.

A second point is that there is always a tradeoff between quantity expansion and quality expansion. I like to think about quantity/quality progress as conveyor belts and ladders, respectively. The economies of scale works wonders especially early on as quantity expands almost of its own volition (i.e., riding a conveyor belt). To make quality improvements, however, one must work much harder (i.e., climbing a ladder). And the ladders themselves get shorter even though the rungs get further apart (i.e., less potential improvement at greater sacrifice). It would be wonderful if we could hop on a conceptual escalator and get more of both, but unfortunately those don't exist.

A third point relates to perspective. It will generally seem to be the case that you have just left the expansionary production stage (quantity) and have entered the improvement stage (quality). This is partially always true and partially illusory. The only reason you think you’ve left the expansion stage is if you’ve been in one; otherwise, there would be no quantity output there to point to. The only reason you have an opportunity to think about improvement is because you are staring at the product that now exists allowing you to creatively come up with other uses. When you get a car or a smartphone or a whatever particular product, you probably are satisfied with that one—an additional one does you almost no good.² You aren’t concerned with another much less the production process getting more efficient at making more. You’d much rather see it transform in the next iteration to be better.

On the production side this can be true as well albeit tempered by the desires and incentives of a profit-seeking firm. If you and competitors are in a race to get more efficient at pushing out more products, it feels like a cost-cutting rat race you can only lose not win. Much better would be the route of pathbreaking into the next new version of the thing you’re producing leaving all the competitors in the dust grinding it out among themselves.

A fourth point relates to the adjacent concept of jumping S-curves.³ Individual companies attempt to do this, but they almost always fail. This is both despite government support/protection and independent of antitrust attacks—these are almost always after the true threats to companies have begun delivering deadly blows. Rather we should think about this in two general regards:

1. An economy-wide series of S-curves where different cohorts of industries, firms, and thought-leading organizations occupy various S-curve positions up the chain.

2. A series of S-curves that have a few dominant leaders occupying a given position, and these are periodically replaced by new firms taking on the lead role as progress is made up the chain.

In both cases the collections of those propelling progress forward changes perceptively generally slowly over time but is substantial when clearly different eras are compared. Think about the differences between any two years within a decade of each other versus the differences between any two years 50 or 100 years apart. In the latter case the type of technology, geographic location, and principal architects of the current leaders would likely be almost completely different.

Most Important Implication

Most importantly, I think this should give us perspective. Obviously this has implications for business leaders, investors, and policy makers. Yet all of us should take it to heart because it offers perspective on where we are. The world is always changing quickly around us.

This perspective is explanatory. Pushing back against Douglas Adams’ observation:

1. Anything that is in the world when you’re born is normal and ordinary and is just a natural part of the way the world works.

2. Anything that’s invented between when you’re fifteen and thirty-five is new and exciting and revolutionary and you can probably get a career in it.

3. Anything invented after you’re thirty-five is against the natural order of things.

And this perspective is hopeful. Embracing the wisdom of Mama Cass:

Once I believed that when love came to me
It would come with rockets, bells and poetry
But with me and you it just started quietly and grew
And believe it or not
Now there's something groovy and good
Bout whatever we got
And it's getting better
Growing stronger warm and wilder
Getting better everyday, better everyday

P.S. I think the first paper discussed by John Cochrane here supports this idea.

P.P.S. This Maxwell Tabarrok post has some relation to the discussion at hand:

The Most Important Century Is Not Unlikely

1. I am not giving any opinion on the PE theory itself within the study of evolution.

2. This doesn’t hold as much for luxury goods or for status goods. It is more applicable to general purpose (normal) goods (and services).

3. Parsa Saljoughian has a good post illustrating this concept.