Uber forms of governance

A few weeks ago Samuel Hammond posted some interesting thoughts on multi-sided platform (MSP) technologies like Uber and PayPal, and the role they play in providing forms of governance. You can read the whole thing here, but the outline is as follows: Governance—that is, things like rational planning to solve co-ordination problems, the setting of rules and assigning of rights, etc—is done not just by states but by private companies, too. Platform technologies (essentially those which enable interaction between different groups of people) are a good example of this. Amazon and Ebay, for example, are virtual marketplaces which connect disparate buyers and vendors from across the world, whilst PayPal is not only a payments processor but an arbiter of commercial disputes, with procedures to file a complaint and rules on when compensation is entitled.

'Good' governance occurs when the rules set and rights assigned are reasonable to both sides of a transaction, and when the total societal cost of any regulation is kept to a minimum.

State governance schemes are well-intentioned, but can be rather crude and inefficient in their execution. Take taxi-regulation for example: licenses guarantee a certain level of quality and safety for consumers, whilst regulated fares remove the cost and risk of having to haggle for every journey. At the same time, though, these regulations result in high prices, inflated barriers to entry, a lack of competition and little reason for incumbents to innovate or improve their service. Whilst the state tries to efficiently balance the costs regulation imposes on each party it often falls short, both because of the grand Economic Calculation Problem, and things like capture of the regulatory process by special interest groups.

In contrast, Hammond argues, MSP technologies are very good at being governance institutions. For example, Uber has ruffled so many feathers because its popular service is arguably a superior system of taxi regulation, thanks to its use of participant rating systems, safety features, an algorithmic pricing structure and so on. And, by controlling a bottleneck to market access, Uber to some extent acts as a de facto private licensing authority.

These 'market regulators' tend to be good at governance for a couple of reasons. One is that they're free to harness new technology and experiment with different setups, driving down transaction costs. Another is the fact that a rival platform may always come along an offer an alternative service— and, as Hammond notes, "the only way to supplant an incumbent platform is to adjust the governance structure in a way that social costs are better compensated by maximising the bargaining surplus". This ensures that even when a market regulator looks like a natural monopoly, so long as there is the possibility of exit, the cost of regulation will tend towards the social minimum.

Hammond argues that this means that MSP technologies are not just a bit better at governance than state institutions, but that "they potentially meet the economic definition of an ideal 'public interest' regulator". And, just as Uber challenges traditional taxi governance models, we can imagine a future where all property rentals are listed on something like Air BnB, with tenancy acts and local regulation displaced by market-set rules and regulations which efficiently balance the interests of renter and landlord.

Such a situation should perhaps not be understood as 'deregulation', but a shift in the act of governance from the state to the firm, resulting, we assume, in reduced costs to society as a whole.

I particularly liked this post because it complemented some thoughts (and assuaged some fears) I'd had about the state harnessing new technology and commercial consumer insights to better perform its functions. In November I wrote a rather gloomy piece on 'algorithmic regulation' and the government's use of things like 'big data' and behaviour prediction to create more efficient, streamlined, and reflexive regulation, which, like the google search algorithm, would be constantly reviewed and updated according to insights generated into 'what works'.

Such algorithmic regulation, I thought, could make government regulation more efficient, less irrational and less intrusive—but it could also open the doors to forms of dystopic technocracy. Once governments have the ability to create, access, and utilise vast swathes of information on their citizens, they're likely to want to expand their scope of operations. Perhaps they'll be tempted to 'connect the dots' between different types of lifestyles and tax income, health outcomes and the like. The opportunities for Nudge-on-crack policies could be everywhere. In addition, behind the seemingly apolitical goal of 'rule by algorithm' it's easy to smuggle in hidden political assumptions, and use questionable or untrue assumptions to dictate what our government supercomputers do. Nonetheless I felt I was being an unwarranted techno-pessimist, so I filed it away my wonderings before resurrecting them recently on my tumblr.

However, Hammond's post sketches out an alternative governance system I'm much more of a fan of. Instead of harnessing private sector insights and using them to aid an intrusive and bloated state, he imagines a situation where government effectively outsources certain functions to private bodies (Uber as a private licensing authority, etc). And, because these bodies have to respond to market pressures, if they do a bad job or overstep the mark parties can vote with their feet. These alternative governance systems are less likely to cater to special interests, and don't require the state to handle so many terabytes of personal data. We still have algorithmic regulation, but done more on the terms of the parties affected instead of the state.

To me, neither of these two futures of regulation seem implausible. But I certainly know which one I'd prefer.

Markets get around silly regulations

Advocates of free markets often bemoan all the regulation that firms are subjected to under modern neoliberalism. One thing they forget is that this is a sign that capitalism has won, not that it has lost! The debate now is about restraining or editing or improving capitalism, and never about overthrowing it. All the major officially anti-capitalist countries are gone or anti-capitalist only by name and not by nature.

But another thing you often see them overlook is how markets work their way around regulations and can effectively neuter them. Ban one financial instrument and if the instrument served a purpose, and is missed, you will soon see another instrument, technically different but substantively filling the same niche, creating almost as much value as the older one did.

According to a new paper from Stephen McDonald at Newcastle Business School, this also works for car insurance. In its ridiculous Test-Achats decision of 2011 the European Court of Justice decided that insurance firms can no longer use gender/sex as a risk factor to price insurance.

That is: the ECJ recognises that men have more accidents and women have fewer, so male drivers are more costly to insurance firms and society and women drivers are less. And that a random male driver is more likely to be costly to a given insurance firm than a random woman. But despite men driving more recklessly and women driving more safely, the insurance firm cannot use these true facts to price their services more efficiently. The decision was not even driven by identity politics and social justice rhetoric; since barely anyone thinks men are discriminated against.

Thankfully, markets have worked around the issue, and found proxies for gender they can use to eliminate most of the inefficiencies generated by forcing them not to use useful and important information. "Indirect Gender Discrimination and the Test-Achats Ruling: A Field Experiment in the UK Motor Insurance Market" (which Dr. McDonald kindly sent me a pre-publication version of; I hope he doesn't mind me quoting from it) shows us how.

Following the ‘Test-Achats Ruling’ by the European Court of Justice, firms in the European Union can no longer use gender as a risk factor to price insurance contracts. However, the Ruling allows factors correlated to gender to continue to be used, thus raising the possibility of indirect discrimination. This paper examines the effect of the Ruling in the UK motor insurance market where gender-sensitive pricing was previously common.

Using a difference-in-difference-in-differences estimation approach, it is found that gender is no longer used directly to price contracts, but that there is some evidence of indirect discrimination in which occupations are used as a proxy for gender. Specifically, it is found that prices for young (21-year old) drivers become relatively cheaper for those in occupations with a higher proportion of female workers, but increase for occupations usually performed by males. There is no evidence that this occurs for older drivers or that car type is used as a proxy for gender

Good old market mechanisms!

Non magister sed mendax

Once again we've the, umm, interesting assertion that it's sugar that is really causing the outbreak of obesity. That this is not true doesn't seem to bother those pushing the tale. For here they are again:

Sugar and carbohydrates are the real culprits in the obesity epidemic - and the public has been falsely told that couch potato lifestyles are to blame, a new report has claimed.

Writing in the British Journal Of Sports Medicine, they said poor diet now generates more disease than physical inactivity, alcohol and smoking combined.

The editorial, by a group of cardiologists and sports experts, says that while obesity has rocketed in the past 30 years there has been little change in physical activity levels.

"This places the blame for our expanding waistlines directly on the type and amount of calories consumed," they write.

Here is that editorial:

A recent report from the UK's Academy of Medical Royal Colleges described ‘the miracle cure’ of performing 30 min of moderate exercise, five times a week, as more powerful than many drugs administered for chronic disease prevention and management.1 Regular physical activity reduces the risk of developing cardiovascular disease, type 2 diabetes, dementia and some cancers by at least 30%. However, physical activity does not promote weight loss.

In the past 30 years, as obesity has rocketed, there has been little change in physical activity levels in the Western population.2 This places the blame for our expanding waist lines directly on the type and amount of calories consumed.

So, what's actually wrong with this analysis?

What's wrong with it is that it's simply factually wrong. As Chris Snowdon has been manfully pointing out all along, calorie intake in both the US and UK has been falling over the decades. As has, remarkably, sugar consumption. To the point that, for the UK today, average calorie consumption is lower than the minimum recommended during WWII rationing. Actually, today's average consumption is below where our grandparents started to lose weight on such wartime rations. It simply cannot be an increase in consumption to blame as there's not been an increase, there's been a reduction.

Given that weight does work on calories input minus calories expended, this means that calorie expenditure must be down. But our magisters here are telling us of a study that shows that exercise levels have not fallen, might even have risen. So, what is happening here?

Quite simply, they are looking at formal exercise, not calorie expenditure. Perhaps more people do go for a shuffle around the block than used to. But that's not going to outrun the effect of us all having central heating these days upon calorie expenditure.

It's getting very difficult indeed to think that magister is the appropriate word here, our opinion is leaning ever more to the word mendax.

Four basic points on deficits

I'm (probably) going on Scotland 2015 later, to talk about Paul Krugman's views on deficits—i.e. 'do we really need to reduce the deficit?' Now there's no real reason why my economic views and arguments should be trusted over those of a Nobel prizewinner (it's a red herring that his Nobel prize was in the economics of trade; he has a widely-respected macro textbook and a number of widely-cited macro papers). But I do think my points hold water anyway. 1. Krugman is right that we didn't and don't have a debt crisis in the UK. When it comes to debt—like with many other things—I trust the markets. Markets aren't stupid; they aggregate the preferences and information of billions of people.

Look at Greece: it can only sell new debt at a high yield because markets are worried about the existing 200% of GDP they owe. The UK can sell debt very cheaply because the UK's debt level is more or less manageable and the UK has always repaid debts it's incurred, for hundreds of years.

2. Krugman is right that (extra) deficit spending can sometimes raise growth. Cutting taxes or raising productive government spending in a recession will raise growth, but only if the central bank is incompetent and (a) has let monetary-macro conditions fall below where they were expected to be; and (b) is unwilling to correct its mistake. Cutting taxes will also enhance efficiency and give the economy a supply-side boost.

3. Krugman is wrong that the UK is and has been suffering from a massive insufficiency of demand and needed to do more expansive fiscal policy. Firstly, fiscal policy is unnecessary or counterproductive when the central bank keeps the nominal economy stable with no monetary spurts or crashes.

The Bank of England lowered its policy rate to 0.5% and kept it there for over six years; it still rests there. It did a £375bn QE programme. Consumer price inflation hit 5.2% twice and stayed above target for five years. Do we really think it was willing to see inflation go even higher, but only if it came from extra fiscal policy?

In New Keynesian models a demand-driven slump is typically identified when you have low or negative growth and low or negative inflation. But we saw high inflation and low or negative growth. This suggests that there was a big supply-side problem—the 'productivity puzzle'—and that demand was not necessarily massively deficient.

4. There are reasons to reduce the deficit other than a possible debt crisis. At the zero lower bound—as Keynesians endlessly tell us—interest rates cannot fall further to induce extra borrowing to invest and consume. In fact, the zero lower bound may or may not exist (lots of European government bonds currently have negative yields). But even if it does exist, 99%+ of assets are not yet at the zero lower bound! This especially includes private firms' debts and equities, which are exactly where private investment comes from. And remember that private investment is how societies get richer.

By all means the government should borrow to fund investment projects that will produce above-market positive returns (although NB that these almost never exist except where the government has effectively outlawed private firms from investing in a given area). But bear in mind that borrowing to funding general government spending comes out of funds that could otherwise be used for private investment. It comes at a cost, even when Bank of England policy rates are near-zero and even when gilt yields are near zero.

So Krugman is right that we don't have a debt crisis (look at markets!); he's right that deficit spending can work (in weird circumstances); but he's wrong that the UK has suffered a massive demand deficit (look at inflation!); and borrowing comes at the expense of private investment (nearly no assets are at the zero lower bound & the zero lower bound may not even exist!)

Well done to The Guardian for joining the dots here

It is, of course, possible that we're all being mugged by the retailers and supermarkets. In the absence of sufficient market competition that's actually what we'd expect in fact, for capitalists are greedy for profit. That's why we like markets. It's also possible that the retailing business has intensive competition meaning that vast pressure is being put upon those suppliers and retailers to deliver the lowest possible prices to us, the consumers. Either story is possible but it's really most unlikely that both are true. So, well done to The Guardian here:

The competition regulator is to scrutinise allegations that UK supermarkets have duped shoppers out of hundreds of millions of pounds through misleading pricing tactics.

Which? has lodged the first ever super-complaint against the grocery sector after compiling a dossier of “dodgy multi-buys, shrinking products and baffling sales offers” and sending it to the Competition and Markets Authority.

That's a version of the first story. That there's insufficient competition, we cannot take our trade elsewhere and so we're being rooked by the capitalists.

Meanwhile, new research suggests that more than 1,400 suppliers to Britain’s supermarkets are facing collapse as the cut-throat price war takes its toll on the industry.

The number of food and beverage makers in significant financial distress has nearly doubled to 1,414 in the last year, according to insolvency practitioner Begbies Traynor.

That's a version of the second story, that there's intensive competition to the benefit of us consumers. And it is entirely contradictory to the tale of the first story.

We really cannot have both happening in he same market at the same time. But according to The Guardian we do because both examples are from the same article. Without their being able to connect the dots between the two that show that one or other of the stories must be wrong.

Universal healthcare and market-based systems aren't mutually exclusive

An op-ed published last week in the New York Times laments Americans' decline in support for government involvement in the redistribution of wealth - or, as the Times author Thomas Edsall calls it, ‘sharing’. Edsall analyses a bunch of polls throughout the article, but what he finds troubling I find to be good common sense. For example, most Americans aren't incredibly trusting of their government:

Even worse for Democrats, the Saez paper found that “information about inequality also makes respondents trust government less,” decreasing “by nearly twenty percent the share of respondents who ‘trust government’ most of the time:”

Smart thinking.

Furthermore, most Americans aren’t convinced that Obamacare is going to be the shining, efficient, cheaper, all-inclusive beacon of hope it was promised to be:

An earlier New York Times poll, conducted in December 2013, found that 52 percent of those surveyed believed that the Affordable Care Act would increase their medical costs; 14 percent said it would reduce costs. Thirty-six percent believed that Obamacare would worsen the quality of health care compared to 17 percent who thought it would improve it.

Also probably wise.

On the whole Edsall appears to understand people’s perceptions of government care (to my relief and his dismay) quite well – except for in one area.

Esdall claims the “most dramatic” change in public opinion has been people’s perception of the ‘right’ to healthcare. He cites the two Gallup polls in an attempt to claim that majority support for guaranteed access to health coverage has dropped radically over the past six years:

The erosion of the belief in health care as a government-protected right is perhaps the most dramatic reflection of these trends. In 2006, by a margin of more than two to one, 69-28, those surveyed by Gallup said that the federal government should guarantee health care coverage for all citizens of the United States. By late 2014, however, Gallup found that this percentage had fallen 24 points to 45 percent, while the percentage of respondents who said health care is not a federal responsibility nearly doubled to 52 percent.

But Esdall isn’t comparing apples with apples. The belief that in a developed society everyone should have access to basic healthcare provisions is not the same as believing that healthcare is a federal responsibility – especially in the United States.

The debate is not – and has not been for a long time – whether or not people should have access to healthcare, but rather how that care should be provided. What kind of delivery of healthcare will create the cheapest prices and best outcomes, and what safety net for those at the bottom will provide the most comprehensive care?

There is huge demand in the States for healthcare reform, and most people want this reform to focus on cheaper access to care. But that can be achieved without fully handing healthcare provision over to the federal government or adopting something that resembles the NHS.

Both the US and the UK should be looking to countries that rank highest for healthcare provisions internationally, which have almost all settled on systems where the central government funds healthcare but does not directly provide healthcare.  The Netherlands, Denmark, Switzerland, and Germany all have healthy relationships with private companies, ranging from insurance companies and charities, that provide better outcomes than those in the UK and in a cheaper, more efficient manner than in the US.

Support for universal access to healthcare and support for market mechanisms in healthcare are not mutually exclusive; there's plenty of evidence to suggest a combination of the two creates the best healthcare systems in the world.

Don't campaign against tax havens: they are good for us

Thanks to faulty headline-grabbing propaganda, most people think tax havens are outrageous places in which tens of billions of pounds are being stored offshore, denying UK citizens valuable tax revenue that could be used on public services like schools, health care and roads. Nice idea. But like many nice ideas, it veers far from the truth. First off, what of the complaint that if the money stays in the private sector in tax havens then UK citizens are being robbed of vital tax revenue? To answer this, consider if the money stays in the private sector in a tax haven, who else benefits from that apart from the person with the money? On the one hand that money is invested, which generates plenty of jobs and lots of economic growth. On the other, if a British billionaire keeps £500 million in a tax haven then all the time he's not spending it he makes everyone else in the UK better off in terms of more resources and lower prices. This is because money earned but not spent is like conferring a gift to the UK taxpayers. Moreover, it's important to remember that the primary contribution high earners make to society is not in the taxes they pay, it is in the goods and services they produce.

When it comes to tax havens, what is also being missed by a lot of people is that tax havens actually make us better off in another way, in that they provide vital competition to tax rates in the UK. A popular view from the left is that because of tax havens governments have to increase our taxes to make up for all the tax they are not getting from money stored in places like the Cayman Islands. In actual fact, the opposite is true – tax havens keep our UK taxes lower not higher.

To see why, suppose there is just one quite expensive Bakery in town (call it Bakery A). Along comes another Bakery in competition (Bakery B), offering townsfolk lower prices for bread. The very worst thing that Bakery A could do in response would be to raise its prices even more. Their best response would be to try to out-compete Bakery B for custom. This is the nature of competition, and how it lowers prices and improves efficiency.

Similarly, tax havens are like Bakery B: their more competitive tax rates place competitive pressures on governments that might be tempted to tax us highly. Competition for prices occurs with tax just as it does with bread, laptops and cars. Governments must be competitive with their tax rates, otherwise more and more money will be stored in places with lower tax rates. Tax competition is a key driver of economic growth in the world, as this incentivises politicians to keep taxes on savings and investments low. When tax rates are excessive, there is less economic growth. Tax havens provide the necessary competition to militate against this happening.

Finally, tax havens can claim to have some of best standards of living and economic growth in the world. That's precisely because low taxes stimulate economic growth and better standards of living, as the qualities of the free market predominate over party political interests. Instead of calling for politicians to tackle the grave injustices of tax havens, campaigners should be calling for a more fruitful tax system here, based on lower rates, reduced complexity and bureaucracy, and increased market freedom.

Well, that's markets for you

Not only is this markets for you it's rather the point of markets for you:

The Co-operative Group has told its members that it cannot make an enhanced commitment to stock Fairtrade products because of tough competition among supermarkets and its shift towards convenience stores.

The UK’s largest mutual made the remarks in response to a motion tabled ahead of the upcoming annual general meeting asking for the commitment to Fairtrade – for which the group has prided its link in the past – to be reiterated and also retain the long-term strategic objective that that if a “Co-operative product can be Fairtrade, it will be Fairtrade”.

Saying it could not back all elements of the motion, the board blamed the current financial position of the group and “the austere market climate we continue to face and the strategic direction of the business into convenience shops which naturally increases pressure on space and range”.

There are some out there who desire to purchase Fairtrade products. We don't share that view, thinking them to be counterproductive at best, but we absolutely defend the more basic idea. If your worldview means that you either desire to, or desire not to, purchase products made in a particular manner, or place, of by a certain group of people or not, then that's rather the point of having a market economy. So that you may do so. If enough people share those values of yours then you might even be lucky enough to find that supply arises to meet your desires. This is true of bread without alum, of meat that isn't rotten, of food prepared to certain religious standards and, yes, to things made by poor people in poor countries. It's wonderful, it's glorious in fact.

However, it is worth noting that perhaps not everyone shares your particular worldview. As here: the Co Op finds that while there's enough people who care about Fairtrade to make it worthwhile not enough people care about it to make it compulsory. And that's where we'd slightly argue with the description of it being "competition" that causes this. Because yes, OK, the supermarkets are in competition to sate our desires. And some of us do desire to pay higher prices to provide that outdoor relief for the dimmer children of the upper bourgeoisie that is the real result of Fairtrade. But not all of us: and therefore it's not really the competition between the supermarkets being the problem here, it's that not enough of us Britons share the initial worldview.

Which is, again, one of the great glories of this free market idea. You get to maximise your utility by purchasing things made in the manner you approve of and so do I, we, them and they. According to our different estimations of our own utility.

Do patent-owners 'hold up' further innovation?

One of the standard arguments of the anti-patent crowd is that patents hinder follow-on innovation by making it risky or costly to build on other people's breakthroughs. There is some evidence for this (see this post from my colleague Charlotte).

However, a new paper challenges this general thesis by looking at whether the outcomes it predicts happen in the real world. If it is true that owners of standard-essential patents (SEPs)—those ones that set up a whole standard used across the marketplace and essential for a large number of follow-on innovators—charge over-the-odds fees and prevent follow-on innovation, then it must also be true that:

1. Industries where SEPs predominate are ones with relatively stagnant (quality-adjusted) prices, because new entrant innovators have less chance to bid them down through competition
2. Court decisions that reduce the power of SEP holders will lead to more innovation in those sectors

The paper, "An Empirical Examination of Patent Hold-Up" (pdf) finds neither of these to be true:

A large literature asserts that standard essential patents (SEPs) allow their owners to “hold up” innovation by charging fees that exceed their incremental contribution to a final product.

We evaluate two central, interrelated predictions of this SEP hold-up hypothesis: (1) SEP-reliant industries should experience more stagnant quality-adjusted prices than similar non-SEP-reliant industries; and (2) court decisions that reduce the excessive power of SEP holders should accelerate innovation in SEP-reliant industries.

We find no empirical support for either prediction. Indeed, SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy.

The principle is nicely illustrated in this chart.

At one point there was more or less of a consensus among libertarians that intellectual property was a good kind of property rights. Nowadays you are more likely to see a proto-consensus against copyright at the very least and often patents as well. I think that emerging evidence means we should keep our minds open.

Markets are actually quite good at regulation

The ASI blog reader may not be surprised to discover that some regulations have unintended consequences that, instead of solving a given problem, make the situation worse. This isn't necessarily always true—though it might be, it's an empirical question—but it seems that regulatory fair disclosure laws, intended to make executives disclose more bad info about their firms, are another one of these. A new paper "What Induces CEOs to Provide Timely Disclosure of Bad News: Regulation or Contracting?" (pdf) by Stephen P. Baginski, John L. Campbell, Lisa A. Hinson & David S. Koo finds that regulatory fair disclosure laws lead to executives systematically guessing more pessimistically about the future. But the laws fail to stop executives delaying the release of bad news.

By contrast, they find that contracts including provisions for 'golden parachute' payments get rid of the career concerns which incentivise repressing bad news, and get around the asymmetric information problem that would exist in their absence.

Prior research finds that career concerns encourage managers to withhold bad news in the hopes that subsequent events will turn in their favor, and that government regulation (i.e., Regulation Fair Disclosure, or “Reg FD”) eliminates this problem.

In this study, we re-examine the effectiveness of government regulation at mitigating the delay of bad news, and consider the effectiveness of a contracting mechanism that accomplishes the same goal. We provide two main findings.

First, recent studies show that Reg FD changed the way managers provide forecasts in two fundamental ways: (1) managers are more likely to issue a range forecast that is pessimistically biased rather than a neutral point estimate, and (2) managers are more likely to issue forecasts at the same time as earnings announcements.

We show that when design choices do not reflect these changes in manager behavior, the extent to which regulation induces timely disclosure of bad news is overstated.

Second, we identify a compensation contract (i.e., ex-ante severance pay agreements) that firms use to explicitly reduce their CEO’s career concerns, and thus should encourage more timely disclosure of bad news. We find that if managers are promised a sufficiently large payment in the event of a dismissal, they no longer delay the disclosure of bad news relative to good news.

Overall, we find that managers continue to delay the disclosure of bad news after Reg FD, and that if firms provide compensation contracts to reduce their managers’ career concerns, this asymmetric release of information is eliminated.

Just like obscure traditions, market practices that look arbitrary, weird, or irrational are often one of the ways market institutions create a successful and rational economic order. Regulators need to be very careful before tinkering with them.