Amazon as an example of how markets really work
A useful example of how this market economy thing really works from Amazon. No, not the standard cries about incipient monopolies, killing off Mom and Pop stores, driving up emissions with delivery vans and all the rest of it. Rather, the actual and real effects of competition in a market economy.
Amazon has received 238 proposals from cities and regions across North America vying to host the company’s second headquarters, it said on Monday.
As we know, Amazon's looking to build a second HQ. The effects of the current one on the Seattle economy are such that better to do the amoeba thing and split off the expansion into a separate unit, elsewhere. Well, OK:
Some said this month they could offer Amazon billions of dollars in tax breaks if they were chosen. New Jersey proposed $7 billion in potential credits against state and city taxes if Amazon locates in Newark and sticks to hiring commitments, for instance.
At which point we can see the effect of this market competition in an economy. Here, rather than that monolith of retail power of some nightmares, the company is the consumer. Just as much as if it is you or me going out to buy an apple (no, apple, not Apple). There are myriad suppliers of apples, myriad places to put an Amazon second HQ. So, who is it that benefits from this competition?
It's us the consumers, isn't it? Potential locations are falling over themselves to gain that business of a second office. Their margins on doing so are going to be slim, if they even exist at all, given the other 237 vying for the location. This is also why farmers don't make much profit growing apples for us.
This is also what underlies William Nordhaus' great paper on entrepreneurial, Schumpeterian, profits. Of the value created by exciting new things some 3% sticks with those doing the creating. Near all the rest flows through to us as the consumer surplus.
This is why market economies work. The very competition they involve means that near all the gains flow to us, the consumers. We get fat and rich off the efforts of others to enrich themselves. Ain't that great?
Alan Milburn's just made the argument for markets inside the NHS
This isn't quite where we'd expect this point to be coming from but it does make the case for markets in the NHS all the same. From Alan Milburn:
Technology and innovation are key to saving the NHS
Yes, OK then:
The reason is simple: the challenges facing healthcare today are different from yesterday. Perhaps more importantly, the opportunities for healthcare to do more will make them different still tomorrow.In the public debate about the NHS, the talk is much more of daunting challenges than opportunities. A sense of possibility is missing. Yet the world is on the verge of a huge leap forward in healthcare, driven by advances in knowledge and technology.
...
All these big changes are under way. They will accelerate in the years to come. The question policymakers should focus on is how to harness them to improve the health of the nation. That will mean making big changes to the NHS, not just putting in more cash.
We agree entirely. And then we play our party pooper trick which is to point out that we know very well what it is that fosters innovation and the use of technological advance.
No, this is not the argument about who invents something - we're quite happy to agree along with William Baumol that governments can achieve that. But we also insist, along with Baumol, that innovation, the working out what to do with the new inventions, is something that markets achieve and planned systems do not. For, of course, working out what to do with some new invention is trial and error. Well, what could be done with it? What, in reality, does it achieve? And which of those things do we want to have done? It is markets which process through all of these options iteration by iteration, planning does not.
Thus, the greater the coming wave of medical invention the more we need markets in the NHS to foster the innovation. Not that we quite expect Alan Milburn to be saying that but he should be.
Sharing values more effectively: a new approach for the Commonwealth?
The Commonwealth is a collection of states that claim to be united by shared values, such as democracy, human rights and the rule of law. Recent examples demonstrate, though, that those values might not be shared very well within the Commonwealth. What could be done so that happens more effectively? Aim to influence societies, as well as governments, I argue.
To show its relevance in the modern world, the Commonwealth is indeed trying to ensure its key values are shared. It has developed significant arrangements to influence governments of member-states. These include suspending or even expelling members in violation of its values. It employs softer methods, as well, for example having its officials observe elections. However, I mentioned examples in an earlier blog post that suggest it isn’t great at ensuring governments share its values.
Indeed, recent episodes demonstrate the limits to the Commonwealth’s approach. Some governments, such as the one in the Maldives in 2016 or in Zimbabwe in 2003, simply remove their country from the Commonwealth, when threatened for breaching values. The Commonwealth itself recognised concerns about it effectiveness when it appointed a group to advise on possible reforms. The group published its report in 2011, A Commonwealth of the People: Time for Urgent Reform. In spite of its title, though, its recommendations would keep the Commonwealth focused on influencing governments. When the governments of members couldn’t agree how they should be influenced, some of the report’s key recommendations went unfulfilled. If that’s the way to get a Commonwealth for the people, it will only happen when governments permit it.
Even in more neoliberal areas like free trade, the key method to achieve change remains for the Commonwealth to influence governments. For example, the 2005 Commonwealth meeting in Malta endorsed the idea that the governments of members should pursue free trade agreements with each other. Yet, in India, the member with the highest population, attitudes at the upper levels of society aren’t well disposed to free trade. What hope is there of governments to introduce neoliberal reform, if the societies they represent aren’t themselves keen for it?
I started my series of posts on this blog by discussing how neoliberalism would be strengthened if societies shared their experiences of different policies. I then identified that the Commonwealth might provide a network of countries to make such sharing worthwhile. In this post, I’ve reviewed the Commonwealth’s record of upholding its key values and identified that it too could do with greater focus on societies. If both neoliberalism and the Commonwealth might be strengthened by societies sharing policy experiences, how could this actually be achieved? This subject I’ll tackle in my final post in this series.
It's amusing what people don't grasp about inequality
As we're continually being told inequality is the very terror of our times. Despite books like the Spirit Level entirely failing to prove the point all do seem to pay at least lip service to the idea that it is, in and of itself this inequality, destructive to all that is good and holy about society.
Our own view is that given the manner in which free markets laced with capitalism have abolished absolute poverty here at home, are well on the way to doing so globally, those who desire something to whine about just have to go looking for something else - relative poverty and inequality. For how can a revolution be demanded if the current system is working rather well at our basic economic task, making us oiks out here in the street better off over time?
Despite all of that it is worth at least following the logic of those complaining. For example, this from Max Lawson at Oxfam:
The poverty and inequality of data on inequality
The first thing to say is that the data is not good, but that we do know that the problem is strongly biased in one direction- inequality is systematically underestimated.
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The Gini is calculated using household surveys or census data. This data has been shown to systematically underestimate the incomes of the richest part of society. For example, a study of several Latin American countries found that the richest survey respondent had a salary lower than that of a manager in a typical medium to large scale firm. The super-rich do not fill out surveys, and when they do they rarely reveal the true scale of their income.
The only possible logical conclusion from this is that inequality is less damaging than is claimed. Not what they're saying of course but it is the only logical possible conclusion.
For all of the estimations of how damaging inequality is come from observing the bad things which happen in a society and then comparing it with our measurement of that inequality. Now we say that inequality is higher than we thought. But we've still the same amount of bad things going on. Thus, obviously, any given level of actual inequality - not our measure, but the real number out there - must be producing a smaller bolus of bad things.
Think it through, some dreadful lurgy, some plague, is passing through the population. Of those we identify as getting it then 10% die. Then we find out that we're missing 90% of those who do get it but show, say, no symptoms. We now regard that disease as having a 1% death rate, something a great deal less worrying.
So it is with inequality. If the level is x and we note y bad effects, now we reconsider and state that inequality is 2x but we've still only got y effects then inequality is half as damaging as we'd previously thought.
All of which means that, if we want to insist that our earlier estimations of inequality are too low then we've also got to agree that all of our estimations of the effects of inequality are far too high. Too high by exactly the same amount as our estimates of the inequality itself were too low.
Thus, joyously, the more the protest over inequality being higher than recorded the less important inequality itself is.
Not a point we've seen being made as yet but no doubt they'll get to it given the stout commitment to intellectual consistency on the subject, yes?
If only Owen Jones knew something about the subject upon which he pontificates
We don't mind people disagreeing with us, indeed we think that's rather normal. We do rather object when people seem to pull in their facts from some alternate reality. As with Owen Jones here telling us about the banking system:
Sometimes the case for a policy is as overwhelming as the level of ridicule it will get from the punditocracy. The nationalisation of Britain’s failed banking industry – the sector responsible for most of our country’s current ills – is one such example.
In support of the obviousness of this idea we are given:
No other industry enjoys the same protection. They are “too big to fail”, which means they benefit from an implicit subsidy – worth £6bn in 2015.
Some are indeed too big to fail. Which is why they are charged the bank levy, specifically and exactly a fee for the implicit subsidy they receive as a result. Which is why they've been shrinking themselves too, just as we would like.
State-backed deposit insurance of up to £85,000 per consumer is another de facto mass public subsidy.
Again, they are charged for this, paying what amounts to an insurance premium, just as they should do.
As the New Economics Foundation says, it is commercial banks who are now responsible for creating the vast majority of money in economies like the UK, a source of vast profit. This is called “seigniorage” and – as the foundation puts it – it represents a “hidden annual subsidy” of £23bn a year, or nearly three-quarters of the banks’ after-tax profits.
As ever when the nef says something about economics they get it wrong. What they've measured is not the effects of seigniorage but of the float. Our current accounts tend not to pay interest. But the aggregate of all the money in them is lent out by the banks at interest. That's the float and it does indeed make money for the banks. It's simply nothing to do with credit or money creation.
By contrast, foreign publicly owned banks are self-evident successes. Take Germany: KFW, the government-owned development bank, is crucial in developing national infrastructure as well as the renewable energy revolution. On a regional level, state-owned Landesbanken are responsible for industrial strategy. Then at the most local level, there are Sparkassen: they focus on developing relationships with local businesses and consumers. They’re not beholden to shareholders – instead, they have a stakeholder model, focused on helping local economies – indeed, their capital has to remain in local communities.
The German banking crisis was, by some measures at least, larger as a percentage of GDP than the British. And it included many of those more local institutions as well who seemed to end up with very much more than their fair share of the lesser dross of the American mortgage market.
A management board would run the network day to day, but a board of trustees would ensure the bank was accountable to the broader economy and customers, not shareholders.
A third would be elected by workers, a third by local authorities and a third by local stakeholders. The mandate of each local bank would be to promote local economies – not least their small businesses – rather than the City of London. Here is a model of democratic ownership that can, in time, be extended to the rest of the economy.
Apparently that's how we should do it instead. But we are also told this:
Would Brexit, Donald Trump, or the gathering demands for Catalonia to secede from crisis-ridden Spain have happened without the financial collapse?
Ah, yes, crisis ridden Spain. Where the cajas, all run on local grounds, by local politicians, unions, stakeholders, in near unison went bust as a result of the political and self-dealing among politicians, unions and stakeholders?
We really don't mind that Jones has a different vision of how the world should be but we'd really prefer a bit of that facts are sacred stuff so that we do get at least a modicum of interaction between the lofty plans and reality.
We have a small suggestion for The Guardian
Not that they're likely to take editorial advice from us, neoliberals that we are, but still, we do think that this would make an interesting series of articles:
The Guardian is trying its luck at venture capitalism in a bid to bolster its £1bn cash reserve and cover its operating losses.
The publisher said it will create a £42m fund to take minority stakes in technology start-ups in fields potentially useful to journalism, such as virtual reality and artificial intelligence. It will also compete with dozens of venture capital firms in the US and Europe seeking to back promising ideas in advertising and payment technology.
No, we're not going to make sniggers about their using the market to fund their newspaper. We think that's not just fine but admirable anyway. Rather, we think it would be interesting for them to put their crack columnists onto the job of recording this process of venture capital investment and then the work and success, or not of course, of those ventures.
We would very much look forward to Owen Jones on the hunt for viable ideas that could be tried. On how few niches the market has left uncovered and how hard is the hunt for those still available to be exploited. Felicity Lawrence on how tough it is to actually run a business in the face of attempts to regulate. Polly on the effects of workers' rights on start ups. George Monbiot on how easy the capitalists have it because the profits just roll in without great effort. Perhaps they could bring Laurie Penny back to explain how, when the work going out the door is everyones' sole useful interest, attention must be paid to diversity and economic democracy within the firm.
We think it would be most interesting. And there's even the possibility that the writers, and Guardian readers in general, might then begin to understand how damn difficult this capitalism in a free market business is. Why 9 out of 10 of such start ups fail, why 4 out of 5 new companies don't pass their fifth birthdays. You know, just how hard it is to run the production of anything at all?
All of which is why we don't think the newspaper will pick up on our idea of course. For who wants their prejudices, writers or readers, tested by something as uncouth as reality?
Whadda abaht the workers?
The Social Mobility Commission treats us to their new report on the problem of low paid workers. More specifically, on how people are able to move up out of low paid work over time or not. As ever with such things it pays not to read the reports on the, umm, report, nor the conclusions or recommendations, but the evidence itself. For often as not there's not all that much connection between that last and the rest.
Britain’s low pay culture traps people in poorly paid jobs and prevents them from escaping into full-time work with better pay, according to a major study by the government-backed body that tracks social mobility.
Only one in six workers on low pay managed in the last 10 years to push themselves up the pay ladder and stay there, while most remained stuck in a cycle of part-time and insecure jobs.
Oooh, disaster, eh? And they do quote from the findings accurately:
Alan Milburn, the former Labour MP and health minister who heads the commission, said the study showed that successive governments had failed to reduce inequality between rich and poor despite two decades of interventions.
He described the situation as “endemic” and warned that without “radical and urgent reform”, the social and economic divisions in British society will widen even further, threatening community cohesion and economic prosperity.
Our word!
We do, we admit, think there's a certain amusement in tracking how the low paid are doing in climbing the wage ladder over the period,. from 2006, that includes the largest recession in 80 years or so for the UK. We're really rather sure that it will be difficult to tease out the cyclical effects from the structural. However, what we find really interesting is this:
Our analysis finds that for most low-paid workers, poorly-paid positions are not acting as a first rung on the ladder – it is the only rung. Of all those low paid in 2006, by 2016 just one in six (17 per cent) were escapers. One in four (25 per cent) remained stuck throughout the period while just under half (48 per cent) were cyclers, moving onto higher wages at some point but not sustaining that progress. The remaining one in ten employees exited the data, meaning they were not an employee after the initial period.
Despite this negative overall picture, these figures represent progress over recent decades. For instance, 35 per cent of those who were low paid in 1981 were still stuck in 1991, the highest proportion in our data which stretches back to low paid workers in 1975. But while the share of low-paid employees escaping has risen slightly over the past quarter of century (from one in ten, or 11 per cent, for the 1981- 91 cohort), the falling share of people becoming stuck appears to have been replaced by a greater proportion of cyclers.
It's that second para there that interests. Things are improving, things are getting better by the very metric they use. That is, some to a large part of what needed to be one has already been done. You know, those structural changes to the labour market to make it one of the most flexible in Europe?
Which is why we supported them of course in the face of much shouting. The people who benefit from flexible labour markets are the workers.
So, unilateral free trade post-Brexit it is then
From The Guardian's daily email:
A no-deal Brexit would rip about £260 a year from the average UK household budget, analysis predicts. The Resolution Foundation and Sussex University academics say “just about managing” families in the UK’s poorer regions have the most to lose from trade negotiations failing, with significant price rises forecast on a range of goods, including 8% for dairy products and 6% for meat, while car prices would jump 5.5%. The study found that the impact of rising prices would add 1.1% to the cost of living for the poorest 20% of households, against 0.8% for the richest 20%.
What the report actually says is that this will be the result if we were to exit and then impose the maximum possible WTO tariffs upon imports. It also says that:
Clearly reverting to MFN tariffs with the EU is by no means the only possible outcome from a “no-deal” Brexit. If we leave the EU without a free trade agreement some have argued that the UK should unilaterally reduce all tariffs to zero. Our analysis indicates that should the country do this the benefits to consumers would be low. Across those good affected by the tariff cuts prices would fall by just 1 per cent. The evidence is that – unlike a rise in prices caused by reverting to MFN tariffs with the EU – zero tariffs would have a relatively even impact across the income distribution. Although households right at the bottom would benefit the most, those in the middle 20 per cent of the distribution would be no better off than those at the top.
Unilateral free trade benefits us all and even benefits the poor more than other groups in society. Just what we learned 169 years ago with the repeal of the Corn Laws. Further, as they say, tariff protection makes all poorer while also weighing more heavily upon the poor. This is not an argument in favour of trade protection.
Unilateral free trade it is then, eh?
Is Net Neutrality good for permission-less innovation?
Net Neutrality is the idea that Internet Service Providers (ISPs) should treat all content (from Netflix and YouTube to this very blog) equally. Advocates of Net Neutrality typically back regulations that ban ISPs from charging companies like Netflix extra for access to fast lanes.
There’s a number of reasons that Net Neutrality advocates back additional regulations, but probably the most important is the idea that a ‘neutral’ net will lead to more innovation. For example, take this op-ed in Wired magazine. The author argues for Net Neutrality on the grounds it will support permission-less innovation, he writes “the neutral and level playing field provided by permission-less innovation has empowered all of us with the freedom to express ourselves and innovate online without having to seek the permission of a remote telecom executive.”
But this argument confuses permission-less innovation, the idea that creators shouldn’t have to ask for permission from gatekeepers (regulators, ISPs, etc.), before launching a new product, with the idea of paying gatekeepers from a publicly available menu of prices. It’s true you couldn’t launch a Netflix competitor without access to broadband subscribers but it’s equally true that you couldn’t reach consumers without electricity. Yet we typically don’t act as if Google has to seek the permission of British Gas or EDF.
It’s true that vertically integrated ISPs could hurt innovation by blocking access to competing services (e.g. Sky forcing Netflix to pay a big fee to access end users). But two things should work against this.
First, if an ISP blocked Netflix or Amazon or any other service they would lose customers to rival ISPs. According to OfCom 95% of UK premises have a choice of 3 or more ISPs. It’s not clear that ISPs have the market power in the first place to block a rival service.
Second, competition law exists for a reason. If an ISP were to pursue such a nakedly anti-competitive move, they would soon be censured by the Competition and Markets Authority.
We shouldn’t ban a practice simply because it could be used for anti-competitive ends. After all, cutting prices can be used to drive out competition. We should only restrict practices if they are almost always likely to restrict competition, otherwise we would end up restricting business practices that have real benefits to consumers.
It is just as easy to see how a practice of charging Netflix, Amazon or Google for access to fast lanes could help consumers. ISPs could use the extra-revenue from web services to cut prices for broadband subscribers allowing them to expand market share. It might also encourage greater investment in under-served rural areas. Economist Hal Singer notes that capital expenditure from ISPs fell in the US the year after the Open Internet Order was passed.
Tim Wu, the legal scholar who first coined the term, argues that Net Neutrality is a subsidy to creators from consumers.
“A more accurate description of a ban on payments from content providers to Internet intermediaries is this: it is a subsidy to the creative and entrepreneurial at the expense of the passive and consumptive.”
Wu, accepts that Net Neutrality likely raises prices for broadband subscribers but argues that is a price worth paying for the innovation created by tech companies launching new and exciting services online.
But I think this view is mistaken for three reasons:
- Even if it were effectively a subsidy, it doesn’t seem obvious why the best way to finance that subsidy is a tax on internet use. It seems to go against the principle that the most efficient way to raise revenue is from a broad base.
- Broadband subscribers are creators too. It’s weird to highlight YouTube and Facebook as examples of the success of net neutrality when the reason for its success is broadband subscribers creating and submitting their own videos. Expanding internet access through lower prices (funded by revenue from companies like Netflix) would also expand the pool of creators for companies like YouTube.
- If lower prices mean more people accessing the internet that also increases the size of the market for web services encouraging more innovation at the margin.
Innovation is important, but enforcing Net Neutrality rules that will push up broadband prices isn’t the way to encourage it.
We shouldn't fear automation
Recently a report from Future Advocacy on who will suffer the most under automation came out. The report concludes that around all the constituencies between 21.8 percent and 39.3 percent of jobs are at risk of being automated. Generally, this causes some to freak out because what is going to happen to them once their jobs are automated.
However, the fear of automation is far from new. It has been around since before the Industrial Revolution. Some of you might already have heard of Ned Ludd and the movement he inspired called the Luddites. He supposedly encouraged his followers to destroy textile machines because the machines facilitated more textiles to be produced with fewer workers. Reducing prices is terrible, right? A Luddite has later become synonymous with a person afraid of automation and technology.
Luckily as the report shows, the UK population doesn’t share this view with the Luddites and they shouldn’t.
The logic behind this movement, that is still present in today’s debate, is that in order to save jobs, you have to be as inefficient and unproductive as possible. This logic insinuates that the Luddites were after all right when they decided to destroy the textile machines.
One of the biggest problems with this axiom is that people concentrate only on the immediate effects. They focus on the fact that some people whose jobs are in danger of being automated will lose their jobs and think that they are basically done for. The narrative they subscribe to is one that describes how people moved from agriculture to manufacturing and then later on to service industry as automation happened over the last 100 years. “Where are people supposed to move to now?”, they think.
This argument is flawed because of the assumption that there are no more jobs to be created once further automation happens - the so called lump of labour. But human imagination is infinite and so are jobs. Imagine telling your granddaughter or grandson a 100 years ago that they could become an app designer or social media manager. There is no way they would have any clue about what you are talking about and once you told them they certainly wouldn’t believe you.
As David Autor notes in this article, the concerns about eg. self driving cars’ impact today is similar to those a century ago when we shifted from horses to cars. However, we shouldn’t worry because this shift will create new demands:
Similarly, just as people worry about the potential impact of self-driving vehicles today, a century ago there was much concern about the impact of the switch from horses to cars, notes Mr Autor. Horse-related jobs declined, but entirely new jobs were created in the motel and fast-food industries that arose to serve motorists and truck drivers. As those industries decline, new ones will emerge.
Thus, as Henry Hazlitt taught us in Economics in One Lesson, it’s important that we not only look at the immediate effects of automation but also look to the succeeding effects over the long run:
Joe Smith is thrown out of a job by the introduction of some new machine. “Keep your eye on Joe Smith,” these writers insist. “Never lose track of Joe Smith.” But what they then proceed to do is to keep their eyes only on Joe Smith, and to forget Tom Jones, who has just got a new job in making the new machine, and Ted Brown, who has just got a job operating one, and Daisy Miller, who can now buy a coat for half what it used to cost her. And because they think only of Joe Smith, they end by advocating reactionary and nonsensical policies.
But this doesn’t mean we shouldn’t bother to do anything to help ease the transition. We therefore ought to focus on creating a better educational system that is suited for the future awaiting us. In addition, a universal basic income or negative income tax could be introduced to help people in this transition, as the ASI have championed for many years. (You can read the report on NIT here)
Nonetheless, the great benefits that automation brings with it shouldn’t be neglected. Everyone will in the end be able to reap the fruits of several decades of innovation. Just look at your smartphones. With all the benefits these tiny phones bring with them, you are probably richer than the richest person in the beginning of the 20th century.