Monopoly is a terrible thing

Monopoly is a terrible thing, till you have it. Rupert Murdoch

 

I think it’s wrong that only one company makes the game Monopoly. Steven Wright

 

We [Microsoft] don’t have a monopoly. We have market share. There’s a difference. Steve Ballmer

 

They will come to learn in the end, at their own expense, that it is better to endure competition for rich customers than to be invested with monopoly over impoverished customers. Frederic Bastiat

 

 

The Economist’s A to Z glossary of economic terms defines monopoly thus:

When the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output. Contrast with perfect competition, in which no single firm can affect the price of what it produces. Typically, a monopoly will produce less, at a higher price, than would be the case for the entire market under perfect competition. It decides its price by calculating the quantity of output at which its marginal revenue would equal its marginal cost, and then sets whatever price would enable it to sell exactly that quantity.

 

When we think of monopoly we are worried about the monopolists’ ability to charge higher prices. From an economic point of view if some Monet is transferred from one group to another. This may be deemed socially unacceptable but it is an equal transfer of wealth from one group to another and doesn’t reduce aggregate welfare. What economists object to is that as the monopolist raises prices above the competitive level in order to make extra profits, customers buy less of the product, therefore less is produced, and society as a whole is worse off.

 

Monopolies go back a long way. Traditionally it has been state power, which has been used to restrict access to particular sectors and industries. In the past kings would grant or sell monopoly rights. More recently it has been governments who have played this role. One way to keep out potential competitors is to have the government make it illegal for others to operate in particular industries. An extreme example was India at the end of the last century which would licence companies and decide what and how much these companies could produce. There are always political justifications for these interventions.

 

As monopoly has come to be seen as harmful to economic growth, over the last century or so we have seen a rise in the number of antitrust cases. They are called like this because cartels used to be known as trusts. There is more to these cases than meets the eye. There are often underlying political motivations and it would be unwise to assume that protection of consumers is the rationale. We often think of the robber barons of late nineteenth century USA, companies such as Standard Oil. They were growing but they were in fact reducing prices. That is hardly typical behaviour for a monopolist Often pressure comes not from consumers but competitors who resent losing their market share. The Microsoft case is a prime example. I don’t think that consumers were clamouring for the prosecution. Microsoft would quickly discover what would happen if they tried to abuse their customers.  There are alternatives to the Windows – Linux, Apple, unauthorised copying and more alternatives would undoubtedly spring up. The latest panic is about Google but who knows how they will be doing in 2030?

 

We also lack an historical perspective. Just because a company is dominant now doesn’t mean that it will hold that position in twenty years time. History is littered with the cases of megaliths that have seen their position eroded by more agile competitors. Bigger is not always better. Natural history teaches us that – Where are the dinosaurs now?

A Petition

Frédéric Bastiat, the French classical liberal theorist, wrote a famous satirical petition from the candlemakers’ guild to the French government, asking the government to block out the Sun to prevent its unfair competition with their products. It is a delicious satire of the kind of self-serving justifications we so often hear. It is more than 160 years old but it is still relevant today:

 

A PETITION From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

To the Honourable Members of the Chamber of Deputies.

Gentlemen:

You are on the right track. You reject abstract theories and little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and the principle behind all your policy.

Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense?

We have our answer ready:

You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.

Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well, surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.

“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.” Very well, If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.

Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?

But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: + x + = -; in other words, it would be to heap absurdity upon absurdity.

Labour and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labour that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.

Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labour withstand the competition of foreign labour when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?” But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.

To take another example: When a product — coal, iron, wheat, or textiles — comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

Markets and the yuck factor

              For me a well-functioning market with its way of aggregating dispersed information is a thing of beauty. But there are times when the role of markets becomes extremely contentious. There are some transactions that are just seen as beyond the pale. These prohibitions are not carved in stone. For centuries charging interest was seen as immoral. In The Divine Comedy Dante reserved a special place for usurers in hell. Buying and selling slaves was, on the other hand perfectly acceptable. Why do we let people seek employment as coal miners or chemical factory workers– but recoil if they want to work as prostitutes or human cannonballs? You can kill a horse to make pet food in California, but not for human consumption. Land is bought and sold every day but for many traditional cultures the idea of selling sacred land was taboo. You can’t go to a bookmaker and place a bet on your own death but life insurance is now considered okay. In particular, money and the human body are always uneasy bedfellows. Paying young women for eggs to be fertilized and men for sperm is now perfectly acceptable – they are still regularly referred to as “donors” even though these are economic transactions. The sale of tissue, cells and eggs for stem-cell research or organs for transplant are not considered acceptable.  If you donate a kidney to prevent a death, you will be hailed as a hero, but if you take any money for it, you could well end up in jail.

 

               What is coming into play here is what is known as the yuck factor, also known as the wisdom of repugnance. It argues that when something such as incest, cannibalism, or coprophagia (the consumption of feces), produces a knee-jerk reaction of disgust, it is because these acts are in themselves harmful and indeed evil. Chris Anderson, editor-in-chief of Wired magazine summed it up like this:

When it comes to thinking about how to regulate the science, the best test may be the “yuck factor.” This is, as you might imagine, a pretty squishy concept, something along the lines of using gut reaction as a proxy for a long and unproductive philosophical debate. Perhaps if people are grossed out by, say, vat-grown artificial organs, they may not be ready to use them wisely. Indeed, their gag reflex may be telling us something about the essence of human nature and what might threaten it.

 

              There are many universal taboos, which may have evolved as a useful evolutionary defence mechanism. This notion of the wisdom of repugnance is however inherently problematic. It seems to be an appeal to emotion which implicitly rejects rationality. Here do we draw the line? It has also been applied to as same-sex marriage, abortion and cloning. In all cases, it expresses the view that one’s “gut reaction” trumps making a persuasive rational case against that practice.

 

            Money is a relatively new invention in evolutionary terms and could be considered as somehow unnatural. As humans we operate in two mutually exclusive spheres. Hayek referred to it in his book The Fatal Conceit

Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e., of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of world at once. To psychologist Paul Bloom the problem is not that economists are unreasonable, they are in fact evil, assuming that everything is subject to market pricing unless proven otherwise. Economists dare to think the unthinkable.

 

            If there is one subject where the introduction of market pricing is guaranteed to create a scandal then it is the selling of organs. Kidney transplants were first carried out in the 1950s. In the US in 2006 there were 74.000 people waiting for a kidney, 4,400 of whom died because of the shortage. Our old friend Gary Becker, in collaboration with Julio Jorge Elías, even calculated the price it would take to get rid of the backlog completely – about $15,000 for kidneys and about $35,000 for livers. According to Becker this wound also undermine the black market, particularly organ tourism, where people in need look for donors in countries which are not too scrupulous about enforcing these rules.

           

            Becker may be right but I do not foresee this coming into law anytime soon – this “commodification” of the human body is just not going to be acceptable for the majority of the population. There are genuine fears that this could lead to the exploitation of the poor. We will have to look for other solutions. Spain has a successful policy of organ donation, using an opt-out system. You have to expressly make it known that you do not want your organs to be harvested. We could also allow payments to the families of these donors.  Perhaps science will produce other solutions – xenotransplantation (using organs from other species) or the regeneration of organs. These however may prove equally controversial.

Pirates and the invisible hook

Where there is a sea, there are pirates.  Greek proverb

 The average man will bristle if you say his father was dishonest, but he will brag a little if he discovers that his great-grandfather was a pirate.  Bern Williams

 Merchant and pirate were for a long period one and the same person. Even today mercantile morality is really nothing but a refinement of piratical morality. Friedrich Nietzsche

             Blackbeard, Sir Henry Morgan, Anne Bonny, Black Bart Roberts, and Calico Jack Rackam – these names have become part of our collective consciousness. These pirates come from a different age but the word is also in vogue now. The other day I typed it into the Guardian search engine and got 438 hits just for this year. This is not just about those Somali pirates wreaking havoc in the Horn of Africa. The scandal about Westminster expenses is all down to a pirate disk that the Daily Telegraph acquired. Last April saw the conviction of Fredrik Neij, Gottfrid Svartholm, and Peter Sunde, the men behind Pirate Bay, the world’s most notorious filesharing hub. And finally the worst news of all Hollywood is planning to unleash Pirates of the Caribbean 4 in 2012. Oh, I can’t wait for that one! What can you expect from a film that has its origins in a Disney amusement park ride? Give me the real stories about the pirates.

              As the Greek proverb shows piracy goes back a long way – maybe the second ship that was ever built was built by pirates. Julius Caesar was kidnapped by pirates from Asia Minor as a young man. When the pirates asked for twenty talents, the future dictator was most miffed and suggested that they should actually ask for fifty. He warned them that they would pay for their illegal act. They were captured and Caesar had them crucified. The period we most associate with pirates is The Golden Age of Piracy a period spanning from the 1650s to the 1720s. This is where we get our image of the pirate.

             In his book The Invisible Hook: The Hidden Economics of Pirates, l Peter Leeson looks at pirates as economic actors. They may be operating outside the law but they still respond to economic incentives. They are businessmen who seek to maximise their profits. Violence had to be used in a calculated way. Your victims needed to know that if they resisted they would suffer the consequences but if they surrendered it was important to treat them well to incentivise this behaviour in the future. They preferred to surrender the minute they were approached by a pirate ship, seeing piracy as one of the costs of doing business. If there had been resistance, this would have been more costly for the pirates. A lot of the pirate cruelty shown in the movies did not really happen. Walking the plank seems to have been a myth. If the pirates had wanted to get rid of someone they would have just thrown him overboard.

            Pirates are also interesting terms of their organisational structure. One intriguing paradox is the parallels between our modern democratic constitutional government and in the institutions created by the pirates. Leeson points out that they created self-regulating, democratic societies aboard their ships, complete with checks and balances, more fifty years before the American and French revolutions. They also initiated an early system of workers’ compensation, health care plans, and in some cases they practised racial tolerance and equality. They operated in this way not out of the goodness of their hearts but because they needed to stick together in order to pursue profits. This is what Leeson means by the invisible hook, an obvious allusion to Adam Smith.

            Modern piracy is not really about getting booty – it’s about taking hostages.  Now we face the threat of the Somali pirates. The majority of them used to be fishermen. After the collapse of the Somali government in the 1990s, the coast around Somalia was subject to over-fishing. Some of the fishermen banded together to protect their resource. They armed themselves went to try to stop the over-fishing, making trawlers pay a toll. They soon realised it was a much more lucrative business and inevitably it experienced huge growth. Under maritime law it is illegal to carry weapons so these pirates could get easy prey. It is a hostage-taking business. In general they treat their hostages well – of the 815 people kidnapped last year by the Somali pirates, only four were killed. This is pure economic rationality. It looks like pirates will be around for many years to come.

Sketches #4 John Law

The man who invented the stock market bubble

 

We have had an endless diet of financial scandals in recent years but there is nothing new under the sun as the case of the Scottish economist John Law demonstrates. Law was born into a family of bankers and goldsmiths from Fife in 1871. At the age of fourteen Law joined the family business, where he worked and learned the ropes, until the death of his father in 1688. This led Law to abandon the firm and go off to London where he lost a fortune gambling. Things were about to get worse for the young Law. On 9 April 1694, he fought a duel with Edward Wilson over the affections of one Elizabeth Villiers. Wilson was killed, and Law was found guilty of murder and sentenced to death. This sentence was commuted to a fine for manslaughter but when Wilson’s brother appealed the sentence, Law was imprisoned.  However, he managed to escape to Amsterdam. At this time the city was the world capital of financial innovation – with the world’s first central bank and the invention of the company. This was the perfect place for Law and he was able to amass a huge fortune through financial speculation. It also gave his some ideas about financial engineering – he now needed a country where he could apply them.

 

In 1705, he returned to Scotland, and wrote a book – Money and Trade considered, with a Proposal for Supplying the Nation with Money. The same year, he made a proposal to the Scottish Parliament for the establishment of a national bank, but his suggestion was turned down. He would have to take his schemes back to the continent.

 

In 1715, he settled in France, and soon came to the attention of the rakish Philippe Duc d’Orleans, Regent for the young king of France. Both Law and the Duke enjoyed frequenting gambling dens. In 1715 Philippe succeeded his uncle and would be Regent to the new king five-year old Louis XV, until 1723. Law now had his foot in the door. In 1716 he persuaded the Duke to allow him to set up the Banque Generale with the power to issue banknotes. Although it was a private bank, three quarters of the capital consisted of government bills and government accepted notes. The economic difficulties faced by the French government gave Law just the opportunity he had been waiting for to put his revolutionary ideas into practice.

 

We need to look at the historical context of these events. Under Louis XIV France had been at war with England for many years and this left the French economy with its rampant inflation shortage of coins and unstable prices, in a parlous state. It was on the verge of bankruptcy. Law’s plan was to convert government debt from fixed-rate annuities to shares paying a lower rate.  He was going to create the Dutch model but on steroids combining a trading company and a public bank.

 

In 1817 the Banque Generale became the Banque Royale. Not content with having the French money supply under his tutelage, he then sought the trading concessions of the Compagnie d’Occident and he also had the Royal Mint. This was not a good idea because it gave Law and the Regent the incentive to print money.  Law floated the Compagnie d’Occident as the Mississippi Company, which owned a quarter of what is now the United States in the Companie were originally issued at 500 livres, but rose to 10,000 livres in the course of 1719. When the Companie issued a 40% dividend in 1720, the share price rocketed to 18,000 livres, far-outstripping the capital base of the Companie. This was the biggest financial bubble in history, surpassing what happened in the United States in the 1920s before the onset of the great Depression. The atmosphere is captured by these observations from the time:

It is inconceivable what wealth there is in France now. Everybody speaks in millions. I don’t understand it at all. But I see clearly that the God Mammon reigns an absolute monarch in Paris.

 

The problem was that the Mississippi Company was based on marketing and had little fundamental value it was basically a Ponzi scheme. In 1720 after those spectacular gains, speculators resolved to take their profits and run. The share price dropped as dramatically as it had risen.  As panic set in investors sought to redeem their bank notes and promissory notes, but the Companie did not have the funds it and went bankrupt. In 1720 with a false passport in his hand, Law fled France returned to his nomadic existence, and died, penniless, in Venice in 1729.

 

What about the consequences for France? It set back French finances and Louis XV and Louis XVI were permanently hamstrung by a lack of resources, surely one of the most important factors behind the revolution of 1789. Interestingly Britain suffered a similar crisis, The South Sea Bubble, but it did not have the same disastrous effect. The British government took a too-big-to-fail stance, nationalising the company and a resolution was proposed in parliament that bankers be tied up in sacks filled with snakes and tipped into the murky Thames. The lesson I would draw is that is that venality is a constant theme in society but it is also important not to renounce financial innovation completely. Financial innovation has also created a lot of wealth and it would be a grave mistake to throw out the baby with the bath water.

Trust me, I’m an adman

Good advertising does not just circulate information. It penetrates the public mind with desires and belief. Leo Burnett

 Advertising is the greatest art form of the twentieth century. Marshall McLuhan

 Advertising is a non-moral force, like electricity, which not only illuminates but electrocutes. Its worth to civilization depends upon how it is used. J. Walter Thompson

 Half the money I spend on advertising is wasted; the trouble is I don’t know which half. John Wanamaker

 Advertising is the most fun you can have with your clothes on. Jerry Delia Femina

         Advertising goes back many millennia. The Egyptians used papyrus to make sales messages and wall posters. Another typical technique was to paint an eye-catching sign onto the wall of a building and archaeologists have uncovered many such signs in the ruins of ancient Rome and Pompeii. For example, they found an ad painted on a wall in Pompeii, publicizing a tavern from another town. In medieval times merchants used town criers to plug their products. The trademark, a two- or three-dimensional design symbolizing a company or industry, dates from about the 16th century, when tradespeople and guild members posted characteristic symbols outside their shops. Some of these still survive today such as the striped pole of the barber and the three-ball sign of the pawnbroker. The invention of the printing press and the gradual evolution into societies with mass literacy meant that more and more consumers could be targeted. In June 1836, French newspaper La Presse became the first to include paid advertising in its pages, allowing it to cut its price, extend its readership and increase its profitability and the formula was soon became the standard business model. It was in the USA where advertising really found its contemporary form. The country had its first advertising agency as early as 1850. 

             The share of advertising spending relative to GDP has changed little in the last 80 years despite all the technological breakthroughs that have transformed the way we consume media. For example, in the U.S. in 1925, the main advertising media were newspapers, magazines, signs on trams, and billboards. Advertising spending as a share of GDP was about 2.9%. By 1998, television and radio had become the major advertising media. However, advertising spending as a share of GDP actually down to about 2.4%. Changes have continued apace. Spiegel-Online reported that in the USA in 2008 for the first time more money was spent for advertising on Internet than on television – $105.3bn and  $98.5bn respectively. Print media were still the leading recipients with $147bn. This will surely be very different in 20 years’ time.

             The advertising industry also gives rise to a lot of economic fallacies. Advertising is seen as another cost that has to be added to the cost of producing a good or service. This is simply not true. By increasing sales figures, advertising helps bring economies of scale to production. The fact that many products that are heavily advertised such as over-the-counter drugs, cosmetics, and razor blades, are also the cheapest should make the reality clear. Obviously there are different effects in different markets but in many cases far from being a wasteful expense advertising actually lowers prices. In a classic study of advertising restrictions on optometrists, Lee Benham found that eyeglass prices were twenty dollars higher (in 1963 dollars) in states banning advertising than in those that did not. Benham concluded that advertising allowed high-volume, low-cost retailers to communicate effectively with their potential customer. There is also no correlation between heavy advertising and monopolies: advertising promotes competition rather than monopoly.

             For Naomi Klein and her ilk brand names give companies a way to charge a higher price for the same product by persuading people through advertising that there is a quality difference, when in fact there is no such difference. India’s Prime Minister Nehru once complained, “Why do we need nineteen brands of toothpaste? This is another example of economic illiteracy. Brands force producers to compete in quality and price. A heavily advertised brand simply cannot afford the risk to its reputation and ultimately its bottom line by bringing out a defective product. Even under central planning, officials in the Soviet Union encouraged the use of brand names and trademarks in order to monitor which factories produced substandard merchandise and to make consumers aware of products available from different sources. In this extract economist Thomas Sowell explains how brands economize the use of scarce knowledge:

“Like everything else in the economy, brand names have both benefits and costs. A hotel with a Hyatt Regency sign out front is likely to charge you more for the same size and quality of room, and accompanying service, than you would pay in some comparable, locally-run, independent hotel if you knew where to look. Someone who regularly stops in this town on business trips might well find a locally run hotel that is a better deal. But it is as rational for you to look for a brand name when passing through for the first time as it is for the regular traveller to go where he knows he can get the same things for less.”

           Since its inception advertising has been a source of controversy with often fantastical claims about its powers. In 1957 a magazine writer named Vance Packard published a book, The Hidden Persuaders, an exposé of the practices of the advertising world. According to Packard, not only did these charlatans resort to exaggerated claims and outright lying, but they were also using hidden symbols that went straight to the unconscious mind. In the hands of these evil advertisers we could be made to buy anything they wanted us to buy. Here is a piece from the book:

“Large-scale efforts are being made, often with impressive success, to channel our unthinking habits, our purchasing decisions, and our thought processes…. The result is that many of us are being influenced and manipulated, far more than we realize, in the patterns of our everyday lives.” It all sounds very sinister. There is just one problem – it has a very scant relationship with the truth. I have seen no convincing evidence for the effectiveness of subliminal advertising.

             Advertising obviously can be and are often is used to deceive and mislead us. We can all think of campaigns that have enjoyed incredible success. Nevertheless, we are not simply passive victims of their dark arts. I don’t particularly trust admen but I do trust competition. Advertising is a ubiquitous part of the modern and we need a richer and more nuanced view of what it can and cannot do.

Top 10 Advertising Icons of the Century

Advertising Age also did this list recognizing those images that have had the most powerful resonance in the marketplace. The criteria include effectiveness, longevity, recognizability and cultural impact: 

1. The Marlboro Man – Marlboro cigarettes
2. Ronald McDonald – McDonald’s restaurants
3. The Green Giant – Green Giant vegetables
4. Betty Crocker – Betty Crocker food products
5. The Energizer Bunny – Eveready Energizer batteries
6. The Pillsbury Doughboy – Assorted Pillsbury foods
7. Aunt Jemima – Aunt Jemima pancake mixes and syrup
8. The Michelin Man – Michelin tires
9. Tony the Tiger – Kellogg’s Sugar Frosted Flakes
10. Elsie – Borden dairy products

Some thoughts on work

It’s not just about me and my dream of doing nothing. It’s about all of us. I don’t know what happened to me at that hypnotherapist and, I don’t know, maybe it was just shock and it’s wearing off now, but when I saw that fat man keel over and die – Michael, we don’t have a lot of time on this earth! We weren’t meant to spend it this way. Human beings were not meant to sit in little cubicles staring at computer screens all day, filling out useless forms and listening to eight different bosses drone on about mission statements. From the film Office Space.

 

To find joy in work is to discover the fountain of youth. Pearl S. Buck

 

Work expands so as to fill the time available for its completion. C. Northcote Parkinson

 

This boundless region, the region of le boulet, the job, il rusco – of daily work, in other words – is less known than the Antarctic. Primo Levi.

 

The meaning of work has been constantly under discussion for millennia now. For Aristotle all paid jobs absorbed and degraded the mind. In the Bible work was a curse for man’s disobedience to God.  In the sixteenth century with the Reformation we got the protestant work ethic; hard work was seen as a blessing as a way of showing love for God. In Karl Marx’s communist utopia there would be no limits to what humans could choose. One could be a painter in the morning, a fisherman in the afternoon, a writer in the evening, and a lover at night. Sounds bloody tiring if you ask me. More recently has come the idea of work as being a place to find meaning. Getting a salary is not enough we need to be self-actualised. 

At the centre of much of modern work is the office. In his book about everyday life, Queuing for Beginners, Joe Moran identifies three kinds of office:

 

1. Cells – individual offices for people such as barristers or academics who need to work quietly on their own or have one-to-one meetings.
2. Dens – busy places where people need to exchange ideas. The classic example is the newspaper office.
3. Hives – places like call or data-entry offices, where employees just get on with their jobs like busy worker bees.

 

An integral part offices is the desk, another one of those American inventions that has come to dominate our lives. In 1915, the Steelcase Corp. created a newfangled piece of office furniture they called the Modern Efficiency Desk. It was such a simple design – a metal slab atop three drawers – that we may not fully appreciate its significance. It limited individual privacy and was essential for the evolution of the open-plan office. With IBM’s desktop computers we got the workstation. The workplace is then constantly evolving although innovations such as hot-desking don’t seem to have caught on; they are a victim of our strong sense of territoriality.

            The division of labour, described by Adam Smith in his famous account of the pin-making factory in The Wealth of Nations, has become a dominant factor in our societies. Some people lament this. Undoubtedly it can be dehumanising – we all remember those dystopian images from Charlie Chaplin’s masterpiece Modern Times, where the main character spends his day tightening the same bolt over and over again. But this enormous specialisation, only possible in a sufficiently large market, has enabled wealth creation never before seen in history. We now have a dazzling variety of things people do, activities which are often difficult to describe in a single word, unlike those traditional jobs reflected in many a surname. Can you imagine trying to make surnames out of some of today’s professions?

Work has become much more unstable in the last thirty years. The idea of The Organisation Man seems to be a thing of the past. We have gone from six generations of blacksmiths in a family to today’s friction-free capitalism. This is a question of balance. The kind of stability we saw in the past could be oppressive. We want a dynamic society but we are afraid of the destructive consequences of  change. We would like growth without change but we are always going to face this kind of trade-off.

Many now see work as a source of meaning in life. This is an incredibly ambitious goal and mirrors the way love has become a central part of marriage. Both of these ideas would have shocked our forefathers and are difficult to live up to and a sure recipe for dissatisfaction. We need a more realistic basis. Organisations do not love us. We are probably not going to find nirvana at our workplace. Moderate contentment is more attainable. Maybe the Bible was right – work is our curse and we just have to make the most of it.

The never-ending War on Drugs

Obama’s visit to Mexico this week has once again highlighted America’s interminable War on Drugs. The term was coined by Richard Nixon in 1969, in a clear allusion to Lyndon B. Johnson’s famous War on Poverty. We are now in 2009 and the war continues. The website drugsense.org has a drug war clock, which graphically shows the enormous costs of this war. So far this year the American federal government and the states have spent more than fifteen billion dollars on this war – that works out at over $600 a second. In the same period more than half a million people have been arrested for drug-related offences.

         This insane struggle goes back much further than Tricky Dicky. One of its first key players was HJ Anslinger, the head of the Federal Bureau of Narcotics, a precursor of today’s DEA (Drug Enforcement Agency). Anslinger personifies the punitive approach to drug use. I know it’s a bit unfair to judge a historical figure by contemporary mores but this quote will give you a flavour of the man:

“There are 100,000 total marijuana smokers in the US, and most are Negroes, Hispanics, Filipinos and entertainers. Their Satanic music, jazz and swing, result from marijuana usage. This marijuana causes white women to seek sexual relations with Negroes, entertainers and any others.” According to Anslinger marijuana had almost magical qualities, being responsible for inducing both violence and pacifism. He also claimed that it “makes darkies think they’re as good as white men.” Anslinger was at the FBN for more than 30 years. He is no longer around but these catastrophic policies continue to hold sway.

            My first objection to this war is based on individual freedom. As adults we should be free to ingest whatever we want. As long as we don’t harm others, we have the right to choose what we do with our lives. But this freedom comes with responsibility. If you abuse that responsibility, you have to face up to the consequences of your actions. I think we hear the word victim and illness too often in these cases. Freedom without responsibility is a recipe for disaster. I have always stayed away from the whole drug culture – I have little sympathy for this world.  But I think if I did become addicted to any substance, I would find it very tough to go straight. Therefore, the best option for me is to stay off them.

Economic analysis can also be used to analyse the efficacy of this war. The aim is to reduce the supply of illegal drugs, thus pushing prices up and as a consequence reducing the amount people want to consume.  A typical enforcement strategy is to pressurize countries like Colombia or Mexico to eradicate the production of coca. This has been going on for three decades now and the policy just hasn’t worked. For a little while supply did go down but the drug cartel were able to lie low a while or their organisations mutated and now the total number of hectares has actually gone up. So the U.S. government has wasted billions of dollars on Plan Colombia and seems unwilling to learn the lessons of the recent past in the drug war. Let’s just suppose for a minute that it were possible to completely eliminate all the coca – all you would do is shift production to whatever country is next best at producing it. You can grow coca in many different places and so the effect on cost is likely to be minimal.  The cost of producing drugs abroad and transporting them to the United States is said to represent only about 1 percent of their street price. The inescapable conclusion is that this will never be an effective way of reducing drug use.

Finally we need to look at the unintended consequences. The most prevalent one is crime. This occurs in our countries and in the producer countries. In Mexico almost 10,000 people have been killed in the last two years; 10% were law enforcement agents. This has had a destabilising effect on Mexican democracy. Prohibition of alcohol helped Al Capone get rich and now history is being repeated with the Mexican cartels. Will we never learn?

Politics is about making trade-offs not finding the perfect solution. Decriminalisation is most definitely not perfect and I do have a certain unease about what the consequences would be. But this perpetual war reminds me of the joke by British Tommies in the trenches during WWI – if we keep advancing at this rate, we’ll get to Berlin in 100 years. At least that war ended after four years; this one has been going on for decades and there is no is no sign of a victory parade.

Of paternalism, Homer Simpson and oxymora

We are all paternalist when it comes to our children. We wouldn’t dream of allowing them to do whatever they wanted. But paternalism is not limited to the parent-child relationship – it is also rife among politicians who seek to control how much adults smoke, eat and drink. They also want us to exercise more and spend more time with our families. And there is now a lighter version called Libertarian paternalism that has become all the rage in the last 5 or 6 years. (It can also be called soft paternalism, or asymmetrical paternalism.) The idea is to nudge steer and coax but not to bring in bans or coercion as in traditional paternalism does. Two of its principal proponents are law professor Cass Sunstein and economist Richard Thaler, authors of the 2008 book Nudge: Improving Decisions About Health, Wealth And Unhappiness. Thaler, summed up their philosophy in the following way:

“Although the phrase sounds like an oxymoron, we contend that it is often possible to design policies, in both the public and private sector, that make people better off — as judged by themselves — without coercion. We oppose bans; instead, we favour nudges”

 

          What is behind this theory is a lot of recent work in behavioural economics. This is where Homer Simpson comes in. Thaler believes that many of us are limited by an inner Homer Simpson. Behavioural economists believe that many impulsive decisions are taken the Homer Simpson part of our brain. These decisions may have very negative consequences. There are many examples of this. It could be continuing to pay a magazine subscription years after the six-month free trial period is over – we are suckers for the word free and are often victims of our own inertia. Another example is anchoring when we get stuck on an initial number and use it as a basis for our decisions. And we are extremely bad at judging probabilities.

 

Let us look at some concrete examples. Take pensions for example. Opt-in schemes have participation rates of around 60 per cent, while otherwise identical opt-out funds retain between 90 and 95 per cent of employees. This prompted Adair Turner, the chair of the FSA to recommend an opt-in default position in his report on pensions. Spain has made kidney donation the default option unless people consciously decide to opt out. A more trivial example comes from men’s lavatories. As any woman will testify, men when urinating do not always achieve precision with their delivery. This effect can be multiplied in any public convenience. An economist came up with a brilliant solution for Amsterdam’s Schipol airport. His idea was to put an image of a black fly onto the bowls of the airport’s urinals, just to the left of the drain – I think I have also seen spiders. The result was that spillage went down by 80 percent. Apparently, if you give men a target, they can’t resist aiming at it. And who said economics was the dismal science?

 

              All this libertarian paternalism may sound quite reasonable idea but for traditional libertarians it is a misnomer, an oxymoron. They argue that it is impossible for a government to know what is best for individuals. Just because we are sometimes irrational does not mean government would do any better. We have an intimate knowledge our own preferences. To go back to the pension example how can the government know your exact circumstances (present and likely future incomes or how you value  consumption now versus consumption in the future.) No government can possibly know all this. Just because you know someone is irrational doesn’t mean you are capable deciding for him or her.

 

            I am always a bit wary of government intervention. It is such a great temptation for politicians to interfere. There is a danger that libertarian paternalism could become a slippery slope toward greater government intrusion in our lives. But as long as there is always the possibility to opt out, I think there are far more egregious uses of government power that should be attacked.