The copyright wars

Only one thing is impossible for God: To find any sense in any copyright law on the planet.  Mark Twain 

Society confronts the simple fact that when everyone can possess every intellectual work of beauty and utility–reaping all the human value of every increase of knowledge–at the same cost that any one person can possess them, it is no longer moral to exclude. If Rome possessed the power to feed everyone amply at no greater cost than that of Caesar’s own table, the people would sweep Caesar violently away if anyone were left to starve. But the bourgeois system of ownership demands that knowledge and culture be rationed by the ability to pay.—Eben Moglen dotCommunist Manifesto

The idea of copyright did not exist in ancient times, when authors frequently copied other authors at length in works of non-fiction. This practice was useful, and is the only way many authors’ works have survived even in part. Richard Stallman

There has grown up in the minds of certain groups in this country the notion that because a man or corporation has made a profit out of the public for a number of years, the government and the courts are charged with the duty of guaranteeing such profit in the future, even in the face of changing circumstances and contrary public interest.  Robert Heinlein

You may believe that copyright rows are a relatively modern phenomenon but you would be mistaken – the world’s first copyright law, known as the Statute of Anne was introduced in England in 1709. The language used by the publishers has a very familiar ring to it. The figure of the struggling author came to the fore and has been a constant ever since. These writers were having their books pirated “…to their very great detriment, and too often to the ruin of them and their families.” It proved to be a most effective lobbying strategy. In a classic example of public choice economics, a few motivated lobbyists were able to get legislation through which benefited them a lot while spreading the costs out over the rest of the population. And remember this “vital” law was passed before the Great Reform Acts, the abolition of slavery and London had a sewerage system.

Now once again the issue of copyright is in the limelight. The modern creative industries are at war with illegal downloaders. The economic argument in favour of copyright is that a monopoly is a necessary evil to give an incentive to people to create something of value. The logic is that if people weren’t paid, they wouldn’t engage in these activities. I think this argument has some truth in it but there was a lot of human creativity before copyright laws came along.

One argument we hear is that file sharing is theft – like stealing a car. That is not strictly accurate. The difference between a song or a film and a biscuit is that if I eat a biscuit, then you can’t have it because I’ve eaten it and it’s gone. A song or a film are what economists call nonrival goods, those which may be consumed by one consumer without preventing simultaneous consumption by others. This is a characteristic of intellectual property – it can be enjoyed by many people at the same time,

Since 1709 there has been a battle about copyright. The spark has usually been some technological development. The content providers always like to talk in apocalyptic terms about piracy being the end of culture as we know it. The latest round in this battle has been with the internet, which has so far been able to defeat the copyright industries. But it’s not been for want of trying; they’ve sued the operators of file sharing networks as well as some individual downloaders in the United States. They have won many of those cases, but filesharing has continued unabated. Now France has its three strikes law. Let’s put this in some kind of perspective – I think movies and DVD sales are pretty healthy and I don’t think we’ll be seeing Robbie Williams sweeping the streets any time soon.

Record companies, for example, have made a lot of mistakes. They have failed to adapt to changing times .The idea of extending copyright from fifty to seventy years is one example. There can surely be no justification for such a measure. There will surely be business opportunities but they need a different model. Singers and groups will be able to make money from concerts and merchandising. I also think €1 for a song is a bit steep. Amazon charging $9.99 for a book to read on its Kindle falls into the same category. I realise that value is a very subjective question but these prices don’t seem the money saved in distribution costs.

I can sympathise with record companies and other content providers. They have seen their whole world turned upside down. The digital transition is proving a golden age for free culture. Information does truly want to be free. I don’t know how long this situation is going to last. I think people like Rupert Murdoch are going to have a hard time trying to get anyone to pay. In the current round of copyright wars, there’s probably greed on both sides – on the part of corporate owners wanting ever more expansive rights, and on the other hand, amongst those who are the most enthusiastic peer-to-peer file sharers believing everything can be free. There’s no doubt that the majority of musicians, film makers and other artists don’t live the life of rock stars. What we need to look at whether copyright law is the best way to promote activity.

More toilet paper than you could dream of

Last week I did a piece on the fall of the Berlin Wall. This week I thought I would reproduce a talk given by Martin Krygier analysing the changes in Poland. I know it’s a bit facile but I like it anyway:

A couple of months ago, that is now, segue to 2009, I returned from Warsaw where I teach a few weeks each year which I’ve been doing for some years. I’ve become used to it. Though it’s special to me, it’s basically just another European capital. A bit shabbier than many, but also with some lovely renovations and innovations. It all seemed pretty normal to me after the time…now. But because I was there during the 20th anniversary of June 4th and those elections, I tried to work out just what had been achieved and how much I had to forget, to remember what had been achieved. Among other things, I reread, as one does, my old articles, I discovered how much I’d forgotten. In particular what I had to make some effort to recall was just how much had had to change to seem so ordinary. No queues, food and goods of all sorts, colours, shapes, sizes. Restaurants in every language and every quality rather than one language an no quality. More than two sorts of car—in fact every sort. Radio taxis…this is a term of art in Polish. Taxis you could ring for. Because the only way to get a taxi in Poland used to be to find the stop, wherever the stop was. You couldn’t hail a cab, you had to seek out the stops where the taxis stood, unmoving, until you found and came to them. they would certainly not come to you.

There was more toilet paper than you could dream of. There were bookstores in which you could actually touch and choose the books rather than point at a distance and plead with surly and rather heavy intermediaries. So many books now, and magazines from all over the world. Huge shopping malls, advertisements… I remember when I was taking the train out of Poland in ‘85, I’d fallen asleep and I woke up and I just saw a hoarding, an ordinary western hoarding advertising—I don’t know what—could be toothpaste, whatever. It was the colour of it just hit me, and then I realised I was in the west.

All this: advertisements, some gaudy, some classy, quite a lot gaudy, quite a lot not classy—all this jostling for your attention, bustling energy, taught, not slack. If you don’t like it, leave. If you miss it, return. Pretty simple, really, but it hadn’t been simple once.

…So ordinary had all this seemed to me, that had it not been this year, where I had to sort of try to remember how things had been, I wouldn’t have remembered, and I wouldn’t have been shocked. And I failed to register the historical novelty of it all until I went to visit Michnik. And I asked him, particularly given the hate-filled nature of Polish politics, which I’ll conclude, and a lot of hate of Michnik in the process, I asked him how he summed up Poland’s past 20 years. He said, ‘It’s a miracle. Independent for 20 years, no president executed, no war looming; free, democratic, unprecedentedly prosperous—in NATO, in Europe; comings, goings, open to everyone, to everywhere. Who could have imagined any of this 20 years before or, in Poland’s case, 200 years before?

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.