We’re at the 200th anniversary of Karl Marx’s birth – also the 201st of Ricardo’s publication, the 242nd of Smith’s Wealth of Nations. And it has to be said that the latter two were more perceptive analysts of the human condition and also contributed vastly more to human knowledge and happiness. Most of the bits that Marx got right in economics were in fact lifted from those other two. The one big thing he got wrong was not to believe them about markets.
We can find, if we look properly, Marx’s insistences of how appalling monopoly capitalism would be in Smith. They’re both right too, it would be appalling. But we do have to understand what they both mean by this. In modern terms they mean monopsony, more specifically the monopoly buyer of labour. What is it that prevents this? Competition in the market among capitalists for access to the labour they desire to exploit. That very competition decreasing the amount of grinding of faces into the dust they’re able to do. Henry Ford’s $5 a day is an excellent example of this very point.
Ford wanted access to the best manufacturing labour of his time. He also wanted to have a lower turnover of that labour, lower training costs. So, he doubled wages (actually, normal wages plus a 100% bonus if you did things the Ford Way) and got that labour. At which point all the other manufacturers had to try and compete with those higher wages in order to get that labour they wanted to expropriate the sweat of the brow from. Marx did get this, he pointed out that exactly this sort of competition, in the absence of a reserve army of the unemployed, is what would raise real wages as productivity improved.
Smith also didn’t like the setting of wages as it precluded just such competition and such wage rises.
Where Marx went wrong was in not realising this power of markets. He knew of them, obviously, understood the idea, but just didn’t understand their power to ameliorate, destroy even, that march to monopoly capitalism.
[…]
The thing we really need to know on this bicentenary about Karl Marx is that he was wrong. He just never did grasp the power of markets to disrupt, even prevent, the tendencies he saw in capitalism. Specifically, and something we all need to know today, the power of competition among capitalists as the method of improving the lives of all us wage slaves. You know, that’s why we proletariat today, exploited as we are and ground into the dust, are the best fed, longest lived and richest, in every sense of the word, human beings who have ever existed. Something which is, if we’re honest about it, not a bad recommendation for a socio-economic system really. You know, actually working? Achieving the aim of improving the human condition?
Tim Worstall, “Marx At 200 – Yes, He Was Wrong, Badly Wrong”, Continental Telegraph, 2018-05-04.
August 2, 2020
QotD: Marx’s imperfect economic understanding
December 28, 2019
American railways are simultaneously world-beating and terrible
That’s because, as Sean Smith and Peter Earle point out, there are two very different entities running on America’s rails:
Burlington Northern Santa Fe (BNSF) locomotive 5399, Kansas City Southern (KCS) 4807, and 1890 westbound on the BNSF Emporia Sub near Timberland Blvd West of Northgate Street in Olathe, Kansas.
Photo by Tyler Silvest via Wikimedia Commons.
American railways are the envy of the world.
Many might shake a collective head at that statement. In the case of passenger rail that is an appropriate reaction. Since it was pieced together – a government-constructed Franken-rail system built of numerous bankrupt railways which were essentially nationalized – Amtrak has been a reliable money sink, losing tens of billions of dollars since 1970.
Any traveler that has used Amtrak to any significant extent has firsthand experience with the crumbling infrastructure, frequent delays, and general unpleasantness that accompanies U.S. passenger rail service. Even the oft-cited bright spot of Amtrak, the “high speed” Acela system (which shuttles between Boston and Washington D.C) pales in comparison when compared to high-end passenger rail systems in Western Europe, Japan, and China.
Bullet trains routinely travel at least 200 mph, whereas Acela trundles along at a pedestrian 84 mph, and there is no indication (and probably no intention) of that gap closing anytime soon.
U.S. passenger rail services in general are money-losing and antiquated versus their global counterparts, an inarguable (and to public transport proponents, embarrassing) fact. Passenger rail is just one part of the story, and serves as an excellent example of how not to manage a rail system. In fairness, efforts to turn Amtrak around (mainly through aggressive cost cutting) do seem to be having an impact, as current year losses total a shade under $30 million. It’s an admirable effort to be sure, but decades of losses, poor service, and general mismanagement cannot be ignored.
The U.S. freight railway system, conversely, is the envy of the world, and this is not hyperbole or chest thumping; the facts back it up. Since the Staggers Act of 1980, which deregulated freight rail, improvements have been substantial. U.S. freight railways carry 81% more ton-miles of freight, and costs have fallen 46%. (It isn’t common for an industry to increase its capacity by 81% while reducing costs by nearly half.) That level of success has even been noted by the Community of European Railway and Infrastructure Companies, which might be surprising, given the common assumption that Europe has a monopoly on rail excellence.
Compared side by side, it seems a conundrum: Amtrak limps along, still relying upon billions of dollars worth of taxpayer-financed subsidies, while U.S. freight railways evince growing profitability and capacity amid rapidly falling costs. Why are U.S. freight rails so profitable when U.S. passenger rail – sometimes traveling the same routes, on some of the same rails – remains a perennial money pit?
New Amtrak Viewliner diner Atlanta deadheading on the eastbound Capitol Limited at Point of Rocks in November 2017.
Photo by Mark Levisay via Wikimedia Commons.
November 30, 2019
QotD: Comparative advantage
Deirdre McCloskey, Bourgeois Equality, 2016.
May 18, 2019
Tim Worstall lists the benefits of a hard Brexit
In the Continental Telegraph, Tim Worstall responds to a demand for a list of the benefits of a hard Brexit:
1) How will you protect UK business from dumping?
We won’t. The aim, purpose and intention of trade is to gain access to those things which Johnny Foreigner makes better, cheaper, faster – pick any two of three – than our own domestic producers do. Given that the aim of an economy is to make the people, consumers, as well off as the constraints of the real world allow, we wouldn’t protect domestic producers from anything. Shape up or go bust.
As even the Treasury’s briefing on the costs and benefits of Brexit said, competition from trade is exactly what incentivises domestic producers to become more productive.
So, we don’t protect from dumping and the people of Britain become richer. The problem with this is?
2) What will you do for those who lose their jobs because the businesses that employ them are undermined by WTO rules?
Exactly the same as we do for anyone else who loses their job for any other reason. The economy destroys some 10% of all jobs every year – some 3 million – and another 10% are generated newly as well. That’s just what labour market churn is. We have a welfare system for the interim and people who lose jobs because of Brexit or WTO do exactly as everyone else, get another job with the welfare state as the backstop.
And it’s important to note how new job creation works. It isn’t that we must plan what those jobs are before the old disappear. It’s the availability of the newly employable labour which generates the testing of what should be done next.
3) What will you do on the Northern Ireland border?
Lie.
We have pointed this out before:
Our answer should be “Yes.” We agree that we are leaving, that we have put in place that hard border. Then we do absolutely nothing above what we already do. People come and go as they wish, carrying what goods they can, and we do nothing. Except, as we already do, we keep an eye on those moving things on an industrial scale and have our little customs and tax chats with them away from that line on the map.
What other people wish to do on their side of that line is entirely up to them. We will do, as we’ve always done when in our right minds, what is useful and beneficial to us. It’s somewhat unfashionable these days to talk of the empire but it’s still true that we had it. Often because we’re rather good at this lying, cheating and dissembling. We should carry on. So, there’s the border, as it is today. And?
May 15, 2019
QotD: Women competing against other women
There are women out there who still see dressing to please a man as some sort of Stockholm syndrome thing — participating in your own (flouncy, spaghetti-strapped) subjugation. So, it’s possible that those advising you “Don’t change for a man!” are just trying to help you be a modern and empowered woman. Of course, one could argue that actually being a modern and empowered woman means you don’t have to dress like you’re hoping to get a call to clean out a sewer line.
Maybe those in your advice coven really do believe they’re acting in your best interest. Maybe. Social psychologists Roy Baumeister and Jean Twenge report that it’s widely believed that men drive the “cultural suppression of female sexuality” — which could include shaming women for how they dress. However, in reviewing the research, they make a persuasive case that it’s primarily women (often without awareness of their motives) who work to “stifle each other’s sexuality.”
This is right in keeping with research on female competition. While men fight openly — “Bring it! I will ruin you!” — women take a sneakier approach. As female competition researcher Tracy Vaillancourt explains it, women fight for their interests using “indirect aggression,” like gossip, mean looks, disparaging remarks, and other underhanded tactics to “reduce the mate value of a rival.” Underhanded tactics? You know — like suggesting you’re selling out womankind if you wear a skirt or winged eyeliner.
Amy Alkon, “Casual Coroner”, The Science Advice Goddess, 2016-09-20.
April 4, 2019
March 3, 2019
QotD: Four ways to corporate monopoly
1. Proprietary technology. This one is straightforward. If you invent the best technology, and then you patent it, nobody else can compete with you. Thiel provocatively says that your technology must be 10x better than anyone else’s to have a chance of working. If you’re only twice as good, you’re still competing. You may have a slight competitive advantage, but you’re still competing and your life will be nasty and brutish and so on just like every other company’s. Nobody has any memory of whether Lycos’ search engine was a little better than AltaVista’s or vice versa; everybody remembers that Google’s search engine was orders of magnitude above either. Lycos and AltaVista competed; Google took over the space and became a monopoly.
2. Network effects. Immortalized by Facebook. It doesn’t matter if someone invents a social network with more features than Facebook. Facebook will be better than their just by having all your friends on it. Network effects are hard because no business will have them when it first starts. Thiel answers that businesses should aim to be monopolies from the very beginning – they should start by monopolizing a tiny market, then moving up. Facebook started by monopolizing the pool of Harvard students. Then it scaled up to the pool of all college students. Now it’s scaled up to the whole world, and everyone suspects Zuckerberg has somebody working on ansible technology so he can monopolize the Virgo Supercluster. Similarly, Amazon started out as a bookstore, gained a near-monopoly on books, and used all of the money and infrastructure and distribution it won from that effort to feed its effort to monopolize everything else. Thiel describes how his own company PayPal identified eBay power sellers as its first market, became indispensible in that tiny pool, and spread from there.
3. Economies of scale. Also pretty straightforward, and especially obvious for software companies. Since the marginal cost of a unit of software is near-zero, your cost per unit is the cost of building the software divided by the number of customers. If you have twice as many customers as your nearest competitor, you can charge half as much money (or make twice as much profit), and so keep gathering more customers in a virtuous cycle.
4. Branding. Apple is famous enough that it can charge more for its phones than Amalgamated Cell Phones Inc, even for comparable products. Partly this is because non-experts don’t know how to compare cell phones, and might not trust Consumer Reports style evaluations; Apple’s reputation is an unfakeable sign that their products are pretty good. And partly it’s just people paying extra for the right to say “I have an iPhone, so I’m cooler than you”. Another company that wants Apple’s reputation would need years of successful advertising and immense good luck, so Apple’s brand separates it from the competition and from the economic state of nature.
Scott Alexander, “Book Review: Zero to One”, Slate Star Codex, 2019-01-31.
February 26, 2019
Laissez-faire versus “Fairtrade”
In the Guardian, a sad tale of the fading bright hopes of the (relatively small number of) affluent westerners who passionately supported the “Fairtrade” movement:
When, in 2017, Sainsbury’s announced that it was planning to develop its own “fairly traded” mark, more than 100,000 people signed a petition condemning the move. Today, on the eve of Fairtrade Fortnight, the fact that most supermarkets have moved away from the standards developed by the Fairtrade Foundation is worrying.
While some grocery chains have sought the foundation’s stamp of approval, many have gone their own way. This means most consumers have little sense of which organisation is doing what to protect the wages and rights of developing world workers. Over the next two weeks, the foundation plans to focus its publicity efforts on cocoa farmers in west Africa and the way the Fairtrade mark can improve their lives.[…]
That is a sad situation. After the great financial crash of 2008, a commodity boom that lasted from 2013 to 2017 turned into a slump that has robbed farmers and developing world governments of vital cash. Just as they were managing to stabilise their finances and set aside money to invest, the world price tumbled and wiped out their profit. Fairtrade practices protect farmers from this sort of setback and allow them to plan for the future.
Of course they have their critics. These are most mostly from the US – people who favour unfettered markets and seek to undermine the Fairtrade ideal, saying it is a form of protectionism that dampens innovation and ultimately ruins farms.
Theirs is an almost religious adherence to the free market that discounts the gains in stability and security that Fairtrade provides, and the scope of the community premium to promote universal education and the rights of women.
But without large employers making strides to adopt the standardised and transparent Fairtrade practices put forward by the foundation, it will be left to consumers to drive the project forward.
At the Continental Telegraph, Tim Worstall responds:
The Guardian tells us that the Great White Hope of global trade, Fairtrade, isn’t in fact working. On the basis that no one seems to be doing very much of it. To which the answer is great – for the only fair trade is laissez faire.
This does not mean that Fairtrade should not have been tried – to insist upon that would be to breach our basic insistence upon the value of peeps just getting on with doing what they want, laissez faire itself. But the very value of that last is that we go try things out, see whether they work and if they don’t we stop doing them. If they do then great, we do more of them.
[…]
So, trying out Fairtrade, why not? Let’s go see how many other people feel the same way? In exactly the same way we find out whether people like Pet Rocks, skunk or Simon Cowell. Product gets put on the market we see whether it adds to human welfare or not. If people value it – and revealed preferences please, by actually buying it – at more than the use of those scarce resources in other uses then that’s adding to human welfare and long may it thrive. If it doesn’t, if it’s subtracting value from the human experience, then we’ll stop doing it as those trying go bust.
This is not an aberration of the system it is the system and it’s why laissez faire works. Peeps get to do whatever and we keep doing more of what works, less of what doesn’t.
Fairtrade? No, I never thought it was going to work as anything other than virtue signalling for Tarquin and Jocasta but that’s fine. Why shouldn’t Tarquin and Jocasta gain their jollies by virtue signalling? As it turns out, now that we’ve tried it, no one else gives a faeces*. So, we can stop. Except, obviously enough, for those specialist outlets like the Co Op where the odd can still gain their jollies. It being that very mark of a laissez faire, liberal, society that the jollies of the odd are still catered to in due proportion to the desire for them.
*From Gibbon, all the fun stuff’s in Latin.
February 6, 2019
“The haggis croquette is the most London-thing ever done in London”
At the IEA, Andy Mayer reports on the first attempted Burns Night Supper in the City of London:
Haggis is a traditional Scottish dish made with sheep’s heart, liver and lungs, and stomach (or sausage casing); onion, oatmeal, suet, and spices. It’s either a local delicacy or an elaborate joke played on the English (take your pick).
Photo by “Lordvolom1” via Wikimedia Commons.
Last week the City of London held their first attempt at a Burns night supper, with the First Minister and representatives of the Scottish Government as guests of honour.
It is a difficult tradition to get wrong. Largely it requires steaming piles of Scotland’s revenge on the sausage, poetry that the English politely pretend to understand while feeling vaguely threatened, and bonhomie to overcome it, enabled through litres of distillate infused with the flavour of an entire peat bog.
The City served haggis croquettes, with wine.
There’s possibly a Glaswegian satirist somewhere who’s just given up. “Ach I canne compete. The sassenach dough-monkeys just served wee Nicola a haggis croquette, on Rabbie Burns night! I’m breaking-me pen.”
Meanwhile in Shoreditch two Millenials have just set up the Haggis Croquette Cafe, serving Organic Iron-Bru made from recycled plastic girders. The haggis croquette is the most London-thing ever done in London.
I spent much of the evening talking to trade officials. Their job is to sell Scottish opportunity around the world and open up its markets.
This was interesting – how would descendants of Adam Smith visiting the birthplace of trade economist David Ricardo define their comparative advantage? What can Scotland do better than anyone else? What might they do well enough that they can carve out positions, despite larger rivals, better off leaving such things to Scotland? Fundamentally, how are they going to compete?
There was an uneasy pause after these questions. And then to paraphrase, “Oh no, we don’t want to compete, we want to cooperate! With everyone! Not being threatening, that’s our advantage!”
I feel very sure that Smith, on hearing this, would have reached out, to extend the invisible hand of history across time, to give this official a mild slap. “Encouraging competition, with and from other places, and then getting out of the way, is the whole point”, he might say.
December 6, 2018
QotD: The best “industrial policy” is not to have one at all
Which brings us to nub of the matter: how do we increase trade and productivity, given that productivity is the thing they claim the whole schemozzle is about. There is one simple and single policy which will do both. One policy which will increase British productivity simply by allowing more trade.
This policy is so simple that even the Treasury (yes, that’s our Treasury, the one in London) was able to get right, even when being run by George Osborne. As they set out in their analysis of Brexit repercussions:
“The benefits of trade in terms of increasing productivity are well understood… greater openness to trade creates a larger market which the most productive firms expand to serve. Openness also increases competition between firms, enhancing the incentives for domestic firms to innovate or adopt new technology… It increases returns on investment, and encourages UK firms to make greater use of new technologies, either by improving the quality of inputs, or through the more effective adoption of technological innovations. Greater openness to trade also increases consumer choice and reduces prices. Lower trade costs give consumers access to cheaper imported goods and competition reduces the price of domestically-produced goods.”
In plain English, it is the competition from imports which forces British firms to buck up their act and become more productive. So here is how we improve British productivity: we move to unilateral free trade. No barriers to imports, no tariffs, just the same regulation as domestically produced items.
British industry, facing the stiffest competition from the best in the world, would be forced to meet global standards of productivity. So the best industrial policy would be to stop trying to have an industrial policy about what we can and can’t buy from beyond Britain’s borders – and the rest should take care of itself.
Tim Worstall, “The best industrial strategy for Britain is not to have one”, CapX, 2017-01-23.
November 14, 2018
QotD: Protectionism and competition
The ITC [U.S. International Trade Commission] acts as if American companies have a right not to be injured by foreign competition, regardless of how poorly they serve their American customers.
James Bovard, The Fair Trade Fraud, 1991.
November 7, 2018
Quebec cabbies sue provincial government for declining revenues and lost capital cost due to Uber competition
William Watson makes the argument that it’s the ripped-off taxi customers who should be suing, not the cabbies:
There are at least two problems with the court case, one technical, one regarding fairness. The technical one: Cabbies want compensation for both declining revenue and the capital loss on their permits. But that’s double-counting. The permit is an entitlement to earn the revenues. Its value falls only because expected revenues have fallen. Give operators one or the other, if the law eventually says you must, but not both. They can have their compensation but not eat it, too.
The fairness question concerns where the taxi cartel’s surplus came from all these years, which is no mystery: It came from taxi users. But what are we, chopped liver? Why don’t we start a class action suit of our own to get back all the money ripped off from us over decades of artificially restricted taxi supply?
Basic fairness would certainly require that. Unfortunately, the law may not. The taxi drivers’ case against the government is that, despite statutes on the books about needing a taxi permit in order to provide taxi services, when Uber came along the government decided not to enforce the law. That created two classes of taxi driver: Uber drivers, whom the government turned a blind eye to, and regular taxi drivers, whom it continued to subject to close regulation. That double standard was an unfairness, yes, but a minor one compared to the long-lasting aggravated rip-off of consumers.
Bottom line: Taxi drivers lobby for and get a law allowing them to overcharge their customers. When in a bout of good policy sense (a “Taxi Spring” you might say) the government decides not to enforce it, the taxi drivers set about suing taxpayers instead. However unfair that may seem — and it’s exasperating! — I suppose, in the end, supply-and-demand must take notice of the principle of rule of law.
September 24, 2018
QotD: Entrepreneurs
We need entrepreneurs to decide what to do.The only alternative is governmental bureaucracy, which is good for national defense and a few other things, but very bad at most of what we do, from room rental to rock music. The entrepreneuseonly succeeds if people like what she does, and agree voluntarily to pay for it. A free society is one of choice. Entrepreneurs give choice, bureaucrats crush it.
Deirdre Nansen McCloskey, “Why We Need to Admire Entrepreneurs”, Peace Love Liberty, 2018-09.
September 23, 2018
How to use the stock market as a scorecard during a trade war
At the Continental Telegraph, Tim Worstall explains how even the financial journalists at Fortune are misunderstanding what the changes in stock market values mean during Trump’s ongoing trade disputes with China:
… how stock markets react is not a good guide to the positive effects of tariffs. Quite the opposite in fact. It’s a much better guide to how we’re all getting screwed by tariffs. That is, the better the US stock market does the more evidence we’ve got of the bad effects of tariffs and a trade war.
Think on it. Why is Trump imposing tariffs? To protect American business from competition by those dastardly foreigners. Who loses in the absence of competition from the Yellow Peril? Those American consumers who would have bought those better/cheaper Chinese goods if they were able to. Who gains from tariffs? American businesses who can now gouge the American consumer a little more in the absence of those items imported from East Asia.
So, a rise in the US stock market is a guide to how much more profit American business can screw out of the American public. It’s a measure, a reasonably good and precise one too, of how much we the people are losing from the trade war and tariffs. More exactly, it’s the capitalised value of the ongoing losses we’re suffering from this restriction of our choices, the competition those who supply us face.
That is, the better the stock market performance the higher those costs and the more we’re losing the trade war. That is, as long as you accept that it is consumers, not producers, that matter, but then that’s the standard economic assumption ever since Adam Smith even if it gets lost in Washington DC often enough.
The US stock market rising in response to US tariffs is evidence of the losses from tariffs, not the gains.
September 13, 2018
Mind Your Business Ep. 2: Aceable in the Hole
Foundation for Economic Education
Published on 11 Sep 2018Believe it or not, parallel parking is not an impossible task. Meet Blake Garrett, the entrepreneur who is using VR to teach people how to drive, without actually getting behind the wheel.
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Produced & Directed by Michael Angelo Zervos
Executive Produced by Sean W. Malone
Hosted by Andrew Heaton
Original Music by Ben B. Goss
Featuring Blake Garrett
