Tuesday, 17 October 2017

If only we could get Jeremy Corbyn The Adam Smith Institute to understand about capital

From here, on the topic of Uber:

Because they've all been making great gaping losses as they start up, meaning that they've needed capital to exist. And that's the problem with cooperatives, the only capital, by definition, that is available to them is what the workers are bringing to the table themselves*. Uber has swallowed however many billions it is and still makes gargantuan losses.

My reply:

In principle you are correct and Corbyn is wrong anyway, but Uber is a very poor example.

Most of the money they raised was spent on advertising (the same goes for all these intermediary companies). Uber's actual app works fine but is just one of many dozen such apps which work just fine. Uber's main spend was on somehow securing a quasi monopoly position (footnote 1) by bombarding us with advertising, which is not capital at all, it is a monopoly position (or 'land' to use David Chester's classifications).

Footnote 1) Clearly, passengers want to use the app with most drivers and drivers want to use the app with most passengers, and it is far more efficient if everybody uses the same app, or marketplace. So being Number 1 gives you a huge advantage. but simply owning the marketplace and skimming off from buyers and sellers is not contributing to the overall functioning of the market, it is hindering it.

Inevitably, a Faux Libertarian wades in:

A 'quasi-monopoly' is not a monopoly at all. Its not even close to a monopoly.

All Uber's done is promote its brand - like every other business that's ever existed.

Sure, advertising is not capital - but the brand is.
1.Uber doesn't 'own the marketplace' for ride-sharing.
2.Uber developed the app - shouldn't they get a share of the wealth that people using it create?
3.Uber maintains the app - so shouldn't they get a share of the wealth that people using it create to support maintaining the app?

(1. Clearly, Uber does own the 'marketplace'. Uber IS the marketplace.
2 and 3, straw men arguments. Return on capital or payment for services provided is different to monopoly super-profits.)

To which I replied:

So you simply refuse to acknowledge the existence of 'agglomeration benefits'? Do you not grasp that Uber's actual capital (their clever software) is no probably better or worse than dozens of competing app's which have fallen by the wayside, simply because there is no point being number 2 or 3 in the market? It is what's called a natural monopoly. I suppose you could short circuit this and deny that any monopoly has ever existed anywhere, because they all required some modicum of business acumen or luck to get them started.

* On the facts, the original argument is weak anyway. Uber has spent $1 billion on advertising over the past few years and has signed up half a million drivers. That's a few $100 per driver per year, a trifling sum compared to what drivers spend on cars, depreciation and other running costs.

Had drivers had the nous or initiative to set up their own app and just all sign up to it, it would not have required any massive advertising campaign. The spend would not have been a few $100 per driver per year, it would have been a one-off cost share of less than $100 and running costs would not be 20% - 30% of fares, it would be 2% or 3%, like any normal payment handing charges.

By default, every passenger would use their app because there wouldn't be anything else. So less 'capital' (i.e. money) would have been spent. What Uber was really spending on was persuading drivers and passengers to sign up to something which they could have done themselves for virtually no cost (had they had the nous and initiative, which they didn't), hoping to harvest the agglomeration benefits for themselves in future.


Tim Worstall said...

Advertising a new service or good is not the spending of capital?


Mark Wadsworth said...


1. Money is not capital. It is money.

2. Their excellent software and app clearly is capital.

3. The rest of the money went on securing a quasi-monopoly position. As it happens, they spent it on advertising, but they might as well have spent it on bribing local politicians or acquiring taxi medallions or permits to shut down the competition.

4. The amount spent on software, per driver was considerably less than $100 per driver, which drivers could easily have afforded it they'd been organised enough.

5. Simply referring to money, actual capital, share prices, land and buildings as 'capital' as if it were all one category and the same thing is entirely unhelpful.

James Higham said...

"Money is not capital. It is money."


Dinero said...

Advertising fundamentally is informing potential customers of a new service , no need to be so dismsisive of it.

Dinero said...

>James Higham

" "Money is not capital. It is money."

Discuss. "

When you consider that money can be obtained by borrowing it, ie the ability to issue a credible liability , the idea that money qualifies as something that is amassed and saved to enable the formation of a productive endeavour does not hold water.
In economics capital is often considered to be physical tools.

Bayard said...

Did Uber really need to spend all that money? They already are the No1 by virtue of being first to the market. People talk of the "Uber of this" and the "Uber of that". I sense a strong vein of "jobs for the boys".

Mark Wadsworth said...

B, they are pretty clued up, so yes. There were or are several competing taxi apps, and they have to fend them off/beat them in the advertising arms race.

Tim Worstall said...

OK, so let's not call it capital then. Let's call it the money that had to be spent to get going by advertising.

Still more than a co op has to hand.

Shiney said...


Why not call it 'equity' as in Brand Equity (dons tin hat in prep for all the incoming flak).

Bayard said...

" There were or are several competing taxi apps, and they have to fend them off/beat them in the advertising arms race."

Do they? If they are the biggest, will they not simply end up the only one anyway? Think VHS v Betamax.

Mark Wadsworth said...

TW, my other point was that actual spending on true capital (the software) was less than $100 per driver. Had they clubbed together, they could easily have afforded it. Uber spent the $trillion on getting loads of people to meet up on their marketplace, shutting down the competition, not creating the marketplace (the software).

Sh, I can't give you flak for using words like "brand" or "equity" because you are only using these meaningless phrases ironically.

B, VHS v Betamax is a good example re agglommeration effects, but those were 'open source'. Any electronics company could build to those standards.

We know that the only reason Uber spent all that money on advertising was to get the number 1 slot and hence the ability to take the piss on % fees charged to drivers (privately collected tax), which they spend on yet more money on the advertising arms race to maintain their number 1 slot, rinse and repeat.

We've seen all this before, some other company will set up an app and charge drivers lower fees. Uber will then either
- reduce their own fees a bit temporarily to prevent leakage, competitor goes out of business,
- up advertising spend, or
- buy up the competitor for a high price and then shut them down.

Shiney said...


Re Brand+Equity - my view is they aren't meaningless except when used together.

'Brand' in the sense of a guarantee of quality or efficacy certainly has 'meaning' and has a value to the consumer... so higher prices can be charged for the product/service. And advertising those benefits is to a certain extent an 'investment'.

But then you get into Veblen goods etc..... not my area and in a free market who cares.

But yes, I agree with you that Uber's 'brand' is really just the network effect of the platform... like eBay, PayPal, Facebook, BACS (for trad banking) etc and the higher price is just 'rent'.

Equity... well, that's another word where the meaning has been warped by the centre-left establishment like 'investment' and 'liberal'.

Mark Wadsworth said...

Sh, good explanation and agreed.