Bill Gates has rare honest moment

From CNBC:

Gates admitted his “greatest mistake ever” was allowing Google to develop Android — one of Apple’s biggest smartphone competitors — before Microsoft could develop a competing mobile operating system, he told Eventbrite co-founder and CEO Julia Hartz Thursday at a Village Global event.

“That was a natural thing for Microsoft to win,” he said. Gates said he blames his own poor “mismanagement,” since he didn’t guide his team to jump on the opportunity. He also partially blames Microsoft’s antitrust problems in the early 2000′s for allowing Google to get ahead.

Google moved on mobile shortly after Apple did, when it acquired Android in 2005. Google later released it first Android device in September 2008, a little more than a year after Apple released its first iPhone on June 29, 2007.

“These are winner-takes-all markets. So the greatest mistake ever is whatever mismanagement I engaged in that caused Microsoft not to be what Android is,” he said. Gates added that there is now only room for one “non-Apple” operating system, and that market is worth $400 billion.

He added that if Microsoft would have “got that one right,” Microsoft would be the top technology company in the game right now. “We would be the company. But oh well, ” he said.

Yup. These things are natural monopolies, it's easiest if everybody uses the same platform-system-language, whether it's perfect or not (and nothing is).

He got this one right with Windows, and IBM has been kicking itself ever since for buying in Microsoft software for its PCs, rather than just developing its own; hiring Bill Gates; or snapping up Microsoft for cheap forty years ago, in the same way that Google snapped up Android in 2005. Once IBM used it, other PC manufacturers used it etc.

What goes around, comes around, but key to this is the tacit admission that Microsoft also holds a natural monopoly, and most of its income is simply unearned rent. However rubbish its updates are, it knows it can sell a billion new licences every year with a marginal cost of 0.001c.

Daily Mail inadvertently hits the nail on the head.

I hope everybody is enjoying the strength and stability of the UK government as much as I am LOLZ.

Moving on to more important topics, the Daily Mail ran a cartoon to accompany a Homey rant article about the "Garden tax". I'm sure the irony of this will not be lost on people who actually know about this stuff:



The point is that this is a major attraction of Land Value Tax; people will only want to own/occupy what they actually need; land ownership will no longer be a magical money tree.

It's not a game of Monopoly... well, it is actually.

Via MBK from The Times:

Tesco, the country’s biggest supermarket group, has announced a surprise £3.7 billion merger with the food wholesaler Booker.

The deal, which has the unanimous backing of both boards, will create one of Britain’s largest wholesale and retail food businesses that aims to improve the quality, choice and price for customers, independent retailers, caterers and small businesses.

1. Tesco is trying to increase its monopoly power, so whole idea is to reduce "the quality, choice and price for customers, independent retailers, caterers and small businesses".

2. That's a kick in the teeth for the 1,000 workers at the two distribution centres which Tesco is shutting down.

3. Tesco is still my favourite supermarket though. As a consumer, I see little to complain about.

Reader's Letter Of The Day

From The Evening Standard. The letter won't be viewable online for a couple of days, because for some reason it is updated two days in arrears, go figure, but here is the original text as submitted:

If Thames Water was allowed to charge what the market would bear, they would enjoy excessive profits of the scale that London developers, home sellers and landlords do now. Surely a compelling case for heavy taxation or regulation of these monopoly profits?

A Land Value Tax would deal with the problem most efficiently but rent controls and a massive council housing building drive would provide some relief for UK renters and homebuyers. We have the shameful honour of the worst value housing in the world, clearly the market is utterly broken.

Joe Momberg, Young Peoples Party

Who put him in charge?

From today's FT:

Sir, A point buried in “Scrambled signal” (July 1), your excellent analysis of Europe’s telecom market, should not pass without some comment. Europe did indeed have a global lead on GSM in the 1990s.

But it is hard to see how the sector could have responded to the next wave of technological challenge from the US when, as the article notes, governments screwed €100bn out of the sector by rent-seeking spectrum sales. HM Treasury, if my memory is correct, was in the vanguard.

David Fisk, Laing O’Rourke Professor in Systems Engineering and Innovation, Imperial College London.

I hope he knows more about systems engineering and innovation than he does about economics, about which he clearly knows nothing. Every planned £1 of future spending reduced the bids by £1; so a) the price paid will not have materially affected total investment - it was planned investment which reduced the price paid; and b) on the whole, the telecoms companies are profitable and pay dividends.

Rather more worryingly, I did a quick Google search on "spectrum auctions" just to gen up, which led to Wiki, which tells us that the US government has collected about $60 billion so far in their various auctions.

Adjusted for exchange rates and population size, the US government probably collected as much as the European ones.

Russian gas: Monopsony vs monopoly*

From The Daily Mail:

Energy prices in Britain will rise unless urgent action is taken to prevent Russia holding countries to ransom by cutting off gas supplies, a minister has warned.

Energy Secretary Ed Davey warned aggression from Russian President Vladimir Putin could quickly force up costs for families in the UK. Energy security will be high on the agenda of a meeting of the G7 meeting in Rome early next month.

A quarter of Europe's gas comes from Russia, half of which passes through Ukraine which has been the focus of mounting tensions after the Crimea region was annexed by Moscow.

Last week President Putin insisted it was 'impossible' for Europe to stop buying gas from Russia...

According to Wiki, European Union countries use 460 bn m3 a year, so they import about 115 bn m3 from Russia. Russian exports are 173 bn m3 a year, so two-thirds of that goes to Europe.

So we are dependent on them - but they are equally dependent on us.

If the EU, or European countries acting in concert, really wanted to do something they would draw the lessons from the way Thatcher dealt with the miners or the way supermarkets squeeze their suppliers, and simply set a cap on the price which they are all willing to pay for imports of gas. This price can be any figure they like, as long as it exceeds the extraction and transport costs.

I can't see Russia's other customers buying all the spare capacity, indeed they could join the buying cartel, hence the exporters will just have to accept it.

(The only reason why the EU/European governments wouldn't do this is if a lot of the senior people are in the pocket of Russian oligarchs, which they probably are, it is certainly true for German politicians.)

Sorted.

* OK, technically that is probably oligopsony vs oligopoly.

[Heathrow expansion] Yes, but that's not really a "cost", is it?

From This Is Money:

Failing to build a third runway at Heathrow will add £300 to the cost of an average return fare from the airport by 2030, according to a new study.

The report by consultancy Frontier Economics, commissioned by Heathrow, said there was no doubt the South East needed new airports.

And it warned costs would soar at Heathrow if no new runway was built, with demand for flights significantly outweighing supply...

The study also estimates that passengers are paying an extra £95 at present at Heathrow than they would if it had another runway.

Yes, let's assume that because demand has increased but supply is constrained, the amount which airlines can charge for tickets is £95 higher than it would be if there were more supply (more runways).

That's clearly a "cost" from the passenger's point of view.

But the total real "costs" to the airlines and airports are entirely unaffected by demand, their fixed overheads are unaffected and the per-plane cost (fuel, staffing) is also entirely unaffected.

So what this means is that airlines are making a £95 per passenger super-profit (also known as "rent").

It's the same when demand suddenly falls (post 9/11, for example) or when flights are halted because of bad weather or Icelandic volcanoes. The air travel industry's costs were largely unaffected but income fell, so they made losses.

The bitter irony here is that the NIMBYs and anti-expansion campaigners are doing whoever owns the scarce landing slots a huge favour.

Multiply that £95 by 95,000 passengers per day (half of arrivals+departures) times 363 days a year, that's a cool £3 billion extra rental-monopoly-artificial scarcity income.

Further irony is that Air Passenger Duty raises about £3 billion a year, so all the government is doing is clawing back the rental income (in a very crude and inefficient fashion). This duty is, from the point of view of the airlines a real cash "cost", but does not add much to ticket prices.

Robert Peston goes Shopping

Transcribed from part 2/3, originally broadcast on 9 September 2013.

Tesco had steadily been making progress through the '80s but it wasn't until after the recession of the early 1990s that it really surged ahead.

The company's marketing boss Terry Leahy understood what his customers wanted:

[Interview with Terry Leahy]: "It turned out that our customers were the most reliable guide. They said, 'Look, we've been in recession, we need you to offer us good value, erm, we need you to be more aware of the pressures we're having today'"

Tesco responded by going back to its low-price roots. First it launched its Value range and then came the marketing slogan 'Every Little Helps'.

Tesco was cutting prices to boost sales while in contrast Sainsbury's was protecting it profits. This was a return to the glory days of Slasher Jack [Tesco's founder Jack Cohen]. Perhaps value was in Tesco's DNA.

Tesco always had a keen eye for price when dealing with suppliers:

[Excerpt from a much earlier programme about Tesco]: "Because one thing a price-cutting company needs is sheer size. The power to place orders large enough to force bargains with even the biggest suppliers."

Now it could offer even lower prices because it was operating on a bigger scale, enabling it to buy in bulk and sell cheap.

This was due to another canny move by Tesco. It bought vast amounts of [cheap] property during the recession of the early 90s, acquiring sites for a new generation of out-of-town superstores:*

[Interview with former Tesco boss Lord Ian McLaurin]: "We were able to accelerate it through sort of '93, '94, '95 and that gave us the opportunity to leave the others cold. And I mean they… they didn't catch up then and they haven't caught up to this day."

The other huge contributor to Tesco's rise came from Terry Leahy. He'd been pondering how to revive Slasher jack's retailing trick the loyalty scheme [Green Shield stamps]. What his team came up with was ClubCard…

By their own words etc.

So now we know why Tesco was racing ahead of the competition for ten years or so, muscling in on the land monopoly which it can use as a stick to beat suppliers and competition with, and also, despite what McLaurin says, why Tesco has been falling back again over the last five years or so. Land is incredibly expensive again, so it cannot repeat this "canny move".

* In my experience it wasn't just out-of-town, Tesco were actively in the market for any decent sized site, five acres and upwards, and if that was in a town centre, then so much the better, they'd happily open up there as well.

Land, oil, gas, rents, price caps etc

1. The knee-jerk industry response to Red Ed's musings about price caps for energy prices was that "We can't help it if world market prices for oil and gas go up, if you impose price caps that's tantamount to forcing us to sell at a loss and we'll have to shut down".

Well, maybe they would, maybe they wouldn't, but that is only if the UK were to do this in isolation. Because while the world market price (WMP) for oil or gas (O&G) is whatever it is, that price is far in excess of the actual cost of getting it out of the ground (AC); so any price cap which Labour dream up would be lower than WMP but higher than AC.

But what if most governments formed an oligopsony and agreed a universal price cap: nobody is allowed to pay more than $x for a unit of imported O&G? As long as $x is in excess of AC, then we can assume that exporters will continue exporting as they can still make real profits.

2. This leads me to my next topic, which is the truism that when the economy does better, demand for O&G increases disproportionately, and because supply is relatively price insensitive in the short or medium term, O&G prices increase super-proportionately.

Which is a vicious circle for importing countries. Let's say that at current GDP levels, 5% of our GDP output (call it £1,500 billion a year) is spent on importing O&G (call it £75 billion a year).

If GDP goes up 10% to £1,650 billion, then O&G prices go up by a lot more, say 20%, so we are now importing 10% more OG at a 20% higher price, £75 billion x 1.1 x 1.2 = £99 billion, which is 6% of our GDP; or £24 billion of that extra £165 billion GDP (15%) disappears abroad, to be recycled when exporting countries buy up assets in the UK.

3. Economists tend to see land/location rents and O&G prices as two separate topics (apart from those insane economists on far left and far right who deny that land rents even exist), although they both come under the same general heading of "land" or "natural resources". Land Value Taxers agree that both are suitable subjects for taxation, but also tend to see them under separate headings, or suggest taxing them for subtly different reasons.

But remember that land/location rents are merely a function of average net wages minus the costs of a basic minimum living standard; so a small percentage increase in GDP or wages leads to a much larger percentage increase in land/location rents - even though the landowner's actual costs (AC) have not changed and what he is providing has not changed (he is sub-licensing the same government-granted exclusive right to access to land).

Similarly, O&G prices are a function of how well the global economy is doing, and the costs of extraction are fairly fixed, so a small % improvement in global GDP leads to a larger % increase in O&G selling prices and, mathematically, an even larger % increase in the pure profit/rental element (WMP minus AC).

So ultimately it is the same thing - if the economy grows, landowners get a larger and disproportionately larger share; and O&G exporters get a larger and disproportionately larger share. If your landlord is a Russian or Saudi Arabian, it's all the same as far as he is concerned.

4. Finally, price caps.

Let's apply the logic from Part 1 above to land/location rents. Although most housing market commentary talks about changes in selling prices, it is rental values which drive the markets, they are the Maypole around which house prices dance.

We know that while rent caps work in the short term, in the medium and long term they lead to all sorts of unwanted side effects.

But what if the boot were on the other foot? What if we look at the demand side, not the supply side?

In other words, instead of the government preventing individual landlords from charging "market rents" (being average local net wages minus basic living costs), the government made it illegal for any tenant household to spend more than 10% of its gross income on rents, or for first time buyers to spend more than 10% of their gross income on monthly mortgage repayments?

It wouldn't actually need government action if tenants/first time buyers themselves would wake up and organise themselves, i.e. form an oligopsony and agree among themselves that "nobody pays more than ten per cent on rent"?

5. For the sake of this discussion, let's assume that the average tenant household in the UK pays £9,700 in rent and the average tenant earns £28,000. On average, a tenant household has one-and-a-half earners, so has gross income of £42,000.

If only a small number of tenant households did it, then they would have to downsize, but what if every tenant household did it? They can't all be forced to downsize. Every landlord would want to attract the highest-earning tenant household (as at present) but the highest-earning tenant household in turn would want to live in the nicest house.

So our high-earning tenant household with gross income of £100,000 now know that they only have to pay £10,000 a year in rent instead of £20,000 or £30,000. Their landlord will be a bit miffed, and when the tenancy comes up for renewal, he will try and find a tenant household earning £110,000; but that even higher earning household will only be paying £11,000 for something much nicer so won't want to down-size etc.

The upshot of all this is that gross rents will fall by half or so; our average tenant household will be paying £4,200 for an average sort of house which costs the landlord a lot less than £4,200 to maintain and insure, so he is still making some money; but pure land/location rents, the excess of gross rents over actual costs will fall disproportionately (to a few hundred pounds per home per year in most places).

But - and this is the important point - very, very few tenant households would end up moving. The highest earners remain in the nicest homes, the average earners in the average homes and the lowest earners in the cheapest homes. So the allocation would still be a free market allocation - if you want to live somewhere nicer, then try and get a better job or a promotion, or do more overtime etc.

6. Remember, this is a cultural thing.

There is no hard and fast rule on what a basic minimum standard of living is, we can only work out the annual cost thereof by observation, even though we do not know what this basket includes (and it is almost certainly different things for different households).

If it simply became tradition or custom that "nobody spends more than ten per cent on rent" then the amount spent on "everything else" would go up accordingly and over time, this would become the new basic minimum. We know that output would increase (less money disappearing into the LMBH) and with higher output, unit costs would decrease (same fixed costs divided by larger number of units of output).

"The House That £100k Built"

Is a new series on BBC2.

Episode 1/6 featured "A young pizza van owner from Leeds [who] has an ambitious plan to build a four-bedroom house." 

In the end, he was really struggling to stick to the budget of course, and ended up cutting corners, making do with second hand materials and so on.

The programme also briefly explained that he'd obtained the land "cheaply" because it was an infill site just big enough for one or two houses and thus of no interest to large developers (it only had a narrow access road between two rows of terraced houses, or through the middle of a longer row).

And even more briefly, it mentioned that he'd managed to acquire the land for "only" £100,000 - as much again as the entire construction cost of the house, which makes a bit of a mockery of the whole concept.

I assume that the programme makers don't even consider the £100,000 which disappeared into the Land Monopoly Black Hole to be a "cost".

Land Monopoly Black Hole (LMBH).

An astrophysicist observes clusters of orbiting stars moving at incredible velocity, or the bending of light without the influence of any object, or beams of high energy radiation emanating from the centres of distant galaxies. If he/she didn’t know about black holes and their effects they’d have to provide an alternative model of physics. An erroneous one.

It’s a bit like that with economics. If at the heart of your model only Capital exists, you are never going to be able to account for the effects of the £250bn per annum LMBH at the heart of our economy.
You will observe phenomena like boom/bust cycles, wealth/regional/intergeneration inequalities, dysfunctional housing markets, falling disposable incomes, poor growth, etc,etc.

But because your model does not account for monopolies (everything has to have a free market solution, right?), you must put the blame elsewhere. Too much government regulation, too much tax, the lazy feckless poor, not enough house building, not enough private property,  immigration  etc, etc.

Equally, if you can’t see the LMBH, it could all be exactly the opposite.

The LMBH distorts and destroys,  unobserved and unaccounted for by politicians, economists and the media. Blind, brainwashed or corrupt? Who knows?

Monopolies, rents, taxes

Here is a summary of what we were debating here.

Basically, in a sane world, normal earned income, output or profits would not be taxed at all. But there's no harm, and a lot of benefit to taxing rental income or monopoly/cartel income.

Monopolies and cartels

The traditional view of monopolies is simply to say that if one business controls a large share of a particular market, then the government steps in and prevents it increasing in size, opening new outlets or taking over rivals. The usual example is supermarkets in the UK. This is actually a misuse of the word "monopoly" because what the supermarkets have is a cartel with half a dozen big players and a few minnows. So what the Monopolies and Mergers Commission does if it restricts each business to a market share of x%, it ensures that there are 100/x players in the market, and cartel behaviour or collusion is less likely the more players there are.

Some kinds of monopolies/cartels arise solely because of barriers to entry, usually imposed by the government (encouraged by incumbents), which restrict the size of the market, thus enabling incumbents to push up prices without fearing competition. Two examples of this are towns where there is only a limited number of taxi-drivers permits and the mass of regulations imposed on children's nurseries and child-minders. These monopolies can be largely abolished by getting rid of the barriers to entry.

But there are "natural" monopolies where there can only ever be a limited number of providers or where the total market is limited by other forces (natural, economic, legislative, doesn't really matter). If the government wants to claw back the monopoly element of their profits, there is no one-size-fits-all approach, it's a question of divide and conquer.

The main sources of rental or monopoly income:

Rental income from land-location values

An annual tax on the land-location's market rental value. The tax can be anything up to 100% of that rental value without any harm being done, but it could be a lower figure.

This is by far and away the largest potential source of revenue. In the UK, it's only about one-sixth of GDP (£200 - £250 billion per annum) but if taxes on earned income were abolished, it could easily be one-third or one-half.

Road space

In monetary terms, the second largest source of rental income for the government is user-charges for roads (currently about £50 billion per annum). In theory, this can be done by road pricing but that requires a lot of technology.

What most countries do is simply have fuel duty and then VAT on top of that. There are lots of other bits and pieces like the annual car tax; VAT on new cars, parts and repairs; P11D charges on company cars; parking fees and fines; insurance premium tax and so on. It all adds up to about £50 billion a year.

The whole lot could be replaced with a slightly higher fuel duty. This has the advantage over road-pricing in that it is also a tax on pollution and encourages people to build/use more efficient cars, drive more steadily and reduces the cost to occasional motorists. It also acts as a "congestion charge" because driving during the rush hour is simply less fuel-efficient than driving at other times when the roads are emptier.

Oil, gas and other natural resources

Different countries do different things.

Some countries auction off extraction rights for a certain period and some levy a very high rate of corporation tax on the profits.

The most sophisticated system would be to realise that actual extraction costs + reasonable profit margin are fairly fixed but market prices fluctuate wildly. Any excess of selling prices over actual costs is pure unearned rental income.

So what a sensible government would do is to declare itself the legal owner of the resources and put the extraction out to tender - whichever company offers to extract a certain amount per year at the lowest cost (for a given minimum safety and environmental standard) wins the tender. From thereon in, the company receives the agreed price for unit extracted, and the government then runs a daily or weekly auction system again to sell those materials for their market value.

Other sources of rental or monopoly income

There is then a whole list of much smaller monopolies, the value of which is in the order of a couple of billion or perhaps only a few million every year, but it's useful to go through some examples:

Airport landing slots

The UK government currently raises about £3 billion a year in Air Passenger Duty, which is an incredibly daft tax, as it is per passenger, it doesn't matter which airport you are flying from and depends on the distance travelled.

The scarce resource which is being used is that few minutes for which the runway and the airspace leading to/away from it is needed for landing or take-off. This clearly places a burden on the people under the flight path, whether the plane is full or empty. It doesn't really matter how far the plane flies after that, there's no shortage of airspace over the Atlantic or the Pacific.

So a more sensible tax is a per-plane tax, and even better than that is a tax on the value of the slots themselves (or annual auctions thereof), which in turn is down to the location of the airport (i.e. near London is worth far more than near Newquay) and how many connections there are from that airport. So although Heathrow only accounts for half of aircraft movements in the UK, its slots are probably 80% or 90% by value.

Happily enough, such a tax/auction achieves three things: it raises revenue; it captures the agglomeration benefit of lots of routes converging at one airport; it captures the location value of the airport itself (i.e. half an hour from a large city) and it captures the external costs of half a million flights a year over a densely populated area.

Radio spectrum

Depending on the cost of the technology required to exploit frequencies fully, the government can just auction off twenty- or thirty-year licences for capital-intensive things like 3G, 4G. For bread and butter stuff like radio or television, the auctions can be for much shorter periods like a year.

Please note, the amount which the winning bidders pay for their licences has no impact on the prices paid by end-consumers, because the bidders worked backwards from their likely total income, deducted their likely real costs and a fair profit margin and the amount left over was what they were prepared to bid.

Cherished number plates

These are a government-created monopoly. It came up with the sensible rule that motor vehicles all have to have unique number plates to make it easier to track down offenders and recover stolen cars.

Then it noticed that some people were prepared to pay over the odds for the right to use certain numbers, so about thirty years ago, the UK government started auctioning off new number plates.

It doesn't raise much money from this, about £3 - £4 million a year, but so what? It's a good principle and an entirely voluntary tax - just imagine that the government just embedded a radio-readable micro chip in each car to help identification and abolished the requirement to have unique number plates entirely? What would a really cool number plate be worth if everybody were allowed to make himself one and drive round with it as decoration?

Fishing, angling, hunting

Having decided how much fish can be safely caught from the North Sea without depleting stocks, the government can then auction off quotas on an annual basis. Or it could measure how much each boat catches and charge per amount caught. If stocks are becoming depleted, it increase the charge and vice versa.

For whatever reason, the UK government decided years ago to hand out quotas which can be traded on the grey market, which is the worst of all worlds, as one cartel has now accumulated all the quotas for itself and imagines this to be its "property" and even had the temerity to try and sue the UK government when it tried to cancel/re-allocate some of the unused part of the quota.

If a town notices that there are too many hobby-anglers using a river, it can make a few quid by charging a daily rate for angling permits. The same applies to hunting and shooting rights - if people really get a kick out of hunting foxes with dogs, then make them pay £x00 per fox.

Water and utility companies

Their monopoly income can be choked off at source by imposing price caps. This leads to slight over-use of water or electricity, which you might consider a price worth paying.

Or the government could abolish price caps and allow them to charge what they like and levy a very high rate of corporation tax and pay this out as a kind of Citizen's Dividend, i.e. every person gets a few hundred pounds a year cash to cover the increased cost - if they manage to curb their water or electricity use, then they can keep the rest to spend on what they like.

Betting shops and pubs

A local council can restrict the number of betting shops or pubs by simply limiting the number of licences it will grant. All this achieves is to push up the profits of the few lucky people who own a licence. The second-hand value of that licence can be hundreds of thousands of pounds, so a bookie or landlord can cash in several years income at once by selling on the business.

So the better way is to make people pay for the market value of the licences (the super-profit or monopoly element). So if the council decides that there should be only two betting shops or three pubs in a certain area, it just auctions the licences off each year, or for a few years at a time. That way the people in the area are still restricted in their choice of gambling or drinking haunts, but at least there is some money in the kitty to pay for libraries or lollipop ladies, or indeed treatment for compulsive gamblers or drinkers.

Copyrights, patents

Without the protection of international governments, nobody would earn much in royalty income. But protection of intellectual property stimulates creativity and innovation creativity - up to a certain extent - so it seems reasonable for governments to levy a tax on royalty income.

The system of patents is used by some to stifle innovation. Corporations (especially electronics and software) just register thousands of vaguely defined patents to prevent anybody else from actually turning a good into a viable product. I suppose you could deal with this by charging exorbitant registration fees for such vague ideas. If registering the design of an actual existing piece of technology were cheap or free (but making the owner liable to tax on the future profits) but it cost £1 million a pop to register a vague idea, then the practice would more or less cease overnight.

The administration of this is going to be quite tricky, but it is still less complicated than taxing everybody's income. The owner of a patent can set his own price for the amount of monopoly income embedded in a certain product. If he sets a high price, then he will pay a lot of tax on that price, and if he chooses a low price, his competitors will be able to use that patent in their own product provided they pay the price (net of tax) over to the patent owner.

We can also looks at methods rather than sources:

Annual user charges/licence fees

This is the best and simplest method, and applies to LVT, fishing quotas, radio spectrum, betting shops etc.

Export restrictions

Where a country has a natural advantage in producing something for prices well below world market prices, it can lock in some of that saving for its own citizens by imposing export restrictions.

Nationalisation

Is always a fall-back, but approached with caution, as there is always mission-creep and a reluctance of politicians to accept that some industries ought best be shut down or privatised, so this often ends up as subsidies for unviable industries.

The government retains the monopoly and pays others to do the work

This works with oil, gas and natural resources. It also works with e.g. public transport - the government can decide the routes, timetable and the prices and then put the franchise out to tender. If the franchise is profitable, the highest bidder wins. If the route is unprofitable, then whichever company is prepared to do it for the lowest price gets paid to it, see for example with refuse collection (one of the examples where privatisation really worked well).

Very high corporation tax rates

This is what Norway and The Netherlands do this with oil and gas companies.

"Windfall taxes" aka "fines"

Another fall back for governments when they think that large corporations are abusing a position of market power but can't quite pin down how or why, is to simple find them guilty of "anti-competitive behaviour" or other misdemeanours and negotiate a fine.

The EU does this every few years with Microsoft and the USA does it quite often with non-US banks.

Economic Myths: Interest rates and asset prices

From AME Info:

The relationship between the cost of money and asset prices is pretty well established. Asset prices tend to rise if interest rates are falling, and fall if interest rates are rising. Last week interest rates went up, so are stocks and real estate coming down in price?

... What ultimately determines the value of an asset is its return relative to interest rates. Share dividend yields can be low if interest rates are low; house rental yields can be low if interest rates are low.

But if interest rates go up then dividends on shares are worth less by comparison and so share prices generally fall. Likewise if the cost of a mortgage goes up then the value of a house has to fall to compensate for the increased cost of money and the relative decline in rental value.

That is all broadly correct of course, all things being equal.

What is a myth, or obfuscation at best, is the notion that stocks, shares and land are "assets".

Surely things like cars, machines, buildings, software, experience and know-how are "real assets"? The price/cost/value of these is largely unaffected by interest rate changes.

The "assets" whose price changes as a result of interest rate changes are not "real assets", they are flows of monopoly-type income, i.e. where the amount of income the owner receives from the "asset" is fairly fixed and cannot (easily) be competed away; the only way to get your hands on those sources of income is to buy the "asset" itself.

And taking the economy as a whole, for every recipient of such income there is a payer, and such "assets" add nothing to overall national wealth or national income.

- Interest received by holders of government bonds are matched with taxes paid by taxpayers.
- If there were no barriers to entry in any industry, then shares in companies would only be worth what the underlying "real assets" are worth, so the surplus of the share price over net asset values is a measure of any company's monopoly income. Where there are monopolies, innovation and competition is stifled and prices are pushed higher (or output pushed lower). This is bad.
- For every landlord there is a tenant - if the net present value of the rental income goes down (or up), then so does the net present value of the future rental payments from the tenant's point of view. Collecting land rents (also a kind of monopoly income) adds nothing to the economy, they are a way of redistributing GDP to landowners.

It is quite different with "real assets".

If a building burns down, or a car rusts to bits, or a machine breaks down, then clearly, not only is the individual owner of that "real asset" worse off, but the whole of society is worse off.

Reader's Letter Of The Day

From yesterday's FT:

Sir, Might it not ameliorate the antagonism towards fracking if the government were to agree that part of the proceeds would go to setting up a new sovereign wealth fund?

Michael Melville, Great Chishill, Cambs.

Cracking idea.

For some inexplicable reason, people love the idea of hypothecated taxes and I'm sick and tired of hearing about Norway's oil fund. They had as much oil in "their" bit of the North Sea as we did but have only a tenth of our population, and they have super-high tax rates on oil companies, so it's hardly surprising there's a surplus.

So first of all, you have to have a proper tax system in place. With natural resources, the simplest thing is for the government to pay businesses to get stuff out of the ground.

So once somebody has worked out how much stuff is down where, the government puts it out to tender and whichever business offers to extract a certain minimum amount per year for the lowest price gets the gig. As far as I am concerned, they can agree a net-of-tax price so that the business doesn't have any hassle with corporation tax or PAYE afterwards.

That means the company has a stable flow of income (it can choose whether to incur large set up costs and extract it all quickly or spend less and extract it more slowly) and it is protected from most of the downside risk. The government on the other hand, has all the up- and downside risk, but at national level, this scarcely matters.

And then you bung all the money from the unearned gas profits (market value minus extraction costs) into a wholesome sounding fund. The Greenies will want it to be spent on windmills, the CPRE will want it spent on conservation, a sane person would want it spent on reducing the deficit, we can have that argument afterwards.

There is more of everything in densely populated areas - shock

From The Daily Mail:

On high streets where many shops still lie empty as they recover from the worst recession in Britain since the 1930s, one type of business has continued to thrive in the economic gloom.

Bookmakers have swamped the UK's shopping parades – with numbers up 25 per cent since 2008 - and in one London borough, Newham, there are currently 82 - six per square mile.

Around almost every corner in this generally deprived part of East London are shops where people can stake £100 a spin on casino-style gambling machines, which are as addictive as crack cocaine.

Yesterday Newham Council was in court to defend its decision to block plans for a new Paddy Power shop, and if they win it could lead to hundreds of betting shop licences nationwide being turned down or revoked.

OK, is that really an abnormally large number of betting shops?

1. There are about 8,500 betting shops in the UK.

2. The UK has a population of about 62 million.

3. So that's about 1 betting shop per 7,300 people.

4. The borough of Newham has a population of about 310,000

5. 310,000 divided by 7,300 = 42.5

So that area has about twice as many bookies as you would expect, which surely is not abnormal, they're just at the far end of the bell curve.
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Footnote - in a former life, I had a client who'd run a couple of betting shops, he said it was fairly easy money but the biggest profit was getting a licence in the first place (which appears to be specific to the building, not personal to the applicant), which increased the value of those premises by about £100,000 (and that was 15 years ago).

So you could make a handsome turn by getting the licence and then selling the place. If the local council hands them out like confetti, then the value will be lower, but if it starts revoking them, the embedded value of the still valid licences will go up and up.

Economic Myths: There is a free market in land

Homeys always dismiss the claim that land ownership is a monopoly by pointing to the fact that land is subdivided into millions of bits with a wide spread of ownership; and claim that it cannot be a monopoly as anybody can buy or sell land at the same price.

Clearly, land IS a monopoly (or at best a cartel), we can tell this from the simple observation that the income you can receive from (most) land vastly exceeds the cost of producing or holding land, which are precisely zero. These unearned profits can only be monopoly profits. There is no other possible explanation for them, or else they would have been competed away years ago (wouldn't everybody like to get money for doing nothing?).

For sure, the value of land is increased by buildings and improvements, which might be integral to the land itself (drainage, protection against cliff falls etc) but the income which relates to the buildings is very much 'earned" for these purposes. The only factor affecting the location rental value (or "site premium") is what 'everybody else' is doing in the surrounding area, i.e the location.

And for sure, there is some limited competition between the owners of neighbouring plots on any street, but there is no real competition between the owner of a plot in a good location in a town centre and plots in a poor location in a marginal area. Perhaps the marginal area wins the battle for more government funding and goes upmarket, then that is largely at the expense of existing good areas. The playing field can be tilted this way or that, but it is the same water sloshing around in the puddles.

Let's see if I can reduce this to a couple of simple analogies which even the most stubborn Homey has to grasp (although there ability to not grasp analogies never ceases to astound):

1. Diamond mining/selling is (or used to be) controlled by a monopoly/cartel called DeBeers. There is no point DeBeers saying "Oh no, we don't have a monopoly, because anybody can buy or sell diamonds (i.e. second hand ones)", DeBeers still has (or had) a monopoly.

So the fact that land can be bought and sold and that nobody is prevented from buying it, and that purchasers by and large compete on a level playing field (i.e. whoever bids the highest can buy it) does not stop land itself being a monopoly any more than the fact anybody can buy and sell diamonds.

2. The same goes for oil. Let's assume that the Saudis control such a large share of output (directly or via the remnants of OPEC) that they effectively have a monopoly. It's not much consolation to the motorist that refining and retailing petrol is a free-ish market and that the motorist can choose between competing petrol stations. Ultimately, you are buying your petrol from the Saudis (or some other producer whose interests are closely aligned with the Saudis), and they have a monopoly.

3. Imagine a government-run electricity company which has the monopoly over mains electricity supply in an area with a million people. That is clearly a monopoly.

4. "But I don't own all the land in my area, I am just one of hundreds of thousands of people who all own small plots. None of us has a monopoly and we do not collude" wail the Homeys.

5. So what? Now imagine that the electricity company is privatised and each resident is given one share, for free, which has a value of £1, and which can be bought and sold on the Stock Exchange, and the price fluctuates in line with other shares. Superficially, there is a "free market" in those shares. But does the company still have a monopoly? Of course it does.

6. What if you want to buy shares in the company. You can only buy them from somebody who already owns shares in that monopoly. So the owners of the shares are a cartel; the number of shares cannot be increased or decreased (unless they are consolidated or sub-divided, which is irrelevant). So the company earns monopoly profits (let's assume there's no price regulation) and there is also a limited market in shares. Nobody can come along and create competing shares. So the owners of the shares form a cartel, and when you buy shares, you have to pay a premium to join the cartel which owns the monopoly.

7. So it does not matter how finely sub-divided or how widely held the shares in a monopoly are, it is still a monopoly. It makes little difference whether all the land and sea in the whole of the world is owned by a single landowner and everybody else rents or whether the physical land is divided into seven billion equal value plots and every human being is given one. Land is still inherently a monopoly. The rent or purchase price you'd have to pay to occupy any particular plot is unaffected by whether the current owner merely owns that one plot or lots of other plots or all the land in the whole world. The rent or price you'd have to pay is quite simply "at least as much as the next highest bidder".

8. Nobody acting in isolation or any cohesive group not large enough to be able to form their own "state" and control land by force, can arrange for all the infrastructure to be built and for a stable and law-abiding society to build itself up to create rental values. Rental value is something which all human beings create, i.e. all who happen to be present somewhere at some time (or near enough to able to influence it).

9. If burglars and car thieves are known to be active in an area, then yes, those few humans beings pull land rental values down in that area, but Wadsworth's Law of Conservation of Rents applies here as anywhere else: those burglars and car thieves push up the rental values in other areas which now count as "low crime areas".

10. "If you don't like it you can go abroad!" shout the Homeys. What difference does that make? Land is the same monopoly everywhere. If mains electricity is supplied by a different monopoly in each town, then moving from one town to the next doesn't help you, you are always buying it from a monopoly at monopoly prices.

Here endeth today's rant lesson.

Economic Myths: "Monopoly profits are passed on to the consumer as higher prices"

1. It must be blindingly obvious and a matter of general application that if there are barriers to entry into any particular industry, the industry is smaller but faces less competition and can thus charge higher prices (moving leftwards and upwards on the demand curve) than if there were full, free and fair competition.

2. Some barriers to entry are practical, if you want to be a mini-cab driver, you need to own a minimum of one car (OK, two or three drivers could share and work shifts, gloss over that), or in a small village, there might only be demand for one taxi driver, if there already is one, no new entrant will ever break into the market (unless he engages in a price war and drives the other out of business), but most are down to insider lobbying or government regulations.

3. So if there is demand for two taxi drivers in a slightly larger village and the parish council only issues one permit, the incumbent can rake in extra profits (and half of potential passengers have to walk). The grey market price of the permit is thus the NPV of that extra future income. If our newcomer wants to be a taxi driver, he has to pay a high entry charge to the previous incumbent. That permit is to all intents and purposes the same as "land" where supply of usable land is limited (whether for natural, economic or regulatory reasons).

4. Our new incumbent might apologetically say to his passengers, "I'm sorry that my fares are so much higher than in the other village, but I am paying off a £10,000 loan which I took out to buy the permit and I add that the minimum price I have to charge" and his passengers might even accept that. But what if the parish council then abandons the permit system, or introduces an excellent bus service..?

5. Allister Heath in City AM gave an example a couple of days ago Daft planning rules are pushing up the price of food in shops, in brief: if the number of available sites for shops is restricted, then there are fewer shops, who can thus sell more goods per sq ft retail space and/or charge higher prices; this pushes up the rental value of the restricted number of such sites. That is the chain of cause and effect.

More recent estimates cited by the authors suggest that the cost of land for UK supermarkets is at least five to ten times greater than in similar Continental European countries. No wonder food and other retail goods are cheaper in those countries; excessive land prices are being passed on to the consumer, as ever.

6. Nope, here he gets it all wrong again, this is putting the cart before the horse. Restrictions lead to higher prices lead to higher rental values for the favoured plots. It is idiotic to say that higher rental values lead to higher prices. The customer is not paying extra because rents are higher*, he is paying extra because there is limited competition.

* Actually, with physical goods, this effect is barely measurable across the UK. Retail prices for similar goods are pretty much the same everywhere, despite there being a wild disparity in retail rents between a glitzy shopping centre in Westminster and a run down high street in Anytown. It is only with goods and services consumed at or very near the point of purchase where there are noticable variations, so there is "embedded rent" in cups of coffee, hotels, pints of beer, cinema tickets and so on, but not in 500 sheets of 80 gsm printer paper.

How to collect taxes from monopolists: just ask them for money.

Here's how not to do it:

Telecoms company paid zero corporation tax in the UK this year

Google pays just £6m in UK tax on £395m earnings

Lloyds [Banking Group] will not pay corporation tax until profits hit £15bn

Amazon: £7bn sales, no UK corporation tax

Insanely Rich Tax Cheats Hid Over $21 Trillion In Offshore Accounts

Mobile phone scam costs VAT billions
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Here's how to do it:

UK mobile phone auction nets billions

EU fines Microsoft a record $1.3 billion

Standard Chartered reaches $340 million settlement over Iran

Bank levy to raise £2.5bn a year but bigger banks could still gain

London set for business rates rise to subsidise rest of UK

FirstGroup outbids Virgin for rail contract

Surely the point is that it is very difficult to force people to hand over x% of the value of goods and services exchanged privately, but if it is the nation-state itself which enforces, guarantees and protects certain monopoly rights or privileges, they can charge however much that monopoly right or privilege is worth and they will get it. You can justify it on a practical level or a moral level.
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Question: how long will it take me to explain to people that land 'ownership' is not the result of private contracts like owning a car or a painting, it is a contract between the land 'owner' and the nation-state? Just like a banking licence, broadcasting licence, patent protection etc.

The current owner of land may well have acquired the rights under the master-contract with the nation-state from another individual under a private contract and he may well have paid good money for them, but the subject matter of the contract is the privileges which the nation-state now bestows on whoever happens to be the registered owner at any particular time (the nation-state is even in charge of keeping the ownership records up to date).

Consider: if Mr A sells a second hand car to Mr B; the parties to the contract are Mr A and Mr B and the subject matter of the contract is the car.

By analogy: If Mr A sells land to Mr B, the parties to the contract are Mr A and Mr B and the subject matter of the contract is the rights bestowed on the current owner by the nation-state.

Mr A isn't providing or doing anything, he has produced nothing which he can sell to Mr B, and once the sale is completed he is out of there with his money and it's the rest of us who have to respect Mr B's right to exclusive possession; pay the taxes for the street cleaning, the local schools and the policemen to deter burglars. All these rights were previously enjoyed by Mr A, of course, he is just selling these rights to Mr B.

Price discrimination & monopolies

From Tutor2U's fine summary of Price Discrimination:

What is Price Discrimination?
* Price discrimination involves market segmentation
* It is practiced by any firm with price setting power
* It does not occur in perfectly competitive markets
* A firm price discriminates when it charges different prices to different consumers for reasons that do not fully reflect cost differences
* Involves extracting consumer surplus from buyers and turning into additional revenue and profit (producer surplus)

Conditions for Price Discrimination
* The firm must have some price‐setting power (i.e. the business is operating in an imperfectly competitive market)
* There must be at least two consumer groups a with different price elasticity of demand
* The firm should be able to identify consumers in each group, and set prices differently for each (requires sufficient information about consumer preferences)
* The firm must prevent consumers in one group selling to consumers in the other (i e there must be no market arbitrage or market seepage)

1. We can therefore conclude that if there is a lot of price discrimination, i.e. totally different prices are being charged for something with the same cost of production, that some form of monopoly is in place and that any difference between prices charged and the lowest price for which that same service is being provided elsewhere is monopoly/unearned profit or 'rent' (in the wider sense). The bigger the differences, the more powerful the monopoly.

2. Which is indeed the case with land/location rents (in the narrow sense and literal meaning). The cost of producing land at any particular location, from the point of view of the owner of land (or a mooring) at any location is precisely zero. Sure, it happens that some land is less suitable for building on than other land, it's marshy ground or whatever (in which case you either drain it and build buildings, or dredge it and build a harbour), but that is a cost of physically improving the land at that particular location; the location is simply there (and its value is dictated by what 'everybody else' does).

3. In summary, this is yet more evidence that land ownership is the biggest monopoly of all. The fact that land is divided up into small plots and lots of different people own those different plots does not mean that it is not a monopoly; any more than than fact that shares in a monopoly utility company are widely held or freely traded does not mean that the company itself does not have a monopoly.

4. If the price (rent) for any location is set by the ability and/or willingness of the single highest bidder to pay that price (rent) we also observe that a tax on those monopoly profits would be borne in its entirety by the current owner of that location; the would-be occupant is already paying as much as he is willing and able to pay and will not pay a penny more.

Killer Arguments Against LVT, Not (214)

Richard Murphy launched a debate about the incidence of corporation tax and denied that there was such a thing as objectivity in economics/admitted that he used evidence selectively*.

Henry Law commented thusly:

The French physiocrats argued that the economic incidence of all taxes was ultimately on the economic rent of land**. The same conclusion follows from Ricardo’s Law of Rent. The latter law appears to hold objectively i.e. it can be observed in operation. There are a few other laws of economics that appear to be confirmable by observation.

The Murphmeister hit back with a novel counter-argument:

The physiocrats were wrong. And so are you.

* Delete according to prejudice.

** Strictly speaking, taxes are borne by the least elastic factor of production, which is by definition always land/location but also any other monopoly or near-monopoly right. Take personalised number plates for example. Some people are prepared to pay £lots extra for the right to have a certain combination of letters and digits, and that right only has value because the government will prevent anybody else from using that number. We can observe a crude relationship between how short a number is and how much it costs on the grey/free market.

Now, let's assume that DVLR imposes a tax on shorter numbers; for example two characters costs £500 extra a year, three characters is £400 extra and so on. what now happens to the resale value of a three character number plate on the grey/free market? Does it go up, stay the same or go down?