Killer Arguments Against LVT, Not (487)

Georgist, quoting Churchill circa 1909: "LAND MONOPOLY is not the only monopoly, but it is by far the greatest of monopolies -- it is a perpetual monopoly, and it is the mother of all other forms of monopoly."

Home-Owner-Ist or Faux Libertarian: "Not it's not. There are billions of landowners all over the world. Anybody can buy land. You can choose between dozens of landlords in an area."

These people aren't interested in listening to the explanation, but here it is anyway...

There is a fixed amount of land, you can't increase the surface area of a planet, no matter how much you build or how many swamps you drain. It is land itself that is the monopoly. For sure, it has been sub-divided and there are more small landowners than large landowners, but that does not change anything.

Let's agree that water companies have a monopoly on mains water supply (in their region). The fact that many water companies are quoted on the stock exchange and have zillions of shareholders does not change that. However many shareholders they have, that doesn't change the prices which consumers have to pay.

[As an aside, water prices are thankfully capped by the government at enough to give them handsome profit margins (but still at much lower than whatever the profit maximising price would be). In this case, capping prices does not reduce supply. Profit per consumer is fixed, so to maximise profits, the water companies just want to supply water to as many consumers as possible (provided the income covers the marginal costs). Stick that in your pipe and smoke it, Faux Lib's!].

Or we could cycle back a few centuries to when all the land in an area was owned by a descendant of a violent thief (i.e. an 'aristocrat' as they like to call themselves). He was clearly a monopolist and charged as much rent as he could get away with. By today, his descendants will have sold off small areas for development, which have since become very valuable, but they still owns lots of fields around the towns that have grown up.

Along comes our developer, looking for a greenfield site near the town. Some of the land is owned by a few small farmers and the bulk is still owned by one of the original thief's distant descendants. The small famers will demand the same price per acre as the 'monopolist'. Sub-division has not helped the potential buyer.

Or maybe the thief's descendants retained some of the land in the growing towns and built their own housing there to be rented out (or sold on long leaseholds). If you are looking to buy or rent, the price or rent you will have to pay to the sellers or landlords who own a single unit will be exactly the same as the price demanded by the original monopolist who owns all the housing across the road.

Another indicator that land is a monopoly is that in a monopoly, the price is set by demand and bears no relation to costs of production (the cost of producing land is precisely zero, or course). The monopolist can maximise his profits by restricting supply/pushing up prices so that his marginal revenue = his marginal costs. At the margin, land bankers home builders do exactly this, they just drip new housing onto the market so slowly that selling prices are not depressed. If selling prices fall (i.e. after every 'financial crisis'), they just mothball their projects for a couple of years. They'd be daft to complete and sell a house for £160,000 today if they know they will be able to complete and sell it for £200,000 in a year or two.

[Which also pours cold water on the idea that more generous planning rules = more construction = lower prices. Lower prices = less construction. It is self-limiting.]

With land and housing, supply is fixed in the medium term and so price is set purely by demand, which is entirely beyond the control of most landowners. Local factory shuts down? Less demand, lower prices. A new station or road is opened? More demand, higher prices. In truth, you aren't really paying for the land, you are paying for the bundle of local amenities which you can easily access from any particular plot, which is why houses with big back gardens don't sell for noticeably more than houses with small back gardens. The amenity value of a few extra square yards to store an unused trampoline and a rusty lawnmower is a tiny fraction of the amenity value of a well-paid job within an easy commuting distance.

Tory win - great news for state-backed and monopoly businesses!

From The Guardian:

FTSE 250 rockets to record high as banks, housebuilders and utilities surge

Confusing two separate issues and tbus drawing the wrong conclusion

It is generally accepted (whether entirely true or not) that

a. Energy, mobile phone, broad band and insurance companies offer new customers discounts and overcharge continuing customers. Some people waste hours every year switching to a different company; and the companies then have the added hassle of closing old and opening new accounts. This is not proper price competition and does not make the companies/the economy more efficient, it just wastes a load of time.

b. Energy companies in particular enjoy a monopoly-cartel position and overcharge generally.

Problem a. is solved by banning new customer discounts i.e. expecting companies to offer the same price to new and continuing customers. This seems fair enough to me. Whichever companies have the most competitive price/service will gain market share naturally, as it should be.

Problem b. is easily fixed with a price cap. It's not difficult to set the price of electricity, gas or water so that providers still make a reasonable return, and the original privatisation was done on this basis. The most efficient companies will still be the most profitable. I don't see how this applies to mobile phones, broadband or insurance, that is proper competition IMHO.

Sam Bowman went off on a tangent in yesterday's City AM:

Even if you’re a savvy customer who remembers to switch insurance and energy providers every year, and cancel your mobile phone contract once you’ve paid off the handset, it’s a near-certainty that you have relatives and friends who aren’t. To many people, it’s too much of a hassle to switch, and the gains are too uncertain to bother checking.

This practice seems like a rip-off, and that was the motivation behind the energy price cap proposed by Ed Miliband and implemented by the May government at the start of this year.

No, that's confusing issues a. and b, which is where he goes wrong.

As critics of the policy predicted, the energy price cap is now being ratcheted downwards, so that more and more customers will be caught in it and the price discounts that energy companies can offer will become smaller and smaller. In telecoms, Ofcom has just reached an agreement with most of the mobile operators to curb loyalty penalty pricing in mobile phone contracts.

This may sound like a good thing, but trouble with price caps and contract regulations is that customer switching is good for efficiency overall. Customer switching forces companies to compete with each other and try to find ways of doing business more cheaply. Diminishing the rewards for switching means that fewer people will be willing to shop around, which weakens the incentive these companies have to improve.

Even if domestic electricity prices were fixed at a uniform price, companies would still have every incentive to generate electricity/supply gas as cheaply and efficiently as possible.

'Contract regulations' just means no new customer discounts/loyalty penalty. This reduces the amount of entirely artificial and unnecessary switching, but there would still be the incentive to switch to a cheaper/better provider. The overall competitive pressure would focus on price/service and not on pricing/marketing gimmicks.

The current regulatory approach tries to protect non-switchers by hurting switchers. That’s a dead end, making markets affected by it sclerotic, uncompetitive, and less innovative in the long run.

Neither policy a. nor policy b. 'hurts switchers'. They are entirely neutral.

A better approach may be to make switching easier, or even entirely automatic.

Agreed, but that is complementary to policy a. If companies aren't allowed to penalise existing customers with a 'loyalty penalty', they can't be allowed to penalise them with a 'leaving penalty' (to cancel out the other company's new customer discount). Gym's stay in business with savage leaving penalties, and that is not a healthy business model.

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.

More London taxi-based rent-seeking fun

From The Daily Mail:

The number of Uber drivers in London should be capped to ensure 'healthy competition and consumer choice', the boss of a rival minicab app has claimed. Kabbee chief executive Justin Peters called for a limit on the proportion of minicab drivers overseen by one company if Uber overturns a decision not to renew its operating licence.

'Nuff said.

From The Evening Standard:

An "extortionate" rise in licensing fees for private hire car operators in London will force thousands of drivers out of work and close hundreds of cab firms, it was claimed today. Transport for London has approved increases that will see five-year fees leap from less than £3,000 to £700,000 for some operators.

The charges, which last rose in April 2013, depend on the number of cars run by firms. Those with between 101 and 500 will see their licence fee jump from £2,826 to £150,000. Operators with 501 to 1,000 cars will see their bill jump from £2,826 to £350,000 over five years, while those with 1,001 to 10,000 cars will see their fee go from £2,826 to £700,000.

1. TfL is doing a bit of bureaucratic rent-seeking here. It's budget is about £200 for each driver and each car per year for monitoring, which is of course way too high.

2. If it really cost this much (which it doesn't), it would seem reasonable to charge £200 per driver and per car a year. So if anything the charges are too low.

3. A minicab business with 10,000 drivers is only paying £14 per driver per year (£700,000 ÷ 5 years ÷ 10,000 drivers). This is a slap in the face for a business with 1,001 drivers, which has to pay £140 per driver per year (the same calculation applies in every band) and acts as a sort of barrier to entry/growth. The marginal hit from going from 999 to 1,001 drivers is more or less infinity for those last two drivers.

4. Nonetheless, those charges aren't huge, absolute maximum about £3 per driver per week, divide that by a few dozen journeys and it's next to nothing. If they add that to their fares, it is not going to make a measurable difference to quantity demanded, so the claim that this "will force thousands of drivers out of work and close hundreds of cab firms" is complete and utter bollocks.

Monarch and the monopoly value of landing slots.

From City AM:

Shares in some of Monarch's airline rivals jumped this morning after the news that Britain's fifth biggest carrier had ceased trading.

Easyjet, which was reported to be one of a number of parties in talks with Monarch to save the airline, led the way and was this morning's biggest FTSE 100 gainer. Shares were up almost five per cent by lunchtime. Wizz Air was up almost four per cent and was quick to offer Monarch customers so-called "Rescue Fares" to help people stranded in Tel Aviv get back to the UK. Ryanair shares rose 2.64 per cent while Flybe was up 2.2 per cent and British Airways owner IAG was up over two per cent.

According to another article, the increase in value of shares in the other airlines was £500 million (ironically, a similar amount to what Monarch's last owners lost).

Why would this happen? Woolworth's, MFI and HMV went *pop* ten years ago, because retail generally was doing badly (credit crunch and internet competition) and they were doing worst. Did shares in other retailers jump? No. They all had the wolf at the door.

The answer is simple. From The Birmingham Mail:

Rivals have begun circling the carcass of collapsed airline Monarch in the hope of bagging its landing slots as the firm's administrator prepares to carve up its assets.

The likes of easyJet, Wizz Air, Norwegian Air Shuttle and British Airways owner IAG are understood to be mulling moves for the carrier's slots, which span Manchester, Gatwick, Birmingham, Luton and Leeds-Bradford airports, according to people familiar with the matter.

Robin Byde, transport analyst at Cantor Fitzgerald, said that Monarch's assets would be attractive to easyJet in particular. "Monarch assets may enable easyJet to increase frequencies on common routes, gain more attractive year-round and seasonal slots, and generally take market share. On fleets, synergies could be attractive as Monarch currently operates 34 Airbus A320-family aircraft which are compatible with easyJet's fleet."

The allocation of landing slots is murky, historically, airlines got them "for free" on a use-it or lose-it basis.

You can sell them on provided you've actually used them 80% of the time over the past X months, so the liquidators of Monarch only have a short period to sell them before the slots all forfeited. So there's half a billion quids' worth of mini-monopoly slots now to be sold cheap in a fire sale or given away "for free" by the regulators (with a corresponding number of cheap second hand aircraft), hence the increase in the share price of its competitors.

Re nationalisation - people aren't as stupid as Legatum make out.

Here's the summary of Legatum's opinion poll:



Commenting on the report, the Legatum Institute’s Matthew Elliott said:

“The findings of our polling are concerning for anyone committed to the principles of free enterprise. Competition entrepreneurship and free trade are all essential to achieving prosperity, not to simply generate profit for businesses, but to extend opportunity to all...

It is clear that those of us who believe passionately in free enterprise need to up our game. We need to redouble our effort in the battle of ideas, because populist thinking has a superficial attraction and we need to better articulate the case for free enterprise, which is the most effective path to prosperity.”

He's missed the point (probably deliberately), as has Jeremy Corbyn (probably supidly) and most other commentators, right or left. The point is that people seem to realise that there is a big difference between monopolies and competitive industries, and are more likely to want to see nationalisation of monopolies. That is not a straight neo-liberal vs socialist thing, it is far more nuanced.

One the second half of the list, there's ship building, food, cars and travel agents, these are competitive industries not monopolies, so only a minority are in favour of nationalisation. I assume 'travel agents' was a trick question to identify the base level of socialist nutters who want to nationalise everything.

Mobile phone companies are very competitive (switching is easy and prices are ever cheaper for ever better services) and they pay for the value of their radio spectrum. We've tried nationalising airlines and it never works, although - unlike mobile phone companies - they do not pay for the value of their landing slot privileges.

Happily, the majority agree with this overall analysis, probably intuitively.

Going down the list of things where a majority is in favour of nationalisation, they are all monopolies in some way...

1. Mains water supply is a natural monopoly, there is simply no point laying parallels set of pipes and drains.

2. Electricity generation can be done perfectly well by private businesses and historically was. It is the national grid which is a natural monopoly, and it only exists because the UK government forced it through in the 1920s and 1930s to hook up all the existing competing electricity generators - thus enabling more competition in the first place.

3. The same sort of logic applies to gas as it does to water or the national grid.

4. People have strong views for or against rail nationalisation, it's not something I'm overly bothered about, suffice to say Transport for London does a great job, it runs the Tube network itself and co-ordinates all the private bus and train companies to provide a pretty seamless service - you can use an Oyster card on just about any mode of transport in Greater London, for example. In most other large towns, public transport is a complete mess.

5. Defence spending is largely a slush fund for a few large manufacturers, it's a heavily subsidised cartel rather than a monopoly.

6. Banking is also a cartel. Banks are brilliant at the day to day stuff, like direct debits, debit cards, online banking and so on, there is no doubt in my mind that if we had only ever had a single, government-run bank it would be really primitive in comparison. So hooray to all that. The problem is that 80% of their lending is mortgages on land so they are behind all the land price/credit bubbles and inevitable land price/credit busts.

'Nationalisation' is only one way of dealing with monopolies and is not always the best. As I said before, there are various ways of dealing with them (items 1 to 6 at the end of that post), you have to decide on a case-by-case basis what to do and try and get the best of both worlds (private provision and public rent collection) in each specific case.

This is not a 'mixed economy' approach, that is far too vague a term, but in an ideal world, the government builds the road network and private businesses make the cars (in a literal sense, but the logic applies to everything else as well). Consider the opposite - driving British Leyland cars on a network of private toll roads...?

Round-up of the week

I was very busy at work this week; Mrs W was abroad on holiday all week so I was on single-parent duty (which is not that difficult once your kids are school-age) and the weather was nice so sitting in the garden was always the obvious thing to do.

But lots of things caught my eye:

1. From The Sun:

YOUNG families are being milked by councils who are now charging to take away nappies as part of their household rubbish.

The charges – for either big bins or special plastic bags – have been slammed as being unfair on families and could cause fly-tipping.

It is complete nonsense.
- The cost of emptying household bins (and those of most businesses) is surprisingly small, average £100 to £200 per year per household/business.
- If they are going to charge extra for nappies, why not charge extra for everything that people throw away?
- If they are going to levy specific amounts for what people put in the bin, the most efficient way of doing it would be to levy the charge when they buy it new. I covered all that years ago. That largely solves the fly tipping and enforcement issues.

If you want to simplify it and put a number on it, a flat tax of 1% of the value of all the products which households and businesses buy would cover the cost of refuse collection. Seeing as VAT is already 20% on most things, people buying e.g. disposable nappies have already paid for the cost twenty times over.

2. My view is that each election is actually a referendum in which everybody can choose their own question.

So while the Greens and UKIP have had little electoral success (apart from in meaningless EU Parliament elections), they did manage to shift the terms of debate in their favour and the two big parties adjusted their policies accordingly.

That being so, the Tories messed up the election because Labour nearly outflanked them with their two main vote grabbing proposals - "an end to austerity" and "reducing tuition fees". Lots of people voted for the former and they got an extra few million younger people who'd like to see the end of tuition fees.

Hey presto:

From The Guardian:

One of the key architects of David Cameron’s austerity programme has suggested the government must consider tax rises and increased spending on public services to respond to overwhelming pressure on social care, schools and the NHS.

From the BBC:

The Conservatives must "change hard" to win over young voters who backed Labour in June's general election, Theresa May's most senior minister has warned.

Damian Green told Tories to modernise after losing their majority in the general election and trailing behind Labour by 30% among voters aged 18-35... Speaking at the Bright Blue liberal conservative think-tank's conference in central London, Mr Green said a new "city Conservativism" would woo young, metropolitan voters... Mr Green also suggested there was a "national debate that we need to have" about university tuition fees.

This is all tokenism of course, there is no sincerity on either side, but it confirms my suspicion that there is no need for - or any real prospect of - any YPP candidate with Georgist policies to be - or being - elected. As soon as we are getting a few per cent of the vote, the big two parties will modify their policies accordingly to try and put us out of business.

(The most successful UK movement of recent years doesn't even bother having their own party - it's the old age pensioners. They push out simplistic and inherently contradictory slogans i.e. "We have worked hard and paid taxes and saved hard all our lives". The "worked hard and paid taxes" justifies higher old age pensions, plus all the extra NHS spending. The "paid taxes and saved hard" bit is the argument against taxing land values i.e. clawing back inflated house prices. Hang about here - if they really have saved so hard, how come they need hand outs and subsidies? A century of deficit spending suggests they weren't paying enough taxes, doesn't it? But they get what they want because they bother to go out and vote, that's it, one tick every few years, job done, don't bother with silly protest marches, get on with more important things - a winning strategy.)

3. EU v Google.

Disclaimer - I am big fan of Google: their search engine, gmail, Blogger, Google maps, Google translate, Chrome are all free to use, work very well and make the world a better place. I am no fan of the EU for various reasons. But every now and then the EU get it right.

As I said last year, we all now that these supra-national corporations take the piss on corporation tax, which is not actually that important, because they get stung for VAT, PAYE and Business Rates which are more difficult to evade. National governments know this but find it difficult to draw up and enforce rules which would make them pay "the right amount" of corporation tax in any country.

So the EU doesn't bother with all that, it just invents some trumped up anti-competitive practices and fines them a few billion every few years.

From The Telegraph:

The European Union has fined Google €2.42bn (£2.14bn) after a seven-year investigation into claims the technology giant abused its internet search monopoly.

The penalty is the biggest ever competition fine from the European Commission, doubling the previous record handed to Intel in 2009. The EU said Google had broken EU competition law by exploiting the power of its search engine to promote its online shopping service, at the expense of other price comparison sites.

Which doesn't make sense on their terms - it's Google's search engine and they can use it to advertise what they like, surely? You wouldn't expect the Tesco website to carry advertising for competitors.

The real point, which the EU seem to have missed is not just that Google have a competitive advantage that amounts to a monopoly, it is that what they are charging their advertisers is rent. As with land rent, the value arises from agglomeration benefits (same as Air BNB or Uber), consumers use it because so many sellers use it and vice versa. It is surely more efficient for everybody to use the same marketplace for buying and selling, that's fine, what is not so fine is for a third party, to siphon off part of the producer and consumer surplus.

4. On the topic of Google, Microsoft etc, Benjamin' emailed me a link to a splendid lecture by a succesful Silicon Valley insider/investor called "Competition is for losers".

It's fifty minutes long but I watched it all the way through. I gritted my teeth at the appalling typo at 25 minutes 14 seconds; applauded at 31 minutes when he points out that the main beneficiares of the British Industrial Revolution were landowners ("The workers didn't make that much, the capitalists didn't make that much either"). The most telling bit is where he cheerfully admits that competition and free markets are good for society as a whole, but promptly dismisses it as a way for an individual businessman to make money (I didn't make a note of when he says it).



5. Right, I'm off back into the garden, shame to waste the sunshine.

"Monopolies Are Worse Than We Thought"

Good article on Bloomberg, via Steve S.

No point me summarising, go and have a read.

Uber - employment lawyers don't understand maths or logic

From the BBC:

Uber drivers have won the right to be classed as workers rather than self-employed.

The ruling by a London employment tribunal means drivers for the ride-hailing app will be entitled to holiday pay, paid rest breaks and the national minimum wage. The GMB union described the decision as a "monumental victory" for some 40,000 drivers in England and Wales…

Fair enoughski, but this is just people fighting over the same source of income. Taxi drivers, collectively have a monopoly - each licence is a little monopoly. the tell tale sign is that an increase in demand for taxi rides does not increase the supply of taxi licences (which are at the whim of a local council or similar), it merely pushes up the value of the licences.

From the point of view of the consumer, Uber busted the taxi drivers' monopoly, bringing down prices and increasing supply, but from the point of view of drivers, it created a new one of its own. The trick with these platforms is to persuade passengers/buyers that they are the biggest and have most drivers on call, while simultaneously persuading drivers/suppliers that they are the biggest and have most potential customers.

Things being what they are, it is far easier and more efficient if everybody uses the same platform.*

Which brings me to this…

The ruling accused Uber of "resorting in its documentation to fictions, twisted language and even brand new terminology", adding: "The notion that Uber in London is a mosaic of 30,000 small businesses linked by a common 'platform' is to our mind faintly ridiculous."

No, that is exactly how it is. Presumably, if you register as a driver with Uber that does not stop you from registering as a driver with other platforms at the same time. Question is then - whose employee are they now? Do they have two employers? How is the holiday pay, rest pay and national minimum wage while on call but not driving supposed to be split between the two?

Here comes the maths fail:

Alex Bearman, partner at Russell-Cooke solicitors, said Uber could look to meet any additional costs by increasing the percentage of each fare that it kept as commission: "It seems likely that this decision will be appealed and we may not see a final determination for some time to come."

Again, no. It appears that Uber takes about 25% of the total fare paid by the customer. If Uber takes a higher percentage, then that leaves less for the driver, not more. So either:
- Uber takes a lower percentage (which won't kill it, their income is pure profit/rent once its minimal overheads are paid) or
- prices overall go up by a third to get driver's average hourly earnings up from £5.03 to the National Minimum Wage. And you can't just put prices up, the result will be less demand and fewer Uber drivers. So those at the margin will be unemployed again and those who keep their jobs will earn more for less work. Which is classic rent seeking, it is just when trade unions do it, they dress it up as A Good Thing.
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Then there are taxes on output and employment to consider. Let's assume our driver is genuinely self-employed and is below VAT registration threshold. He makes £10/hour gross, Uber takes 25% leaving our driver £7.50/hour, on which he pays 29% income tax/NIC = £5.33 after tax. The self-employed will also get a full tax deduction for motor vehicle costs.

If the drivers are all now employees of Uber, the full fare will be liable to VAT, so out of £10, £1.67 goes in VAT. This leaves £8.33. Even if Uber generously slashes its fee to 5% (42p after VAT) to cover its minimal overheads, this leaves £7.91 to pay gross wages. 96p goes in Employer's NIC, leaving £6.95 employment income taxable at 32%, leaving our driver with £4.73 per hour. The tax deduction which employees can claim for business use of private car is also much more restrictive than for the self-employed and is more difficult to claim.

So an epic fail all round**!

* Which is why the answer is for the government to simply set up its own low-cost ride sharing app, it can provide it for free to all and sundry and will make its money back ten times over from all the extra income tax/NIC it can collect (even at self-employed 29% rate) now that it knows who is doing what. That still looks like a monopoly in the old-fashioned sense of there being a single provider, but in practice it isn't a monopoly at all.

** Unless you are totally cynical and think that the Employment Tribunal is an arm of government and decided the case this way because it vastly increases the tax take from Uber drivers...

Economic Myths: Monopolies

Traditional thinking is that a monopoly means that there is one single supplier of any particular category of goods or services.

It's a fair enough starting point, but then people tie themselves in knots trying to decide how widely or narrowly this should be defined. So there might be only one ferry company between Port A and Port B, but if there is also a road bridge and an airport connection between A and B, does the ferry company really have a monopoly etc. Further, having a monopoly is no guarantee that your business will make super-profits or even profits. Even if you are the only ferry between Port A and uninhabited island B, if there is insufficient demand, the service might well be loss making.

But this is all pretty irrelevant, all that matters to the man in the street is this simple observation:

... in a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists. A monopolist cannot trace a short term supply curve because for a given price there is not a unique quantity supplied. As

Pindyck and Rubenfeld note, a change in demand "can lead to changes in prices with no change in output, changes in output with no change in price or both".

That makes indentifying a "monopoly" much easier, you can put "land" at the top of the list. It does not matter how much you sub-divide land or how many million owners there are; a change in demand leads to a change in price with no change in quantity supplied.

Copyrights and patents are another kind of government-protected monopoly. You write one book or invent one thing, the amount of money you can earn from it depends entirely on demand and bears little relation to the effort or skill you put into it.
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Having established what a monopoly is, as a separate issue, BenJamin' and I have discussed this to death, whether and what we 'should do' about a monopoly depends on how it arose. Depending on the circumstances, the correct response is either:

1. Do nothing. Who cares if super-rich people keep bidding up the price of Picassos? Copyright periods are probably too generous but patents expire after twenty or so years, which seems fair enough.

2. Reduce barriers to entry, especially if they arise from government regulations (for example taxi driver licences).

3. Cap prices (for example with utilities).

4. Tax away the super-profits (such as a Land Value Tax or imposing a higher tax on copyright royalties).

5. The government provides a low-cost alternative, like state education, social housing or the NHS.

6. In some situations, it might be better just to nationalise something (for example refuse collection).

UPDATE: Lola points out that refuse collection is no longer 'nationalised'. It is taxpayer funded but sub-contracted to competing providers. This is one of the examples where this works well. But whether such a service is truly nationalised or taxpayer-funded/sub-contracted is a secondary issue in the context of 'monopolies'.

Cronyism Rules OK?

From here:

I quote:

1. Pick a field where you can establish a monopoly – such as Mexican billionaire Carlos Slim who from 2010-2013 was ranked the richest person in the world after taking control of the country’s entire telecommunications market.

2. Expand as quickly as possible – Amazon has eschewed early profitability to becoming the “everything shop” and as a result investors have poured money in.

3. The worst place to do business is really the best – it is easier to dominate emerging markets due to the lack of competition and potential for growth.

4. Take risks with other people’s money – do all you can to encourage investors and then gamble their money rather than your own.

5. To get rich you need to own your own business and property rights – Bill Gates’s Microsoft at one point had a 95 per cent share of the operating systems market, protected by intellectual property rights.

6. Spin complex laws into gold – set up in industries bound by such convoluted regulation – for example agricultural subsidies and banking regulation - that it is easy to bend the rules as nobody understands [them] anyway.

7. Establish business networks – telecoms networks and shipping networks have created a lot of billionaires’ fortunes as they can squeeze out all competition.

No. 6 is my favourite...

Generally that's all about Private Enterprise, not Free Enterprise.

"Joseph Stiglitz: Thomas Piketty gets income inequality wrong"

Emailed in by Sackerson, from salon.com

What’s new in your recent work on the distribution of income and wealth among individuals?

JS: There are several things. There’s some debate about this, but I think most readers of Thomas Piketty’s book (Capital in the Twenty-First Century) get the impression that the accumulation of wealth — savings —is responsible for the rise in inequality and that there is, therefore, in a way, a link between the growth of the economy — the accumulation of capital— on the one hand and inequality and wealth.

My paper begins with the observation that in fact, you cannot explain what has happened to the wealth/income ratio by that analysis. A closer look at what has gone on suggests that a large fraction of the increase in wealth is an increase in the value of land, not in the amount of capital goods.

When you say “land,” you’re not talking about land in the Jane Austen sense, that is, agricultural land under the ownership of the lord of the manor, right?

JS: It’s not agricultural land, it’s the value of urban land. I would include in that, broadly, rents associated with natural resources (“rent” is an economic term for unearned revenue). It’s the value of existing assets.

As a footnote, some of what has gone on, in addition to an increase in the wealth/income ratio, is a capitalization of the increase in other kinds of rents, like monopoly rents. If monopoly rents get increased, if the market power of firms relative to workers gets increased, as when you have the ability of a few, like the banks, to get government guarantees — the value of that is increased and gets capitalized. That increases wealth but it doesn’t increase capital. So it’s that distinction between wealth and capital that turns out to be critical. That’s the first idea.

The reason that’s important is that you then begin an inquiry into the explanations of why the value of the land or other sources of the value of rents would have gone up. A lot of my book (The Price of Inequality) is about why there has been an increase in rent-seeking. But the other part is more external in terms of the value of land or the value of assets. That, I suggest, is very closely linked with the credit system….

Stiglitz is a bit of a leftie, but apart from that, amen brother!

"Berlin bans Uber app citing protection of taxi driver privileges"

From the BBC:

The mobile taxi app Uber has been banned in Berlin by the city's State Department of Civil and Regulatory Affairs.

In a statement, the authority said it had banned the app on passenger safety grounds and threatened the firm with a 25,000 euro (£20,000) fine for ignoring the order.

Uber said it would challenge the ban. It is the latest setback for Uber, which has faced bans and protests in cities across Europe.

The Berlin authority said passengers may not be covered by insurance because they aren't traditional cabs.

If they are worried about the possibility of uninsured drivers etc, then surely they would have to ban cars completely? That's the only way I can see.

Whether there should be a rule that people who drive other people round for money have to take out a particular kind of insurance is a completely different debate to the debate as to what marketing/communication channels such people can use, surely?

More hilarity with the Homeys at City AM...

The great defender of monopolies spake thusly (on the topic of fracking):

"the big flaw in the UK’s zero sum game planning system: no mechanism exists to allow the winners to pay off the losers. We need radical reform, and fast.."

Well, duh.

Of course such a mechanism exists: it's called Land Value Tax (or Domestic Rates or Business Rates).

Land which benefits from an externality (a new railway station, a fracking licence etc) pays more LVT; and land which falls in value (near a noisy train track; fracking activities next door) pays less LVT.

It's the free market solution to a monopoly situation and a much better source of revenue than taxing output and employment i.e. real wealth creation.

Cheerleader Rights

From the BBC

Most Raiders and Jills cheerleaders make around $100 (£60). Bengals cheerleaders get $90. They receive no compensation for time spent practising or working at events. Only one club, the Seattle Seahawks, has said they pay cheerleaders an hourly wage and overtime.

In the end, says Sharon Vinick, the lawyer representing the Raiderettes, it doesn't matter that there are thousands of women lining up to do the job or that they get perks associated with the NFL.

The NFL isn't just about football. It's about pageantry and spectacle, and above all, commerce, bringing in $9bn (£5.3bn) last year. The cheerleaders, she says, should get their share.

One of the things that we often like to discuss on this blog is about monopoly rights (land, patents, spectrum) because of the value they produce, and this story pretty much fits in with it.

If you look at something like the NFL, there are all sorts of people that have to pay to be there. The guy selling hot dogs and beer at a stadium will have to pay a fortune for the right to do so. Why should he? Without someone selling hot dogs and beer, football matches wouldn't be as much fun for people. The NFL needs people to sell beer so why isn't he also getting a share of that $9bn revenue? The reason is that lots of people want the concession, will make a lot of money from being there and so ultimately the NFL collects the rent from the guy selling beer and burgers (and this is generally a much better model than companies trying to run their own concessions).

In the case of cheerleaders it's more of a symbiotic relationship, like a celebrity appearing on a chat show. Very little money changes hands (an appearance fee), but both parties get something from it. The celebrity gets to plug their film or book and in exchange, the show gets an entertaining guest that draws in viewers. So, while cheerleaders have to train and entertain the crowd, they also get the rights to be one of a tiny number of franchise holders that can turn up at an event as a legitimate Bengals cheerleader and make some money from it.