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.

The Law of Rent strikes again!

From the BBC:

Rising rents mean young people are less likely to move to UK cities where average salaries are higher, a report indicates. The number of young people in private rented accommodation who moved for a new job has almost halved in 20 years.

Despite the higher wages available, financial incentives for moving are lower, say researchers.

"Pay gains are being swallowed up by high housing costs," said Lindsay Judge of the Resolution Foundation. "For young people in particular, there are real advantages to moving when it comes to trying new roles and developing skills - and housing should not be a barrier that prevents them doing this."

Although unemployment has fallen, the Resolution Foundation found that rents had climbed the fastest in higher-paying areas of the UK. Private rents have risen by almost 90% in the UK's highest-paying local authority areas, while rents have increased by just over 70% among the lowest-paying local authority areas.

In 1997*, after housing costs were deducted from salaries, private renters moving from a low-paying area such as East Devon to a mid-paying area such as Bristol would have received an average financial gain of about 16%. Today, the financial gain would be a mere 1%.

I trust this is no surprise to anybody who reads this blog, this is all entirely as predicted.

* In 1997, the UK government made no-fault evictions much easier under s21 Housing Act. This was the last vestige of Georgism Lite that kept rents and prices down for most of the 20th century. Banks were suddenly falling over themselves to offer buy-to-let mortgages, knowing is would be much easier to sell the home with vacant possession if they wanted their money back in a hurry, and the rest is history...

But back in 1997, rents had not yet rebounded to their full market rate and you could still improve your net income by moving to a higher wage area. That quest is now pretty futile.

Rent v tax v cost of services - you know it when you see it.

From the comments here:

I suggest that the payment for queue jumping is not rent, but the premium paid for convenience and saving time.

Would you classify the premium paid for supersonic travel as 'rent'? Or the taxi fare versus the bus fare plus a walk at both ends for the same journey?

Anything collected by government is tax.

DP

A good way of defining "rent" is "premium paid for convenience and saving time". The magic word is "premium". Consider: it costs the same to build and maintain a home in a good location for commuting or in a bad one. People will pay more for the former, primarily for convenience and saving time, ergo the difference/the premium is "rent".

Tools and capital are labour saving devices, I use an electric drill not a hand drill for convenience and to save time. But there are enough competing drill manufacturers and the price of a drill is a fair price for making it, there is no premium and no rental element.

The Daily Mail article explained that doing a certain operation costs the NHS £5,000, but people will pay £14,000 if they can queue jump and get it done next week. That breaks down into £5,000 actual cost of service provided and £9,000 rent.

Anything collected by government is tax.

Nope. If the NHS i.e. the government collects it, it is £5,000 cost and £9,000 rent. If an NHS surgeon takes the day off and does the operation privately for £14,000, it is £5,000 cost and £9,000 of it is rent.

The fact that the NHS i.e. the government collects it does not make it a tax. A tax is an arbitrary payment with no relation to cost or value of services provided to the individual taxpayer. So VAT, income tax and National Insurance etc are taxes.

Would you classify the premium paid for supersonic travel as 'rent'?

Not a live issue, let's take a real life example

I recently flew Stansted to Edinburgh and back for £49, car parking for a day also cost £49. There must be a small rental element to the £49 ticket price or else the airline would not be able to afford the Air Passenger Duty, but for the sake of this discussion, let's assume it's £nil and £49 is for cost of services.

The price for parking a car is nearly all rent (apart from a few pence for maintaining the tarmac).

London to Edinburgh is 332 miles. London to Paris is only 214 miles, but return tickets cost (say) £200 and upwards. Therefore three-quarters of the London-Paris ticket price is rent; one quarter is for actual cost of services. Of course, the government collects some of that rent in Air Passenger Duty, landing fees etc, but it is still rent.

"Or the taxi fare versus the bus fare plus a walk at both ends for the same journey?"

The cost per passenger of ferrying one passenger is clearly higher than one seat on a bus so of course it a taxi will cost more. In a free market, the taxi driver is charging for cost/value of services provided with no rental element. If there is a restriction on the number of taxi driver permits, then taxi drivers can charge a bit more; that excess is rent (as measured by the value of a taxi permit on the grey market).

There's no point being too scientific about this or pretending that there must be one all-defining way of describing it, but you know it when you see it.

Fun Online Polls: NHS charges for queue-jumping; Rhyme and Reason

The results to last week's Fun Online Poll were as follows:

Is it acceptable for the NHS to allow patients to pay extra to jump the queue?

Yes - 31%
No - 46%
Depends on how the extra money is spent - 23%

It seems like a fine idea to me. That extra payment (way in excess of actual cost) is "rent" and so to the extent we can't eliminate it, it might as well be the government that collects it.

DP came to exactly the opposite conclusion and thought the rent should only be collected privately. As we know, many NHS surgeons do private operations on the side, if the NHS won't let rich people pay to queue jump, NHS surgeons will just take a day off and do the operation privately. So the normal NHS waiting list stays as long as ever. If the surgeon uses an NHS operating theatre, the NHS could claim a fair chunk of the rent as, er, rent, I suppose.

The last option was a trick answer, it is nigh irrelevant because it is a futile exercise trying to match up sources of government income with particular items of expenditure. It's pretty futile for most people, as a matter of fact.

But clearly I'm in a small minority on this. Thanks to all 71 who took part.
-----------------------------------------
This week's Fun Online Poll is hair splitting (and I don't know whether there is a right or wrong answer).

"The word "seam" rhymes with...
Beam
Seem
Seam (the word itself)."

Vote here or use the widget in the sidebar.

Fun Online Polls: Recycling & NHS queue jumping

The results to last week's Fun Online Poll were as follows:

It would be a good idea to charge refundable deposits on...

Glass drinks bottles - 13 votes
All glass jars - 12 votes
Plastic drinks bottles - 9 votes
Aluminium cans - 10 votes
Other, please specify - 0 votes
None of the above 7 votes

Total voters - 22

The low turnout might be because I messed up the widget, or maybe the topic is not that interesting.

That's not an overwhelming majority in favour of deposits. IMHO there are three main reasons for deposits:

a) To encourage recycling of valuable materials
b) To discourage littering, knock-on pollution
c) To discourage use of disposable materials, the production of which harms the environment in the first place.

In which case, the results are the wrong way round.
- Plastic drinks bottles got the lowest number of votes. They are a waste of raw materials but those materials aren't worth much. The point is that producing them causes pollution and they end up shredded in the oceans, so not a good thing.
- Aluminium cans got the second lowest number of votes, even though aluminium is the most valuable raw material and drinks cans are very likely to end up as litter.
- Glass got the most votes, even though it is not a particularly valuable raw material and is quite heavy to take back to the shop. Food jars are unlikely to end up as litter, and if they do they are completely inert so don't cause any knock-on pollution (although splinters of drinks bottles can cause injury or puncture tyres, I suppose).

All in all, I'm not sure what to make of it.
----------------------------------------------
There was some wailing in The Guardian recently about people paying £145 to see a GP privately. Their arguments against are that this "will mean NHS patients without money will wait even longer for care" and it will lead to a "two-tier NHS".

Both those arguments are nonsense, the doctors are operating privately, so good luck to them. The real argument against is that these GPs are rent-seeking, they are selling earlier access to taxpayer funded healthcare.

For a more neutral look and a better example, see a Daily Mail article of two years ago:

Hospitals are letting patients jump NHS queues for knee and hip replacement surgery if they pay for the operations themselves.

Patients are being charged up to £14,000 for some procedures – almost treble the cost to the Health Service – leading to accusations that hospitals are ripping off the sick. Knee and hip surgery is being rationed across England, forcing some patients to wait in pain for more than a year to get to theatre.

Yet The Mail on Sunday has found that more than 40 trusts are promising patients they can have the ops in as little as a week – if they can afford it.

I don't see a problem:

a) a voluntary extra payment for a better service is not being ripped off, you pays your money and takes your choice. If the NHS doesn't do this, then surgeons will just do the operations privately for the same charge.

b) The NHS has to get money from somewhere. If it can get a bit more from better-off patients then in an ideal world and all thing being equal, either the taxpayer pays in a bit less or the NHS has a bit more money so waiting times will not go up.

c) The extra payment is just rent under the Von Thünen definition (money paid for shorter journey time) as it bears no relation to the cost of the operation, so the NHS might as well collect it as anybody else

d) It also illustrates my point that the value of a place in a queue depends on how many people are behind you, not how many are in front of you - if the normal waiting list time were two weeks, nobody would pay that much extra to get it done next week. So the NHS now has a perverse incentive to make waiting times even longer, that means it can actually boost the charge for queue jumping, that's the only downside I can see.

So that's this week's Fun Online Poll: "Is it acceptable for the NHS to allow patients to pay extra to jump the queue?"

Vote here or use the widget in the sidebar.

Economic Myths: Cost-plus

The point of the post Economic Myths: Business Rates hike may force UK's shops to raise prices is that prices are set by where marginal revenue and marginal costs per unit happen to cross on the supply-demand chart.

Fixed costs quite simply have nothing to do with it. In the very long run, most fixed costs are actually variable costs. It is a question of fact and degree. But clearly rent and rates are a fixed cost for these purposes (from the point of view of the tenant).

The chart showed the supply-demand curves for monopolistic competition, but the same principles apply wherever a business is on a sliding scale between perfect competition and absolute monopoly. Most businesses are somewhere in the middle.

(Land ownership is a not a business for these purposes, that is a pure monopoly. By putting up and maintaining buildings, land owners act like businesses of course, they have a dual role and it helps if you don't confuse the two distinct functions.)

From the comments:

Dinero: However I don't see the relevance of the chart from Economics help.

Me: A change in variable costs per unit = changes the optimum price/output level. A change in fixed costs = has no effect. Business Rates and rent = fixed cost = have no effect. That is why the linked chart and article ONLY mention variable unit costs (or marginal costs or whatever you want to call them).

Dinero: The chart is a diagram of profit maximizing price setting for a monopolistic supplier (1). Retail is competitive market (2), where prices are a competitive level of profit plus variable costs (3) plus fixed costs.(4)

Wrong on so many levels.

1. Even with perfect competition, the market clearing price is where revenue and marginal costs per unit happen to cross on the supply-demand chart. Same for monopolistic competition, cartels and a pure monopoly. Fixed costs have no impact on prices; they affect profits.

2. Yes, bricks and mortar retail is competitive, but not that competitive. Most shops have their own niche, customer base or brands etc. And by occupying space (and crowding out competitors), most shops have some degree of local monopoly. Even if it were competitive, see 1.

3. That misses the whole point of the article and pretty much everything else you need to know about economics. With most industries without absolute barriers to entry and even with cartels, abnormal or super profits are competed away, so that prices end up at a level of what looks like cost-plus. This is not because each individual business decides to aim for cost-plus, it is because of the competition.

4. For 'fixed costs' read 'rent'. Rent is not a 'cost' in economic terms, it is an appropriation of the earned profits of the business. Profits (or the profits of potential other tenants) are what dictates rents, not the other way round!

I've done this one dozens of times.

Imagine a partnership running a business, the two partners share profits 50/50. One partner might secretly consider himself the senior partner and consider the other partner's profit share to be a 'cost'. It might be a cost to him personally, but it is not a cost to the business. Perhaps they change the profit share ratio to 60/40. Does that change what customers are prepared to pay or the optimum level of output of that business?

Does it heck.

In the same way, maybe this year, the landlord is taking half the profits in rent and next year ups the rent to 60% of the profits, makes bugger all difference to prices and output. That's a dispute between the business owner and the land owner.

In the same way, the local council takes a slice of the rent from the landlord (Business Rates). The business tenant, as 'customer' of landlord (who provides the building) and the local council (which provides pretty much everything else) couldn't care less how they split up the rent between them. Each tenant has his own pain threshold, if landlord and local council demand more than he is prepared to pay, that's it, he vacates the premises, end of.
------------------------------------
UPDATE: Dinero: And so the opportunity to set a price using a profit maximizing policy , marginal revenue vs marginal costs, is more or less removed by competition, and so the suppliers to the market are left with selling at the minimum acceptable profit plus the costs.

To reiterate: in a reasonably competitive market with sufficient reasonably well-informed consumers the market clearing price is still set by the basic rule tends to settle at, price = marginal revenue = marginal cost + 'minimum acceptable profit'. This happens to be the point at which - given the competition - an individual business (or indeed the whole industry) maximises its gross profit. Prices are NOT dictated by fixed costs. Gross profits dictate 'fixed costs' i.e. rent.

Von Thünen's Law of Rent in action...

From The Telegraph:

House price growth at stations on Southern Rail's routes has ground to a halt as strikes by the RMT Union continue to make commuters' lives a misery.

New research by the online estate agency HouseSimple found that properties on the Brighton Mainline, Mainline West and East routes have fallen in value by an average of 0.4pc, losing £1,875 in value in the last three months.

This is not due to a general slump in house prices in the area during a traditional summer lull: in the south-east of England, house prices have risen on average 2.4pc between June and August, according to the Land Registry.

Von T's rings assume constant travelling speed (in the days of horses and carts) so it is only distance that matters; what actually matters is time, cost and hassle, so if a train service is less reliable, that is effectively further away from The Centre.

Right at the end there's a nice bit of Home-Owner-Ist double counting:

Alex Gosling, chief executive of HouseSimple, said: “House prices along Southern Rail routes haven’t gone into freefall just yet, but these figures do suggest that the ongoing dispute is hurting local property markets.

"It would be a real kick in the teeth if homeowners, who have had to endure the daily misery of train delays, cancellations and strike action, started to see the value of their homes falling because of the RMT and Southern Rail’s inability to reach a deal."

The amount by which rental values (and hence house prices) fall is not in addition to the grief and hassle, it is the market's estimate of the cost of the grief and hassle.

David Triggs' Law of Rent

He summed up the recent IU conference with one final thought, he said there are so many theories and explanations regarding land rent (von Thünen, Ricardo etc), but it's actually very simple:

"Rent arises where more than one person wants to occupy any particular plot of land. It arises quite independently of any actions or inactions of the 'land owner'."

Which pretty much covers it. Quite why the rent for one site is higher or lower than for other sites depends on a million and one factors, none of which have anything to do with the 'owner' of any particular site. There are plenty of examples where there is no 'owner', such as the middle of the ocean. If there is oil to be drilled or fish to be caught, that site will have value. And there is plenty of privately owned land in the UK with a rental value of effectively zero.

It also covers all sorts of KLNs, for example "It's about supply and demand. If we built more houses/restricted immigration, there would be more housing to go round and hence lower rents and prices"

Even if that were true, so what? The newly developed land has a much higher rental value than it did as farmland and the rental value of previously developed land falls a bit; the total rental value stays much the same, there will still be high and low value areas etc. The law still holds.

Or this KLN: "How can you say that land is a monopoly? I only own a small number of homes out of 27 million in the UK. I am competing with millions of other landowners."

There are 27-million households in the bidding for those 27 million homes; there is nowhere else for them to go. That is a monopoly which generates higher rents in the more desirable areas, tapering away to negligible rents in the marginal areas (there are plenty of homes in low wage, undesirable areas of the UK where the rent is effectively zero).

You can sub-divide this monopoly as much as you like, once all the other homes in non-zero value areas are taken, for the last remaining available home in a non-profit value area, there will be dozens or hundreds of potential bidders.

All those other occupied homes are off the market and have no influence on the price of the last available one. Even if there are only two bidders, the price that the winning bidder has to pay is rent and is dictated by how much the other person bids; which largely depends on how much he or she earns/can afford to pay, which has absolutely naff all to do with the current 'land owner's' actions or inactions regarding the site.

And so on.

"Virtuous Rent: a Rudder That Can Transform Our Economy"

A great article from Evonomics forwarded by SJS. Worth reading in full (quite lengthy) but here is the salient bit:

In Adam Smith’s view, landlords benefited from land’s unique ability to enrich its owners “independent of any plan or project of their own.” This ability arises from the fact that the supply of good land is limited, while the demand for it steadily rises. The effect of landowners’ collection of rent, he concluded, isn’t to increase society’s wealth but to take money away from labor and capital. In other words, land rent is an extractor of wealth rather than a contributor to it…

More recently, the concept of rent was expanded to include mono­poly pro­fits, the extra income a company reaps by quashing com­pe­tition and raising prices. Smith had written about this form of wealth extraction too, though he didn’t call it rent. “The interest of any particular branch of trade or manufac­tures is always to widen the market and to narrow the competition… To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can only serve to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens"

… In short, traditional rent is income received not because of anything a person or business produces, but because of rights or power a person or business possesses. It con­sists of takings from the larger whole rather than additions to it. It redis­tributes wealth within an econ­omy but doesn’t add any. As British economist John Kay put it in the Financial Times, “When the appropriation of the wealth of others is illegal, it’s called theft or fraud. When it’s legal, it’s called rent.”

Good article about demand-priced parking.

From Xerox.com:

Why does parking matter so much? What’s the impact of parking on city architecture and quality of life?

In most cities, the footprint of parking is bigger than that of any other land use. Parking spaces are also the most uniform and most frequently rented pieces of land on earth…

Cities should charge the right prices for on-street parking because charging either too little or too much can do great harm.

If the price is too low and no on-street spaces are vacant, drivers searching for a place to park will congest traffic, waste fuel, and pollute the air. If the price is too high and many on-street spaces are vacant, adjacent businesses will lose customers, employees will lose their jobs, and cities will lose tax revenue.

Consequently, the right price for on-street parking is the lowest price that can keep a few spaces open to allow convenient access for motorists. This is the Goldilocks principle of parking prices.

They don't like being beaten at their own game...

From The Telegraph:

Members of one of Britain’s most prestigious golf clubs have threatened legal action against their new foreign owners over plans to introduce a £100,000 fee.

Reignwood, the Chinese conglomerate that bought Wentworth, in Surrey, for £135  million, also wants to reduce the number of members from 4,000 to 800.

Those invited to rejoin the club will be charged a one-off payment of £100,000 while annual fees will rise from £8,000 to £16,000.

Well played Reignwood! If 800 people are dumb enough to rejoin for £116,000 up front, then Reignwood has recovered three quarters of its initial outlay of £135 million.

If this had happened to anybody else, they'd have my full sympathy, but in this case the plaintiffs are all city financiers and people who live in multi-million pound mansions surrounding the course. Serves them right for not buying up the golf club themselves i.e. 4,000 members @ £33,750 each.

Clever scientist understands and explains agglomeration...

… but fails to draw the obvious conclusion.

From the NY Times, h/t Pablo:

In essence, they arrive at the sensible conclusion that cities are valuable because they facilitate human interactions, as people crammed into a few square miles exchange ideas and start collaborations.

“If you ask people why they move to the city, they always give the same reasons,” West says. “They’ve come to get a job or follow their friends or to be at the center of a scene. That’s why we pay the high rent. Cities are all about the people, not the infrastructure.”

Having established what creates rental value, why not ask whom it belongs to? To say it belongs to landowners is like saying that fireplaces give off heat. They don't. It's the burning fuel that gives off heat.

As an aside, this further undermines the view that particularly high rents and prices in London are caused by shortage of supply. They are not. They are caused by the presence of large numbers of people and businesses (and the appropriate infrastructure to support it).

If you build more buildings, will you get more people and businesses or fewer..? Continuing the fireplace analogy, you can't cool down a fire by throwing more dry twigs on it.

And how much of this is just "rent"?

From City AM:

FITBUG, a little-known Aim-listed firm that makes wearable fitness trackers, saw its shares rocket more than 350 per cent yesterday, after revealing that Sainsbury’s and a leading US retail chain would begin stocking its products next month.

The Fitbug Orb, which retails for £49.95 and connects to a smartphone app to track daily routines and nutrition, will be sold in 293 Sainsbury’s supermarkets from 9 November and all 1,800 Target stores in the US.

Fitbug’s shares soared from 0.37p to 1.7p yesterday on news of the deal, the company’s largest distribution deal to date, pushing its market valuation from £630,000 to over £3m.

We know from the recent Tesco episode that supermarkets charge new entrants a fee to stock their goods, in other words, the supermarkets are renting out shelf space. If the "internet" (i.e. glorified mail order) were really such a threat to bricks and mortar retailers, then clearly this wouldn't happen.

We don't know how much Fitbug paid Sainsbury and Target, if anything, but as the market capitalisation of the company went up by nearly £3 million, so in theory, those two chains could have charged Fitbug a signing on fee of £2 million or so.

And whether or not a signing on fee was paid, the lucky shareholders have made an overnight gain of nearly £3 million.

Is that really all earned income? It can't be, because that's the net present value of the additional future profits. Emphasis on "future" - it hasn't been earned yet, somebody else has to do the earning.

And being a shareholder is like being a mini-monopolist. Although there's nothing to stop other people developing and manufacturing these fitness gadgets, there is a limited number of Fitbug shares, and Fitbug have stolen a march on their competitors by being on the shelves first.

And so on.

An interesting model in Cafes

from the Guardian

A Russian cafe chain called Ziferblat has opened its first UK store in east London. It provides tea and coffee and Wi-Fi for nothing – but it's 3p a minute to sit there. I know. Genius.

But in Shoreditch where this is based, this makes sense. The biggest chunk of a cup of coffee in that area is the space you're occupying drinking it. You compare the price of a coffee in central London with the price of a coffee in say, Swindon, and there's a bigger difference in price than the price of the coffee beans (about 20p of the cup)(1). The extra rent is being added into that coffee.

If someone has 2 coffees in an hour instead of 1, all that's really costing a restaurant is in coffee beans and maybe milk. Staff, rent, heating, lighting are all fixed for the period. They're sitting at the same table, denying it to other customers whether they drink 1 or 2 in the same period. By charging for rent, it's charging based on the most expensive bit of the coffee being drunk.