Wednesday, June 17, 2015

Trade but at what price?

You don't need to be an economist to know that things are different now.  It used to be that if you were Liberal that the single variable you cared most about as representation of how the macro economy was doing was the unemployment rate.  Inflation came next in importance.  If you were Conservative the order of importance was reversed.  There was thought to be a tradeoff between the two represented by the Phillips Curve.  Maybe for a while there was.  Now that no longer seems to be the case.  Having a job is no longer a plum.  As the gallows humor goes - now you need to have two or three of those jobs to make a decent living.  In other words, when we used to talk about the Phillips Curve most jobs were good jobs.  Now good jobs are rather scarce.  We never used to talk about income distribution.  Now its the rage.

On matters of trade, particularly trade across national boundaries, I'm afraid that our rhetoric is biased in favor of hardware, which is clearly private good and sells at a price, and against software, which is often public good (meaning the incremental cost of another user getting it is essentially zero).  I am using these terms metaphorically here.  Digital video is considered as software in this view.  Likewise, a prescription drug is software.  I hope the reader can come up with many other such examples.  In this piece I will be concerned mainly with how software is priced, though let me briefly mention that bundles of software and hardware packaged together also should be a concern.

Consider doing a Google search and then going to some of the Web pages recommended by the search engine.  Is that trade?   I use a program called StatCounter (the free version, which has ads in it) to track hits on my blog.  No doubt my use of StatCounter is trade.  But what of people who read my blog?  Is that trade too?  There are no ads.  No money changes hands as a consequence.  Below is a list of the origins for the last several hits on my blog.  Does the fact that all of these are from abroad make those hits international trade?

India FlagGhaziabad, Uttar Pradesh, India
Chile FlagTalca, Maule, Chile
Switzerland FlagGeneve, Switzerland
Greece FlagAthens, Attiki, Greece
Greece FlagThessaloníki, Thessaloniki, Greece
France FlagFrance
France FlagParis, Ile-de-france, France
France FlagFrance
Hong Kong FlagCentral District, Hong Kong 

If it is trade, but non-monetized trade, how can it be valued?  I can give an economic theory answer.  If the people who generate those hits are better off having reading whatever post(s) they looked at, then the value is the sum of their willingness to pay for the privilege.  But that theoretical answer is not very satisfying in practice.  As is well understood in the economics of public goods, practical attempts at eliciting people's willingness to pay in order to allocate the cost of the public good to the users will fail miserably because of what is termed the free rider problem

As an author rather than as an economist, I have a different conception of the value of my blog posts.  The number of hits, something which is easy to count, is a poor measure of value.  Here I think the well known Dorothy Parker quip is applicable.

You can lead a horticulture, but you can't make her think. 

The hit is very much like leading the horse to water.  Value happens when the reader has found what she was looking for in the search or, even if not that, it gives the reader some ideas she didn't have before.  I have two ways of knowing that my posts have some value.  One is via reader comments where they say as much.  Another is from observing readers who repeatedly come to the site.  Why make a return visit unless there is value expected in doing so?  For the others who visit the site only once and don't comment, I don't know if there is value or not. 

Software pricing can seem quite arbitrary and often is.  Consider this little example.  After all these years of being addicted to The West Wing, I think I've finally reached the point where I'm fatigued with the show.  I watched it first in reruns (I believe on the Bravo Network).  Then I got the entire series as a boxed set of DVDs.  Then I watched it online via Netflix and Amazon Prime.  (We have both, go figure.)  When it was TV programming it was public good, paid for by the commercials.  The DVDs made it into a private good.  My wife paid for it when she gave me the boxed set as a gift.  Streaming the video over the Internet puts it back into the public goods arena.  Netflix pricing is pure access pricing.  It's like buying a library card.  Once you are a member you have access to everything in the library.  (Unlike a book lending library, you never have to worry about another reader checking it out first.)  The value of access then depends on what's in the library.  Amazon Prime offers something of a mixed model.  Some items are pure access, like Netflix.  Others are pay per view.  The odd thing with The West Wing is that when I first went online to watch it it was pure access for both Netflix and Amazon Prime.  But now it is still pure access on Netflix yet pay per view for Amazon Prime.  Why?

This is not an isolated example.  Another is the schlock but adorable movie about George Sand and Chopin called Impromptu.  It used to be pure access at both Netflix and Amazon Prime.  It is no longer available at Netflix and is now pay per view at Amazon Prime.  Access, it seems, is for a time window only.  Outside this time window access is limited.  Whose interest is served when what was once freely available to members of the subscription service is no longer free or no longer available at all?

With hardware pricing the usual trajectory over time is for the new product to be fairly pricey at first and then for price to come down, as a result of learning by doing in production, Moore's Law, and entry by rivals, all of which encourage price to drop.  The trajectory of software pricing should be different, especially software like the videos I've mentioned above that once produced have no incremental production costs such as from needing to be remastered or modified in some other way.  Better here to think of the production costs as entirely sunk, at least at first pass.  Those costs were incurred in the past.  Standard economic efficiency arguments would then suggest that socially optimal pricing would be to make the items free and readily available, after they have had their run where access charges or pay per view were in force to cover their production costs.  That we are not seeing this but rather something else suggests that market power is determining the pricing.  Whether that is market power by the Hollywood Studios or by Netflix and Amazon or a combination of the two I can't say.  I don't know the contractual details between the parties.  An insider, I'm sure, could set us straight on this matter.

I am writing this piece in reaction to Tom Friedman's column from this morning.  I didn't like the column at all.  Friedman takes as a given that the Trans-Pacific Partnership is a good thing for America and therefore since House Democrats blocked it they must be evil in some way (they are moving leftward in a populist way).  But the argument presented amounts to trade is good - by assertion.  If you are against trade you must be evil.  It seems to me we could make the discussion a bit more nuanced as follows.  TPP might lower entry barriers for small companies who then can export to Pacific countries that they find difficult to penetrate at present.  TPP might also enhance market power of large multinationals, particularly those in the software business (as I've defined software above).  How much of it is one and how much of it is the other?  And how would you know the answer to that?  Posing it this way, we might conclude that the devil is in the details of the agreement.  Who understands those details?

Even the opponents of TPP (I'm thinking specifically of Bernie Sanders and Elizabeth Warren here) seem to have fallen into a trap in arguing about this because they use NAFTA as a point of reference and therefore consider it only from the angle of whether it is a jobs destroyer or not.  Most economists when thinking about market power and legislation think of intellectual property law and antitrust law.  On the first, I've written a while ago about how horrible copyright law is at present in a piece called Kopy Wrong.  Term structure is much closer to the pure monopoly solution (favoring Hollywood) than to the socially optimal answer and the nature of the business, as a consequence, has come to rely on the occasional blockbuster with many quite expensive bombs being produced as well in the oft chance it will turn into the next big cash cow.  I am less knowledgeable about patent law, but I do have a sense that sleeping patents are now being used by the big guys as a way to deter entry and to beat up on rivals.  How much attention is that issue getting?  Companies that we now think of as innovative, like Apple and Google, might readily become ossified, content to earn their monopoly rents, if they no longer need to be concerned about the threat of entry.  What does TPP do on this score?   I have no idea.  Does Friedman know?  Do any of the other pundits who are supporting TPP know? 

Antitrust law, here I mean the Sherman Act and the subsequent Clayton Act, came into being because the way the Constitution originally envisioned industry should be regulated, by the states, proved to be inadequate by the late 1800s.  I wrote about this in a post on Progressivism, with the relevant section of the piece linked here. By essentially the same argument, in Friedman's flat world the right scope of authority to regulate large multinational companies would itself be an international organization.  Thus, one role that TPP might play is as the 21st century analog of antitrust law.  Is it doing that?  A cynic might argue that what's happening is that the big multinationals are writing the legislation themselves as a way to block subsequent legislation of this sort that might have more teeth to it.  Does anyone know which is happening here?  How would one tell?

Let me take on one other point that Friedman makes and then wrap this up.  It is on the immigration issue, particularly by East Asian young adults who are going to college in the U.S. and whether they should be on the fast track for a green card after they graduate, if they so desire.  The recommendation sounds like the smart thing to do.  (The ones I've had in my class are often quite talented and even more often very hard working.)  But like most of the ideas in this piece today, this one isn't fully fleshed out.  Consider Chinese nationals, in particular.  They are apt to be the only child in their family.  What of their parents?  Can the parents get a green card too?  What sort of immigration policy would it be if it allowed the child but blocked the parents?  Alternatively, since the parents would not have gone to college in the U.S., might not be nearly as proficient in English as the child, and yet might consume social services without having previously paid taxes to fund those social services, if the parents are part of the package it is less obvious that overall it is a good deal.  It might still be, but it is a harder case to make.

Indeed, that is my main point.  Even when considering the market power issues, overall TPP might be a good deal.  But you really need to work these things through, because it might not.  And then it might be that reasonable people disagree about whether it is a good deal or not.  But instead of working it through you get endorsement of TPP coupled with the criticism that anyone who is against it is a populist of the far left or the far right.

Can't we do better than that in arguing about the policy? 

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