Well, that’s markets for you

Not only is this markets for you it’s rather the point of markets for you:

The Co-operative Group has told its members that it cannot make an enhanced commitment to stock Fairtrade products because of tough competition among supermarkets and its shift towards convenience stores.

The UK’s largest mutual made the remarks in response to a motion tabled ahead of the upcoming annual general meeting asking for the commitment to Fairtrade – for which the group has prided its link in the past – to be reiterated and also retain the long-term strategic objective that that if a “Co-operative product can be Fairtrade, it will be Fairtrade”.

Saying it could not back all elements of the motion, the board blamed the current financial position of the group and “the austere market climate we continue to face and the strategic direction of the business into convenience shops which naturally increases pressure on space and range”.

There are some out there who desire to purchase Fairtrade products. We don’t share that view, thinking them to be counterproductive at best, but we absolutely defend the more basic idea. If your worldview means that you either desire to, or desire not to, purchase products made in a particular manner, or place, of by a certain group of people or not, then that’s rather the point of having a market economy. So that you may do so. If enough people share those values of yours then you might even be lucky enough to find that supply arises to meet your desires. This is true of bread without alum, of meat that isn’t rotten, of food prepared to certain religious standards and, yes, to things made by poor people in poor countries. It’s wonderful, it’s glorious in fact.

However, it is worth noting that perhaps not everyone shares your particular worldview. As here: the Co Op finds that while there’s enough people who care about Fairtrade to make it worthwhile not enough people care about it to make it compulsory. And that’s where we’d slightly argue with the description of it being “competition” that causes this. Because yes, OK, the supermarkets are in competition to sate our desires. And some of us do desire to pay higher prices to provide that outdoor relief for the dimmer children of the upper bourgeoisie that is the real result of Fairtrade. But not all of us: and therefore it’s not really the competition between the supermarkets being the problem here, it’s that not enough of us Britons share the initial worldview.

Which is, again, one of the great glories of this free market idea. You get to maximise your utility by purchasing things made in the manner you approve of and so do I, we, them and they. According to our different estimations of our own utility.

Do patent-owners ‘hold up’ further innovation?

One of the standard arguments of the anti-patent crowd is that patents hinder follow-on innovation by making it risky or costly to build on other people’s breakthroughs. There is some evidence for this (see this post from my colleague Charlotte).

However, a new paper challenges this general thesis by looking at whether the outcomes it predicts happen in the real world. If it is true that owners of standard-essential patents (SEPs)—those ones that set up a whole standard used across the marketplace and essential for a large number of follow-on innovators—charge over-the-odds fees and prevent follow-on innovation, then it must also be true that:

  1. Industries where SEPs predominate are ones with relatively stagnant (quality-adjusted) prices, because new entrant innovators have less chance to bid them down through competition
  2. Court decisions that reduce the power of SEP holders will lead to more innovation in those sectors

The paper, “An Empirical Examination of Patent Hold-Up” (pdf) finds neither of these to be true:

A large literature asserts that standard essential patents (SEPs) allow their owners to “hold up” innovation by charging fees that exceed their incremental contribution to a final product.

We evaluate two central, interrelated predictions of this SEP hold-up hypothesis: (1) SEP-reliant industries should experience more stagnant quality-adjusted prices than similar non-SEP-reliant industries; and (2) court decisions that reduce the excessive power of SEP holders should accelerate innovation in SEP-reliant industries.

We find no empirical support for either prediction. Indeed, SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy.

The principle is nicely illustrated in a few charts.

Screen Shot 2015-04-20 at 15.53.51

Screen Shot 2015-04-20 at 15.54.01

At one point there was more or less of a consensus among libertarians that intellectual property was a good kind of property rights. Nowadays you are more likely to see a proto-consensus against copyright at the very least and often patents as well. I think that emerging evidence means we should keep our minds open.

Markets are actually quite good at regulation

The ASI blog reader may not be surprised to discover that some regulations have unintended consequences that, instead of solving a given problem, make the situation worse. This isn’t necessarily always true—though it might be, it’s an empirical question—but it seems that regulatory fair disclosure laws, intended to make executives disclose more bad info about their firms, are another one of these.

A new paper “What Induces CEOs to Provide Timely Disclosure of Bad News: Regulation or Contracting?” (pdf) by Stephen P. Baginski, John L. Campbell, Lisa A. Hinson & David S. Koo finds that regulatory fair disclosure laws lead to executives systematically guessing more pessimistically about the future. But the laws fail to stop executives delaying the release of bad news.

By contrast, they find that contracts including provisions for ‘golden parachute’ payments get rid of the career concerns which incentivise repressing bad news, and get around the asymmetric information problem that would exist in their absence.

Prior research finds that career concerns encourage managers to withhold bad news in the hopes that subsequent events will turn in their favor, and that government regulation (i.e., Regulation Fair Disclosure, or “Reg FD”) eliminates this problem.

In this study, we re-examine the effectiveness of government regulation at mitigating the delay of bad news, and consider the effectiveness of a contracting mechanism that accomplishes the same goal. We provide two main findings.

First, recent studies show that Reg FD changed the way managers provide forecasts in two fundamental ways: (1) managers are more likely to issue a range forecast that is pessimistically biased rather than a neutral point estimate, and (2) managers are more likely to issue forecasts at the same time as earnings announcements.

We show that when design choices do not reflect these changes in manager behavior, the extent to which regulation induces timely disclosure of bad news is overstated.

Second, we identify a compensation contract (i.e., ex-ante severance pay agreements) that firms use to explicitly reduce their CEO’s career concerns, and thus should encourage more timely disclosure of bad news. We find that if managers are promised a sufficiently large payment in the event of a dismissal, they no longer delay the disclosure of bad news relative to good news.

Overall, we find that managers continue to delay the disclosure of bad news after Reg FD, and that if firms provide compensation contracts to reduce their managers’ career concerns, this asymmetric release of information is eliminated.

Just like obscure traditions, market practices that look arbitrary, weird, or irrational are often one of the ways market institutions create a successful and rational economic order. Regulators need to be very careful before tinkering with them.

Finnish politics just got interesting

We think it’s fairly obvious that over the past decade the most successful economy in the eurozone has been that of Germany. And we also think it’s fairly obvious why this has been so, the so-called Hartz IV reforms. Which appears to be very much what the new Finnish likely Prime Minister believes in:

A millionaire former telecoms executive touted as a technocrat capable of rescuing Finland from economic slump won Sunday’s parliamentary election, but he will likely need coalition support from a second-placed eurosceptic party critical of any more Greek bailouts.

Opposition Centre Party leader Juha Sipila, who advocates a wage freeze and spending cuts to regain Finland’s competitiveness, beat pro-EU and pro-NATO Prime Minister Alexander Stubb after four years of policy stagnation and a bickering coalition.

Hartz IV looked at Germany’s labour costs and concluded that they were too high for the productivity levels in the country. This therefore meant unemployment for some, low economic growth for all. The answer to this was to change the relationship between the costs of labour and the production from that labour.

It’s worth nothing that this is one area of economics where there is no difference between the different schools. All will agree that involuntary unemployment is the result of wages being higher than the market clearing level. The arguments all start with why this is so (a supply or demand shock? Capitalist plutocrats screwing everyone? The banks have fallen over?) and then continue on into what should be done about it (raise demand in the economy? Increase educational levels? Lower wages?).

Dependent on the details of what is happening, something which is an empirical, not theoretical, question one of all of them could be happening, could be the right solution, at any one time. Germany then and apparently Finland now mapped it out and decided that it really was simply the general wage level that was too high. That was managed down in Germany and a decade of comparative success has followed (yes, we do have to limit ourselves to the eurozone economies in that comparison, given the burdens of the single currency). Here’s hoping that the Finns have the analysis right this time and that the same solution works again.

There is no such thing as tax avoidance

You don’t have to go far through the public prints to find all sorts of blood curdling tales about how the Treasury is being ripped off by varied forms of tax avoidance and even aggressive tax avoidance. And yet the truth is that as a thing tax avoidance doesn’t actually exist. So it isn’t as we’re told in the Telegraph, that tax avoidance is actually a good thing, it’s that it just doesn’t happen:

Successive governments have left us with a tax regime so complex it verges on chaotic.

Which is exactly why we should be suspicious of politicians who talk imprecisely about “tax avoidance” and “tax evasion” – or who muddle the two terms, or use them interchangeably.

There is nothing wrong with tax avoidance.

Tax avoidance is what everyone does, not just the wealthy. It’s what we do when we save in Isas and pensions, or in Junior Isas for our children.

There’s no doubt at all that there are attempts to avoid tax. Sticking your money in an ISA or simply not declaring millions in income are both attempts to avoid tax. But we have a system which decides which of those plans is successful in doing so. That system being HMRC in the first line, the various tax tribunals in the second and then on and up to the European Court of Justice as both Vodafone and Cadbury found out. The end result of this system of adjudicating upon attempts is that there’s no room left for tax avoidance to actually happen in. For, obviously, once the courts have had their say either whatever is going on is obeying the law of the land or it isn’t. And when it is decided that it isn’t that’s tax evasion. And when it’s decided that it is according to said law that’s not actually avoiding anything, is it? It’s paying, in full, one’s dues as Parliament has decided you ought to.

There really isn’t anything called tax avoidance. There’s only obeying the law and not obeying it.