The costs of illegal downloads

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I think it's probably fair to say that Ben Goldacre is currently the best writer about science in the British newspapers. This piece of his about what is purported to be the cost of illegal downloads is a good example. It would appear that the debate over what the law should be is being driven by an conspicuous absence of rigorously sourced facts. The headline number employed is:

An industry estimate, as an aside, in a press release.

You'd hope that they would be able to do better than that really.

However (and Ben does say that he's not an economist so we can forgive him not stating this) there's a much larger problem with all of these estimates of the costs of downloading, of pirate production, of couterfeiting.

Reports always, but always, take the form of x illegal pieces or downloads and the value of a legal sale is y thus to total cost is xy. Which betrays a rather alarming lack of understanding of the most basic building block of economics. That as prices change so does demand.

It might be that demand doesn't change very much with prices, it might be that it changes a lot, but we're absolutely certain that the demand for a music album at £10 each is different from the demand for the same album at £0. Thus we cannot assume that all of those who get a counterfeit or illegal download of music would in fact have purchased one at the full price: indeed, we're pretty much certain (unless we think there are Giffen Goods hidden in here) that the number of purchasers at £10 will be lower than the number at £0.

So whenever you see the costs of these actions being calculated in that xy manner simply snigger and ignore the argument. They're either ignorant or, what is worse, propagandists.

Public choice economics

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John McDonnell seems incredibly naive for a man who has spent nearly 30 years in elective politics. Seriously naive

Given this history of a party created and motivated by the highest ideals, founded and motivated by the self-sacrifice of generation after generation of its members and supporters, party members have looked on aghast, in disgust and anger at the self-interested, self-serving political faction fighting among ministers and MPs over the last week. Ambition and naked self-interest have taken over from any sense of political purpose.

As James Buchanan has been pointing out over those years this is simply what happens in a system that grants such powers to politicians.

It isn't that this year's or this decade's crop of politicians are any more venal than those of any other time and place. It's simply that the limits and checks on them have been reduced so that the innate venality is able to express itself.

For all economic actors are self-interested, it the limits that we place upon its expression which re important. In market systems we do it by competition. In politics it appears that we don't.

Let's put it another way. Would Mr. McDonnell be so aghast at a group of children gorging themselves sick if they'd got the keys to the sweet shop?  Naive to think that politicians won't do the same.

The solution is simple, simply have fewer politicians with fewer powers so that there's less of ours that they have access to.

Who's in control?

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altAlthough the political show of resignations, reshuffles and elections is damaging Gordon Brown and the Labour party to their core, there needs to be a rapid solution or conclusion if Britain is to move forward 

At the moment we are a country lacking any clear government, leadership or direction. Gordon Brown has taken his hands off the helm and we are heading straight for shallow water. We clearly need a change of government, in a recent poll 66% of people said they would like an immediate election if Gordon Brown stood down. However, we live in a country where the wishes of the people have little part to play in governance. We are currently in limbo – if there was a terrorist attack in London or a flash flood, would the government really be in a position to respond? Party politics is clearly a major distraction from fixing past mistakes.

It would be easy to think that as long the Labour party are concentrating on damaging each other at least they aren’t focussing on damaging us. But we currently have a government wielding huge power but with no clear idea what to do with it. If there is one thing we have learnt from the past month, it is that we need to limit the power of the government and introduce much greater levels of transparency and accountability.

Blog Review 783

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How confused are farmers getting over the dairy market?

And how bad a deal are we getting from the PFI schemes?

There's also a problem with having a committee deciding what medical treatments the NHS will pay for: clearly, those who provide certain medical services will compete to get on that committee.

Gordon Brown does seem to have a little of the control freak in him, no?

I know John Redwood Mr. Purnell and you are no John Redwood.

Booze in inflation adjusted money terms is about what is was in 1909 and yet a great deal cheaper compared to average earnings. Except for Bordeaux, strangely.

And finally, the most useful political website of our time. isgordonbrownstillprimeminister.com.

Online transparency

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altThe Public Accounts Committee of the House of Commons is annoyed that the BBC won't open its accounts to deeper public scrutiny. Apparently the Beeb has gone to some lengths to thwart the National Audit Office – the official scrutineer of the public finances – to prevent the publication of the salaries it pays to its top presenters.

In a BBC News interview on 11 May, Labour Peer Lord Foulkes turned on presenter Carrie Gracie, forcing her to reveal she was paid £92,000 a year – one-and-a-half times the salary of a Member of Parliament. But then she probably doesn't have a second home allowance. Or does she? I think we should be told. (For the record, I think Carrie Gracie is about six times more useful than the average MP, so she's actually pretty good value for money by government budget standards.)

The BBC is a public corporation, funded by £3,000m a year of taxpayers' money. Yes, we want to maintain its independence – though frankly, it would have far more independence if it was privatized and did not have to keep the politicians sweet by laying on all those 'public interest' broadcasts whose sole function is to allow politicians to preen themselves in front of the political junkies who watch this kind of stuff. But taxpayers have a right to know how public bodies are spending their money. That means all public bodies – Parliament, government departments, local authorities – and quangos.

If we're forced to pay taxes, we should at least have the right to know how they're spent. Who is paying how much of our cash to whom? It's a simple question. And the easy way to answer it is to post on the internet every cheque which government and public bodies issue. Then concerned citizens and the media can spot irregularities. MPs being paid for duck islands? Council bosses giving lucrative contracts to their in-laws? Quangos spending more on PR and offices than on their job? Online transparency should be a basic principle of public finance.

Daily Mail: The lump(en) theory of wealth

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One of the more persistent fallacies in economics is “Lump Theory": that there is only so much to go around and the question is how it is share it.

The most common example of this is the Lump Theory of Labour, where new entrants to the job market are alleged to take away work from existing workers. This is usually used to bash immigrants, though it has in the past been used to argue for the Closed Shop and for restricting labour-market participation on grounds of gender, age and race.

Another example is what we might call the Lump Theory of Wealth, the Mercantilist belief that money leaving the country means less wealth for citizens. This ignores the rather simple fact that pounds are pieces of paper whereas the stuff they buy is usually far more useful: are we really poorer if we give a Chinaman twenty five pieces of paper, each of which says “Ten Pounds" on it, and he gives us a television? It also ignores the fact that pounds can only be spent in the UK, so eventually they must make their way back here either to buy our exports or as loans to government, business or citizens.

Monday’s Daily Mail had a textbook example of this in the article 'Immigrants send home £4.9m a day'. According to the Mail, “The economy is losing £4.9million every day because of the huge sums immigrants send home to their relatives..." Migrationwatch, the anti-immigration lobby group, suggested that this is enough to build two new aircraft carriers and argued that “claims that there are only positive economic benefits from mass immigration are clearly untrue."

All exchanges in a free society are voluntary; both parties benefit. If companies are paying foreign workers £4.9m a day (for the sake of argument let us ignore the difference between wages and remittances), it must be because companies (and therefore Britain) must be getting something that in the companies’ judgement is worth more than £4.9m. For example, if those foreigners were employed in ship yards, they would get £4.9m a day and we would get (say) Andrew Green’s two aircraft carriers. Thus the labour that these migrants are selling to the UK is beneficial to us.

What is more, those £4.9m cannot be spent abroad: the pound is not legal tender there. At some point the pound must return to the UK, either stimulating exports or providing much-needed credit to UK industry or government. Thus, having gained from the labour of the migrant, UK businesses then gain from the desire of his family to import goods or lend money for profit.

Sadly, this simple economic logic is beyond the lumpen intellect of Migrationwatch and the Daily Mail. To them, as to the Mercantilists against whom Adam Smith railed 233 years ago, the wealth of nations is a zero-sum game expressed by the flow of money.

End specialist mobile telecoms regulation

The report identifies a number of specific examples of a heavy-handed regulatory approach, including:

  • Micro-management of customer service: Ofcom is asking operators to gather and publicise information of no interest to customers
  • Efforts to improve price transparency on national numbers that may lead to Ofcom setting the price of individual calls
  • Slow regulator reaction over misselling complaints – industry self-regulation reduced complaints by 95% while Ofcom were still drafting their consultation
  • Attempts to reduce the time to port a number between operators to less than 48 hours, even though this timescale is satisfactory for consumers
  • Demanding mobile providers deliver 100% mobile coverage across the UK, even though this would take resources away from investment in new technology and improved services.

The report sets out a series of recommendations which emphasise the ample opportunities for Ofcom to withdraw from detailed regulation. With this goal in mind the report recommends that the regulator should prepare a timetable for phased regulatory withdrawal across the sector. In this context, it is important to note that the recently strengthened EU Consumer Rights Directive provides an unprecedented opportunity to wind up sector-specific consumer rights regulation and replace it with a set of robust consumer rights based on the new EU Directive.

Accordingly, the report calls for a systematic toolkit to be developed in order to stimulate greater competition and ensure that consumers enjoy similar rights across a raft of sectors, such as energy, telecommunications and water services. This should be a welcome development for consumers who should find such an overhauled system easier to use and consistent across the entire range of goods and services offered in the UK retail market.

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altIn a new study published this week the Adam Smith Institute’s Senior Fellow Keith Boyfield argues that regulation of mobile telephones in the UK is far too detailed and cramps innovation. It needs to be rolled back to allow this highly successful industry to adapt to the next wave of technological change. The report, entitled Regulating Mobile Phones: A fresh look, published by the European Policy Forum, points out that the mobile sector is characterised by a wide raft of suppliers who have delivered consumer satisfaction rating of 94% - far higher than other markets such as rail, water and energy. They have also provided tremendous value for money: prices have tumbled by 17% a year over the last five years.

Why then is Ofcom, the sector regulator, showing increasing signs of wanting to tighten its regulatory hold on the mobile telecoms market? It is currently in the middle of a Mobile Sector Assessment exercise aimed at reviewing its whole approach to regulation. However, there are few indications that it is seeking to withdraw from regulatory intervention in the market.

Keith’s study identifies a number of clear disadvantages in Ofcom’s current approach and the damage to the market caused by unnecessary regulation. Ofcom’s micro regulatory management has limited innovation by reducing competitive advantage; it has further limited the incentive to invest in new products and services. Ofcom’s regulatory approach has tended to focus too much on the concerns of a few voices rather than the bulk of consumers. As a result, overall costs – and prices – are higher than they could be if market mechanisms were unshackled. ‘Relations between the sector and the regulator do not reflect the achievements of the market’, says Keith. “Increasingly regulation is a hindrance to the consumer. The pace of technological change in the sector is not slowing down, providers must continue to adapt. Heavy-handed regulation weakens incentives for investment and opportunities for innovation.’

He adds, ‘Ofcom needs to adopt best practice in regulation – which is to step back where competition is delivering for the consumer. Regulation will always be a second-best approach to meeting consumer needs. Successful sectors often outgrow the regulator. We no longer have specialist regulation of fixed line telecoms, the time has come to withdraw from mobile specialist regulation as well.’

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