Beware big data doomsayers

It’s become almost cliché to complain that Facebook, Amazon and Google have become unassailable monopolies. Critics, from the left and right, argue that big data and network effects combine to create massive barriers to entry.

The idea behind network effects is straightforward. Facebook isn’t very useful to me if none of my friends are on it. Google’s ability to put the right adverts in front of your eyeballs depends on their ability to analyse large pools of data. The more data-points they get, the better they can target consumers. Intuitively, it implies that there are massive first-mover advantages in the platform economy and that once a firm gains critical mass then insurgent startups don’t have a chance. Calls for trustbusting, and even public utility regulation inevitably follow.

The problem is, as an excellent article in this month’s edition of Regulation points out, that the evidence doesn’t fit the theory. Authors Evans and Schmalensee bash the armchair theorists who presume that whenever there are network effects then insurmountable monopolies inevitably follow.

One key mistake is to ignore that network effects can work in reverse too. Take instant messaging services. They’re only useful if your friends use them too. If there is anywhere where network effects should be able to create insurmountable monopolies then it is instant messaging. But, we’ve seen AOL Instant Messenger and MSN Messenger lose their market-share to WhatsApp, Snapchat and Slack.

The same is true of social media. The Guardian may now publish op-eds arguing that “We need to nationalise Google, Facebook and Amazon”, but just a decade ago they were asking “Will MySpace ever lose its monopoly?”

Why are the doomsayers wrong? Evans and Schmalensee explain:

“The flaw in that reasoning is that people can use multiple online communications platforms, what economists call ‘multihoming.’ A few people in a social network try a new platform. If enough do so and like it, then eventually all network members could use it and even drop their initial platform.”

Examples of ‘winner take all’ markets are often the result of economists and journalists misidentifying what the market is. Google may be the dominant search engine, but in the highly profitable product search market it has stiff competition from Amazon.

It’s become trendy to say ‘data is the new oil’ but slogans shouldn’t be a substitute for evidence. It is often asserted that ‘big data is bad for competition’, yet the last twenty years have seen incumbents with reams of data being displaced by nimble better services. Evans and Schmalensee give half-a-dozen examples:

“AOL, Friendster, MySpace, Orkut, Yahoo, and many other attention platforms had data on their many users. So did Blackberry and Microsoft in mobile. As did numerous search engines, including AltaVista, Infoseek, and Lycos. Microsoft did in browsers. Yet in these and other categories, data didn’t give the incumbents the power to prevent competition. Nor is there any evidence that their data increased the network effects for these firms in any way that gave them a substantial advantage over challengers.”

This isn’t to say it is impossible for Google, Amazon and Facebook to abuse their market position, but just as competition theorists rejected simplistic ‘big is bad’ assumptions in the 80s, it’s time for critics of so-called ‘tech titans’ to move beyond ‘big data is bad’.


To complain about Lidl's peeled onions means you think someone would like them

There's a certain paradox in complaining about what you insist no one will want:

Supermarket giant Lidl has faced a backlash for selling pre-peeled "naked" onions in plastic packaging.

There is no point in complaining about, nor campaigning against, what you insist no one will or could want. For, in a market economy, if no one wants it then it will quickly enough disappear for lack of demand.

It is only if you think that people will buy it but that they shouldn't that there is a case for banning or saying that people shouldn't.

As with, say, a new supermarket. If everyone does indeed want to shop in the High Street then the existence of the new and larger store will make no difference. It is only if you think they won't shop at and therefore maintain the High Street that you have a case for protesting.

That case only being that people will do as they wish and you wish they wouldn't.

Peeled onions? If no one wants them then they won't be sold beyond a most limited trial. If people do then why shouldn't they have them?  

Lords should leave Leveson out of it

Sequels of Hollywood movies are often more expensive and worse than the original, and it’s the same in politics. With the news that the House of Lords has decided to push the government to open a second press inquiry, that doesn’t seem likely to change.

It is, however, good news that the new culture secretary has come out fighting against the move by the House of Lords a week ago, with Matt Hancock saying:

"The House of Lords have just voted to restrict press freedoms. This vote will undermine high quality journalism, fail to resolve challenges the media face and is a hammer blow to local press. We support a free press and will seek to overturn these amendments in the Commons."

We are rightly keen to chastise and lampoon the enemies of a free press away from home (whether its mocking Trump’s attacks of #FakeNews and his calls to open up the libel laws, Chinese censorship or Turkey’s Erdogan shutting down private papers and TV channels). But the threat that comes from the House of Lords should be just as worrying.

The original Leveson cost the public £5.4m and cost the industry £43.7million. It was widely regarded as being broad in scope and unearthed wrongdoing that led to the arrest of 10 journalists. It led to sea-changes in operations at paper media organisations and was widely regarded as comprehensive (and in many ways counterproductive). Another inquiry was said to be designed to be focussed on relations between the press and the police but this was an area that the original inquiry already focussed on – something that Dr Marianne Colbran has argued led to a breakdown in relations between the two institutions.

Calls for evidence from across media would cost further millions of hours and thousands of hours spent. With the scope a second Leveson trailed as being any editorial coverage of any matter past, present or future, the inquiry would be open to abuse with complaints intended to deter and disrupt investigations.

The newspaper industry has changed its practices and its outlook. But it isn’t playing on a level playing field. The rules that govern online players, including the likes of facebook and twitter, as well as the myriad blogs and apps, do not apply uniformly. One of the recommendations, being pursued by Liberal Democrat and Labour Lords, was that press would have to bear the legal costs of both sides during investigations into their practices (by bringing into force Section 40 of the Crime and Courts Act 2013) following the Press Recognition Panel's decision to grant Impress the recognition of the Royal Charter. After local and national media highlighted the cost implications of the new regulations, the then Culture Secretary Karen Bradley backed away. She was right to do so, it could have meant investigations grinding to a halt under pernicious acts of those anxious to avoid scrutiny. The Conservatives were right to subsequently to recognise the too high a cost of a second inquiry when they stood on a manifesto of dropping it and the Section 40 provision at the election earlier this year. 

British people get a great deal from a free and open press. No-one is safe just because of their status or position. Whether it's the Profumo affair, the Sunday Times investigation into Fifa's world cup allocations systems, the Telegraph's MPs expenses, or the Winterbourne care home abuse, our press keeps us all in the loop and everyone accountable. The Lords should back away from another damaging inquiry. Our press must remain free to publish without fear nor favour. 

Markets might not tell you what you want to hear but they don't lie

There's a great deal of huffing and puffing going on over in the US over changes to the manner in which Facebook presents news stories. This isn't, in reality, anything very much to do with Facebook but rather about the effects of the internet itself.

The UK has been a - largely enough - national newspaper market since the railways covered the country and distributed the same 10 - 15 titles everywhere. Roughly enough, pre-WWI. The US has just been going through this process in these last couple of decades, as the regional monopolies imposed by geography failed. The industry is haemorrhaging money and, of a great deal more importance to those who write for a living, jobs. Thus the wailing of those who write for a living, the insistences that Facebook and Google should pay for journalism.

Then comes this latest change, that Facebook will be showing people fewer pieces of professionally produced news and more produced by their friends and family. This is, according to some at least, a grave danger to the Republic.


Mark Zuckerberg’s decision to alter Facebook’s news feed to prioritise personal posts over professionally produced news and video was spurred by a potential exodus of users, according to research.

Time spent by average members fell by 7% last August compared with the same period in 2016, and by a further 4.7% in September, according to a review of Nielsen traffic data.

The analysis, by Pivotal Research, suggested that Facebook users had become tired of being bombarded with news stories and adverts.

It appears that the citizenry who make up the Republic don't in fact care very much for the professionally produced writing.

Ah well, pity, eh? 

Markets are the scientific method of doing things

Imagine, for a moment, that you are a scientist with an idea. Go on, just a little supposition. What is it that you do in order to test whether your idea conforms to the restrictions of reality? 

You do an experiment of course. First you just try it out. Then you try to construct further tests to disprove what you think you're seeing. What you don't do is sit around in committee trying to decide whether it could work. You take real world actions to find out.

Which is what markets do. People go and try things and see if they do work. As with this fracking in Lancashire.

Cuadrilla’s controversial bid to frack for shale gas in Lancashire has struck a rare gush of good luck after tests unearthed “excellent” conditions for fracking.

The fracking firm drilled a 1.6 mile deep vertical well at its protest-hit Preston New Road site, through two different types of shale, to reveal “excellent rock quality” for fracking.

The tests also suggest a high natural gas content in the core samples, Cuadrilla said.

No, we don't know and nor does anyone else as yet. Which is rather the point. From the committee method we have:

The findings rebut a warning from a team of scientists at Heriot-Watt university last year that the UK’s most promising shale gas reservoirs had been warped by tectonic shifts millions of years ago.

The report claimed that these geological quirks meant Britain was unlikely to be able to produce economic amounts of shale gas.

Well, we've those two claims. How do we choose between them? Obviously, we've got to go and try fracking and find out. Which is, of course, exactly the thing that markets do, try things and see if they work or not.

That is, far from planning being the scientific method, as is so often claimed, markets are. That very freedom to experiment which they allow is exactly what makes them such too. For each and every one of those experiments is a scientific test of whether the whatever it is works, accords with reality.

Karl Marx explains Walmart's pay rise

We've made this point before - the combination of full employment and a market economy is the workers' best friend. Entirely obviating, for example, the need for minimum wages. This being something simple enough that even Karl Marx managed to get it right, a useful example being this announcement from Walmart:

As you know, the President and Congress have approved a lower business tax rate. Given these changes, we have an opportunity to accelerate a few pieces of our investment plan. We plan to continue investing in you, in our customers through lower prices, and in our future--especially in technology to help improve your jobs and the experience for our customers.

So, we’re pleased to tell you that we’re raising our starting wage to $11 an hour for Walmart U.S., Sam’s Club, Supply Chain, eCommerce and Home Office hourly associates effective in February.

No doubt the tax changes have had some effect. It is usual to assign at least some - the amount open to argument - of the costs of the corporate income tax to the workers through their wages after all.

However, this does strike us as being rather closer to the heart of the matter, political announcements notwithstanding:

"Walmart would have had to go to at least $11 in many markets in order to retain reliable employees," University of Michigan business professor Erik Gordon said. "The tax cut made it easier for the company to swallow."

We'd be entirely happy with the description there, that Walmart wanted to do this anyway, the tax cut allowing them to do so. But then the underlying point is one that even Marx did get right. When there's that reserve army of the unemployed then employers don't have to share the profits, or any rise in them through things like productivity improvements, with the workers. For there are those unemployed who can be brought in to do the work. Either because more labour is required or because the current lot get a bit bolshie.

When there are no unemployed then the various capitalists are in competition with each other to find the labour they wish to exploit. That competition raising the price paid for the labour, that is, wages go up. Full employment really does mean wages rise.

It's worth noting that minimum wages have somewhere between little and nothing to do with this. The current Federal such is $7.25 an hour. Walmart already pays $10 an hour, from next month $11. Competition in markets is thus very much more powerful than legislation, no?

Rent control increases rents

It is a curious truth that when economists agree (a rare occurrence), politicians usually disagree.  Free trade is the obvious one (as Paul Krugman says, “If there were an Economist's Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade”). Another candidate for the Economist’s Creed would surely be “I understand that rent control reduces the supply and quality of affordable housing”. When IGM polled 41 leading economists just one thought that rent control policies in San Francisco and New York had positive effects. Yet despite, the near-unanimous opposition to rent control from economists, politicians persist in proposing rent control policies. Take Jeremy Corbyn, in his party conference speech he announced that if elected he would give cities the power to cap rents to tackle the housing affordability crisis.

A new NBER Working Paper looks at the effect of rent control policies in San Francisco. In 1994 San Francisco expanded rent control to small multifamily housing units built before 1980. The 1980 cut-off was designed to prevent rent control from deterring new construction, a common objection to rent control. But, it also created a natural experiment. Researchers could compare the ‘treated’ group with a control group who lived in small housing units built after 1980.

Who benefited and who was hurt? Unsurprisingly, long-term residents living in rent controlled property came out better-off. They were about 10-20% less likely to move than the control group.

And who was hurt? Pretty much everyone else. Households living in pre-1980 housing for just a few years found that landlords would actively try to remove them. Landlords incentivised to reset the property to market rates could remove tenants in a few ways. They could move-in themselves, announce a plan to remove the property from the rental market, or they could bribe the tenant to move. The result was that rent-controlled buildings were much more likely to be converted into condos. This lead to a 15% fall in the number of people living in the pre-1980s units compared to the control.

But the real harms came to residents outside of rent-controlled property (including migrants to SF). The landlord’s response led to a significant fall (6%) in the supply of rental properties. The researchers estimate that this caused a 5.1% city-wide rise in rents. Not only did this hurt existing SF residents who didn’t live in rent-controlled properties but it also hit those who moved to SF in search of better jobs. Rather weirdly, the authors estimate that the benefits to existing residents of rent controlled properties ($2.9bn) are almost exactly equal to costs to those not living in rent controlled properties ($2.9bn).

But there’s reason to think that this underestimates the problem. Studies looking at the impact of restrictive planning policies indicate that they don’t just harm residents by forcing them to shell out more for rent, but they also trap people in lower paying jobs in one place when they would be better off if they moved to another. This lowers productivity and GDP, and also means that existing residents do not benefit from the spill-overs of growth.

The evidence is clear. Rent control doesn’t work. The young voters courted by Corbyn’s proposal to cap rents should be wary. Price caps protect incumbents at the expense of future renters. So unless you’re ready to settle down where you currently live, you should expect to pay more if rents are capped.

It’s time to remove international students from the net migration target

I’ve recently been arguing that the government should remove international students from the net migration target. You can read my letter to the Evening Standard below:

Bravo to the six Senior Tories who intend to vote for removing international students from net migration figures. The net migration target, like all state-mandated quotas, is folly, but including students in this measure is especially damaging. In her opposition to this measure, the Prime Minister mistakenly believes she can win the confidence of voters by appearing tough on immigration. But ComRes polling last year found that only 1 in 4 British people consider international students to be immigrants.

There is no justification for shutting our doors to some of the best and brightest from abroad, who typically stay here for three to four years, contribute billions of pounds to our economy (£2.3 billion in London alone), and create hundreds of thousands of jobs—not to mention taking British culture, values and business practices back to their home countries. The Prime Minister should listen to her colleagues and U-turn towards a global, liberal, outward-looking approach to migration.

Today, I wrote for The Telegraph on the same topic. You can read the full article here—and an extract below:

To succeed outside Europe, we'll need to strike up new trade links with China, India and the rest of the world. But as the Government lays the groundwork for post-Brexit trade negotiations, the Prime Minister’s insistence on including overseas students in the net migration target has left our potential trade partners bewildered.

Making it harder to study in Britain not only impoverishes our world-class higher education sector, it also hurts the Scotch distilleries who want to sell to India’s growing middle-class. Indian officials are baffled by attempts to close the door on Indian students.

We are already facing stiffer competition for international students from Asia as they become a bigger player in the market, and President Trump’s wide-ranging crackdown on immigration to America presents the UK with a chance to advertise itself as a prime destination for foreign students considering studying abroad.

The Adam Smith Institute has been talking about this issue for years, and it’s starting to look as though there’s a real possibility of change!

The greatest liberty, the right of exit

This could be taken the wrong way around so, to clarify right at the beginning, we do not mean that those who don't like Brexit should leave. However, this is a good example of one of the great - perhaps not the greatest as in the headline but still hugely important - freedoms and liberties:

The number of British nationals applying for French citizenship has increased nearly tenfold in three years, France’s interior ministry has said.

The ministry said 386 Britons filed applications to become French in 2015, rising to 1,363 in 2016 – the year of the Brexit referendum – and to 3,173 in 2017. Over the same period, the number of UK nationals obtaining French citizenship increased from 320 to 1,518.

Le Figaro newspaper said many applicants were motivated by considerations such as avoiding queues at airports, the Channel tunnel and Eurostar terminals or a desire to secure rights to healthcare and social benefits after the UK leaves the EU.

But Fiona Mougenot, a British woman who runs an immigration consultancy in France, said she was handling more than 20 naturalisation applications filed in 2017, many prompted more by a wish to retain European citizenship than to minimise potential bureaucratic issues.

“Practical matters are important for our clients, of course,” Mougenot told the paper. “But for most, the primary motivation is to stay European. Many could not vote in the referendum, are horrified by the prospect of Brexit and feel betrayed. France is vital to them because their lives are here, but beyond France it’s Europe they don’t want to abandon.”

Again, the point is not that those who don't like an independent Britain should wander off. Rather, it's to point to that freedom, the right of exit. If you don't like a polity, for whatever reason, then it is essential that you have that liberty to leave it. This is true of bureaucracies, taxation systems, nations, food suppliers and transport systems.

It is, in fact, the basic argument against monopoly and in favour of competition. That you, we, are able to select the organisational system, supplier of such, which best suits our own desires.

You don't like what your fellow citizens do? So, go and commingle with a different group in a different citizenry. That is the great freedom, that right of exit, just as it is in any other quarter of life.

Will Hutton's latest bright idea

As we know, Will Hutton has many ideas about how the world should be run. There always seems to be something of a flaw with said ideas. Here it's that his basic assertion, that re-nationalisation can take place at no cost to taxpayers, which is simply wrong

It seems impossible, but building on the proposals of the Big Innovation Centre’s Purposeful Company Taskforce, there is a way to pull off these apparently irreconcilable objectives – and without spending any money.

The government should create a new category of company – the public benefit company (PBC) – which would write into its constitution that its purpose is the delivery of public benefit to which profit-making is subordinate.

Public benefit companies aren't exactly new. One reasonable definition of them would include the East India Company. And the BBC in fact. And we'd note that the BBC's licence fee is, in law, a tax. Which means that this desire of getting the borrowing of such PBC's off the government books might not work.

But rather more importantly:

Because the companies would remain owned by private shareholders, their borrowing would not be classed as public debt. The existing shareholders in the utility would remain shareholders, and their rights to votes and dividends would remain unimpaired. So there would be no need to compensate them – no need, in short to pay £170bn buying the assets back.

The idea is that the current shareholders should receive no compensation. Yet look at what is being suggested. Their right to profit maximise is taken away by the new constitution of the company. There are other restrictions proposed as well by Hutton. Something of value is being taken from them - thus they should and must be compensated. This would be rather clearer under US law, where the concept of "a taking" is constitutionally established.

You might try to claim, as no doubt Hutton would, that this new set of restrictions is not a diminution of value. And yet he is arguing that it transfers value, that's his very argument for the change. Some value will move from shareholders to some more nebulously defined public interest as a result of the change. That's why Hutton is arguing for it.

It's thus a taking for the very reason that Hutton is arguing for it. Compensation must be paid.