Opinion

Edward Hadas

Apple, banking and taxpayer subsidy

Edward Hadas
Feb 5, 2014 16:20 UTC

Why does Apple have such high profit? Why do banking systems have a tendency to fail? These seemingly unrelated questions have the same answer – taxpayers take a lot of the risk out of business activity.

The ideas of two unconventional economists, Mariana Mazzucato and Elinor Ostrom, can help improve policy. Mazzucato is a professor of the Economics of Innovation. Her 2013 book, “The Entrepreneurial State: Debunking Private vs. Public Sector Myths” does just what it says. It provides persuasive evidence that governments deserve more credit than private companies for the development of most important modern technologies.

Apple’s iPhone is her star example. She demonstrates that government programmes developed all the key technologies, from the internet to voice recognition. Her argument is that Apple’s profit margins are unjustly high – over 20 percent after tax – because the company’s financial flows are not accurate reflections of its genuine contribution. Taxpayers have done the heavy technological lifting; the company only adds a little engineering pizzazz and a lot of business acumen, but shareholders get rewarded for the whole piece.

Mazzucato is most interested in refuting the accusation that the “dead hand of the state” inevitably slows down economic growth. Rather, the relationship is mutually beneficial. If political leaders and voters accepted her analysis, governments would fund more imaginative research, and Apple’s profit would be more heavily taxed.

However, her analysis could have gone further and questioned why economists create the strict division of public and private. In modern economies, organisations deemed private are almost always heavily influenced by government rules while those counted as governmental almost always work closely with business and finance.

Don’t be afraid of deflation

Edward Hadas
Jan 29, 2014 15:43 UTC

Christine Lagarde says deflation is an “ogre which must be fought decisively.” The managing director of the International Monetary Fund is merely dramatising the current conventional wisdom, but she is wrong.

Lagarde did not explain why she thought deflation was so dangerous. Most likely, she had three commonly-made arguments in mind.

First, deflation might make a tragic debt cycle more likely. The fear is not totally irrational; a generalised price decrease can lead to economic disaster. The American economist Irving Fisher described the toxic cycle: prices fall, debts go bad, banks collapse, businesses fail, desperate workers take pay cuts and then companies cut prices even more. The downward spiral lasts until something happens – war, anarchy or a new monetary order.

Bitcoin repeats gold-standard errors

Edward Hadas
Jan 22, 2014 15:07 UTC

I cannot judge whether bitcoin represents a technological breakthrough, but I am confident that the pseudo-currency’s popularity shows widespread economic amnesia. If bitcoin ever became a real currency, it would suffer from the crippling problems of the gold standard.

The underlying problem is the belief that the electronic token’s independence from the government is a good thing. This libertarian notion could hardly be more wrong. Money is a common good for the whole society, and in the contemporary world governments are the pre-eminent social guardians.

It is true that under dire circumstances people might have to resort to an inferior monetary substitute. If a government collapsed or totally trashed the monetary system, then some privately issued money could be the least bad alternative. In such apocalyptic times, though, a software protocol which relies on secure electronic communications would not be first choice. Gold, which is tangible and not subject to hacking, is more plausible. So are old baseball cards.

Madoff/subprime – spot the difference

Edward Hadas
Jan 15, 2014 15:36 UTC

Bernard Madoff still has some magic. The public finds anything connected to the fraudster’s case fascinating, from a prison interview to JPMorgan’s agreement last week to pay $2.3 billion for Madoff-related sins. And why not? Madoff was a grandmaster of the confidence trick. But there is more to it than that. His way of doing business was alarmingly close to the perfectly legal practices which brought down the financial system in 2008.

To see that, compare Madoff to a hypothetical pre-crisis hedge fund manager – one with a special interest in U.S. subprime residential mortgage securities. The common tale starts with a commitment to provide higher returns than the economy can safely offer to financial investors. Both Madoff and the hedgie took in funds without making any specific promises, but their investors’ expectations were lofty.

Madoff, of course, knew that he could not live up to those expectations. That makes him smarter than the hedgie, who was either foolish, if he thought American house prices would keep rising for many years; or arrogant, if he was confident that he could sell out before the losses hit.

An early obituary for bitcoin

Edward Hadas
Jan 8, 2014 15:09 UTC

Bitcoin is not over yet. But the pseudo-currency is close enough to collapse to merit an early retrospective.

My prediction is controversial. Many fervent fans are persuaded that this government-free currency is for real. Their ardour may keep it going for a while, but equally bitcoin could disappear very quickly – that’s the way with speculative bubbles. So now is the moment to learn some economic lessons before the whole phenomenon is forgotten. Here are five.

Money without government appeals to people without law.

Legal tender has the backing of the issuing state. The government has a proprietary interest in maintaining a reliable currency. It also has the necessary powers to do so. It can regulate lending institutions, pursue fraud and create new money to keep the system afloat.

A Christmas message for lenders

Edward Hadas
Dec 18, 2013 15:30 UTC

For many shoppers, Christmas is a time to rack up debts in the expression of seasonal goodwill. For policymakers, it should be the holiday of debt forgiveness.

The inspiration for that religious-sounding thought comes from the atheist philosopher Hannah Arendt. She argued that forgiveness has a central role in human affairs, and the secular world should be grateful to Christianity for the discovery. Arendt was of course talking about forgiveness in the common understanding of the term – a pardon for a wrong, the cancellation of “you owe me one”. But her understanding of this as enabling people to “begin something new” works just as well when thinking about the financial equivalent: a willing erasure of material obligations.

Consider a loan from parents to a son or daughter who wants to start a business. If the new venture fails, a tough demand for repayment is likely to spawn resentment. Debt forgiveness will breed gratitude and closer ties.

How not to do healthcare

Edward Hadas
Dec 11, 2013 16:26 UTC

Almost every healthcare system in the world is a lesson in how not to do it. The pricing-based model fails miserably in the United States. The rationing model works almost as badly in the UK. Both fail in the core task of ensuring that the right healthcare goes to the right people.

Price systems should provide clear information to consumers and producers, helping both make sounder decisions. They can help make hard decision about what care is worth giving, but only if the prices accurately reflect the costs. But that doesn’t happen in American healthcare.

Every service and each drug has many prices, depending on who is providing and who is paying. Almost none of the prices bear any clear relation to costs. The New York Times reported earlier this month that the price of a dose of codeine ranges from $1 to $20 in San Francisco. Hospitals routinely send much higher bills to uninsured patients than to people with insurance. The uninsured have less ability to pay, but they have no clout pre-treatment and less clout than insurance companies in the inevitable post-bill negotiations.

The pope takes on economics’ pro-rich bias

Edward Hadas
Dec 4, 2013 16:29 UTC

The leading theories of economics and finance are usually produced for the rich. Pope Francis deserves praise for suggesting an economics for the poor.

The typical criteria of economic success – such as efficient pricing, fully competitive markets and rapid GDP growth – sound uncaring. And they often are. One problem is that most of the leading theories have an implicit pro-rich bias. For example, the Capital Asset Pricing Model, a basic tool in finance, assumes that the rich investors who can afford to take big bets deserve extra-large rewards when things go well. Or consider how most governments’ economic policy aims first and foremost at GDP growth, basically ignoring the uncomfortable truth that the already rich typically take a disproportionate share of additional production.

By contrast, pro-poor concepts receive almost no attention. Mainstream thinkers rarely say that the rich people who have gained from the economy have an obligation of solidarity with the poor who have lost out. Most of them have never heard of the idea (common in Catholic circles) that private property comes with a “social mortgage”, a debt to the society which makes that property valuable.

Bitcoin is a step back not forward

Edward Hadas
Nov 27, 2013 16:00 UTC

The developers of bitcoin are trying to show that money can be successfully privatised. They will fail, because money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.

Bitcoin relies on thoroughly contemporary technology. It consists of computer-generated tokens, with sophisticated algorithms guaranteeing the anonymity, transparency and integrity of transactions. However, the monetary philosophy behind this web-based phenomenon can be traced back to one of the oldest theories of money.

Economists have long declared that currencies are essentially a tool to increase the efficiency of barter, which they consider the foundation of all organised economic activity. On this view, money is a convenient instrument used by individuals to get things done. It is not inherently part of the apparatus of government.

Favour labour over consumption

Edward Hadas
Nov 13, 2013 16:09 UTC

Unemployment is a problem in most developed economies. Any politician, central banker or professional economist in the United States or Europe will admit that the published rates are unacceptably high, that too many people have left the paid labour force and that young people starting out have a particularly bad deal.

Americans often say their problem was caused by the 2008 financial crisis. That isn’t exactly wrong. After the failure of Lehman Brothers, many indicators of labour market depression – for example, the proportion of unemployed people who have been unemployed for more than six months – jumped to the highest levels on record (generally since 1948). Most of these indicators have improved, but remain uncomfortably high.

However, I think that the recession only uncovered longstanding structural weaknesses, and the problems I have in mind are not exclusively American. They just showed up in European statistics much earlier. Unemployment rates there have been persistently high, especially among the young, for decades. And the recorded unemployment numbers are flattered everywhere by the expansion of what might be called the non-labour force: those classified as suffering from incapacity, involuntary students and healthy retirees.

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