The Mugwumpery

[Hint: You can get around The Economist‘s paywall by linking via Google – just put the URL into Google, then click on Google’s link to the article.]

Last month there was a story about various dirigiste steps the Japanese government might take to deal with the post-tsunami electricity shortage in The Economist (of all places).  They published my response in the May 14 issue, again with some unfortunate editing (see “The market for electricity”, halfway down the page).  Here is my original version:

Date: Sat, 07 May 2011 19:06:22 -0400
To: letters [at] economist.com
From: Dave <dave [at] mugwumpery.com>
Subject: Or, you could let the market work

Dear Sir:

I agree with your assessment (“A cloud with a green lining”, 30 April) that Japan’s government has many options to deal with the electricity shortage resulting from the earthquake and tsunami.  As you say, they could encourage solar power, subsidize LED lighting, push for batteries to shift demand away from peaks, etc.

Alternatively, they could do nothing at all, and allow electricity users to bid up the price of power until demand drops to meet the limited supply.  The resulting high price would by itself encourage alternate sources of supply and force conservation without any need for “publicity” or nagging.   More, it would encourage people to find clever ways to increase supply and reduce demand that the mandarins in Tokyo might never have thought of.

And all without costing taxpayers a penny, or feeding subsidies to the politically-connected.

The sad thing here (on top of the greater tragedy of the earthquake itself) is the lost opportunity for entrepreneurs to come up with efficient and innovative solutions to address the electricity situation.

But the market works even when governments attempt to suppress it – just less efficiently. If the Japanese government decides to dole out subsidies and propaganda instead of letting the electricity price rise, that won’t end the shortage. Rolling blackouts will still cause electricity consumers to increase their own electricity supplies, and adapt their demand to the blackouts, by buying their own generators, investing in battery storage to supply power during down-times, etc. But there will be a lot less incentive to cut consumption, since cheap power will still be available in bursts.

Eventually the Japanese electric grid will be rebuilt to handle the demand, but in the meantime adaptation will be slower, and the pain more prolonged, than it would be had the authorities let the market do its thing.  But despite the best efforts of the government, electricity users will adjust and find ways to get by with the limited supply.  And that is the market in action.

Another letter to the Economist:

Date: Thu, 24 Feb 2011 09:06:36 -0600
To: letters [at] economist.com
From: Dave <dave [at] mugwumpery.com>

Subject: Re “Ending the open season on artists”, 19 February

Dear Sir,

As a an “aghast” digital libertarian, I object to your presumption that stronger copyright enforcement is good or necessary for artists.

No one disputes that  artists must be rewarded for successful creation.  (Middlemen are another story.)  Copyright was a reasonably effective system when copying was expensive anyway and the means of reproduction were relatively centralized publishers and distributors, easily policed.  Now that works can be copied costlessly by any individual, the principle of limiting copying is both unworkable and inappropriate, as copying (although illegal) is not theft – because copying does not deprive the original owner of anything.

Certainly, artists must eat.  The challenge is to find new business and legal models to accomplish that without needlessly depriving the public of the full enjoyment of the fruits of creation.

Attempts to perpetuate obsolete business models by law are not the solution.

It is hard to make a strong argument in a letter short enough to get published.

My larger point is that there is what economists call a “deadweight loss” when someone who would have enjoyed a creative work doesn’t because of costs imposed by copyright.

Say we’re talking about a copy of The Beatles “A Hard Day’s Night” (which, completely off-topic, has some of the lamest lyrics imaginable – “…to get you money to buy you things“??).

Some consumers are willing to pay the asking price for the song under the copyright system.  In that case the artists get 10 or 20%, and the middlemen get the rest.  (And yes, the studio technicians, etc. need to get paid too, but not necessarily by a record company – painters seem quite able to buy blank canvas without middlemen to help.)

But more consumers (usually far more) are not willing to pay that much.  They’d enjoy having a copy of the song, but not enough to justify the price.  These people are going to be in the majority almost regardless of the price asked.  This is the deadweight loss; value that could have been realized without cost to anyone, but wasn’t.

To make it clearer – imagine we’re talking about a $1000 copy of Adobe Photoshop instead.  How many of the people who would benefit from using it are willing to pay that much?  Very few.  Yet it would cost Adobe nothing at all to let them use it for free – if that didn’t discourage those few who would pay from doing so.

Of course, under the copyright system this loss is necessary to make the system work – otherwise no one at all would pay.   And this is precicely the problem with the copyright system – it necessitates the deadweight loss to work.

As I implied in the letter, this wasn’t such a terrible flaw when copying was expensive anyway.  Records couldn’t be produced for free; paying the artist  a royalty only increased the price a little bit, so not much harm was done.   But that’s not true in a world where copying is free.

So we need a new system to reward creators for successful creation that other people value.  I can imagine a half-dozen ways to do it; so can you.  It will take some experimentation and evolution to get there, but propping up the obsolete copyright system is not going make it come sooner.

Wind turbine, 43°45’39″N 15°57’11” E

Last week I came back from a brief visit to Croatia (visiting family).

I took along my trusty iPhone, having first jailbroken and unlocked it, so I wouldn’t get whacked with AT&T’s international data roaming fees.

Over the course of 10 days, I used 44 Mbytes of data; I consider that quite moderate – a little Web browsing, minimal email, and some Google Maps. (I’d expected to use about 10x as much.)

I bought a SIM card from one of the local networks, VIP (a Vodafone affiliate, I think).

VIP’s deal was as follows: For HRK 100 (US $17.40 at today’s exchange rate), you get a prepaid SIM card loaded with HRK 100 of credit. Calls come out of that at $0.14 to $0.44/minute, depending on time of day and what network you’re calling (landlines are less). International calls are $0.47 to $1.08/minute, depending on where you’re calling (calling the US is the $1.08/min rate).

Again out of your HRK 100 credit, you can buy data service – 20 MBytes for HRK 15 ($2.61) or 100 MB for HRK 30 ($5.23). (Don’t believe me? Look here. ) I went for the 100 MByte deal, using up HRK 30 of my HRK 100 credit.  Since I only used 44 MBytes of that, the rest went to waste. I don’t really know how much credit was left when I came back to the US; but I know I was able use voice and data both in the Munich airport and in the USA using the same card.

So, 10 days’ use of the iPhone, voice and data, cost me $17.40. And I didn’t use it all up. (Service was great, by the way – much better 3G data coverage in rural areas than I get in the USA.)

Just for curiosity, I checked how much AT&T would have charged me for the same thing.

Their standard international data roaming rate is quoted as $0.0195/kByte. That’s just shy of 2 US cents per 1024 bytes, or $20/MByte. I used 44 MBytes so that would have been $879. Yes, nearly nine hundred dollars. For very light usage; I could easily have used many times more if I’d been traveling for business.

But, of course, AT&T says if you’re going to be travelling internationally, you really ought to buy one of their “Data Global” packages – 20 MB for $25/month, 50 MB for $60/month, and $120 for 100 MB. (Recall that I bought 100 MB from VIP for $5.23.) And if you go over your monthly allowance, it’s $10/MB.

What is AT&T thinking?

Google on “iPhone international data roaming” and you’ll find lots of horror stories about multi-thousand-dollar AT&T bills from short trips. I didn’t get whacked, but what does AT&T think is going to happen when someone gets a $3000 bill after two weeks in London, or a $60,000 bill after downloading one episode of “Prison Break”? They might or might not get paid, but for sure they are going to lose a customer – forever. Each and every time they send out a bill like that.

It may be legal, but it is bad business – incredibly bad business.

One of the things that has made the US such a wealthy country is a business culture that includes the idea of a “fair price”. Although it’s generally legal to charge any price the market will bear – even taking advantage of buyer ignorance or desperation – mainstream American culture supports the notion that there is a “fair price” – the price that an informed buyer would pay in a competitive market, considering circumstances of location, quality, convenience, etc.

So, for example, Americans frown upon selling generators for $10,000 during a blackout, if they go for $1000 at normal times. Or the rural tow truck driver who wants $2000, cash, to pull your car out of the muck, just because the next closest tow truck is hours away.

Many economists wouldn’t have a problem with that – in a certain narrow sense, those kinds of price spikes (“gouging”, if you like) may be efficient. But a society in which most sellers feel revulsion toward “taking advantage” is one in which buyers are more willing to engage in transactions. If buyers feel they’re unlikely to get screwed because of their ignorance (as in the the case of AT&T here) or desperate circumstances, then there is more commerce and less effort expended in investigation of deals and precaution against getting caught by local monopolists. In short, transaction costs are lower for everyone.

I’m not advocating legislation here. But the American attitude has it merits. And AT&T is not making itself any friends or building any customer loyalty.