What killed Blockbuster

No-one’s buying

Around 1989 my local video shop changed its name from Video World to Video and Pizza World. Mr Papandreou who ran the shop had twigged that a full set of Police Academy films and half a dozen copies of Big Trouble in Little China weren’t going to attract the local entertainment spend anymore. So he put an oven in the stock room and started selling pizzas. You could get a Hawaiian and an overnight rental for £4.

That’s how business works; you stand still and you die. Even so, esteemed (by no one more than himself) economist David Blanchflower recently tweeted: “Blockbuster now amazing all these firms in trouble right now nothing to do with govt policy and lack of spending & confidence of course”.

Well no Dave, it isn’t. A business works by taking inputs (land, labour, capital), doing something with them (adding value), and selling outputs for more than they paid for the inputs. By taking inputs that consumers valued at X and selling them for something consumers value at X+, the enterprise has increased the utility of society. That is why profits, earned from productive enterprise, are good things; they are a big neon sign flashing to the rest of the economy: “COME AND DO MORE OF WHAT THIS ENTERPRISE IS DOING!!!”

The flipside is that an enterprise which takes inputs which consumers value at Y and sells them Y- is destroying utility. That is why losses are also a big flashing sign screaming: “STOP DOING WHAT YOU’RE DOING AND NOBODY ELSE START!!!”

That is what companies like Blockbuster, Jessops, and HMV have been doing. Thanks to Amazon or iTunes consumers now value the goods and services provided by HMV at less than its costs HMV to provide them. Thanks to digital cameras consumers now value the service provided by Jessops at less than it costs Jessops to provide it. Thanks to LOVEFiLM and Netflix consumers now value the goods and services provided by Blockbuster at less than it costs Blockbuster to provide them. Unlike Mr Papandreou they stood still and they died.

Back during the boom years these companies could make up the deficit between what their inputs costs and what their outputs sold for by borrowing. HMV ran up debts of £176 million (£765,217 per store). Jessops ran up debts of £60 million. Blockbuster ran up debts of £23 million.

Now, the credit that was keeping these zombie, social-utility-destroying companies going has gone as it was always bound to. Warren Buffett wrote of downturns: “only when the tide goes out do you discover who’s been swimming naked.” The tide of credit receded and these companies were caught skinny dipping.

And, painful as that will be for the staff and creditors of these companies, in the wider and longer perspective this is a good thing for society. As I wrote recently:

“This is an excellent example of how the market process enables individuals to work to increase the prosperity of society. To the consumer, the CD purchased from HMV for £7 yields no more satisfaction than the same CD which, thanks to a leaner business model made possible by advances in technology, Amazon can sell you for £3.99. The consumer’s enjoyment of the CD is exactly the same but he or she has money left over that they wouldn’t have had if they had bought the CD from HMV. With this they can buy something else they also enjoy, good or service X or Y. Their total utility, to use the jargon, is increased.

…

If Amazon or iTunes are able to put Bob Dylan on your turntable or Fritz Lang on your screen with fewer resources than HMV can – the buildings, the staff, and everything that went into producing them – then those resources are freed up to produce something else to increase our enjoyment beyond Blonde on Blonde and Metropolis; good or service X or Y.

This is how the market process enables us to live better and better. Joseph Schumpeter called the market process “creative destruction”. HMV was destroyed but Amazon was created.”

It is utterly foolish to think, as Blanchflower appears to, that these companies have collapsed because of a lack of aggregate demand. Thanks to Amazon, iTunes, digital cameras, LOVEFiLM, and Netflix, there was no demand for these companies’ products and services in the first place, that’s why they were racking up debts.

Blockbuster was killed by economic progress, not George Osborne.

This article originally appeared at The Commentator

Who needs jobs anyway?

Down with that sort of thing

Nick Cohen is one of my favourite writers but he really has come a cropper with his latest piece on Starbucks and its taxes for the Spectator.

He writes

In the past, right-wingers argued for lower taxes and a smaller state and left-wingers argued for higher taxes and a bigger state. Both agreed, however, that you had to pay what taxes the state set.

But that is what almost everyone still thinks. A company which doesn’t “pay what taxes the state set(s)” is engaging in tax evasion, a criminal activity, and I’m not aware of many people supporting that. Starbucks, to be clear, paid every penny of tax it was legally obliged to and if Cohen has information to the contrary he ought to contact HMRC.

If you think Starbucks should pay more tax then increase its legal obligations. This is a point of view Cohen dismisses, saying “We are not talking about a couple moving assets to keep their tax bill down, but vast corporate structures hiding money in piratical tax havens”

First, notice the loaded language. Cohen could have written “We are not talking about a couple moving assets to keep their tax bill down, but vast corporate structures moving assets to keep their tax bill down” Less emotive sure, but also more accurate and more helpful analytically.

Second, consider the thinking behind it. It’s ok when one set of people do it but when another set of people does it it’s not, that we should apply one law to one set of people but another set to others. This is a major blind spot for a man who considers himself the beleaguered tribune of a dying, liberal England.

The whole piece is an example of the moralistic guff which fogs the debate about tax in this country. One of the silliest phrases in current public policy discourse is ‘aggressive tax avoidance’, which is a little like complaining that someone is ‘aggressively’ quitting smoking when they stop as a result of the tax on cigarettes going up.

Cohen, for example, writes “A good rule of thumb in all circumstances is to ask whether you can defend your actions in public”. Actually Nick, in business that’s a pretty terrible rule of thumb. If you are wondering whether to invest or not you need information upon which to base the calculation of whether that investment will be worth it. Considering that tax is going to effect the return on investment it therefore helps to have a firm idea of what taxes are likely to be. This is why taxes are levied on the basis of laws everyone knows in advance. If we dispensed with taxes raised in this way and, instead, investors had to base their tax calculations based on “What Nick Cohen might think is fair”, well, it’s a far less quantifiable variable.

And there’s the moral question. Can a man who wrote ‘Reports from the Sickbed of Liberal England’ really be advocating the rule of man (himself) or the mob (UK Uncut) over the rule of law? Apparently so.

We have a large and persistent problem in Britain with youth unemployment. Many unemployed youths simply lack the skills to command high wages and so, until either that changes or until capital can be applied to make their labour more productive a job somewhere like Starbucks is probably the best gateway to employment. And if we want to tackle youth unemployment we ought not to be chasing these companies out of the country.

Nick Cohen gleefully instructs David Cameron to “point [Kris Engskov, Starbucks’ UK managing director] westwards, and tell him to keep going until he reaches Heathrow” and writes that “From the point of view of the Exchequer, it is a matter of supreme indifference whether Starbucks stays or goes” But it might be a matter of rather less indifference to Starbucks’ staff. Or maybe Cohen can get those unemployed baristas jobs writing for his tax efficient employers at The Guardian?

This article originally appeared at The Cobden Centre

Our ever changing moods?

Same as it ever was

Are people more selfish now than they were in the 1970s? It’s often said they are and its just as often said that Margaret Thatcher is responsible. That’s usually said by the people who hold Margaret Thatcher responsible for everything.

But the evidence doesn’t support it. Consider the trade union leaders of the 1970s who plunged the country into darkness and cold, who treated corpses and rubbish the same as they refused to bury either as they were paid to. Consider the representative of the Confederation of Health Service Employees who appeared on television from a picket line outside a hospital the winter before Thatcher was elected; “if it means lives lost, that is how it must be…we are fed up of being Cinderellas. This time we are going to the ball”

Can you imagine anything more selfish than that? Any attitude less concerned with the ‘general welfare’ and more fixated on the ‘personal interest’?

The truth is that men and women have always been able to see what is in their interest as being in everybody else’s interest as well. Indeed, as the Roman poet Virgil wrote in the first century BC “Every man makes a god of his own desire”

More referendum reaction

If you supported the euro you were wronger than this guy

One striking aspect of the reaction to Cameron’s referendum speech has been the inability of some to use the word ‘Eurosceptic’ without prefacing it with the adjective ‘rabid’. Some, it seems, are utterly incapable of entertaining the thought that there could be a skepticism towards the European Union which is not based on some mania but on a rational appraisal of the pros and cons.

I assume these are the same people who, as Peter Oborne chronicles in his must read recent pamphlet The Guilty Men, were telling us that Britain joining the euro was a no-brainer and that you could only be opposed if you were mad/racist/xenophobic/all three. Of course, as we all know now, the Eurosceptics were exactly right about the euro.

Indeed, you have to wonder who it is who has taken leave of their rational, critical faculties here. Those who predicted, absolutely correctly, that the single currency would be a disaster, or those who continue, in the face of the evidence, to believe that the undemocratic, bureaucratic, failing EU doesn’t need reform so radical that we’d be better off out if we don’t get it.

Referendum reaction

The three stooges

There’s been more than enough reaction to Cameron’s referendum speech today without me clogging up your bandwidth with my two penneth. But, for the lulz, I thought I’d offer you this from my statist friend…

“I think the average person’s attitude to an EU referendum would be “well, if Miliband, Cameron and Clegg are in favour and Nadine Dorries, Nigel Farage and Bob Crow are against, then given that by and large the former appear to know what they are talking about and have positions of responsibility and by and large the latter are raving nutters who you wouldn’t trust to run a whelk stall, and as I can’t be arsed to go onto the intricacies of the argument myself, I am going to vote to stay in”

Yes, you read that right. Someone saying that Cameron, Clegg, and Miliband “know what they are talking about” I don’t know about you, but if any of them told me the sky was blue I’d want to go out and check for myself.

Britain must put health before political philosophy

Sick

It is sometimes said that the NHS is the closest thing the increasingly secular British have to a religion. And, like a religion, when questioned its defenders react with accusations of evil and heresy. When Daniel Hannan criticised the NHS in 2009 then Health Secretary Andy Burnham branded him “unpatriotic”.

The dogged defenders of the NHS are wedded to the idea upon which it was founded – the provision of healthcare to all, free at the point of use. In their love of this egalitarian idea they forget that the NHS exists to take care of people’s health, not to advance a political philosophy.

And so, when evaluating a healthcare system, what matters is not the political philosophy but how effectively it cares for your health. The NHS is just a tool, no more, no less, to be employed towards the actual goal of health care. The NHS is useful only so long as it achieves that goal more efficiently than an alternative system. It makes no more sense to get emotionally attached to the NHS then it does to get emotionally attached to a spanner.

Perhaps the revelations from the Alexandra Hospital in Redditch, of patients left screaming in pain, wallowing in their own faeces, starving to death, and receiving cruel treatment from nurses, will finally force the dogged defenders to wake up, grow up, stop relying on unthinking emotion, and critically evaluate our 64-year-old health care system.

It is almost impossible to say anything critical of the NHS without someone accusing you of wanting an American system where, as healthcare expert (sic) Russell Brand puts it, “people die on the streets” for want of an NHS. Indeed, in the UK they die in the hospitals from starvation or lack of hygiene and the consequent deaths from easily preventable infections like C Diff or MRSA.

The idea is that, rather implausibly, the USA has (or had) a profit driven, unregulated market for healthcare. In truth, even before Obamacare, the health care system in the USA was, along with finance and housing, one of the most regulated, government-driven sectors of the US economy. And what do all those markets have in common?

Secondly, it is utterly false to pretend that the mythical capitalist free-for-all of the US is the only alternative to the NHS. This is a falsehood born either of dishonesty or an ignorance of the variety of healthcare systems.

In Japan patients can go to any doctor or facility they choose and they pay 30 percent of the costs. In Italy patients co-pay with the state for drugs and visits to doctors but can opt out completely into a fully private alternative. In France people pay an insurance premium to one of a number of competing companies, pay when they visit a doctor, and are reimbursed the majority of the costs. Across the world in fact a mixture of public and private is the norm in health care.

The World Health Organisation ranks each of these systems above the NHS. In fact, the WHO ranks the health care systems of 11 out of 34 OECD member countries above the NHS. Yet we continue to tell ourselves that “the NHS is the envy of the world” like some catechism. Well, it isn’t the envy of Japan, Italy, and France.

The NHS model of a single monopoly producer and central planning was a major factor in the disgusting lack of care at the Alexandra Hospital. Under the NHS the health care providers, doctors and nurses, work to satisfy targets handed to them by a central, unitary authority. It is these targets they must meet, these bureaucrats they must satisfy, not the patients who have little if any choice over the care they receive.

The NHS killed 1,200 people in Staffordshire. Can you imagine any other organisation in the country killing 1,200 people and trying to cover it up without serious, fundamental questions being asked about whether that organisation ought to continue?

Blindly defending this system does not make you noble, good, or compassionate. We must stop prioritising political dreams over people’s health.

This article originally appeared at The Commentator

The People

I’m often struck by how those who most regularly claim to speak on behalf of ‘the People’ are, most frequently, those who hold the people in the most contempt.

Here’s an example of what I mean. Today the Guardian has published an ICM poll showing the gap between Labour and the Conservatives down to just 5%. The Conservatives are up a little, Labour are down a little. Ho hum.

But note the reaction. The comments sections on Guardian pages are usually full of people fuming about the latest evil assault of Cameron, Gideon, and the ConDems on ‘the people’. Yet this empathy with the people vanishes as soon as it appears they might disagree as the following comments show

“If true, this is evidence of the fickleness and irresponsibility of the public even for its own well-being – incredibly depressing”

“I saw a guy on our local ‘Sunday Politics’ segment yesterday who was working as a city street cleaner. When asked, he said he was vehemently anti-EU. What bet he reads the Sun or something such like?”

“What have these fannies done within the last 3 months for the electorate to suddenly swing in favour of them? Or is it just another case of dumb floating voters proving yet again that they’re unworthy of a vote?”

“And the British public shows how easily led it is.”

“I despair. Are voters really that stupid?”

“…yes, in a word!”

“Nothing like a bit of flag waving to distract the proles from their woes.”

“If people were willing to think rationally, it would be impossible to reach any other conclusion, but they’re not: they blame immigrants and people poorer than themselves. I know it beggars belief, but they really, really do. You just want to shake the British public.”

This strain of thought on the left goes back at least to Marx. He cooked up the idea that any member of the working class who perceived their interests differently from how he perceived them was suffering from ‘false consciousness’, a miserable notion that has allowed generations of Marxists and leftists more generally to rationalise the divergence between what is and what their theory tells them should be by blaming the people for not behaving as they should.

I remember a poem by Bertolt Brecht;

After the uprising of the 17th of June
The Secretary of the Writers Union
Had leaflets distributed in the Stalinallee
Stating that the people
Had forfeited the confidence of the government
And could win it back only
By redoubled efforts. Would it not be easier
In that case for the government
To dissolve the people
And elect another?

The tragic, pointless waste of communism

The Workers Paradise

On the reading list for my Masters course this week is chapter three of Bukharin and Preobrazhensky’s The ABC of Communism. I considered writing something addressing all the stupid, fallacious, utopian, juvenile arguments it contains but a) there are so many and b) history has already done it.

I would simply say this; it is one of the greatest tragedies in human history that over 100 million lives were snuffed out in the pursuit of this shit.

Your cut out and keep guide to how Labour wrecked the economy

The Golden (Conservative) Years

* When Labour came to office in 1997 they inherited falling debt, inflation, and unemployment and rising GDP. They were committed to Conservative spending plans.

* The budget deficit, which had fallen from £51 billion in 1993 to £29 billion in 1996, continued to fall and surpluses were recorded in each of the years from 1998 to 2001.

* Government debt fell from 42 percent of GDP in 1996/1997 to 30 percent of GDP in 2001/2002.

* Unemployment fell from a little over 2 million in 1997 to 1.5 million in 2001.

The Spending (Labour) Years

* In June 2001 Labour were reelected with a barely reduced majority. Two weeks later Gordon Brown says

“Every time in recent decades when the British economy has started to grow, Governments of both parties have taken short-term decisions which too often have created unsustainable consumer booms, let the economy get out of control and sacrificed monetary and fiscal prudence”

Brown ignored this advice himself.

* Between 2001 and 2007 tax receipts rose by 40 percent.

* This was still not enough to fund Brown’s new found passion for spending; in the same period government spending increased by 54 percent in real terms.

* The number of British households receiving more in benefits than they paid in taxes rose from 43.8 percent in 2000/2001 to 48 percent in 2007/2008.

* Even though the economy was growing Labour ran deficits in the fiscal years ending 2002, 2003, 2004, 2005, 2006, 2007 – all before a single banker needed bailing out.

* Between 2001 and 2008 Gordon Brown added over £200 billion to British government debt.

* British government debt increased from 30 percent of GDP to 35 percent on the eve of the crisis.

* Between 2001 and 2008 British government debt payments rose from £21 billion a year to £31 billion.

Then, in 2008, came the worst economic crash since the Depression. 

A tale of two retailers

Spot the customer

HMV stands on the brink of extinction with 4,500 jobs at risk. The shop is a fixture of High Streets up and down the country. It will have a sentimental value for many customers who fondly remember their first album purchase. But online retailers like Amazon and iTunes, able to undercut HMV due to lower staff, property, and inventory costs, have eviscerated HMV’s customer base. In 2010 HMV generated sales of over £2 billion. Last year that was down to £932 million.

This is an excellent example of how the market process enables individuals to work to increase the prosperity of society. To the consumer, the CD purchased from HMV for £7 yields no more satisfaction than the same CD which, thanks to a leaner business model made possible by advances in technology, Amazon can sell you for £3.99. The consumer’s enjoyment of the CD is exactly the same but he or she has money left over that they wouldn’t have had if they had bought the CD from HMV. With this they can buy something else they also enjoy, good or service X or Y. Their total utility, to use the jargon, is increased.

This is not the case for everyone. HMV’s creditors and employees will suffer from this. If the credits extended to HMV represent only a small part of a creditor’s portfolio then the losses will be bearable. For the employees, on the other hand, the loss will be more profound – the greater the share of their income comes from their employment with HMV.

This example shows the market process in action very clearly. It also shows how obstacles can arise.

The utility gains from a new way of providing goods or services can be very large but, spread over society, the gain to each individual can be small (though, of course, if a number of such improvements are taking place at once the cumulative gains to each individual can be large). The losses, however, are concentrated among those who provided the goods or services the old way.

There is an asymmetry here. If the gain to each individual consumer from buying CDs from Amazon rather than HMV is, say, £50 over a year (more accurately, whatever else could be bought with that £50), but the cost to each HMV employee is £5,000 in lost wages (assuming they believe there are other jobs available but paying £5,000 less) then the employees will be incentivised and concentrated and so could agitate for measures to prevent the market process by which the new method takes their market share.

We see this in markets the world over. There are the vast subsidies to US farmers (usually big agribusiness who donate generously to political campaigns) which cost the average American family a few hundred dollars a year but form a large chunk of agricultural income. There are the associations of High Street shops who band together to prevent supermarkets opening nearby although, in that case as in others, the balance of lobbying power can lie with the new method.

Whichever side has the most power, entrenched producers or potential market entrants, doesn’t really matter, what is important is that this moves us from the market process to the political process. Producers try to win market share, not by providing a good or service at a price and quality that is more attractive than others, but by shutting others out of the market. As a rights based argument, we have moved from voluntary contracting to coercion.

As a practical argument, the non-market protection of existing producers at the expense of relatively more efficient new producers decreases the welfare of consumers which eventually decreases the welfare of producers too (insofar as they are  also consumers). The history of all human material progress is the history of increasing productivity; of getting the same output from reduced inputs or more output from the same inputs.

If Amazon or iTunes are able to put Bob Dylan on your turntable or Fritz Lang on your screen with fewer resources than HMV can – the buildings, the staff, and everything that went into producing them – then those resources are freed up to produce something else to increase our enjoyment beyond Blonde on Blonde and Metropolis; good or service X or Y.

This is how the market process enables us to live better and better. Joseph Schumpeter called the market process “creative destruction”. HMV was destroyed but Amazon was created.

This article originally appeared at The Cobden Centre