Categories
Despair World

More on the Chinese Nile

We ought to know that we’ve hit a new level of denial when we become convinced that our global dominance is secured by the superiority of . . . our pop culture:

Ten years ago, I joined a U.S. trade delegation for the chance to visit, as a journalist, a remote part of China that borders both North Korea and Russia. As we traveled around, local Chinese greeters proudly pointed out the contrasting vistas: rugged empty hills in North Korea and isolated clusters of Soviet-era buildings in Russia, whereas in China, commerce and construction abounded between booming border towns. In one such town, Hunchun, population 250,000, regional officials asked me if I planned to write anything. Perhaps something cultural, I suggested. I hoped for a window onto Chinese life in this far-flung zone.

The next night they laid on a manifestly ready-made, two-hour pageant of old Manchu ethnographic music and dance, with fluttering feather fans and colorful costumes. I explained to my conscientious hosts that I had hoped for something more contemporary—perhaps portraying current life on the frontier, something about real people and ideas. My request engendered a lot of brow-furrowing discomfort. I had asked for the one thing that their country’s authoritarian system has found it almost impossible to deliver at any level: a vibrant popular culture.

China has become globally competitive in many fields with blinding speed, from the economy and military to science, medicine, sports and even in cultural areas such as cuisine, classical music and contemporary art. But it can’t seem to compete with the West in crucial mainstream genres such as movies, popular music, fashion, novels and the like. I say “crucial” because, without universalizing its culture at a popular level, China cannot ultimately sell a lifestyle for the world to emulate, a set of aspirations that people elsewhere might embrace. Nor can it make its engagement with other cultures more palatable, less like an intrusion by outsiders.

Melik Kaylan, China Has a Soft-Power Problem, The Wall Street Journal (Sept. 5, 2019).

What the Chinese offered this author was the highbrow. But our tastes have eroded so badly over the last generation that we no longer even feel shame at disliking it. Indeed, we have even come to see the persistence of highbrow art in other cultures as a sign of weakness!

Categories
Annals of American Decline Antitrust Despair Regulation World

Why Progressives Once Fought Tariffs as They Fought Monopolies

The Nineteenth Century understood very well that tariffs have the same effect on consumers as do monopolies. Tariffs prevent foreign competitors from undercutting the prices of domestic companies, because the foreign competitors must now pay the tariffs, and that in turn allows domestic companies to raise prices. It is for this reason that in the Nineteenth Century the same Progressive movement that sought to prevent monopoly pricing, either through antitrust or rate regulation, also sought to replace tariffs with income taxation as the source for government revenue. And succeeded.

But what millions of Americans understood in the late Nineteenth Century is greeted as a bizarre and surprising result today.

Compare:

President Trump’s decision to impose tariffs on imported washing machines has had an odd effect . . . . It is hardly surprising that the tariffs drove up the price of foreign washers. Perhaps more unexpectedly, they also prompted American manufacturers to raise their prices.
Companies that largely sell imported washers, like Samsung and LG, raised prices to compensate for the tariff costs they had to pay. But domestic manufacturers, like Whirlpool, increased prices, too, largely because they could. There aren’t a lot of upstart domestic producers of laundry equipment that could undercut Whirlpool on price if the company decided to capture more profits by raising prices at the same time its competitors were forced to do so.

Jim Tankersley, Trump’s Washing Machine Tariffs Stung Consumers While Lifting Corporate Profits, N.Y. Times, April 21, 2019.

With:

Beginning as early as the 1860s, the Democratic Party challenged Republican power with a biting critique of the central element of the consumption-tax system — the tariff. . . . The Democratic Party developed a general attack on special privilege, monopoly power, and public corruption — one that harkened back to the ideals of the American Revolution and the early republic. Most important, the Democrats described the tariff as the primary engine of a Republican program of subsidizing giant corporations. In 1882, in his first public political statement, the young Woodrow Wilson declared that the tariffs had “Monopoly for a father.” . . . . In the face of these problems, millions of Americans . . . regarded the progressive income tax at the federal level as the next-best alternative . . . .

W. Elliot Brownlee, Federal Taxation in America: A History 77, 79 (3d ed. 2016).
To battles won that were then fought anew,
Our bodies hastened while our minds withdrew.
Categories
Annals of American Decline Despair Regulation World

Congestion Pricing Is Just the Latest in Progressives’ Betrayal of the Regulatory State

Once upon a time, most ways into New York City were tolled. Then the original progressive movement hit. Progressive economists like Harold Hotelling argued persuasively that because the marginal cost of running another motorist over a bridge was near zero, there was no economic reason for which everyone who wanted to drive over the bridge should not be allowed to do so. The way to recover the vast fixed costs of bridge construction was not by charging a toll, but by extracting contributions from motorists that would not discourage them from using the bridge whenever they wanted to do so. And the way to do that was to tax them, regardless how much they actually used the bridge.

This solution to funding infrastructure construction — taxation combined with free access — was a regulatory solution, and not just any kind of regulatory solution, but a rate regulatory solution, because the government chose to set the price of infrastructure access: only you could easily miss it, because the government set that price at zero.

In this way, the original progressive approach to roads and bridges was not different from the progressives’ approach to markets of all kinds, which was to regulate terms of sale with social justice in mind. Thus the government in this period encouraged AT&T to recoup its own fixed costs by charging high prices to wealthy long-distance users, freeing the company up to provide local calling services, which were used more heavily by the poor, at very low rates. And the government forced the railroads to recoup more of their fixed costs from intercity routes used by the wealthy, even though competition would typically have held prices down for those customers, and to use the savings to charge lower prices to rural customers.

The progressives’ approach to regulating roads and bridges though a combination of taxation and zero price access was socially just, too, because of course it meant that city driving was free for everyone.

Then, for reasons that remain unclear, progressives seemed to forget what the entire regulatory project was all about, and in the stunningly short space of three years in the late 1970s, they collaborated with conservatives to tear down most of the regulatory state at the federal level. They deregulated the airlines, trucking, railroads, and natural gas. And in ensuring decades the federal government stopped regulating banking, and telecom rates as well.

One might have thought that the resurgence of the progressive movement in recent years would have led to a rediscovery of the original progressive model of price and quality regulation, but instead the movement has seemed time and again to mistake policies that the original progressives fought bitterly to overcome for progressive solutions to today’s problems. This has played out to a farcical extreme in the recent progressive love affair with the antitrust laws, which promote the unrestrained competition that the progressives fought so hard to overcome through the regulatory model.

And it is sadly in evidence now too in the progressive love affair with congestion pricing, which amounts to no more than reimposing the toll system that the original progressives fought so hard to take down. To be sure, the original progressives missed something important about roads: they congest, and they pollute. So Hotelling was wrong to assume that the marginal cost of allowing another driver to cross a bridge would always be near zero. That cost stays near zero until the bridge reaches the optimal level of congestion, after which point the cost of adding another car to the bridge is very high indeed.

But the solution to the problem of congestion isn’t to start charging users a price for access. That just takes us back to the bad old days when being poor meant you lost your right, even, to access that most quintessential of public spaces, the streets. The solution is to ration access to the streets using a criterion that isn’t tied so closely to wealth. And technology makes that easier to do today than it ever has been.

I’ve argued that one approach would be for the city to use a smartphone app to decide who gets access based on a combination of first-come-first-served and proximity to public transportation. You could log in from the comfort of home, the app would decide whether the city can accommodate you based on current traffic conditions and whether you are near a subway, and you would instantaneously receive an authorization to proceed or a request to go into town by other means that day. A colleague has suggested to me that those with jobs in the city should get priority.

Regardless how the rationing mechanism might be structured, the point is that price — and its sinister correlation with wealth — doesn’t need to play any role. Nor should it, unless you are so naive as to believe that those who are willing to pay more are always those who can put the streets to more productive use, rather than simply those for whom a dollar isn’t worth as much as it is to others, because they happen to have more of them.

What’s so troubling about the progressive embrace of congestion pricing is that progressives don’t seem to care about the classist consequences, setting today’s progressives rather starkly apart from the originals. Instead, today’s progressives view the price system as the solution not just to big city traffic, but climate change more generally — in the form of the carbon tax. What they don’t seem to understand is that there is no magic to price when it comes to rationing access to resources that are in fixed supply, like city streets, or air. Price is just another ration card, just another way of deciding who takes and who doesn’t. Only unlike other rationing mechanisms, price gives the rich priority.

Why would progressives ever opt, among the myriad criteria to use in sorting those who get to take and those who do not, to choose the one that selects for wealth? This approach may of course be self defeating — the gilets jaunes movement that almost toppled the French government consisted of poor people aggrieved by a gas tax aimed at fighting climate change, a tax that the government was forced to withdraw.

But even if reliance on price rationing doesn’t prove a political loser, it’s still socially unjust. Why should the poor bear the burden of saving the world’s climate? Yes, under carbon taxes and congestion pricing, the rich do end up paying, but they also end up getting to drive. The poor might end up better off, if some of the proceeds of the tax are redistributed to them, but they still won’t get to drive. Why? Because if they were to benefit so richly from redistribution of tax proceeds, or from exemptions designed to temper the effects of the tax, that they were still able to access the streets as much as the rich, why, then the carbon tax wouldn’t actually reduce emissions after all!

It is this sort of seemingly naive betrayal of the regulatory state, and the civic values that it stood for, by those who ought to be sticking up for those values, that makes the current progressive movement a shadow of the original.

Categories
Antitrust Civilization Despair Monopolization

Arteriosclerosis

Some thoughts on one of Brian L. Frye’s Ipse Dixits, devoted to the art market. In the podcast, Tim Schneider explains that high-end galleries won’t even quote prices to wealthy buyers unless the buyers have standing in the social network that is the art market, because who buys now affects the prices that galleries and their artists can demand in the future. In fact, Tim observes, buyers who have the highest art market status often pay the lowest prices for art, because the implicit endorsement created by a purchase is so important to galleries.

The Peculiarity of the Art Market

Brian suggests that there is something odd about this situation, because in a well-functioning market you would typically want price fully to reflect the value that is being exchanged. But I wonder if this is just an illusion created by the way prices are charged in the art market. Price there is denominated in multiple currencies, one being dollars, and the other being prestige. Imagine that a high-profile buyer were to tell a gallery in advance that the buyer will announce at the time of purchase that the buyer believes the artwork to be horrifically bad, that the artist is trash, the gallery worse, and the buyer will liquidate the object itself posthaste upon taking title.

To the extent that this would diminish the prestige of the sale, you would expect the gallery to raise its price, and whatever that higher price would be, less the original prestige-weighted price, would be the dollar value of the prestige itself that the buyer would normally pay for the artwork along with the work’s dollar-denominated sticker price. If the gallery charges $1 million for the work, but would raise that to $1.5 million were the buyer to declare the work trash, then the value of the prestige earned by the sale of the work to the buyer absent the trash talk is $500,000.

Regardless whether the artwork is sold for a price denominated in two currencies ($1 million plus prestige) or one ($1.5 million), however, the artwork is still being sold for a price, and that price represents the total value of the work. The price of the work is always $1.5 million whether $500,000 of that price is paid in prestige or in dollars. The fact that galleries vary their dollar-denominated sticker prices based on buyer identity suggests that they know the prestige value that each buyer can convey and alter their sticker prices accordingly to maintain a constant overall (dollar plus prestige) price. That overall price is doing the job that prices are supposed to do, by representing the total value of the exchange.

One problem with this line of thought, however, is that Tim suggests that there are plenty of wealthy buyers out there who could afford to pay just about any price for art, but can’t even obtain a price quote, let alone a sale, from a high-end gallery unless these buyers belong to the art market network. If dollar-denominated sticker prices for art just represent the true price of the art less the dollar value of the prestige generated by the identity of the buyer, and non-members of the art market network simply have no prestige, then you would expect galleries to be willing to quote prices to them, albeit higher prices that reflect the absence of a prestige offset. That sort of thing happens all the time in consumer markets — a brand might charge one price to the average consumer but give a discount to a celebrity, because association of the product with the celebrity makes it easier to sell the product to others.

The fact that galleries won’t even quote prices to average customers can therefore mean only one thing: that the prestige offset is so high that no one can pay the true, full, prestige-value-inclusive, dollar-denominated price of high-end art. The losses to the galleries from selling to just anyone are so large that no buyer, however wealthy, would be able to compensate the galleries for what they would lose from democratizing the art market.

How can that possibly be so? (And at this point Brian’s intuition that there is something strange about the art market starts to make sense to me.)

Perhaps galleries don’t want just any buyer because modern art is junk, valuable only for the social significance of ownership, and not because it conveys any consumption value at all to its owners in the form of enlightenment, edification, catharsis, or what have you, and in this sense is the purest of Veblen goods. Modern art is junk because anything can be modern art (a point that modern artists admirably concede when they are not, Jeckyll-and-Hyde-like, running about pretending to see greatness in some spatters of paint but not others), and therefore the supply of modern art is infinite. Economists are fond of saying that scarcity is an iron law (there’s no free lunch), but in point of fact modern art, in virtue of the fact that everything counts, is the quintessential unscarce good, the only free lunch, the cornucopia, the bounty unique.

To put a finer point on it, there are about 10 to the 80 atoms in the visible universe. If anything can be modern art, then any of these atoms, plus any combination thereof, can be modern art, which is to say that the available supply of modern art in the visible universe is the power set of all the atoms in the visible universe, or 2 to the power of 10 to the power of 80. The reader might object that surely a hydrogen atom in some distant corner of the universe could never be modern art, or could never be bought or sold as modern art. And perhaps this is true, if we at least require that art be objects here and now on earth. But there are about 10 to the 34 atoms on the surface of the earth, and the power set thereof even larger, and the bounty no less mind-bogglingly great.

That modern art is junk and unlimited in supply explains why galleries cannot sell to just anyone, because things in unlimited supply have a market price of zero. It follows that in order for modern art to have a non-zero price, some method must be found to limit supply. When a firm like DeBeers wants to limit the supply of diamonds, it simply keeps them in the ground, or warehouses them. Supply can here be limited because supply is in a sense already limited. Diamonds are plentiful, but they can in fact run out, and so if DeBeers can own all the diamonds in their plenty, DeBeers can restrict access and in this way make diamonds genuinely scarce. Not so for modern art, however, because the supply of modern art is quite unlimited. To do to modern art what DeBeers does to diamonds, the galleries would need to buy up all the atoms in the universe (or at least on the surface of the earth) and horde them, which of course the galleries can never do.

If the standard method of limiting supply to support price — hording — cannot work for the galleries, then what? Another approach would be to impose standards of quality on art. But in the debased cultural environment in which we live today, there is no agreement about what constitutes good art and bad art. One man’s David is another’s toilet bowl, and vice versa. Were the galleries to impose standards, they would immediately become the old guard, the target of a million culture warriors, and their inventories not long after consigned to the fire sales of bankruptcy.

No. The only solution for the galleries was to tie art to the only thing in its universe that in the modern age remains in truly fixed supply, and that is prestige. Sell membership in an exclusive club. Make the ability to keep up with a constantly changing art market the ultimate secret handshake. Make the art market a luxury market — no different from the market for fancy handbags or sportscars — only more so, governed not just by wealth but by a willingness to adhere to a whole set of social rules. Make it the aristocracy to Prada’s bourgeoisie.

It should come as no surprise that one of the social rules that distinguish the art market from mere luxury markets, a rule Tim describes, is that art buyers must resell art only through the high-end galleries, rather than on secondary markets. Reselling on the secondary market gives any member of the club the right to admit new members, and that is a recipe for disaster, because it increases membership and allows in buyers not vetted by the galleries, buyers who may be equally willing to violate the rules of membership, accelerating damage to the club. Membership increases make the club less elite, which in turn reduces the value of membership to all other members, making each less willing to pay the high prices for art that are a necessary, though not sufficient, condition for membership.

 In the rule against resale on the secondary market one sees particularly starkly that what is sold in the art market is prestige and not art. If what is sold were art, then expanding the market — allowing more people to bid on art — would be desirable for the galleries, because increases in demand increase profits, all else equal. But prestige behaves like a commons — let more people in and everyone suffers — which is why the number one club rule must be to leave it to some governing authority to police access. The galleries are that authority.

Antitrust Issues

This brings me to the antitrust question that Brian poses in the podcast: Is there something wrong with the unwillingness of galleries to do business with buyers who violate club rules by reselling on the secondary market? If what the galleries are selling is art, rather than prestige, then there might be an antitrust case to be made against the galleries, but only if one of two crucial conditions holds.

Either any one art gallery refusing to do business with a reselling buyer must have at least a 75% share or so of the art market (or, more generally, power to profitably raise art prices above the levels that other galleries can charge in the art market). Or there must be some at least circumstantial evidence that galleries have explicitly agreed among themselves not to do business with resellers, and the group of explicitly colluding galleries must collectively have at least a 35% or so market share in the art market (or, more generally, some at least very weak power profitably to raise price). If the former holds — the gallery has a 75% market share or substantial power over price — then a claim for monopolization under Section 2 of the Sherman Act would lie. If the latter holds — a group of galleries with a 35% market share or some at least small amount of power over price have agreed not to do business with resellers — then a claim for concerted refusal to deal under Section 1 of the Sherman Act would lie.

The key to both claims would be recognizing that the buyer becomes a competitor of the galleries when the buyer starts to resell artwork. I have made much of this competitor status of resellers in the context of data-driven price discrimination, although it should be noted that the antitrust case against the art market could not successfully turn on a charge of price discrimination. Price discrimination is emphatically legal under current law in antitrust, unless it consist of volume discounts, something that appears hardly to be the rage in the art market. And even then, there has been almost no enforcement of cases of that kind since the early 1990s. The art market reseller is a competitor, but the antitrust case against the galleries is not that the galleries punish the reseller because the reseller is selling at a discount to buyers who might otherwise receive discriminatory prices from the galleries, since such discriminatory pricing is legal outside of the data-driven pricing context. Rather, the antitrust case is that the galleries punish the reseller because the reseller is competing the price of all art down by democratizing access to the art club.

Both claims require proof of “exclusionary conduct.” The refusal of the gallery (in the Section 2 claim) or the galleries (in the Section 1 claim) to deal with the reseller amounts to an attempt to exclude the reseller from the market by drying up the reseller’s source of supply, satisfying this requirement. (Because the galleries once did do business with the reseller, before the reseller resold, any requirement that the refusal to deal represent termination of a prior profitable course of dealing is also met.)

Harm to consumers is also required by these claims, and here the antitrust case becomes potentially unwinnable. At first glance there does appear to be consumer harm, because all the rich social outcasts suffer from not being able to buy in to the club. But at second glance the harm falls away. For the value of the product is tied to membership, and therefore any attempts by the galleries to exclude competitors who want to undermine membership genuinely count as attempts to maintain the value of the product not just to the galleries but also to the other members, the in-group of buyers who play by the unwritten rules. If the art market democratizes, the value of the art to everyone falls to zero, the club is destroyed, the prestige is destroyed, and all art owners are left with is the junk that once was their scroll and key. So the exclusionary conduct protects the value enjoyed by consumers — indeed, gives the unlimited resource that is modern art its scarcity value — instead of harming consumers.

Antitrust has long distinguished between product-improving conduct that incidentally harms competitors and conduct that serves only to harm competitors, generally exempting product-improving conduct from censure and condemning only conduct that has no such redeeming feature.

A classic example of exempt conduct would be Apple’s introduction of the iPhone into the cell phone market in 2007. Any Apple refusal to license iPhone technology to Nokia may well have been the proximate cause of Nokia’s demise, but that refusal would be no antitrust violation, because the refusal would presumably be necessary to protect the value of the iPhone to consumers. If, the argument goes, Steve Jobs knew in 2005 that he would be forced to share iPhone technology with Nokia, destroying his competitive advantage and thereby his ability to recoup his costs through higher prices, then Steven Jobs would never have bothered to invent the iPhone and consumers would have ended up with nothing. (The intellectual property context is not unique here. Supermarkets would not trouble to exercise the foresight needed to build on land most convenient to consumers, the argument goes, if they could expect to be forced to share access to their real property with competing supermarkets.) 

Similarly, the refusal of the galleries to do business with resellers is key to the ability of modern art to maintain its value as a signifier of elite club membership. The product is social prestige, and denying others the ability to sell access to that prestige is key to maintaining the value of the product. The galleries are harming competitors when they harm resellers, but they are not really harming consumers.

Rich social outcasts might think they would benefit as a group from an end to resale restrictions, but the benefits would be fleeting. The value of the artwork these losers buy, not to mention the social status it confers, would evaporate as more and more losers were to pour into the market, just as the marginal fishing boat destroys the fishery, or the marginal cow destroys the commons. Indeed, the destruction incident to a failure to police entry to the art market is worse — in fact, total — because unlike in fisheries or on town commons, for which the cost of a boat or a cow places a natural limit even on unregulated entry, the near-infinite abundance of modern art means that once the club doors are open the cost of entering can be driven all the way down to zero.

The only thing that could therefore prevent the galleries from winning the antitrust case is shame — the shame of raising as a defense the fact that modern art is junk and that they deal instead in prestige. I suspect that such an admission would have no material effect on galleries’ business. If buyers really are there for the prestige and not the art, as I think is the case, then acknowledging that fact deprives buyers of nothing, and so should have no effect on art prices. But such an admission could have an effect on pride. The galleries do claim to sell art; all really good sellers believe their pitches.

Categories
Civilization Despair World

Left Nowhere

The opposition Labour Party is riven by its own divisions. Its leader, Jeremy Corbyn, tends to be skeptical toward Britain’s global role.

The transatlantic left’s isolationism is a huge problem. And uncharacteristic. But that’s what happens when you make everything a matter of principle.