The strategic supply curve

John Quiggin9 Comments

A plug for a recent paper: one of my Twitter followers asked for a non-technical explanation, so here it is.

Flavio Menezes and I just released the latest version our paper “The Strategic Industry Supply Curve,” available here. The central aim of the paper is to extend the standard graphical analysis of supply and demand, familiar to every first-year economics student, to cases where markets are imperfectly competitive (monopolies and oligopolies). At present, these markets are analyzed using quite different theoretical tools, making only limited use of graphical representations.

The main innovation is the notion of the strategic industry supply curve, representing the locus of Nash equilibrium outputs and prices arising from additive shocks to demand.  Special cases include monopoly, Cournot and Bertrand oligopoly and competition in linear  supply  schedules.

As in the standard graphical analysis, we can
* use measures of consumer and producer surplus to determine the distribution of the welfare gains from trade between consumers and producers
* derive elasticity measures for supply and demand
* analyse the comparative statics of cost shocks
 
Our analysis allows us to view imperfect competition as analogous to a case where producers engage in ‘cost-padding’.  That is, the difference between the strategic supply curve (an equilibrium concept) and the industry supply curve (the sum of the supply curves of individual firms) can be seen as the measure of the ‘economic rents’ afforded by imperfect competition.
 
Our analysis has important implications for competition policy. For example, competition regulators examine industry supply curves, but do not directly assess the efficient costs of production. So, they are unable to distinguish directly between efficient costs and the ‘cost-padding’ associated with strategic behavior. Rather, the extent of such cost-padding is implicit in the the specific form of competition that it is assumed in the analysis (e.g., Cournot versus (differentiated) Bertrand). Conversely, assumptions about the form of competition are largely arbitrary and not informed by data. The approach in merger regulation contrasts sharply with that of monopoly price regulation, where the focus is on determining the monopolist’s efficient cost, so as to set efficient (in a second-best sense) prices.

The arbitrary nature of economists’ assumptions about the strategy spaces appropriate for game-theoretic representations of economic problems has been a long-standing theme of ours (refs). In this paper, we have turned this criticism around and shown how an explicit treatment of the strategy space can not only yield powerful new tools for economic analysis but can enhance the scope of such familiar tools as demand-supply diagrams.

Socialism and social democracy

John Quiggin48 Comments

From a comment on a Facebook post by Max Sawicky, asking about the difference between socialism and social democracy (sadly, I think the context was one of the internecine disputes in which the left has long specialised, though the right has now caught up and surpassed us).

Socialism and social democracy

I’ve switched back and forth between the two terms, with a more or less constant understanding of their meaning. For me, “social democracy” refers to the actual policy program advocated and to a significant extent implemented by social democratic parties in the mid-20th century: free and universal health care and education, a social welfare system sufficiently broad and generous to eliminate poverty, full employment and strong unions, in the context of a mixed economy. “Socialism” refers to a fundamental transformation of the capitalist system incorporating and going beyond the social democratic program to end large-scale capital and dependence on wage labour.

That is, as I use the terms, social democracy refers to a contemporary policy program and socialism to a utopian aspiration. During the period of neoliberal dominance, , I described myself as a social democrat, defending the achievements of the 20th century and trying to extend them where possible. Now that there is an opening for the future, we need the kind of utopian vision I associated with “socialism”.

Quiggin quizzical

John Quiggin39 Comments

My observations on the electricity demand associated with Bitcoin made it into the ABC News Quiz last week, which is a kind of fame, I guess.

Meanwhile, I had another piece in the Guardian, this time looking at the fact that, despite being called a “cryptocurrency”, Bitcoin is used even less as a currency now than it was several years ago. The core problem is that the system is so overloaded by miners creating new coins that processing transactions is slow, costly or both I mentioned the fact that game company Steam had stopped accepting coins and that the list of merchants accepting Bitcoin is small enough to fit on one page. Checking further I concluded that this list is out of date, but not in a good way. Lots of those included, such as Expedia, no longer accept Bitcoin, if indeed they ever did. Here’s one person’s experience. Bitcoin is now a “crypto asset” which is even more obviously a Ponzi fantasy than the original currency story.

One response I got was that transaction speed would soon be greatly improved by something called Lightning. Checking on this it appears that this is software in an alpha (very early) stage of development, which would allow any two parties to set up a transactions account separate from the main Bitcoin blockchain, and only occasionally update the main account. An analogy, for readers of a certain age, is the era before Bankcard, when, if you wanted to do something other than paying cash, you maintained a separate credit and debit account with every store you dealt with. This does not seem like the dawn of a new era to me.

Coalition politics and the end of market liberalism

John Quiggin30 Comments

Lots of commentators are making a fuss over the prospect of the Greens taking the seat of Batman following the likely and unlamented departure of Labor MP David Feeney (if not under S44 then at the next election). The underlying claim is that the election of Greens candidates represents an existential threat to Labor. This is typical of a commentariat mindset that sees anything other than majority Labor or LNP governments as recipes for disaster (the phrase “hung parliament” is indicative), even though we have decades of experience of such governments operating successfully both federally and in (I think) every state and territory. The reality is that, however fractious their relationship may be at times, Labor and the Greens constitute a centre-left coalition. As I said a year ago

For Labor that means giving up the idea that the Greens are a temporary irritant that will go the way of the DLP, if they are abused and/or ignored long enough. For the Greens, it means abandoning Third Way rhetoric suggesting that they represent an unaligned alternative to a two-party duopoly.

The details of the alignment between the two will vary according to the circumstances, from formal coalition to general support, but there is no alternative.

The problem of coalition politics is much more problematic on the right. Despite the frictions, I’m not thinking primarily of the LNP “coalition” (so rusted together that, even where they aren’t merged, the two are lumped together as a single “major party” in most commentary). Rather, the problem is the relationship between the LNP as a whole and the tribalist/Trumpist right, represented in various forms by One Nation, the Liberal Democratic Party, Bernardi’s Conservatives* as well as a large faction within the LNP itself. These two groups have nothing in common except that they have common enemies, and even that common ground is limited. They all hate greenies and unions, but the overt racism of One Nation and the religious bigotry of Bernardi repel lots of mainstream LNP types, while the Trumpist base is suspicious of banks and multinationals.

Most importantly, the ideological framework of market liberalism (aka neoliberalism, economic rationalism) and so on has lost its power, which always rested more on the idea that There Is No Alternative than on any positive appeal. Sermons about the need for reform, budget surpluses, more competitive tax regimes and so on no longer get the kind of automatic approval from the political class as a whole that they used to. So, the mainstream LNP no longer stands for anything in particular. Meanwhile, the Trumpists want nostalgic gesture politics without any concern for coherence or practical consequences.

For the immediate future, at least, politics in Australia has resolved itself into a struggle between two coalitions. Both are going to be fractious, but the big problems are going to be found on the right.

* There’s also the Katter party, but Katter is too idiosyncratic to fit into any classification.

A barbarous relic

John Quiggin29 Comments

That’s what Keynes called the gold standard nearly a century ago, and he was right. I was reminded of this by the commentary on my latest piece on Bitcoin, published in the Conversation and also the ABC. I restated the points I made in my 2015 article on the massive and wasteful use of electricity in Bitcoin mining. The key points are that the cost of mining Bitcoins will inevitably rise until it is equal to the price for which Bitcoins can be sold, and that the great bulk of this cost is the electricity used to run specialised computer systems.

The responses included a great deal of huffing and puffing to the effect that I know nothing about cryptocurrency and shouldn’t comment, but showed no understanding of the central point, let alone any attempt to refute it. The scale of Bitcoin’s electricity use (which was hard to observe directly when I wrote in 2015 is now so massive as to be undeniable.

The other response, standard in cases like this, is whataboutery, that is, attempts to point out other wasteful uses of electricity compared to which Bitcoin is allegedly insignificant. I addressed one of these in the article, responding so someone who claimed that the electricity used by Bitcoin (serving at most a few million people) is “only” one-third of that of the rest of the global financial system.

Some other whatabouts led me to some interesting thoughts. One, which I plan to look at further is the use of electricity in electronic equipment on standby. The other, pushed with some vigour by commenters is gold. So, is gold worse than Bitcoin

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Reviving TAFE

John Quiggin26 Comments

I’ve just been invited to make a submission to a Senate inquiry into TAFE in South Australia. From what I can glean, this is a politically motivated exercise by the Turnbull government to make capital out of some embarrassing failures in a Labor state. But it gives me the incentive to write something about the catastrophic failure of vocational education and training in Australia, a failure for which there is plenty of blame to go around. Rather than making political capital out of such incidents, we need to rebuild the TAFE system as the core of a greatly expanded vocational education and training system, including public and non-profit institutions, free from the discredited ideology of markets and competition.

Among the points I want to cover

* The impact of decades of cuts in public support for vocational training
* The disastrous effects of subsidising for-profit providers
* The goal of universal participation in post-school education and training
* Integration of technical/vocational and university education

Contradictions, Part 2

John Quiggin14 Comments

The contradictions in the LNP/IPA attack on free speech became even more evident today with the appointment of Gary Johns as the head Australian Charities and Not-for-profits Commission. Johns was once a junior minister in the Keating government and used this position to give a non-partisan veneer to subsequent career as a hack for the IPA, which was followed by a stint at the Australian Catholic University.

Johns has been at the forefront of the push to suppress political advocacy by charitable organizations eligible for tax-deductible donations. So his appointment by Minister Michael Sukkar followed logically from the LNP/IPA anti-free speech agenda.

There’s just one problem. The announcement came on the day of the vote on equal marriage, an issue on which numerous religious charities campaigned on the losing side. So, in the same breath as announcing Johns’ appointment, Minister Sukkar expressed the hope that the legislation might be amended to allow charities to continue advocacy on this issue.

This is silly, of course. It was already obvious that no amendments would be passed. And, as Warren Entsch pointed out, under current interpretations of the law, there’s no need for them. As Entsch says “A charity may advocate on any issue relevant to that charity and nothing in this bill will change that”. He’s right of course, but the whole idea of appointing Johns was to change this situation.

Hopefully, the government will realise what a trap they are setting for themselves here. If they attempt to remove tax-deductibility for conservation organizations that engage in advocacy, they will create a precedent that can subsequently be used against religious organizations. Turnbull should overturn Johns’ appointment and find someone who actually supports charities and non-profits.

Assumming, as seems likely, that the government is in too much of a mess to work this out, perhaps the churches will do so. If they want to protect freedom of speech for themselves, they’d better start defending it for others (cue Ditrich Bonhoeffer).