Amazon’s Antitrust Paradox | Lina M. Khan

There is a new article in the Yale Law Journal that many media outlets are talking about. The original is fairly long but quite readable, so there is no need to read someone else's digested version of it.

The author argues that Amazon has pursued a strategy of massive expansion and consistent losses or very small profits to attain a dominance not just of the retail sector, but beyond into the very infrastructure of online commerce. The result is a monopoly that Amazon ruthlessly exploits to prevent competition without seeming to trigger traditional antitrust laws. The author suggests two different approaches to the problem.

The consensus seems to be that the author has redefined how we look at online companies like Amazon and that it might redefine how we regulate online commerce to either prevent these kinds of monopolies or leverage them to the greater good.

ABSTRACT. Amazon is the titan of twenty-first century commerce. In addition to being a retailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns—yet it has escaped antitrust scrutiny.

This Note argues that the current framework in antitrust—specifically its pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy. We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.

This Note maps out facets of Amazon’s dominance. Doing so enables us to make sense of its business strategy, illuminates anticompetitive aspects of Amazon’s structure and conduct, and underscores deficiencies in current doctrine. The Note closes by considering two potential regimes for addressing Amazon’s power: restoring traditional antitrust and competition policy principles or applying common carrier obligations and duties.

Origins of Think Tanks.

Think tanks have been in the news a bit lately. Where, you might wonder, did the idea for think tanks come from?

In 1971 corporate USA widely perceived the "free enterprise system" to be "under attack" from communists, environmental activists, and other groups on the left of the political spectrum (anyone who cared about anything except money, basically).

And so they launched an ideological war on society, in which the "think tank" was a central weapon. The job of the think tank was to employ the new PhDs being churned out by conservative business schools and help them to promote the conservative business message, lobby politicians, and keep their message in the media spotlight. Think tanks were and are the propaganda wing of the conservative war on society.

Of course they bought professorships to teach the PhDs and they founded new business schools to ensure that business graduates were never exposed to other ways of thinking. And they bought up all the media companies as well. And they bought a lot of the politicians one way or another.

So by the 1980s we were all reciting the free market mantra and nodding when they said that there was no choice. And we bit the bullet through repeatedly and worsening recessions and the growing social problems fostered by inequality and the capture of government by business interests.

The conservative war on society was outlined by Lewis Powell in a memo to the US Chamber of Commerce that year. It spells out all of the major fronts on which the war would be fought (and won). If you want to learn more about why things are the way they are, then read the memo. It tells you pretty much everything to need to know about how things went wrong for the people  and right for the morbidly wealthy.


See also Adam Curtis blog on Think Tanks from 2011.  It particularly deals with the founding of the Institute for Economic Affairs which has been in the media lately.

Trump, the Mercantilist.

I was struck by a economics blog post: [US] Corporations and mainstream media trumpet the “horrors” of higher wages.

Whatever else he is, Trump is a mercantilist

"Mercantilism states that a country will grow richer by increasing its net exports. To achieve this goal, the original mercantilist writers recommended that wages be kept at the subsistence level, not just to minimise the direct cost of labour, but also to maximise the pressure on workers to work. They believed that workers were lazy and had to be coerced to work." - Prof. David Spencer. Six Centuries of Vilifying the Poor.

Trump is desperate to increase America's net exports. The USA imports a lot more from Russia, to take a topical example, than it exports to Russia. Hence the trade war and hence the pressure on US wages, though not CEOs salaries, because mercantilists are willing to pay top dollar to anyone who can squeeze more work out of fewer workers at lower pay.

If Europe, Russia, and China mounted a coordinated response to Trumps's trade war, he'd be in deep trouble. Now we see why he's going around stirring up trouble between us.

Framing the Debate

I'm going to use this post to collect some resources on Lakoff's theory about framing.

• https://georgelakoff.com/
• Metaphor, Morality, and Politics: Or, Why Conservatives Have Left Liberals In the Dust by George Lakoff
• Frame Lab Podcast. Various Episodes
• We Can Talk About Podcast: Framing 201.

Rent Seeking

"Landlords grow rich in their sleep without working, risking or economising. If some of us grow rich in our sleep, where do we think this wealth is coming from? It doesn't materialize out of thin air. It doesn't come without costing someone, another human being. It comes from the fruits of others' labors, which they don't receive. Is it enough to promise 'pie in the sky when we die'? Or does living in a civilized society dedicated to the proposition that all of us are created equal and endowed with certain rights demand something else of us?"

— John Stuart Mill.

Government

Ann Pettifor has a new blog up: Do tax revenues finance government spending? It includes this memorable quote about balancing the books:

When the economy is powering along, when investment and employment and wages are high, when interest rates are low, and banks are supporting the real economy,  not just gambling on property price rises – then hey presto, the government’s books ‘balance’. When the economy is weak, when investment falls, and employment is low, or insecure, or low-paid; when private indebtedness and real rates of interest are high and the finance sector out of control – then government revenues from taxation will fall, and the government’s books will not balance. 

 Ann continues to inspire me with her insights into how money and the economy works.

Anti-Capitalist

Capitalism works best when capital is invested in enterprises that employ workers; and when workers are well paid and spend their wages on goods and services. It is a potentially symbiotic relationship.

Low wages and employment practices that are detrimental to productivity and the health of workers are anti-capitalist.

Treating labour as a cost of doing business, rather than as partners in creating profit is anti-capitalist.

Accumulation of uninvested capital is anti-capitalist.

Investments that do not create jobs are anti-capitalist (i.e. gambling on the future price of property, commodities, or currencies).

Removing protections and degrading governance so as to allow fraud and malfeasance on a massive scale is anti-capitalist.

So whatever has been happening as a result of the Neoliberal revolution is not capitalism. It's profoundly anti-capitalist.

Economists, Amazon, and Corruption

In my view, these tweets are some of the most damning indictments of economics in recent times. They show the kind of corruption that is rife in the field. Economists are seldom free agents or objective. They are in the pay of the companies who they are commenting on. In the case below it is Amazon who are promoting this form of corruption.

The problem w/economics is that economists do not self-police corruption. Example. Michael Mandel of the Progressive Policy Institute is one of the leading proponents that Amazon warehouse jobs are a net benefit to a community rather than a low wage disaster. Guess who pays him?

— Matt Stoller (@matthewstoller) February 3, 2018

Finally, this story by @lydiadepillis at CNN discusses the 'controversy' over the EPI study. And she actually notes that @MichaelMandel at PPI is funded by Amazon. Yay. https://t.co/FQD0RPy2lc pic.twitter.com/gfp5vQzovk

— Matt Stoller (@matthewstoller) February 3, 2018

The irony with Amazon, is that without the sales-tax exemption on internet sales in the USA, they would never have survived.

Amazon are in the news as they look for sweetheart deals to move their corporate headquarters and build new fulfilment centres. The left-wing US publication, Working In These Times, analyses this in a story titled: Cities Scrambling to Attract Amazon Because It “Creates Jobs” Are Being Sold a Lie.

They point out that Amazon's business model means that they have to build more warehouses anyway:

“If your business model is getting things to people within 24 hours, you have to be everywhere,” Jones said. In other words, paying a company to locate a facility they have to build anyway makes no sense."

The article also cites figures that show that the arrival of an Amazon warehouse has little or no effect on overall employment levels. They have a negative impact on wages and conditions:

A 2016 study from the Institute for Local Self-Reliance found that hourly wages at Amazon fulfillment centers are far below the typical warehouse worker, and employees work more hours to compensate.

Where Does Demand Come From?

Here's the thing. Demand in the economy ultimately comes from workers buying things. That's the driving force of all economic activity. All the capital in the world will not create wealth, if it is invested in something no one buys. Or if it is not invested.

If you cut wages then you reduce demand. If you load workers up with debt so they end up paying interest and have less to spend, you reduce demand. If you close down whole industries, you reduce demand.

Brainwashing workers into believing they "need" the shit you sell is only effective *if* they have disposable income to spend.

It comes down to this: Someone has to buy the shit you sell. Or you are fucked. 

The only way to increase demand is by giving workers more money across the board. The trick is that if you raise wages by too much it creates inflation - the more people are willing to spend, the higher the price goes.

Having more billionaires doesn't really help.They do spend, but in a narrow range and often not locally. They don't pay taxes and they tend to hoard wealth rather than recycling it as poor people do. And they tend to pay too much, and thus force up prices (think the property markets in London or Auckland). The poorest people spend everything that they get, they spend it locally, and they look for bargains.

If you want to help your economy, you institute measures to help poorer workers. Minimum wage. Handouts. However this can be self-defeating because employers see the handouts as a rationale for paying less. In the UK a lot of people work full-time but cannot afford to live. This cannot be sustainable.

We have the weird situation of falling unemployment with falling wages - supply and demand theory is not supposed to work like this. The demand for labour ought to produce higher wages. When it doesn't, something is wrong. The wrongness is millions going to CEOs and shareholders instead.

In the end business people have to realise that paying out too much in dividends and not enough in wages is self-defeating. Replacing people with robots is self-defeating, because robots don't buy anything. Any reduction in wages is ipso facto a reduction of demand for goods and services. You want to sell more? Pay higher wages. Henry Ford understood this. He paid his staff well enough so that they could afford to buy his cars. But they also spent that money in local businesses, increasing the prosperity of the region and the nation.

The world is awash with unused capital sitting in tax havens gathering dust. But that doesn't increase demand or drive economies. The rational thing to do at the moment is give a greater share of profits to workers. That way everyone benefits. Indeed, it would create more jobs as demand picked up.

This is something that business people have to understand. At present they don't seem to.

Why building more homes will not solve Britain’s housing crisis

In  recent Guardian opinion piece, Ann Pettifor points out that the problem in the UK is not really a supply one. We actually have enough houses. The problem is that foreign capital, often obtained illegally, is flooding into the UK (£100bn in the last 6 years!) and inflating house prices.

"It’s speculation in the property market that is fuelling stratospheric house price rises, not shortage of supply. When the “fuel” of private capital, mortgage credit and cash from the bank of mum and dad is supplemented by government subsidies and tax breaks, house prices rise. Moreover, wealthy global and non-resident buyers have funnelled more than £100bn into London property over recent years, making the problem even worse."

 Pettifor suggests a twofold approach

1. A property speculation tax (PST), as in Germany. "This could be used to levy punitive rates on speculators, or those who own second homes and empty properties, encouraging them to invest their cash elsewhere."

2. A Tobin tax on global financial transactions. This allows for free movement of capital, but prevents it from disappearing from the tax regime.

The trouble is that deflating the housing bubble creates losers. As with any bubble, the last in end up losing money or with negative equity - debts worth more than assets. A lot of pension funds are invested in property.

The overall strategy must be to move capital away from the speculative and into the real economy. Rather than speculating in property prices, inflating a bubble, we need capital to be invested in business and jobs. This will not be simple or easy, but if it doesn't happen, we will continue to have a housing crisis driven by inflated prices rather than lack of supply.

~

See also: The more the State has withdrawn from housebuilding, the more it has found itself propping up the private market. LSE Blog.

There is a paradox in modern housing policy, writes Daniel Bentley. The aim of rolling back the state from housebuilding has turned its role from one of subsidising supply into that of facilitating ever greater amounts of spending power, making housing unaffordable for so many.

What's wrong with Bitcoin?

Bitcoin has been in the news a lot recently and I was mostly ignoring it because I already have a perfectly good medium of exchange called Sterling and don't feel the need for another one. Plus I don't have capital to invest.

The main idea seems to be that we cut govt out of the loop. But why on earth would we cut govt out of the loop? Govt, in the UK, provide us with free education, healthcare, policing, roads, etc. It's the "What did the Romans ever do for us?" argument (remembering that in the Life of Brian the Romans represent Government per se). Neoliberals have portrayed tax as an intolerable burden from which people must be relieved. In fact, tax is the way we contribute to society and keep the country functioning. If you want to know what small government with low taxation looks like, then read Charles Dickens! He very accurately portrays the social conditions that prevail under the Libertarian ideal.

But the real problem with Bitcoin is a design "feature" - there is a finite supply. With fiat currency there is literally no limit to how much money can be created. Bitcoin is finite. Let's simplify it to make it easier to see.

I launch my new crypto current the J. There are 100 J in the world, and I hype the shit out of it on the internet as the next big thing. The potential for the J is limitless and no one will ever have to pay tax on it, because it's run on a server on a ship in international waters. (This is by the way a theme from an excellent novel called The Cryptonomicon)  I open the bidding on J at £1 and I buy the first 50 myself. I invest £50. Demand is high for the J so people are willing to pay more that £1. They end up paying an average of £2. My £50 investment just became £100. All the J is now owned, but people start to buy stuff with it or cash it in. So small numbers of J become available at a time.

Word is out that you can double your money by investing in J. So speculators get interested and they buy up all the available J at £4. They think "the price can only go up". My £50 is now worth £200. With this net worth I start to talk to venture capitalists about my next project. This steep rise in value attracts more speculators willing to pay too much. They all want to get in on this *easy money* and are willing to risk more and more. The price hits £10 per J. I convert my J into £500 cash, put it in the bank in the Cayman Island: 1000% profit in just a year or two. My J are bought up at even higher prices, but it reaches a peak of £20 per J.

At the peak, people don't think the J is worth £20 so they stop buying. The price levels out. The early investors also start to sell. The price drops. The last people in realise they are losing money now, and they sell to minimise their losses. The value of the J plummets overnight, back down to £1. Everyone loses their money, except me. And I have already started a new cryptocurrency called the K. And the K is the next big thing...

There are currently about 2000 different cryptocurrencies. And if crypto loses it's savour then it will be some other get rich quick and bypass taxes scheme. 

This kind of financial instrument is a variety of Ponzi scheme. It's named after Mr Ponzi who took investors money and used to to pay dividends to himself and early investors. As long as he could attract new investors at an exponential rate, he was able to pay out high returns to earlier investors. But exponential growth is impossible so it collapsed and most people except Mr Ponzi lost their investment.

Ponzi schemes are dishonest and illegal. One of the benefits of govt is that they protect their citizens from such schemes.

The worst scenario happens when people borrow money to invest - this is what happened in the Tulip Bulb Bubble in the 17th Century and in USA Stock-market in the 1920s. You borrow at 10% interest, but the investment is paying 20% while the bubble is inflating. So the investment pays the interest and you still make a profit, without risking your own capital. The deflating of the bubble is more catastrophic because as soon as growth falls below the interest on the loans, those speculators are bankrupt. These were the guys jumping out of windows on Wall St in 1929.

But of course the Bitcoin bubble didn't deflate all the way to zero. A lot of people still believe. So we don't know what will happen next. It is entirely possible that the bubble will inflate again and that when it bursts a whole new cohort will lose their investment.

This boom and bust cycle, which UK Finance Minister Gordon Brown once declared to be at an end, is built into Capitalism. A guy called Hyman Minsky called it the Financial Instability Hypothesis. The New Yorker magazine ran a long-read story on Minsky and the sub-prime mortgage scam in Feb 2008. Lehman Brothers declared bankruptcy in September of that year, sparking the Global Financial Crisis.

The moral of the story is that government regulations can be effective in preventing con artists from running Ponzi schemes and in regulating financial institutions to prevent the worst excesses of irrational exuberance amongst investors. By subverting this and setting up as a de facto Ponzi scheme, Bitcoin is likely to produce more instability and chaos. And it doesn't solve an existing problem. Well no legitimate problem. It's used to circumvent laws - making it the ideal way for criminal gangs and kleptocracies to launder money while avoiding the regulations that now apply to banks (not that this has stopped them using banks at times - if you have billions to launder, then banks seem only too happy to help).