Economic Threat: Legacy Industries With Bogus 'Safety' Claims To Stop More Efficient Competition

from the sound-familiar? dept

NPR's Planet Money has started a sort of spin-off series which are direct interviews with smart people about the economy. Recently, it interviewed economist Raghuram Rajan, who is given credit as being one of the folks who accurately predicted the recent financial crisis. I'm always a little hesitant to give credit to people who "predict" financial upswings or downswings, because there's usually some serious confirmation bias problems, but Rajan definitely did a good job of calling out some of the specifics of what was likely to happen and which, subsequently, did happen. He now has a new book called Fault Lines, which suggests that many of the bigger world trends that resulted in the financial crisis are still in place, and we may be facing an even larger financial crisis going forward, since we did little to fix these underlying "fault lines." The first half of the interview is fascinating, discussing the political reality in the US that makes it nearly impossible to actually fix these problems.

However, the second half gets into a subject that is much closer to what we regularly discuss around here. In that part of the discussion, he points to certain economies that grew through the government pressuring local industry to focus on exports, with Japan being a key case study. However, he points out that by propping up a small group of these firms, it actually did great harm to local innovation and local economic efficiency. And then, at the end, he gives this example which should sound quite familiar:
Let me give an example: Japanese haircuts are extremely expensive. Part of the reason is productivity in the Japanese haircut sector is lower. So, an upstart comes up and says 'I'm going to start offering cheaper haircuts.' That's the typical way that competition pushes down prices. If you have cheaper haircuts, more Japanese will go get haircuts, and there will be more activity in the haircutting sector and you will get growth there. Well, the startup provides cheaper haircuts, but the existing barbers get anxious, because they'll have to cut prices and they're perfectly happy where they are with fewer haircuts, but getting more per haircut.

And so the "barber's guild" gets together and says: 'This is terrible. You know, this practice of offering haircuts, we have to find a way to nip it in the bud." And they have a brilliant idea. They say: "Well, offering haircuts without shampoos is un-hygienic. It's a bad idea. So, we're going to mandate that before every haircut, you have to offer a shampoo." Well, the nice thing is that all of the existing barber shops are equipped with basins and so on where you can offer a shampoo. But that new startup, because it's cutting costs and because it's cutting frills, doesn't have a basin where you can have a shampoo.

Well, in one stroke, in requiring a shampoo before a haircut, you've raised the cost of doing business for the startup. You've driven the startup to a corner. And, typically, they can't compete any more. And you've preserved the way of life for the existing barbers. In the process, though, you've far fewer haircuts in Japan than if you'd allowed much more competition.

You can see this play out in many sectors: transport, retail, construction. Where a few incumbents sort of monopolize what's going on and don't allow the kind of growth that would allow Japan domestic sources of growth as distinct from the export-sources of growth, which it typically relies on.
This is such a key point that gets overlooked in so many discussions, but is really the key theme about a very large percentage of posts on this site: recognizing the difference between real economic growth that comes from innovation that leads to a greater actual market size, and fake economic growth that comes from just the process of moving money around.

But that story of the Japanese barbershop sounds pretty damn familiar, right? It's the same story we just heard about hotels in New York trying to outlaw couch surfing. Or, as someone on Twitter referred to it: "Home sleeping is killing hotels." Or the story of a online carpooling efforts sued and fined for competing with the local bus company.

What's impressive, of course, is how the incumbents are almost always able to hinder the more economically efficient solutions -- the innovations that actually lead to real growth in the market -- by couching it in terms that make them look like they're being altruistic. In the Japanese haircut examples, it was about hygiene. In the stories about couch surfing and carpooling, it's about "safety." With the music and movie industries shutting down more efficient tools for distribution and promotion, it's about "protecting creators' rights." Of course, none of these are true. They're all just efforts to protect incumbent monopoly rents, so that they can be less efficient, collect more direct profit, but hold back overall economic growth and consumer surplus.

I think it's important to start calling out these sorts of ploys. Perhaps we should refer to them as "home sleeping is killing hotels" arguments, and point folks to Dan Bull's song on the subject:

Filed Under: economics, guilds, planet money, protectionism, raghuram rajan, regulatory capture

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  1. identicon
    Anonymous Coward, 3 Jul 2010 @ 10:24am

    Re: Cars

    Many American car makers were innovative startups before those things were mandatory.

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