29 January 2018

Spotify is a reminder of how the market makes us all richer


Spotify is the very terror of the age apparently, as it means that we, the customers out here in the market, get masses of free (or at least very cheap) music, while the producers of it, the songwriters and bands, get fractions of a penny. Well done Mr. Harris over at The Guardian, this is the very point of a market economy in the first place. To be inelegant about it, sod the producers and look at the consumption.

We may call this system of ours capitalism but capital’s not actually the important part which makes it work. Yes, private people deploying their resources privately in order to try and make a buck does lead to a richer society. That’s what enables the exploration of the possible production universe out there. Which leads to the optimal discovery of those sweet spots where what can be done intersects with what people wish to have done – driven by that lust for profit. This is, however, the less important part of our system.

The vastly more interesting part of the structure is the market part. And the judge of what is good here is not whether profits, or even high incomes, are being made by the producers. Rather, the measure is: “How much of what we want do we get to consume?”

This speaks to a rather larger point about the inequality that so many shout about these days. Oxfam whines about wealth inequality and many more inveigh about income inequality. Yet the only form of inequality that matters at all is consumption inequality. Something that really isn’t of anything like the same order. For example, US figures show that while both income and wealth inequality have climbed in recent decades, the ratios of what people actually consume seem not to have changed other than very marginally.

Similarly, our own TUC produced some figures showing that all is not quite as we might think. Market incomes for the top 10 per cent of households are, on average, 12 times those of the bottom 10 per cent. We can, and do, argue about whether that’s too much inequality. But once we take into account taxes and benefits, and then the impact of government spending (the NHS, education, all that), then the difference in consumption falls to 4 to 1. Again, maybe you think that’s too much, or perhaps not enough, but in either case it’s most certainly different.

The modern world is reducing that consumption inequality markedly. There is no one in the UK who couldn’t afford Warren Buffett’s Big Mac and Cherry Coke habit – if only we could force ourselves to choke it down. That an entire nation can afford the eating habits of one of the world’s richest men is a very modern innovation. We’ve all got absolutely equal access, at the same price, to whatever amount of Facebook Bill Gates uses. Consumption inequality just isn’t the same, at all, as the unimportant types of inequality so many worry about.

We can roll this development back to the Industrial Revolution. Hand-spinning used 10,000 hours of human labour to process 100 lbs of cotton, but by the time mechanical mules were being used, this dropped to 125 hours. Yes, certainly, this caused more than a little disruption to the incomes of those who used to do the spinning, but it also led to the entire country being able to afford cotton underwear. Which, as anyone who has ever worn the woollen kind will know, was a substantial blessing.

It’s true that everyone who works produces something, and thus our position as producers and the income we gain from that work is important to us. But we’re also adaptable creatures. It is always possible for us to go and do something else instead. And we’re all also consumers, including those (roughly half the population) such as children, pensioners, stay-at-home parents etc, who aren’t directly producers at all. It is the expansion of our consumption possibilities which makes us richer, not the protection of our production incomes.

That brings us back to Spotify. It gives us free, or at any rate very cheap, access to the music of the ages, if not the spheres. Which is the very point of what we mean when we talk about having an economy at all. We should be delighted at the expansion of the consumption which is made possible. As for the producers, their loss is somewhere between collateral damage and the very point of the market system. For the important part of that system is that things people wish to consume should be cheap, and getting cheaper. And that is the very definition of us all getting richer.

Tim Worstall is senior fellow at the Adam Smith Institute.