9 October 2017

The folly of bidding for Amazon’s business


Amazon is casting around for a US city to house its second headquarters. Various places are falling over themselves to win Amazon’s business, offering property tax rebates, low cost loans and special breaks on this and that. One city has even announced that it would change its name to Amazon were it to win.

But what is the point of this beauty parade? As Steve Chapman points out in the Chicago Tribune, cities would be better off not wooing Amazon at all.  The competition is so fierce – and will only grow more ferocious – that Amazon will retain absolutely all of the economic value the move might create. Some of the offers are so deluded that the tech giant might even recoup more than the total value of the new headquarters.

That will happen for the same reason that a rise in the value of football’s TV rights means the salaries of footballers go up. The money will flow to whoever it is that has is creating the rare thing valued by the market. There’s only going to be one second Amazon HQ and there are 23 New York City neighbourhoods alone who have applied. All the value of the new will go to Amazon.

This is a useful lesson for government more generally. Auctions of special benefits to specific producers will always end the same way. There are many more governments around willing to tempt car plants than there are factories looking for locations. The economic benefits are therefore always going to be hugely skewed to the people placing the thing of rarity, the plant, than they are to the host location.

The obvious answer to this dilemma is to not play the game at all. If we do find that we’ve got some slack in the system then apply the benefit to business more generally. Rather than handing out special privileges, why not reduce the level of taxation across the board so as to make the place more attractive to all and any form of business rather than just the one large or loud enough to attract political interest? Of course, that doesn’t give politicians a nice ribbon cutting ceremony. But, recall, they’re supposed to be working for us.

There is a larger point here. The very accrual of all of the benefit and more to Amazon is exactly the reason why free-market capitalism thing actually works. This may seem to confirm every lefty’s criticism of the system: that it is big business who always wins out. Except note what Amazon is here, it is the consumer facing countless potential suppliers. And it’s the consumer, not the suppliers, which is going to extract all the value.

Amazon is not the exception, but the rule. As William Nordhaus has told us, it is we consumers who gain nearly all the value from our economic system. The entrepreneur gains perhaps 3 per cent of the value of her work. Almost everything else flows to the customers as what economists call consumer surplus.

The observation about Amazon is just an illustration of what happens more generally. Amazon is sovereign over where its puts its offices and will enjoy all of the economic value of that decision. We are sovereign over our own expenditures and where people are competing for our custom we end up with very much the thick end of the wedge. Which is just why the system works. And why it makes us oiks all richer.

Yes, Amazon is a big business. Yes, it’s toying with governments. But when it is the customer faced with multiple potential providers, it is then the customer which extracts the value. And that is why roughly capitalist free marketry is such a boon to consumers.

Tim Worstall is senior fellow at the Adam Smith Institute