The pie fallacies

Too many people see the world as zero sum. They think of wealth and prosperity — “the pie” — as fixed, and so assume that if one person gets more, someone else will end up with less.

The world isn’t zero sum. (In 2004, Paul Graham called this sort of thinking the Pie Fallacy.) But way too many of the people who delight in pointing this out then go on to assume, explicitly or implicitly, that because the size of the pie isn’t fixed, the distribution doesn’t matter, or at least isn’t worth focusing on. This is just as absurd as the idea that the pie is fixed. I’ve tried to explain why before, but many pie-growers seem immune to the logic of it.

However, we have empirical evidence, thanks to Raj Chetty and colleagues. Given ballooning inequality over the past 40 years, they asked, essentially, how would the number of Americans who end up better off than their parents be different had the pie been divided as fairly as it was mid-century, vs. if the pie had grown as fast as it had at its modern peak?

Obviously, both matter a lot. But they estimate that how the pie is divided mattered more:

The researchers ran a clever simulation recreating the last several decades with the same G.D.P. growth but without the post-1970 rise in inequality. When they did, the share of 1980 babies who grew up to out-earn their parents jumped to 80 percent, from 50 percent. The rise was considerably smaller (to 62 percent) in the simulation that kept inequality constant but imagined that growth returned to its old, faster path.

The fact that the world isn’t zero sum isn’t a license to ignore the distribution.

At this point, the more ideological of the pie-growers argue that more equitable distribution will mean less growth. That is wrong, generally speaking. But it’s at least less annoying than the outright insistence that, because the pie isn’t fixed, questions of distribution just don’t matter.

The physical world and the internet

Last week I wrote:

The internet made communication and entertainment cheap, and put endless information at our fingertips. It seems likely that we’ve overdone it on cheap communication and entertainment, and underdone it on instant access to other forms of information.

One thing I didn’t mention explicitly, though, was the use of information and communication to augment or change the physical world. That was an oversight, especially because in the paper I cited in that post, the most valued internet service after search and email was maps.

My ideas for the next phase of the internet aren’t very physical, but that’s just a reflection of my own interests. Any broader attempt to think about what the internet is good for should discuss how it interacts with the physical world, so I wanted to just link to a few things that do that.

Here’s Tyler Cowen:

Many of the biggest events of 2018 will be bound together by a common theme, namely the collision of the virtual internet with the real “flesh and blood” world. This integration is likely to steer our daily lives, our economy, and maybe even politics to an unprecedented degree.

Then there’s Peter Thiel’s idea that the fact that “we’re no longer moving faster” is a sign of stalled innovation.

Finally, this Benedict Evans talk has a lot in it about the internet and the physical world.

Variety, scale, and industry concentration

Both Derek Thompson and Noah Smith have highlighted the beer industry recently, to explore the topic of industry concentration. Both pieces are worth a read, and I want to just make a couple points.

One, as Thompson notes up front, it’s notable that beer is an example of rising industry concentration; a few firms control the bulk of the industry. And yet craft breweries are also increasing their market share.

For all the attention paid to concentration ratios, oligopoly, and market power, it’s equally important to think about entry costs. And this side of the ledger seems complicated. New business starts are down relative to the economy, but growth entrepreneurship may be up. There’s some evidence that rising startup costs are holding entrepreneurs back, but also evidence that cloud computing advantages new firms.

To my mind, we still can’t quite answer the question: Is it easier or harder than it used to be to start a business? Technology probably makes it cheaper in some ways, at least to get up and running. But it might make it more expensive to become a real competitor, to the extent that scale is rewarded. And then regulation may make it more costly in certain cases, along the lines suggested by Brink Lindsey and Steven Teles in The Captured Economy.

But whatever the answer is in aggregate, the beer story raises the possibility that in some industries things may be going well for the biggest firms and well for the smallest or newest ones. That’s a possibility that ought to get more attention in the industry concentration / monopoly conversation in general. And it makes me think of Matthew Hindman’s characterization of the internet’s effect on the media industry, from his 2009 book The Myth of Digital Democracy. In it, he refers to the “missing middle”:

On the one hand, the news market in cyberspace seems even more concentrated on the top ten or twenty outlets than print media is.  On the other, the tiniest outlets have indeed earned a substantial portion of the total eyeballs…. It is the middle-class outlets that have seen relative decline in the online world.

We ought to think more about “missing middles” when thinking about industry dynamics, market power, etc. It seems, based on Thompson’s and Smith’s pieces, to be a decent explanation of the beer industry.

One last point, sort of unrelated… I was re-reading parts of Information Rules last weekend, Hal Varian and Carl Shapiro’s classic on digital economics and strategy. And it included a little two-by-two that seemed relevant to the beer example, and more broadly to questions of technology and industry concentration:

Screen Shot 2018-02-01 at 10.28.26 AM

Both Thompson and Smith, in their consideration of beer, explore the dimensions of variety and scale. As we seek to understand where the craft beer story can be repeated, this 2×2 is worth bearing in mind.