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Sardine fishing in Kerala: Who benefits from mobile phones?

How govt rakes in taxes (DON'T hand them more!)

Worstall on Wednesday We're now 30 years into the mobile phone era here in Good Old Blighty, with that first call having been made back on New Year's Day. And it's worth asking who has really benefited from this technology: something which, when considered, will lead us to being able to tell big government fan Professor Mariana Mazzucato to take a seat.

(Apologies, but the prof's insistence that the sodding politicians really must get more out of the results of human ingenuity is really, really grating upon me.)

Sure, OK, we've the usual lifestyle pieces pointing out that we can now make a date without having to trudge down to the phone box with our sweaty coppers in hand (err, coins, not pigs). And we can now listen to North African music created on smartphones. These are both additions to human happiness, of course.

However, the classic paper about the effects of mobile phones covers the more needful aspects fulfilled by these wonder gadgets, and deals with the subject of sardine fishermen in Kerala (see here).

When information is limited or costly, agents are unable to engage in optimal arbitrage. Excess price dispersion across markets can arise, and goods may not be allocated efficiently. In this setting, information technologies may improve market performance and increase welfare. Between 1997 and 2001, mobile phone service was introduced throughout Kerala, a state in India with a large fishing industry. Using microlevel survey data, we show that the adoption of mobile phones by fishermen and wholesalers was associated with a dramatic reduction in price dispersion, the complete elimination of waste, and near-perfect adherence to the Law of One Price. Both consumer and producer welfare increased.

An explanation of it is here at The Economist. The easy-to-read slides version is here (PDF).

A simple explanation is this: given that these fishermen cannot afford on boat radios, they've absolutely no sodding idea what's going on around them. They don't know how well others are fishing, who has found a huge shoal, which buyers on land have already taken their fill, which of the various markets along the coast are still short of requirements and so on. They thus have to launch upon the sea, get what they can and then hope like hell that there's still a buyer or two when they reach the shore. Mobile phones allow them to communicate: thus they can find out which markets have had good catches landed on them and which have not. They can call each other to tell of a big shoal. They can even find that all of the markets are replete and thus save on diesel by going home.

The net effect of this is:

This more efficient market benefited everyone. Fishermen's profits rose by 8 per cent on average and consumer prices fell by 4 per cent on average. Higher profits meant the phones typically paid for themselves within two months. And the benefits are enduring, rather than one-off. All of this, says Mr Jensen, shows the importance of the free flow of information to ensure that markets work efficiently. “Information makes markets work, and markets improve welfare,” he concludes.

For those of you not au fait with the usual sizes of numbers in this field, that is a huge, vast effect. A capital investment that pays off within two months has a total (ie, fishermen and consumers together) 10 per cent increase in welfare? This is the sort of thing that planners would give their eye teeth to be able to achieve.

Other research into the same general area tells us that having 10 per cent of the population with a mobile, in a country without an extant landline system, adds 0.5 per cent to GDP growth. Not 0.5 per cent to the two or three per cent or whatever GDP growth rate, but actually 0.5 per cent to GDP. And the mechanism is just as described in that sardine fisherman example. More information means that markets work more efficiently to the benefit of both producers and consumers – thus making everyone richer.

There's actually a school of thought that says that the recent fall in poverty globally, that biggest fall in absolute poverty in the history of our species (you know, that hundreds of millions rising up out of destitution into the petit bourgeois pleasures of three squares a day of the past 30 years), has in fact had bugger-all to do with any economic policy that has been adopted and is pretty much entirely down to this technology. Devout neoliberal globaliser that I am, I wouldn't go quite that far: the technology may well make markets more efficient but you still need that neoliberal globalisation for there to be space in which markets may flourish.

However, this result does illuminate a point I made a little while ago. It's not the innovators, the inventors, who get the vast majority of the benefits of an invention or an innovation. It is we, the consumers, using that invention or innovation to do things which benefit us. This is the consumer surplus that we all enjoy. That's why the innovators end up with three per cent or so of the total value of their own innovation. And this is the point at which we should tell Prof Mazzucato to bugger off.

Mazzucato is arguing that the State should get much more of the value created out of such innovations: golden shares, special taxes on people who market inventions that were originally government-funded. But in a modern economy, the State is already taking 30 to 50 per cent of whatever increase in GDP there is. Sure, it's rather lower in Kerala, but still: whatever the tax fraction is of GDP, that is going to be far larger than arguing over whether the State should take 30 or 40 per cent of that three per cent of the value creation that sticks with the innovators.

The mobile phone has been a vast boon to humanity and it is at least part of the explanation for the fall in absolute poverty in recent decades around the world.

As such, arguing about whether Mazzucato's “State” should have more of Steve Jobs' money is simply irrelevant. We just don't sodding care – given the value that innovation, however funded and whomever is made a billionaire by it, provides to the rest of us. This is especially the case when we think that said State usually ends up with a third to a half of whatever increase there is in GDP anyway. ®

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