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Pumping billions into data centres won't guarantee you an empire

Please take note Facebook, Microsoft, Amazon

It's not a surprise for us, in economics, to find that we've got two (or more) different processes going on, each working in opposite directions. The final result will come from the interaction of the two and we're never really sure which is going to win out.

Sometimes, in a certain society, one will beat the other, and at some sort of rate in the same society the other will win out.

So it is, if we squint a little, when we look at this lovely world of big data, server farms, the cloud and all the rest of it.

We really don't know whether this is about to usher in a world of a couple of dominant companies, a small oligopoly perhaps that exploits us all, or whether the technology itself is going to lead to something akin to a proper free market, where everyone's a little guy and faces the same prices and has the same chances.

As an example of our two effects working in opposite directions consider income tax rates on the amount of work that people are willing to do. We've talked about this before and there's two separate effects, the substitution and income effects.

Say, tax rates are 50 per cent. And then we put them up to 60 per cent. What is going to happen to how much work people are willing to do in order to earn an income?

The income effect assumes that people have an idea of the after-tax income that they desire to have. They'll put in enough work to earn it and then go fishing. So, we raise tax rates and people will actually go and do more work.

Thus, an income tax rise actually expands the economy and GDP. This is true for at least some people some of the time. One study found it to be true of workers such as cab drivers: which is why you can never find a cab in the rain. The increased demand means that it's easier to hit the target income to, so they all go home early. Weird: increased demand causes reduced supply.

The substitution effect assumes that we value leisure at some monetary value. If we increase tax rates so that leisure is valued more highly than the income that can be made from work then people will work less and go fishing instead. Thus an income tax rise reduces the size of the economy and GDP.

We also know this is true of some people some of the time. Several studies have noted that it applies to married women with children: reduce the after take-home wedge and they're likely to say sod it and stay at home and look after the kids (not fishing and possibly not leisure, but not market labour all the same).

Next page: Laffer Curve

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