Wednesday, 1 March 2017

We Seem To Be Confused About This One...

There is nobody more confused in mainstream media at the moment than Paul Mason - a man so bad at economic social commentary that he doesn't even attempt the verbal adroitness required to conceal it. The latest target of his peculiar anti-growth agenda (and there are plenty) was the complaint about the so-called 'absurd' amounts of money millionaire chief executives make running their companies compared with the people that buy their products and use their services. He also gave his usual rant about how the economy is benefiting a few at the top at the expense of the rest of the population. The image above is designed for confused people like Paul Mason.

Alas, the sentiment the wine glasses image evokes is ubiquitously believed to be true - in particular it's a popular complaint from the left, but it rather skews the reality of what's going on. I will illustrate the point by talking about supermarkets. The next time you're feeling disgruntled at the profits of the average supermarket compared with the real income of the average person, I want you to consider just how much better off we consumers are because of supermarkets - so much so, in fact, that we do better out of this than any of the supermarket fat cats.

I was reading in Forbes recently that families are around £400 a year better off because of the supermarket price war triggered by the rise of the discount supermarkets like Aldi and Lidl, thanks to which the competition has driven down food prices at places like Tesco, Sainsbury's and Morrisons. So it's not simply that shoppers get more for their money in discount supermarkets, they benefit right across the board from competition full stop.

I'm asking you to consider that the supermarket fat cats get a few million quid for their roles, but families get £400 each! Hang on, I hear you say, £400 is nothing compared with a few million quid. True, but given that there are around 27 million families/households in the country, that's £400 x 27 million benefits (which is £10.8 billion pounds of gain cross-nationally). Moreover, £10.8 billion is an annual benefit (give or take a few pounds) for consumers, in addition to - and this is also important - the consumer surplus they receive from all the goods consumed.

On the other hand, the supermarket gains are part of a whole range of capital gains that resulted from years of investment (purchasing the land, building the store, paying solicitors fees, government fees, etc), and the concomitant capital sums required to keep the business going to the level it is now, and apply economic duress to competing firms' prices as they do their bit in society to displace less efficient businesses.

Not only is there no injustice in the pay of the executives, what we're seeing quite clearly is that their influence in the world of retail competition is benefiting consumers in the UK to the tune of billions of pounds. The above image has got it all wrong; what really happens is that as the top glass gets larger it doesn't just fill the top glass - it fills all the other glasses too. And if you're unsure quite who is possibly overpaid and who isn't, check out this Blog post here.