Arnold Kling  

Market Socialism and the iPad

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Recently, I wrote about market socialism.

Why don't individual firms use market socialism? That is, instead of managing through command and control, senior management could set shadow prices for various inputs and outputs, and then allow the managers of individual departments to maximize profits based on those prices. Think of a large, vertically-integrated automobile company. It could operate with a series of internal transfer prices for various inputs and outputs. The most recent Nobel Prize in economics was shared by Oliver Williamson, who focused on the issue of markets vs. hierarchies.

I think that there is a tendency for people with power to over-value control. That leads me to the iPad. Many pundits note that Apple centrally controls the applications that are allowed on its products, as opposed to the wide-open Internet, where there is no central control over the creation of web sites and their associated applications. My guess is that Yochai Benkler and Russ Roberts discuss this in their econtalk conversation, but I have not yet listened.

This is a longstanding controversy. In the 1980's, when Apple and Microsoft fought for market share, the view of some Apple supporters was that Microsoft won because Bill Gates was particularly mean and ruthless. However, another view, which I share, is that Microsoft won because it was more open. Then, as now, Apple wanted to control the applications that could run on its hardware. Microsoft instead just published its programming interfaces and encouraged anyone and everyone to develop applications that would run on its operating system. The result was a more varied and dynamic ecology of applications, making Microsoft the winner of the entire personal computing era. That era is mostly behind us. Today, with applications now heavily web-based, fewer people worry about which applications any particular operating system can support, and this change in the playing field is allowing Apple to get back into the game in the computer market.

The controversy also shows up in "walled gardens" vs. the wide-open Internet. Around 1995, some people thought that the public would prefer the safety and simplicity of closed online systems, such as Prodigy, Compuserve, and America Online. Instead, the public flocked to the Internet, and only AOL survived--basically by becoming an Internet service provider distinguished by ease of use and brand recognition.

Today, Facebook represents another incarnation of a "walled garden," allowing you to put your real name and picture on a network without being subjected to spam (at least for now). Whether Facebook survives, or instead gets superceded by a more open approach to social networking, will be an interesting issue to watch.

My thoughts on the iPad, without having used one.

1. For someone my age, it represents a much better form factor than the other i-things. It is hard for me to look at a small screen. I call the iPad the iTouch for old people.

2. I write a lot, so having a keyboard matters. Once you add a keyboard, I don't see the iPad is being much different from a Netbook (again, without having used an iPad).

3. I think that the coolest form factor of all would be a headset and a virtual keyboard. I don't get excited by the tablet concept, although I may be in the minority there. My view on this go back more than eight years.

4. I do not like the way that iPad envisions paying for content. I think the itunes model is wrong. It preserves what I call content "silos," when instead I wish to see what I call "clubs." Again, my views on this go way back.

Having said all that, I am not ruling out someday owning an iPad. If it turns out to be useful and/or enjoyable, I will not stand on principle.

COMMENTS (11 to date)
david writes:

Web-based forums have driven out mailing lists and USENET, despite being inherently more 'walled' than the latter. Facebook also actively drove out the existing ecosystem of numerous personal homepages and disparate entertainments buried somewhere in the open Internet. Sometimes a hierarchy simply outcompetes the market.

There's quite a bit of recentralization going on here; all the big hitters are trying to develop their own service ecosystem with an immunity to threats of disconnection from the others. Each might have their own operating system, browser, office tools, mobile device, search engine, and so on; all of these would be designed to use only its own associated services and discourage other access.

There are some examples of non-hierarchical management failing to achieve good results, like in the chaotic hardware ecosystem of mobile phones. You could develop for Symbian - still the most common phone OS out there, despite the iPhone's siege. But you wouldn't know what hardware or performance to expect, and there is nothing hindering the rampant piracy of Symbian applications. So you won't.

Colin K writes:

A fascinating musing. Some asides:

1. Apple products seem disproportionately popular among the coastal elites.

2. It wasn't so much software that Apple was ruthless about controlling--it was hardware. This is still true today.

3. Microsoft has never been good at marketing to consumers, while Apple has long been one of the best. For the steep part of the PC growth curve, business buyers turned out to be the key, while the real growth in the past decade has been in consumer-driven devices.

4. Facebook vs. MySpace started out as a status game: Socs used Facebook while Greasers used MySpace.

5. Really interesting things are starting to happen in augmented reality. I suspect 10 years from now is going to look a lot more Neuromancer-like.

Simon Kinahan writes:

Big firms do use "market socialism". Lines-of-business often have to "buy" resources from manufacturing, development, etc. Its basically a way of accounting for the profitability of things that would otherwise just be "cost centers", and may work well enough for that. From the perspective of a small business dealing with large ones, thoughIt has a number of problems:

1. Prices are not discovered through an open market process. They're either set by accountants as fractions of costs, or set by a political process between the very people who'll pay/receive them. Its common for under-used resources to be overpriced (because they were expensive to buy, right?) so they're even more under-used.

2. Internal money and external money aren't freely exchangeable - so there are "corp dollars" and "real dollars" which while they may nominally be equal in value can't be exchanged. You can always find something to spend real money on (even if its just investing it) but funny-money has to be spent, so it often gets spent on things that aren't really needed. Similarly it has no real value to the receiver, so there's no real incentive to maximise utilisation of resources.

3. There's often no choice of vendors and hence no price or quality competition. Few companies have the balls to let their lines-of-business contract out for services or divide up functional units to create internal competition (although HP famously once did).

I think this more-or-less accurately reflects the problems with proposals for state-level market socialism that I've seen - no true price discovery, no competition and no real value in holding "money". So the money is essentially just an accounting gimick, and doesn't have the impact on human behaviour real money has.

Nick writes:

@Collin K

It wasn't so much software that Apple was ruthless about controlling--it was hardware. This is still true today.

This is absolutely right. Additionally Microsoft priced MS-DOS at about 1/3 the price of the major competitor PC/M in the early days of the IBM PC.

Naturally MS-DOS was the more popular choice for the IBM PC, and since the IBM PC was very popular the clones all copied its architecture to assure compatibility with popular software. So as you would expect this lead to many more copies of MS DOS being sold.

Despite being first to market, apple's failure was not to let their OS to be run on other's hardware, this had nothing to do with the Mac OS API.

Mr. Econotarian writes:

Activity-based costing (ABC) is the name for assigning costs to products based on the activities they require. Employees document the percent of time they spend on each task, and their employment costs are accounted to projects in that way.

ABC faces the usual Hayekian calculation challenges, but it sure is better than the "feels good" method of managing costs.

Almost all large companies use a form of ABC for internal accounting.

Jeremy, Alabama writes:

I think Boeing used something like "shadow prices" for the design of its 777. They started with tentative allocations for components, then let component designers "buy" or "sell" mass back into the pool, so that a "market price" emerged. For instance, should the designer use steel, aluminum, or magnesium for, say, passenger seatback dvd frames?

This is very clever, and shows that in a carefully controlled, closed environment, with willing participants who understand the process, this can be made to work.

But here's the kicker: if they get it wrong, the "real market" will put them out of business. And this is the real failure of Market Socialism, that it can deny its own failure until it has become a catastrophe.

" Think of a large, vertically-integrated automobile company. It could operate with a series of internal transfer prices for various inputs and outputs."

This is M-theory, and it worked well for GM while demand was basically infinite. It doesn't work so well when demand or supply are rapidly fluctuating because of the knowledge problem.

There is a vast body of literature on this topic. Womack is a good place to start. Waddell and Bodek is also good, albeit anti-intellectual in tone.

Here's a reasonable discussion.

Trevor H writes:

Every firm has some form of internal pricing mechanism to allow departments or divisions to loan resources to each other. My current employer does follow your thought to its great detriment though. What happens is that region & division managers spend much more effort on the easier task of extracting rents from captive customers in other regions & divisions rather than focusing on how to satisfy external customers. I hate it.

Brittany writes:

Personally I think the i-Pad is useless. As a college student writing essays and typing all the things we have to, having a virtual keyboard seems rather inconvenient. I prefer a laptop for more reasons than one. You can tilt the screen to best fit the way you see, they don't cost as much unless you get the best of the best, and best of all they have an actual keyboard. Facebook seems to thrive so they shouldn't have to worry about being forced out of business as some internet providers were because they were "walled gardens." As Kling stated himself he called the i-Pad the i-touch for old people. I completely agree that it is just simply a bigger version of the i-touch. Apple has been able to get back into the computer business and they have to keep up with competition. Don't get me wrong, these products are cool and they are the best of technology. I just don't see replacing a laptop with something that is completely virtual. I also feel like the more applications available, the more useful the product is. An i-Pad may be nice to a businessman or someone of high profession but to me they're ridiculous and cost way too much.

Paavo Ojala writes:

i-Pad sounds like a fantastic toy or entertainment thingy. It's more like playstation than a laptop, and playstation does fine without a keyboard.

I can't comment blogs, but I guess liking and disliking and sharing might be enough for most people for most of the times. Comments can be written at your desk.

I haven't tried it. and won't probably any time soon.

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