Friday, May 6, 2016

"Throwing Rocks at Google" is a Really Bad Book

By Don Boudreaux

As suggested in two earlier posts (here and here), Douglas Rushkoff’s Throwing Rocks at the Google Bus is a series of popular colorful fallacies strung carelessly and incongruently together into a book and then flung at the “Progressive” crowd.  It’s much like a series of colorful beads strung carelessly and incongruently together into a Mardi Gras trinket and then flung at the Canal Street crowd.  (The difference is that people in the partying Canal Street crowd, unlike the “Progressives,” understand the true value of what is flung at them.)

One example of incongruent theses appearing in the same book allegedly to make a sensible larger point is Rushkoff’s repetition of two tired claims, neither of which is true empirically, and both of which can’t possibly be true simultaneously even in theory.  The first claim is that Wal-Mart and Uber succeed largely because they use predatory pricing to oust their rivals.  The second claim is that modern public equity markets oblige corporate managers to focus only on the quarterly performance of their firms – a short-run focus that allegedly comes at the expense of their firms’ long-run viability (that is, at the expense of their firms’ net present values).

A firm that employs predatory pricing by necessity prices below cost today in the hope of ousting rivals and then having a monopoly tomorrow.  That is, a firm that employs predatory pricing is forward looking.  This firm willingly subjects itself to a 100% chance of incurring losses during the present period in exchange for the chance (which is always less than 100%) of earning a stream of monopoly profits in the future.

Never mind here that the theory of predatory pricing has largely been discredited in the economics and antitrust literature as an explanation of firm behavior.  (Not only is history devoid of any clear examples of successful predatory pricing, as a means of monopolizing markets it has too many flaws to make it a viable option for even the most greedy and intrepid monopolist-wannabe.*)  If Wal-Mart were a predatory pricer, its executives would not be focused on maximizing the size of this quarter’s income statement.  That is, such behavior would be inconsistent with the assertion that equity markets today oblige managers to ignore their firms’ long-run viability and to focus instead on achieving maximum quarterly performance even at the expense of their firms’ long-run profitability.

Yet Rushkoff argues both that some of today’s biggest and most successful firms use predatory pricing (see, for example, page 47) and that modern equity markets prevent corporate managers from taking any steps, no matter how profitable over the long-run, that do not have their pay-offs within the current quarter (see, for example, page 115).

The illogic is glaring.  The book is nonsense

The above originally appeared at Cafe Hayek.

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