French fuel blockades, the new economy and the relative weakness of the euro.
Greetings from France
Nice Airport is surrounded by abandoned buses and trucks. But it is possible to escape if you don’t mind driving on the pavements, and the French don’t. Fuel is readily available across the border in Italy. For visitors, it seems like a replay of Britain in the 1970s.
The French government capitulated within 48 hours to the farmers and fishermen who blockaded the Channel ports. It was predictable that within days another group would turn up with their own demands. So truck drivers are now blockading strategic points around France. The government gave in again on Tuesday evening, only to find that the truckers had upped their demands.
The lesson that paying the Danegeld only encourages the taker to come back for more is as old as economic history. And the more recent lesson from the English side of the Channel – the Thatcherite facedown of the striking miners in 1984-85 -is that careful preparation and substantial investment is needed to get rid of the Dane. Years of blackmail had prepared public opinion for such a confrontation. That is not yet true in France. But the time will come.
The New Economy
Despite these disruptions, the French stock market has been making new daily highs on the back of the recovery in TMT stocks. When Nasdaq plummeted in the spring, the new economy story seemed to be over. But the summer rebound suggests that there may be life in it yet.
The argument is that current technological progress is unprecedented, in kind and in scale. That changes the old rules about what make businesses successful. And that, in turn, renders conventional methods of valuation obsolete.
That story has a lot of work to do. Bob Schiller’s recent book Industrial Exuberance tracks the behaviour of US stock prices, relative to inflation since 1870. The past five years look like a mistake, as though the pen has slipped off the top of the graph.
We need that historical perspective because it is hard to sustain the argument that current changes in technology are of a kind and scale that have never happened before. Some new technologies establish new markets for consumer goods such as cars or radios. Sometimes they are what historians call enabling technologies – telecommunications or electricity, which improve a whole variety of processes. Since the Industrial Revolution, one or other of these transforming developments has happened every 20 years or so.
These historic innovations typically run through a 30 to 50 year cycle, from first commercial application to general adoption. Computers, which came into business use in the 1960s, fit this pattern of evolution. And now we move on to mobile telephones and the internet, with gene technology on the horizon.
Big changes, to be sure. But do they really represent bigger changes in economic and business life than the discovery of steam power or electricity, or the invention of automobiles? Two centuries ago, most people had never travelled more than ten miles from where they lived; power for industry was provided by animals and running water; and the only way to communicate with someone outside shouting distance was to send a messenger. It is useful to be able to buy books through Amazon.com, but hardly a discontinuity in the pace of economic and technological progress.
If I had come to your office in the late nineteenth century with a telephone in my hand, I would have made exciting, and correct, predictions about its impact. I would have told you that all businesses would be using telephones in a few years, and that companies that did not install them would go out of business. I would have told you that in time your business would be entirely restructured around the telephone.
All these things would have been true. And yet what would not have changed at all would be the factors that make some businesses succeed and others fail. Good products, brands and reputations, relationships with suppliers, the ability to innovate in products and processes. Of the great firms of the end of the nineteenth century, some – General Electric, Shell, Exxon – were still to be great firms a century later; others – Pullman, International Harvester, J & P Coats – were to become but a shadow of their former selves. But no business historian differentiates the winners and the losers by their speed of response to the telephone. And the long-run impact of e-commerce will be much the same. Everyone will adopt it, and the businesses that succeed will be pretty much the ones that would have succeeded anyway.
But the greatest new economy fallacy is the assumption that huge amounts of money are there to be earned by investors. Suppose in 1900 you had correctly anticipated how great the coming demand for automobiles was to be. And suppose you had projected future sales from the industry by multiplying that demand by the 1900 level of automobile prices. And suppose you assumed that all these revenues would accrue to the first movers in the car business: the people who had products on the market in 1900.
You would be doing exactly the exercise analysts are doing today in rating Amazon or Vodafone. And if you made your investment decisions that way you would have lost your shirt. Automobile prices fell, and went on falling, as the market grew and competition expanded. Henry Ford became market leader by selling cars for no more than one fifth the average price before the Model T appeared. And even if you had been prescient enough in 1900 to pick Ford, General Motors and Toyota as the eventual winners, it would not have done you a cent of good. You could not have invested in any of them.
In the railway mania of the 1840s, the best choice was Great Western. It was destined to become the most successful railway company in Britain. Throughout its life it won the approval of its passengers and its investors. Still, you would have been wise to sell its stock in August 1844, two years after Brunel had opened the line from London to Bristol. The company’s shares never regained the price they achieved then.
The Falling Euro
For the first time in my lifetime, the Cote d’Azur is cheap. There are eleven francs to the pound, and the Americans along the coast can buy a euro for only 86 cents. Not that there are any euros to be had, or any merchants willing to accept them. Until the end of next year, the euro is strictly a currency for wholesale markets only.
But in the end it is the value of a currency in the shops that drives its value in the money markets. Short-run movements in currencies are mainly the result of portfolio decisions. Economists are bearish or bullish about different economies. Interest rates and expected changes in interest rates drive international capital flows. Often these are amplified by speculative bubbles, as traders chase the yen up or the euro down.
But the longer the period you look at, the greater the proportion of exchange rate movements that is explained by differences in inflation rates. International agencies measure purchasing power parities – the number of dollars that you would need to buy the same bundle of goods that would cost you a franc or a pound.
On this basis, the pound is now way over-valued against the euro – as visitors from Paris to London know to their cost and visitors from London to Paris know to their benefit And for the first time in nearly 20 years, the dollar buys more in Europe than it does at home. And Australian and New Zealand dollars look ludicrously cheap.
Now you should not expect that the same money will have the same value wherever you go. Land-rich countries like America, and Australia, have lower property prices than European states, and that generally keeps the purchasing power value of their currencies above their market values. Japan is much more efficient at producing manufactured goods, which are tradable, than services, which are not. So the high price of services depresses local purchasing power, and the market value of the yen is far greater than its ability to buy goods.
But what you pay in a restaurant is a good starting point for what a currency is really worth. And the meals I am eating are not just good, but good value.