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We’re all familiar with the idea of network effects – much of modern tech and computing is infested with them. Each new user of the Google search engine refines it, making it better for the next; each user of Facebook makes becoming a user more valuable and so on. Thus we find that the natural, or efficient, size of such an operation is a global monopoly.
Of course, that’s not entirely true, there are linguistic and cultural barriers in there, which is why none of these are global monopolies rather than regional.
However, to the economist this is just one example of the idea of economies of scale – something we’re certainly all familiar with. This is normally tempered by diseconomies of scale – large organisations are difficult to run.
Absent the Indian railways or the NHS, there aren’t that many organisations employing over 300,000 people and those that are have terrible efficiency problems. Yet we find ourselves in a world where the efficient size means becoming the one global supplier.
Near uniquely there was one such sector – for the metal scandium – but that was because the global market was so small that it would only support one player, as in one person, and not very well.
We’re increasingly finding that world-size is the efficient size in important things – one example of which is 5G mobile technology, which makes the security mutterings about China’s Huawei very interesting. This is a little different though from one supplier being efficient – here we’re talking about one technology being efficient.
As you no doubt already know, 5G is the whizzbang next step in mobile networking and all that. An important decision being which radio frequency spectrum should it use? The world is adopting one standard and the US isn’t – this being a problem for the US of course, not everyone else.
Even the Pentagon is being advised about this issue, which is useful because it’s the Pentagon largely causing the problem. In the US, the military use the spectrum which everywhere else is to be used for 5G. Military matters trump commercial and so that’s how it’s going to stay, of course.
Well, maybe. We Brits have already solved this problem. We charge the Ministry of Defence (MoD) for the spectrum it uses. Yes, obviously soldiers need radios, drones need spectrum and all that.
What we want though is a constant appraisal of the merits of military use of certain bands as against other possible uses. The way to do this is to charge. This isn’t a money-raising exercise, obviously. MoD’s money comes from government, and payments for spectrum go back to government. But it’s wondrous how much it concentrates minds.
The use of this frequency is worth so much commercially – MoD only holds onto it if the military value is greater. It’s not the charging that matters, it’s making people think about relative values that does. The US doesn’t do this to its Department of Defense (DoD), which is why they’re happily squatting on the spectrum the rest of the world is using for 5G.
And this is where the efficiency of scale comes in. Even the US is not a large enough market to feed an efficient supplier of 5G technology – not if it’s using a different spectrum from the rest of the world, it isn’t.
Not even if Huawei gets thrown out of that market for security reasons. That’s not, by the way, a personal opinion – it’s what the Pentagon is being officially told. There will be losses to all Americans from that spectrum-sitting. Sure, there will be military gains, too, but how do we balance these other than by putting monetary amounts on them so that we can do sums?
There is one more level deeper to go in this. It’s a standard idea that we should have our own home-grown champions of this and that. This argument surfaces irrespective of where home is. If we can do it we should be doing it. Saving the Scunthorpe steel plant is an issue of where would we be if we can’t make our own steel? Or, to widen the point, grow our own food, build our own tech businesses and so on.
Economists continually pooh-pooh such economic nationalism. What matters is that we get to consume food, steel, mobile data, not who produces it. If foreigners are better at doing so then we should buy from those foreigners. That’s what trade is for, so that we gain access to those things others do better than us. David Ricardo’s comparative advantage is only telling us that we cannot lose from such arrangements, every outcome of trade is better than trying to do it all ourselves – autarky as it’s known.
Yes, I realise I’m blending a little bit by shading over the difference between the one supplier and the one technology standard. But the point does still stand – we’re in a world where a nation simply isn’t a large enough unit to be an efficient market for a product or technology. By insisting upon being different from that global agreement we condemn ourselves to being forever behind the curve.
There can be little bumps in this road – there was the instance of the Japanese glue factory which burned own. Only when it did was everyone made aware that it was the only glue factory for sticking RAM into the necessary frames which are then put into devices – which is why RAM prices tripled for a bit, much to the joy of those who were long on stock that year.
On the other hand, we all agree that Britain is too small a market to sustain an efficient solar cell manufacturing industry, which is why no one even tries here. We gain more by doing something else and buying from the globally efficient – China often enough.
Economic nationalism has serious problems in competing in a world in which the efficient size of a supplier – or technology – is the entire globe. In fact, the best solution we have is that we do one or other of these things – as we do with jet engines, or finance, or growing unicorns – and then buy in the rest from those efficient-at-size foreigners.
Another way to put this is that 300 million people just isn’t, these days, a large enough market to support cutting-edge communications development.