Tension has got to be running high at the world’s most valuable company about now. Sales of the clunky, rickety old iPhone 4S took a big hit last quarter, with Apple missing their 28m target by 2m, and resultantly falling short of their profit forecasts by $1bn. Though their fleecing of Samsung in the US courts reimbursed them in damages here, this by no means will form an unproblematic blueprint for future litigation worldwide, and Samsung are poised to take revenge if any new Apple products are deemed to have infringed on their strong 4G patents.
It seems that Apple’s courtroom victory was a pyrrhic one – the case has chipped away at the veneer of mystique surrounding Apple, its products and its practices, leaving many cynical about its creative credentials. Consumer technology companies seem to be digging themselves into the trenches, armed with all the esoteric tech patents they can stockpile, in the hope of destroying their competition in a legal world war of attrition, rather than outperforming their rivals on the innovation front. A lot is riding on the commercial success of the new iPhone 5 over the coming weeks, having been announced on September 12 to a less than overwhelming response.
Furthermore, new research says that the US economy could enjoy a substantial material benefit from iPhones if they fly off of the shelves this autumn. In a recent research note, JP Morgan’s chief economist Michael Feroli estimates that iPhone 5 sales “could potentially add between 0.2 and 0.5%-point to fourth quarter annualised GDP growth.” The sums are quite straightforward: 8m in Q4 sales, times $400 (the approximate retail price of $600, minus the $200 worth of components sourced from abroad) equals $3.2bn, or $12.8bn annually. Obviously this is not going to ‘singlehandedly rescue the US economy’, but with recession fears flaring, and a ‘fiscal cliff’ looming at the end of the year, any boost is not to be scoffed at – “The third of a percentage point lift would limit the downside risk to our Q4 GDP growth projection, which remains 2.0%,” as the analysts’ note says.
Now, this is just guesswork, and has already come under scrutiny. Some have questioned the high sales figures, as well as the premises underpinning their conclusions, pointing out that if people buy iPhones with money they would have just spent elsewhere, there would be no GDP boost, just displaced spending. But there’s the rub.
The classical liberal economist Frederic Bastiat wrote in his 1850 essay ‘That Which Is Seen and That Which Is Unseen’ a fable called ‘The Parable of the Broken Window’ to illustrate why the destruction of assets can never be of net benefit to society. Suppose a shop window is broken. It costs six francs to repair the damage, and therefore six francs are transferred from the pocket of the shopkeeper to the pocket of the glazier. The breakage encourages trade to the amount of six francs. Furthermore, in a world of unemployed glaziers, smashing windows can rattle the economy by putting the unemployed back to work. They too then spend the money they make from fitting new glasswork.
However, Bastiat warns, if you then come to the conclusion that it is a good idea to go around breaking windows to cause money to circulate, remember that it is not necessarily true that the six francs spent by every shopkeeper with a brick-shaped hole in his shop-face would not have been spent on something else anyway, like books or clothes or pretentiously marketed consumer electronics. This is called displacement.
Right, but does Bastiat’s fallacy hold? With consumer confidence in a ditch and banks warily sitting on their hands in the wake of the subprime mortgage meltdown of 2007-8, there is evidence that savings are being hoarded, and capital is clogged. Uninvested reserves can be noxious to an economy – smashing windows is like coercing confidence in spending. But wouldn’t it just be easier to say to a glazier, “don’t smash my window, and I’ll give you fifty quid”?
Sadly, alternation between fenestration and defenestration initiatives doesn’t make for sustainable policy. And if I just donate to glaziers, that isn’t trade, and could cause protection racketeering and the formation of a vicious glassmaker mafia. Both charity and creative destruction have very little stimulative effect because they don’t address underlying and long-term problems. Prosperity is best served by innovation and productivity.
Is this relevant to Apple? It depends what you think about ‘upgrades’. You might consider each new reincarnation of the iPhone to be a new product in its own right, in which case upgrading is not so much a case of replacing a broken window as it is investing in a brand new shop front. Or, like me, you might think that it’s a shocking waste of money to throw away your expensive phone to buy a more expensive phone on the strength of minor incremental improvements to its specifications. You might think that buying a new iPhone amounts to breaking your own window just to have it fixed. The point is that the broken glass model’s applicability is contingent upon the belief that the iPhone’s saleability has little or nothing to do with the intrinsic quality of the product, and more to do with the fact that you idiots will go out and buy one anyway. Pressure’s off for Apple then.
But it gets me thinking, wouldn’t it be nice if we, and our friends across the pond, could rely on recovery through intelligent stimulus projects – investment in useful stuff like infrastructure, encouraging employment and growth – rather than on our periodic trashing of old capital.
If it ain’t broke…
