Monday, July 1, 2013

Apple and Aggregate Demand

A couple of weeks ago, I came across two articles that I found in combination to make about the most insightful point about sociology and economics that I’ve seen in a couple months. The first was a post on the website that displayed the geography of cellphone use in several major American cities, comparing iPhone and Android users (Blackberry, too, but they barely show up). In these maps, the red dots are iPhone users and green Android.

The correlation between affluence and choice of phone, as author Emily Badger points out, is strongly positive. For instance, iPhones are common in Northwest DC, while Androids turn up in great numbers in Prince Georges County. 

I don’t know a lot about the functionality of either gadget, but they both seem to satisfy the basic requirements for a Smartphone, while Apple has a major advantage in style and cachet, much as their computers do over PCs. Whatever their incremental advantages in capability, iPhones do not on their own warrant the enormous premium that consumers are willing to pay. In short, iPhones – like Apple products in general – convincingly demonstrate the limitations of economic rationality. 

As luck would have it, Paul Krugman published an op-ed about Apple a couple days after the AtlanticCities post made the rounds on Facebook. Krugman is interested in the reasons why economic recovery has been so slow, and in this particular column he ruminates about how our recent crisis, while quite similar to a couple of other depressions in the twentieth century, might be different. He suggests that in Apple’s case, its profits have more to do with market dominance than actual investments in production (this observation would not have applied several years ago). Unlike earlier corporate giants – GM is Krugman’s example – Apple employs a tiny number of American workers. Even though plenty of Chinese people do manufacture the parts, their take, as well as that of their employers, is marginal. Apple, however, reaps extraordinary profits because their market allows them to divorce the price for their products from their costs.

In short, Apple no longer really needs to compete with products like Android to remain in a dominant position. While this will likely have devastating effects for the company over the long term – eventually it will be superceded by a scrappy competitor that takes the risks that Apple eschews – in the meantime, Apple sits on a vast pile of cash that would have a stimulative effect if the company was compelled to invest it. The longer middle and upper-income consumers succumb to marketing and peer pressure, however, the longer Apple can delay putting its reserves to work.