#83. Backlash, part 2

IN DEFENCE OF MARKET PRINCIPLES

These are disturbing times for those of us who believe in free market economics, and are followers of Adam Smith. After more than three decades in which the West has been governed by regimes claiming adherence to the principles of the market, the economy is locked into “secular stagnation” and massively in debt, and the public is in the process of repudiating incumbent regimes.

How have things gone so horribly wrong? Have events proved our faith in the virtues of competitive markets to be misplaced?

The reality is that the principles of the free market economy have not failed. Rather, these principles have not been followed. The regimes that are now being rejected by the voters have never paid more than lip-service to the principles associated with Adam Smith.

There have been two critical departures from these principles. First, governments have failed to break up the domination of key sectors (including electricity, gas, water, cell-phones and the internet) by small numbers of companies. Second, there has been a failure to enforce honesty and transparency. The principle mechanism of the market – free and fair competition – has therefore failed to operate.

At a time when “capitalism” is being condemned by people who are in fact victims of corporatism, there is a pressing need to restate the case for market economics, distancing it from those who have stolen its language to clothe a creed of selfish cynicism which is now ending in abject failure.

An exercise in failure

That things have gone wrong is surely undeniable, and is evident in two critical ways.

First, the public across the West are in open revolt against the self-styled “liberal” elites. Though widening inequalities, and the sheer arrogance of self-serving regimes, have contributed to this anger, a critical motivation is economic. Real wages have declined steadily, even when measured against official inflation, and even more markedly when set against the cost of essentials – whilst secured and unsecured household debts are at uncomfortably high levels.

In Britain, for example, real wages have been declining since 2007, and are projected to go on falling throughout an official forecast period which runs to 2021. In the United States, middle class real incomes have declined, arguably over an even longer period. Italian real GDP is now 12% lower than it was in 2007. At the same time, security of employment has deteriorated, and millions have been pushed into a “precariat” whilst millions more are now described as “JAMs” (“just about managing”). This is a track-record of failure.

Second, governments and central banks have contrived to run near-zero interest rates for more than seven years. This, too, is evidence of failure, because negative real rates are not consistent with a healthy economy in which investors can earn returns, and provision for retirement can be accumulated. Again, Britain typifies this malaise. Government continues to borrow heavily, despite sustained “austerity”, whilst official forecasts link projected growth to an assumed further expansion in household credit. Immediately after the most recent cut in interest rates, deficits in pension schemes were reported to be £945bn, more than 50% of GDP.

As well as crippling pension provision, ZIRP – zero interest rate policy – has destroyed returns on capital, created a massive bubble in the value of assets, saddled the economy with enormous debts, stymied the necessary process of “creative destruction”, and failed to deliver the stimulus which was supposed to push the economy out of “secular stagnation”.

Between 2000 and 2014, each dollar of nominal global “growth” came at a cost of $2.50 in additional debt. Even this ratio understates the problem, since “growth” has really amounted to nothing more than the spending of borrowed money. The ratio of borrowing-to-growth, which was 2.2:1 before the GFC (global financial crisis), has been 2.9:1 since then.

The dependency on borrowing has become so absolute that it can, without hyperbole, be stated that the global economy has been transformed into a giant Ponzi scheme – and such systems can only ever end badly.

This is failure on a gargantuan scale.

A question of blame

This situation presents a stark choice between two possible explanations.

The first is that the implementation of market-based policies has been an abject failure.

The second is that the supposed market-oriented policies of the Western establishment have, in reality, been no such thing.

To resolve this issue, the obvious starting point is with Adam Smith, the Scottish economist rightly regarded as the pioneer interpreter of the market.

It was Smith who stated that competition is the dynamo that drives the economy, not just in goods and services, but in employment and investment as well. He asserted that competition is so important that any departure from it is damaging.

In the story of economics as Smith tells it, the villains are monopolists, cartels, and anyone else seeking to undermine competition. Any such interference, Smith says, is “a conspiracy to defraud the public”.

The incentive for corrupting the market is, Smith says, self-evident. By ensuring best value for customers, competition obviously limits profitability. Accordingly, Smith makes it abundantly clear that markets need to be kept competitive, fair and honest, despite the incentives which promote malign interference. This is a pretty good description of the regulatory function. Far from proposing an economic equivalent of an unfettered free-for-all, then, Smith is an advocate of vigilant regulation, a clear implication being that only the State can provide it.

It is worth remembering that the great man was born in 1723, and died in 1790. This was an era when government did very little. In Smith’s Britain, time-zones differed even between London and Bristol. There was no income tax, and no national police force. There was certainly no welfare state, very much a twentieth-century innovation. Obviously, Smith could only have looked puzzled if he had been asked about “the public sector”. It simply didn’t exist – and wouldn’t, for more than a century after his death.

The Adam Smith whom we meet in his writings – the advocate of competition and avowed enemy of monopoly and other market distortion – becomes a very different (and lesser) figure in the policies advocated by “the neoliberal right”, and followed by governments since the 1980s.

Now he is an inveterate opponent of “the public sector”, a cheer-leader for “the private sector”, an advocate of “deregulation”, a believer in minimal government, and the high priest of “law-of-the-jungle” economics.

It is a massive transformation.

In plain English, it is simply piffle.

Of course, Smith is not the only victim of the ideological air-brush – Keynes is claimed as an advocate of deficit stimulus in adversity (which indeed he was), but his matching tenet (that governments should run a surplus if the economy threatens to overheat) is seldom if ever mentioned. In the hands of “semi-Keynesians”, the great man becomes a cardboard cut-out, forever demanding stimulus and unconcerned, presumably, about exponential growth in public debt.

But it is on the misrepresentation of Smith that the self-serving creed of “neoliberal” economics bases its flimsy case.

Nonsense compounded by greed

If we once accept Smith falsified into the arch advocate of unfettered private ownership and deregulation, much else follows, particularly if the simulacrum of Keynes can be invoked as well whenever the system needs to be juiced-up with fiscal deficits and cheap money.

For starters, if The Public Sector is A Bad Thing, privatisation follows, not just of businesses like car manufacturing and airlines (which arguably should never have been in state hands in the first place), but of public services as well. The proven concept of the mixed economy is abandoned. Whilst it is not quite the case that The Private Sector can never do anything wrong, the presumption is of innocence in the absence of overwhelming proof to the contrary.

Though lip-service is paid to competition, comparatively little is actually done about it, and the probity required by the real Smith’s concept of the honest and transparent market becomes at best a ‘desirable, but not essential’ characteristic. This is a vision of the market as “law of the jungle”, “red in tooth and claw”, “caveat emptor” and “the devil take the hindmost”. It also follows that deregulation is a public good, and that banks’ managements, not regulators, are the best judges of shareholder interest.

Above all, this is a mind-set. Though the tenets of the falsified Smith can be pulled apart by a first-year student, the attitude is that “market forces” are sovereign, bad outcomes for some or many are just the luck of the draw, the future is irrelevant, debt is irrelevant as well, integrity matters little, inequality is “natural” rather than contrived, and profitability is the sole arbiter of effectiveness.

From this nonsense, almost everything else follows. There is no contradiction between promoting consumption and undermining wages, because debt can fill the gap so long as deregulation keeps the taps open. Buying $1 of “growth” with $2.50 (or much more) of new debt is fine, because debt isn’t very important anyway. Ethics become optional, and corporate misbehaviour, where it cannot be ignored, can be explained away as “miss-selling” (which sounds no more serious than misplacing an umbrella) whilst, if penalties really must be meted out, the hapless shareholders can always be punished. The bosses are almost untouchable.

One of the most tragic consequences of “neoliberalism” has been the relentless degradation of business ethics. Increasingly, only “the eleventh commandment” (“don’t get caught”) is observed, and even this hardly matters if your control of the state renders you but all immune to sanction. Anyone who has read Adam Smith knows that honesty and transparency are indispensable characteristics of a properly functioning market.

A predictable consequence of “free-for-all” economics is that it has fostered market concentration, particularly in sectors like water, gas, electricity, cell-phones, the internet, retail banking and, in America at least, air travel. Anyone truly convinced by Adam Smith’s interpretation of the market would long since have demanded break-ups, so that no business in these sectors should enjoy more than, say, 10% or 15% of the market.

This, of course, is one of the bits of Smith that his falsifiers conveniently forget. Many big corporates have more than enough political clout to ensure that the very idea of “trust-busting” is out of the question, the preference being for “regulators” whose powers are necessarily very limited in comparison with competitive pressures. Wherever we look in some of the most important sectors of the economy, we see a market concentration that impairs drastically the free choice of customers, and delivers profitability far in excess of competitive market norms. The acceptance of this concentration by government has been a huge betrayal of the principles of the competitive market.

The case must be made

The public need to be told that those who claim to speak loudest for “the market” have in fact been its biggest betrayers. The case needs to be made for competition as the servant of the many, not the hollow slogan of a manipulative minority. This requires making the case, too, for regulation and for the primacy of ethical behaviour, and emphasising that the system at fault is not “capitalism”, but corporatism.

If this case is not made, we face two distinct risks. The first, less likely danger is that the current elites survive, perhaps by using ever greater coercion to maintain their power and wealth. The greater danger is that an infuriated public turns instead to the same collectivist philosophy which failed so spectacularly in the Soviet Union and its satellites.

Believers in the principles of the free market should feel angry, not apologetic, about the debasement of their beliefs by a self-serving elite. They should side with the public, and explain that the competitive market offers a future far better than the siren call of collectivism, or the tawdry manipulation of corporatism.

It is to be hoped that what emerges from the popular backlash is reform that does three main things.

First, it must insist on competition, breaking up companies whose market shares inhibit competition.

Second, it must demand the highest standards of honesty, transparency and accountability in business, reinforcing this with appropriate sanctions.

Third, it must block the “revolving doors” between government and corporate wealth.

If these reforms are made, the competitive market can restore prosperity.

If they are not, a populist-collectivist future looms.

36 thoughts on “#83. Backlash, part 2

  1. The voice of reason, as always. There are many of us who yearn for a return to rule of law and true free market-based economics, rather than the technocratic manipulations and ponzis we have now. However, unfortunately we don’t hear anyone in government talking loudly about these issues, so frightened are they of rocking the ponzi growth boat. I fear things will have to get worse before enough (both within parliament and the public) will choose the free market over the status quo. Keep up the good work Tim, the message will get through eventually.

    • Thank you. Your comments are very welcome, as I have been struggling to reconcile the principles of the (genuine) free market, in which I believe, with the shambles that we see around us. In part 3, I will try to suggest what we might do about it.

  2. This is a complicated issue so sorry for any naivety/lack of knowledge.

    But in an ideal world (I appreciate this is where my argument dies) isn’t a better way to do this to give the power to individual buyers/consumers? So they can indirectly break up any monopoly. I don’t mean socialism. I’m thinking more of artificial Intelligence.

    Doesn’t governmental regulation get old very quickly? Especially in a fast moving, innovative world? Isn’t the best way to do it to give power and choice to consumers to change their supplier? Consumer self regulation you could call it? It could move as quickly as the industry.

    What we need is an expert buyer in everyone’s pocket. Or do we need another mechanism to lower barriers to entry too? If everyone knew the ins and outs of each industry, and has the motivation to shop around (laziness is one of the biggest advantages many monopoly/oligopolies have isn’t it, just look at the utility industry) and get the best service/price there would be no monopoly problem would there?

    I suppose it depends on what kind of monopoly it is? Is a government the best way to deal with all kinds monopolies? Especially when governments create some monopolies? Isn’t the reason for the concentrated banking industry government regulation itself? Haven’t they recently opened up the industry to new companies by lowering the money needed to start a new bank (meaning they put the previous regulations in place, thus creating barriers to entry?)? New banks such as Atom, Starling, Mondo? Drug costs is another area where government regulation creates monopolies, especially in single drugs. I appreciate there are reasons for it.

    Ultimately you need low barriers to entry and low barriers to consumer switching?

    At the moment the companies have power because they have money and knowledge to get the edge over the consumer (due to economies of scale). How do we level the playing field, how do we make the consumer as powerful as the corporation? It can be done by the right government but I’d love a discussion of other ways?

    We’re moving pretty quickly into a world of artificial intelligence. This question might be outdated completely in that world, but how will that change markets? Won’t it give the power to the individual? Having an expert in their corner?

    Whenever government is pushed as a solution, you know at some point someone is going to be in charge that is going to screw up (incompetence, corruption etc). Warren Buffett says that you want to buy a company that doesn’t need good management, because at some point you’re going to get bad management.

    What does that look like for government?

    Plus, isn’t the utility industry in the process of opening up? There are lots of companies there now. The big six have power because no one switches supplier despite the relative ease with the new apps etc no?

    Sorry if you tackled these points and I missed them.

    I’m off to look for a job, I’ve already taken too much time doing this instead! If anyone’s interested get in touch – @LeanSamLeek.

    Thanks.

    • Power to the consumer is exactly what we need. But there needs to be the ability for the consumer to vote with his/her feet, only possible if market shares are not excessive.

      I do appreciate (though I do not address here) economies of scale, and sometimes there are “natural” monopolies. Regulation is sometimes the only solution – but this is where integrity, much tougher sanctions, and the accountability of decision-makers comes in.

      The more I think about it, the more important the ethical (and accountability) issue becomes. Those running businesses need to know that, if something bad is done, they, not the shareholders alone, will be on the hook.

    • I definitely agree with you on your point about taking individuals to court rather than a company! It’s bizarre that companies pay fines rather than going after the people behind a crime.

      I think that if we had perfect people in this world we’d have the perfect society but we don’t so whilst I agree that it’s down to individuals to be accountable you have to accept that not everyone is going to be, surely.

      Not only that, but when people see that one arsehole making money by bending/breaking the law and getting away with it, the good people will follow or go out of business. This was a part of the 2008 crash, if people see other making money, they follow without thinking.

      Which means we need a system in place to change behaviour from bad to good. There’s a whole different discussion to be had about our justice system that I won’t start.

      I’m very confused as to whether government can ever be good enough to regulate all industries especially at the speed they move compared to the speed of technology and society.

      I think we should be open to other ways of doing government and everything it does. Especially in this information and network rich world.

      Governments were created at a time where it was needed because information was hard to get and economies of scale meant it was more efficient/better to have one organisation gathering information and making decisions (a government). If I’m correct anyway.

      Now we live in a world where you can get the information easily, or have a huge discussion between and with experts online easily. I have a feeling we’ll slowly move towards a more networked type of government over the next 10-50 years.

      I may well be wrong but I’d like to see some innovative ideas about how better to run a country.

      Maybe all we need is more/maximum transparency in government. Maybe we will always need that final decision maker.

    • It is totally unacceptable that shareholders rather than executives are punished where wrong-doing is proven to have taken place. This amounts to immunity, something also evident (in Britain, anyway) when no action is taken against senior officials when government departments get things horribly, indeed scandalously wrong. This is corporatism at its worst.

      Your second point is about setting a good or bad example. If some are seen to profit from wrong-doing, others are likely to follow. The flip-side is that, if we enforce tough rules without fear or favour, this sends a powerful example to others.

      Of course, everyone is innocent until proved guilty. If they are, however, sanctions should be serious. In the worst cases, this should involve prison time, in a real gaol, not an “open” one, and asset seizure should be considered in these worst cases.

      Government regulation is less effective than market pressure, but sometimes it is the only solution available. But a regulator containing only civil servants is not ideal. It would be better if it had representative customers, employees and suppliers.

      Easy access to information helps, but only if the information is accurate. We need really strong disclosure in regulated sectors, far more demanding than the disclosure required of companies in competitive sectors.

      Moral suasion is important too. The famous example is the campaign against drink-driving in the 1960s. Previously drink-driving had been seen as “slightly naughty”, “one of the lads” and “a bit of a giggle”. Then it was made socially unacceptable, not clever, not funny and something to be ashamed of. This seems to have been even more important than tough enforcement and penalties in getting the message across.

  3. Tim, part Two of your article has been worth waiting for. Thank you for sharing your insights, and as ever, cutting straight to the very core of the subject matter.

    As you say, “A case must be made .. “, but who is going to make it ?
    Where are our modern day philosophers and intellectuals ?
    We cannot trust our Media to make the case. They are in denial.
    I would vote to put you in charge in an instant, many of your readers here will probably second that motion, but we here are too few.
    Here in the UK when I watch the BBC, I just hear the same old rhetoric promoting the status quo, and back home in Germany the ARD/ZDF are equally bad if not worse. With the German economy booming at the expense of the rest of Europe, they see no cause for complaint.
    To them it’s a case of “Crisis ? What crisis .. ? ”
    When the EU finally collapses, the Germans are going to be the last to know.

    I feel that you still hold on to a glimmer of hope that meaningful reform can still save us, that our Politicians and Corporatists will act honorably, and that those in power will see the error of their ways, just as we approach the abyss.
    Yes, you have highlight the problem and you have shown a solution, but human nature being what it is, I do not see those solutions being implemented.
    I see things going on as just before, with more corporate greed, and more intellectually impotent politicians.

    The media, who should be blazing a trail of honesty across the sky, are themselves now a major part of the problem. They are the paid agents of the corporatists. They twist the truth and they blatantly lie, and if confronted with the truth, then they trot out a story on the royal family so they avoid talking about it. The people are not being told the reality of their situation. The ruling Elite know that they cannot come clean on things because the blow-back would put their heads on pikes.

    Our ideologically driven Neo-Cons are still at the helm, and they are still totally convinced of the own infallibility. Populists will not make them shift from their course, they are just viewed as an inconvenience at best, or at worst as a blame hound.
    You say it yourself, the global economy has turned into a giant Ponzi scheme. I can already see the battle lines being drawn, push is now becoming shove, and I have a feeling that we are close to a major event taking place. If the GFC was the appetizer, then main course is going to be served shortly.
    I cannot see the Cavalry on the horizon either.

    • You make some very good points here, and I understand about German complacency – the German economy has benefited from the euro as a weaker currency than the DM, so good for exports, but losses could be huge if the EU or euro falls apart – losses could be far beyond the Target2 number.

      Getting politicians we can trust is difficult, always, but when regimes have held power for a long time they cease to look outwards, become complacent and arrogant, and that starts the public revulsion which in time throws them out.

      My charter idea is one way of trying to keep them honest.

      Yes, on your final point, I think the captains would prefer to go down with the ship than admit to failure – and in fairness I really don’t see, now, how anyone can avoid some sort of smash bigger than the GFC.

      The question may be “where first”? It could – my hunch – be the UK, where government AND household debt are now rising, the current account is very bad, productivity is very weak, real debt levels are huge, and the system of government puts idiots in charge. I like Mrs May, but don’t think she alone can turn it round.

  4. Tim – i think you understate the importance of Economies to Scale in keeping the growth economy ticking over. This is the natural (free market if you like) response to diminishing returns – which affects all resources and markets. Far easier than productivity gains as well.

    The end result being what could look like large monopolies is really a logical viable option as inputs (especially energy obviously) becomes more costly to obtain.

    But yes, the importance of Economies to scale has also resulted in a population ponzi of consumers which linked with a concentration of wealth will naturally result in big problems coming up.

    • I appreciate the economies of scale point, though I decided not to lengthen this article still further by going into it here. Here is where regulation does have a role, as, perhaps, does some state ownership. Again, I come back to integrity and accountability. If monopoly is one part of the problem, the preparedness to exploit it is the other. Say one was running a natural monopoly – in this instance, extreme transparency, knowledge of personal accountability, and multiple oversight (not just the state, but customer/employee/supplier representation) could all help prevent one from exploiting it.

      Above all, we need to escape from the debased ethics of “the market is a free-for-all”, and “profit trumps probity”. It is interesting that, as well as The Wealth of Nations, Smith’s other great work was Moral Sentiments…….

  5. Hi Tim

    Thanks for yet another insightful article.

    Following your line about Adam Smith (and ignoring the important qualification mentioned a couple of times above re technological barriers to entry and size issues) the problem is that in perfect competition returns tend towards zero so the only way to make a reasonable return is via quasi monopoly of whatever sort. It seems to me if you move one iota from the perfect competition into the real world you will have to confront this.

    Now a “quasi monopoly” may be relatively benign (the only grocers shop in the village) but of course in our world what this has usually come down to is egregious and malign rent extraction. But this can only be facilitated by politics and this is essentially a political issue as turkeys do not vote for Christmas (to use a topical analogy). You can see this most clearly in the US where you have almost total regulatory and political capture of the legislature and executive (and media) by the corporate class who are never going to vote for a world of greater competition because it’s too risky and too much like hard work.

    As I have said before here I do not think the present system is reformable; the greed and inability to change the ethic is likely to crash the system and this is the only way that constructive change of the type you suggest will, or rather may, come. I do not think this is a good way to resolve these issues but it may be the only way.

    • Thank you – as ever your thoughts are most helpful.

      I don’t think you cannot reconcile competition with profit. Here you have two equations in action. First, the market in goods and services drives prices downwards (and quality upwards), to the benefit of the consumer. But there is a market in capital as well. If returns are too low, players will withdraw from the market, or increase prices. So this is an equilibrium, which stock markets help to reconcile. What should result is a combination of market-clearing margins on goods/services, and a market-clearing return on capital.

      Barriers to entry were a key parameter in my last broking research job. Sometimes these are natural – newcomers do not have the capital or the knowledge to compete. But if, as a result of high barriers to entry, profits are high enough, they will find it attractive enough to overcome these barriers. Capital is the big one – you can’t start a new oil refinery, say, without a few billion to invest. But, if margins in refining were high enough, you could obtain that capital.

      More generally, I agree. What we have now is pretty tawdry, notably so in the US. We can reform this, but only if we can sever the link between politics and corporate money. Paying serving politicians is controlled (up to a point), but retirement earnings are not, n.b. “consultancies” and the “lecture circuit” – $500k+ to listen to the musings of a retired politician?

      So we need to limit post-office earnings. If this is too low, we fail to attract people of ability into government service. So I suggest 10X median wage as a limit (anything above this being taxed at 100%). Politicians could still earn very good money in retirement – and no reason why not – but politics would not be a road to riches.

      Of course, how do you elect politicians who stick to this? I remember a Syriza minister saying they had to get reforms done in six months, after which they might be “captured” by the system.

      My proposed solution is a Charter. This sets out basic principles which candidates for election could sign up to, or not, irrespective of party. If Charter accreditation swayed voters enough, Charter-accredited candidates would dominate. Charter acceptance would be mandatory for promotion above a certain level in the civil service.

  6. As always an interesting read, so thank you. For a rare change I wanted to take issue, and that concerns the impact on consumers of market dominance in certain sectors, and the implied lack of competition. As a matter of disclosure, I work for a large energy company who will certainly fall into your group of dominant incumbents. The realities of the energy market are that the “market” has only ever existed in dubious form. Networks (distribution and transmission) are natural monopolies. Whilst regulated returns are offered to the owners, the reality is that all aspects of investment and operation are directed by the state. And as a result of the policy of promoting renewables through subsidies, the network companies have to make large investments to accommodate those (a further hidden subsidy, if you like). There are few competitive forces operating here, the whole programme is state directed, merely using private capital. All of those costs are then passed on to the suppliers to recover.

    In generation, a combination of EU and UK rule making dictate what generating assets can be built. Even as we run out of reliable generating plant, policy remains committed to closing all coal generation by 2025. Nuclear new build isn’t left to the market, with government picking a winner in the form of the most expensive (and unproven) design they could find. Where is the market there? The pell mell rush to build renewables, plus the mandation that suppliers must buy about 35% of the power they sell from the government’s selected range of approved “renewable generation”, means that there’s no certainty and no margins to justify build new CCGT; the botched fix of a “capacity mechanism” has just resulted in the latest T-4 auction producing prices that most generators get a subsidy for plant already built, and yet despite the hundreds of millions of pounds added to consumer bills, we’re still not seeing any new build CCGT.

    So that’s Generation, System operation, Transmission, Distribution all totally devoid of real, functional markets and competition. What about energy suppliers? On the one hand there’s now forty odd companies with supply licences, the largest of these “new” entrants have been around for years, and have over a million customers, and are growing fast whilst the incumbents shrink. But is that really a competitive market? All these suppliers have similar restrictions requiring them to buy the same percentage of renewable power, they buy in the same wholesale market, from generators using broadly similar technologies, have to take choices for hedging demand, weather, currenct and commodity risks. The content of an energy supply bill is dictated in the 400 odd pages of Ofgem’s supply licence, because they can’t leave it to the market, can they? Then suppliers have to incur other costs that government ladle on. Energy Company Obligation is a £60 per customer per year levy that large energy suppliers have to then spend on complicated schemes designed by government to improve energy efficiency. Warm Homes Discount is about £30 a year to be given as a selective subsidy to some (government approved) groups of customers. For customers with rooftop PV, large energy suppliers have to administer the scheme but get paid less to do so than the work costs. Small suppliers can volunteer to do this, and then get double the per capita payments making this a multi-million pound subsidy for some small suppliers.

    Because this is a commodity purchase, it is like car insurance. Some customers are not engaged and just stick with their existing provider. In car insurance this is a “market outcome” that people accept. In energy it is a problem that fixates an interventionist and prescriptive regulator and politicians alike. And again like car insurance, the competitive prices offered to get customers to switch are rarely profitable for the supplier – “acquisition pricing” is normal in all markets, and it happens in energy. Like other commodity markets, at a total market level, economies of scale are important. The government has actively promoted “community” energy companies. But why? You don’t hear people saying, “If only we had a community car insurance provider supplying this town, we’d save loads of money”. But in energy, many people seem to ignore the fact that even customers who switch don’t want superior service, they don’t want to “be engaged”, they just want the light to come on when they press the switch, and the lowest possible bill. And lots of smaller companies doesn’t deliver those economies of scale, nor does it get away from the huge policy costs. In Germany, policy costs are clearly visible on customer bills. In the UK, by hiding those costs in renewables obligations, in distribution price reviews, in social “obligations”, in multiple layers of subsidy and intervention, people don’t see them, don’t know how much of the cost of a domestic energy bill is down to government policy on climate change. My reckoning is that even before the misbegotten nuclear programme starts escalating bills, and without any policy measures for the third carbon budget, around 45% of current energy bills are down to government policy changes. There’s no free market here, there’s no choice for customers.

    And I suppose, two question come up: Can we as a nation actually afford this cost no object carbon-fetish energy policy? And what is the place of the market in this diabolical mess?

    • The energy sector is obviously somewhat exceptional, in its importance, its structure and its relationship with government. The state has a legitimate interest in security of supply, and has the right to promote renewables so long as customers, who are also voters, know what this is costing them! The right of the state to do these things does not, of course, excuse making a right pig’s breakfast of it.

      Successive UK governments have made a fetish out of “internal markets”, which are not really markets at all. If they are going to control everything in energy, they really ought not to have privatised it in the first place.

      Although I’m a believer in competitive markets, I also accept that some collective provision is necessary in a mixed economy. In 1855, 114 MPs voted to put the Crimean War out to tender – not a great idea, and it was just as well that the armed forces were on hand to sort out security at London 2012. I do not support privatising police, prisons or the armed forces. What is needed, though, is scrutiny including representatives of customers, employees and “the man in the street”.

      I have a theory that British governance has changed in ways that reduce efficiency – that are in fact less competent. As you say, people want the lights to come on and bills to be as low as possible. This is the responsibility of government. They seem to have made a huge mess of this. They should have ordered replacement nukes by 2000 – and kept (not sold) Westinghouse Electric.

    • Hello Dr Tim.

      Another fine post by Badger. Regarding the costs of the Climate Change Act, Lord Donoughue has recently said:

      ‘In 2008, I was one of the many members of both houses who unquestioningly voted for Ed Miliband’s Climate Change Act, with its legal commitments to rapidly decarbonise the British economy. The measure was not properly costed (now forecast at upwards of £360bn by 2050). I had not studied the Bill. This seemed a noble, if eye-wateringly ambitious, project: to ‘save the planet’. Who could object to that?’

      So the CCA was uncosted, unscrutinised and voted through on the nod. It really is unbelievable. Makes you wonder what the members of the HoC and HoL actually do for their salaries and perks.

      The GWPF has recently issued a report that looks at the costs of de-carbonising the electricity supply industry. And the report states:

      On the basis of figures from the OBR, DECC and the Climate Change Committee (CCC), the average cost of decarbonising electricity to meet Climate Change Act targets was or will be (in 2014 prices):
      • £327 per household per year in 2014
      • £584 per household per year in 2020
      • £875 per household per year in 2030

      These costs place a cumulative £10,800 burden on each household, between 2014 and 2030. Country-wide, this cost amounts to an extraordinary £319 billion.

      http://bit.ly/2gWIpq5

      And then there is the effect of high energy prices on UK industry.

      http://bit.ly/2hrMRxE

      Let’s join the dots:

      High energy prices;
      closure of steelworks, aluminium smelters, cement works, chemical works, etc.;
      record balance of trade deficit; and
      a declining value of Sterling.

  7. Hi Tim,

    the monopoly that greatly disturbs me is the media,

    the Cult of Neo-liberalism has a stranglehold on public discussion through it’s capture of the mainstream media,

    here we are on a private blog talking about things that get omitted in any discussion in the mainstream,

    in the fallout of the US election we have seen a witch hunt against independent media sources and opinion and analysis websites,

    I do the rounds of maybe 20 independent websites and blogs, most of them made it on propornot’s list of allegedly seditious sites peddling Russian disinformation,

    a consistent theme of all these sites is the capture of governance by big banks and corporations, the reality that supposedly free market capitalism is actually being centrally planned and controlled by a politburo made up of the large western financial institutions and of course the dominance of neo-liberal dogma and the perversion of Adam Smith’s theories,

    the interesting point is that anger about modern economic dogma is consistent whether the sites be left leaning or right leaning, it isn’t political it’s just common sense,

    it was pointed out to me that the reason that campaigning for gay marriage around the western world has been so uniformly successful is that it was an issue that transcended the usual political divisions,
    being gay isn’t a fascist or conservative or liberal or socialist or communistic thing, it’s just some people are gay so let’s just get over it,

    and neo-liberalism uniformly screws people irrespective of their political colouring so long as they are not included in neo-liberalisms winners enclosure,

    I think the corporate world is terrified that the masses will turn their backs on mainstream media and start thinking for themselves, they are frightened of a uniform backlash against their nifty scam, I wonder how authoritarian they will become to suppress the emerging independent media,

    in a way, this blog is a bit like the pamphlets that were independently printed and distributed back in the day when printing technology spread amongst the general population,

    do you ever do interviews or get your blog articles syndicated on other sites?

    Matt

    P.S. I recently re read your Tullett Prebon Report ‘The Perfect Storm’

    it is standing up very well to the passage of time!

  8. Thanks for another great article Tim.

    How would you propose we deal with tabloid newspapers whose sole aim appears to be to misinform their readership for the benefit of their billionaire owners and their cronies?

    On the one hand there is freedom of speech, need for independent media etc, on the other hand these are some of the main cogs in the crony ponzi scheme, doing their utmost every day to misdirect and distract the population for their own nefarious ends.

    • Thank you. The media is a tricky question, and always has been. The danger with private ownership is that the owners may have an agenda. The (greater) danger with state ownership is outright propaganda. The danger with arms-length public ownership, as typified by the BBC, is lack of accountability.

      For a start, and this might seem surprising, I would not allow foreign ownership of television or radio stations of any size, or national newspapers. I think the US already has something like this where TV is concerned. This way, if the media have an agenda, at least it isn’t in the service of foreign interests. This may sound melodramatic, but would the Americans or the British be comfortable with, say, a TV or radio station or a major newspaper owned by China or Russia? Are the British even happy about US ownership? If one has to be a US citizen to be president, should not the same apply to those wielding significant influence over the political process? I think, on balance, it should.

      Second, I would demand standards of disclosure that are more demanding than for ordinary companies.

      Third, I would insist on an oversight committee, comprising management, employees and readers/viewers, in equal proportions. They would produce a published report half-yearly, in full, and with one or more minority reports also published if some members disagree with the majority.

      Ultimately, we do need a free press, but we also need safeguards. At the same time, bloggers and other news sources are challenging the dominance of the big battalions.

      Finally, I would enshrine a right to free speech/free expression in law. Given what seems to be happening in Germany at the moment, this appears more important than ever.

    • “would the Americans or the British be comfortable with, say, a TV or radio station or a major newspaper owned by China or Russia?”

      RT UK. https://www.rt.com/on-air/

      I’m comfortable with with it. Caveat emptor, surely, when reading or watching any media.

  9. @ ejhr2015

    From the  comment thread way back here:

     https://surplusenergyeconomics.wordpress.com/2016/10/24/79-dont-you-know-theres-an-excuse-on/

    I said:

    “So how does MMT account for Venezuela’s problems, or Zimbabwe’s hyperinflation trouble, or the Weimar Republic, or even the bankruptcy of ancient Rome?”

    Were they just mistaken in their book-keeping?

    Can every monetary sovereign country in the world simply use this process to create money that is “not a debt that costs resources to repay” and be rich beyond their wildest dreams?”

    In reply you said:

    “Weimar ran out of resources to back up its currency, so away it went.”

    I think that you just shat on your own argument there: because your argument was about it being “not a debt that costs resources to repay”

    I rest my case.

  10. Dr Tim,
    Interesting post, thank you.
    You seem to be quite an optimist after all…
    People who are somehow aware of the kind of predicament our civilization is facing typically tend to be rather pessimistic (“everything is f****ed anyway”), unless they believe that there might still be hope for some sort of societal/economic/political renewal. For some, this hope lies in the establishment of a new political/economic order, while for others it lies on the contrary in the restoration of some “pure”, unaltered form of our existing order, which would somehow have been perverted by malevolent, incompetent and self-serving elites. Apparently you believe that some sort of hope may lie in the restoration of “real” free market capitalism on the basis of the principles associated with Adam Smith, which have been stolen and perverted by the regimes that are now being rejected by voters in the Western world.
    There is in fact little doubt that the principles associated with Adam Smith have been paid lip service by the proponents of neoliberalism, and it is likely that Adam Smith would be dismayed by what has been done in his name by people who probably never really read him.
    However, I doubt that the restoration of the lost “purity” of free-market capitalism may actually be a source of meaningful hope, because this purity never really existed. There was never, ever, any such thing as unfettered free market capitalism, free from interference by state/corporate interests, not in the times of Adam Smith, not in 19th century Britain and certainly not in 20th century America. The vision of free market capitalism rooted in the ideas of Adam Smith may still inspire valuable action, but we should know by now that is just that, a vision, i.e. an abstraction or a fiction. Interference by state/corporate interests is not a perversion of the capitalist system, it is part of its nature. What defines capitalism is the process of capital accumulation, not the existence of free markets. In fact history shows us that capitalism can perfectly exist and thrive in an economy where markets are not free, or where market distortions abound, as these distortions in many cases do not impair the process of capital accumulation even if they serve to direct and constrain it. We may believe that capitalism would work better in an economy where markets are really free from undue interference or distortion by state/corporate interests, but this is only a belief as such economy never really existed.
    However comforting it might be to consider that our problems originate, at least partly, in the fact that the principles of the free market economy have not been followed, I think that it is largely delusional to believe that a return to a stricter observance of these principles will suffice to solve them.

    • Thank you for this. I’m not sure I’m an optimist, but evidence of a public backlash against the elites is something that I take encouragement from.

      I think it was Disraeli who said that “we are all in the gutter, but some of us are looking at the stars”. I’m well aware that there never has been, and never can be, a perfectly free-market, competitive economy along the lines laid out by Smith. But it does give us an ideal, and aiming for an ideal can improve situations even if the ideal itself isn’t and cannot be reached.

      The current chapter, exciting though I find it, has risks. The noble ambitions of liberty, equality and brotherhood led to the Terror, the Committee for Public Safety, a guillotine in every town square, and Napoleon. This revolution may lead to right- or left-wing populism, with all of their attendant dangers.

      But we are at a formative stage. The public, in their justified anger, are rudderless. The need now is for a case to be made for pragmatic solutions which promote ideal solutions but recognise that human fallibility alone make the ideal unachievable.

      What becomes ever clearer (well, to me anyway) is that we need stronger ethical foundations. It is in that – in the mentality of “every man for himself” – that the current system has failed most comprehensively.

  11. A fantastic piece that captures the spirit of the free market. I must ask, however: what exactly do you mean by “regulation”? I have always been under the impression that public regulation is a bad thing – hence the argument for deregulation put forward by the likes of Thatcher, Friedman and Hayek. Or do you refer to a new kind of regulation; that is, regulation by implementing measures to give way to competition in the market? Would also love to hear, at some stage, your opinion on monetarism as well as what sort of role renewable energy (if any) should play in the market.

    • Thank you.

      In this context, regulation means keeping markets competitive, and ensuring probity.

      First, the regulator must ensure that no player controls too big a share of the market, and that companies do not form cartels, or co-operate to the detriment of competition. The aim here is to ensure competition.

      Second, he must ensure that companies do not lie, cheat or in other ways depart from the principles of honesty and transparency. The market is where choice is exercised, and this choice is effective only if it is based on information that is sufficient and true.

      We also need macroprudential regulation too, of course, to ensure that we do not get bubbles inflated by too much debt. This is a regulatory function that overlaps with policy-making.

      Renewables, very briefly, can supply energy that is cost-competitive with oil and gas discovered and developed today. But what it cannot do is provide energy as cheaply as the giant, readily-accessible fields of the past, some of which are still with us as legacy assets.

    • Thank you for the reply. My next question is whether regulating market shares is even feasible; would it not require considerable government oversight and add to an already bloated bureaucracy? Is such regulation consistent with the minimal state?

    • Two answers. First, regulating market shares is perfectly feasible – indeed, most countries have systems for doing this, but fail to exercise these powers rigorously enough. At the extreme end, there is “trust busting” – the way in which America dismantled Standard Oil and AT&T.

      Second, who said anything about a “minimal state”? My view is that a mixed economy, combining the best of private and public provision, is optimal. “Minimal state” sounds a bit like “trickle-down” economics, and “light-touch” regulation – neoliberal gobbledegook.

  12. Good article, but surprising that you don’t include financial services companies within your list of villains. Anyone – which is everyone – that’s been subjected to their usually opaque and collusive pricing practices will find this odd. (“Why do fund managers charge so much and make such distorted returns? Because everyone else does”.)

    And of course the most important market – in the price of money – is not free, it’s centrally planned by a cadre of hardline fundamentalist economists whose models and tools bear little connection to reality …

  13. Excellent analysis of a fundamental problem that shows up the relationship between Government and business that is too close (lobbying is a central corrupting influence), where ethics are forgotten but also where Government seeks large companies to be national leaders and is willing to ignore capitalism for corporatism.
    The USA has Google, Apple, Facebook and the like that are market dominant but seen as national heroes. This, together with the closeness of politicians and business people that Galbraith understood so well, means that it is hard for the proper anti-monopolistic levers to be used. After the banking meltdown in 2007/8, Gordon Brown was self-evidently in the pocket of the banking community and the initial desire of the current PM to distance herself from large corporates has quickly disappeared in the light of Brexit manoeuvring.
    Western economies need to establish an understanding of the role of Government in destabilising monopolies while also ensuring that our markets also react to overseas monopolies (such as Chinese) by governing the way that they are allowed to participate in open economies.
    The requirements for businesses to be ethical and transparent is also central. I own up to being part of Transparency International, where we work with UK-based companies to engender this basic requirement, but it is needed worldwide. Again, markets need to establish who they allow to do business within them. An example is who we allow to be quote din the LSE – so many are energy companies that are national monopolies in their home countries that aspire to complete opacity and undertake the worst ethical and environmental standards. Yet, the UK is extremely welcoming. That is a type of capitalism, but not one that is open, fair and transparent.

    • Thank you, and welcome.

      Yet again, we have today seen banks (i.e. shareholders) fined, but individuals get away scot-free, and even keep their bonuses.

      The biggest single problem might be that, when politicians retire, they either become “consultants” or join the “lecture circuit”, both funded by big corporates, and particularly banks. It is logical to infer that politicians currently active do not want to jeopardise their access to this remunerative retirement, and will not infuriate bank and other corporate bosses by changing the rules on culpability.

      This might apply just as much to “populists” as it does to today’s elites – so the system needs to be changed, not just the individuals.

  14. Tim

    I’ve just discovered your blog and find myself agreeing with you. There are a couple of points that occurred to me as I was reading:

    1. The web tends to create monopolies, since consumers benefit from the network effects of a large user base. Whilst there are new networks springing up, eg instagram and snapchat supplanting whatsapp among youngsters, there is nothing like the competition that is possible with physical goods. The likes of google and amazon are using their power to enter new markets, raising the prospect of a handful of mega corporations controlling the tech space. If competition cannot be the (whole) answer, that leaves us with either breakup (which would probably not serve the public interest because it would undermine the benefits of network) or public/mutual ownership. A google owned by its users (like a building society) would be less threatening than in private ownership.

    2. When you conclude with the reference to a populist-collectivist future, it sets off in my mind a series of points. First, I don’t see the communists emerging triumphant from the present turmoil. They pedal solutions that we know don’t work and, perhaps for that reason, nativist calls from the right are resonating more persuasively with the disenchanted. The second point is that, from my reading of evolutionary psychology, it is clear that people naturally want freedom, equality and inclusivity. We are evolved to cooperate on an equal and reciprocal basis. We pursue our own best interests by being a part of a larger group. A form of collectivism that follows these principles (which communism does not) can work well. Our Victorian forebears set up mutual organisations for healthcare, insurance, construction, unemployment benefits. These worked well because they went with the grain of human nature. A mutual-collectivist future seems more agreeable to me than one driven purely by shareholder value.
    The third thought is that nativism and isolationism also resonate with human nature. To stem moves in that direction an alternative needs to be articulated that appeals just as strongly to our guts as those negative emotions.

    • Jed:

      Thank you, and welcome.

      Re. concentration of market shares on the web, you might have been reading my mind. Amazon doesn’t worry me too much, as a retailer, but Google, Facebook and so on do. Obviously, new users are likely to choose Facebook over a new challenger because so many people are already on it (I’m not one of them, by the way). This holds potential hazards, not least because Google, Facebook etc can corner a disproportionate share of advertising, and pricing power with it.

      This isn’t like, say, Standard Oil or AT&T, where a break-up was mandated. Capping their shares of internet ad revenues might be one solution. Instead, however, they may face regulation, in response to their ability to influence elections.

      Another interesting line here is interconnection (where, for instance, you buy a new computer or software with links to Google and Facebook already installed – from personal experience, getting rid of these linkages can be difficult).

      I’m pinning a lot of hope on ad-blocking, if users demand more of it. Blocking ads on TV is apparently feasible, though apparently no supplier has yet “dared” to market an adblocker for TV.

      I think we are too complacent/dismissive of the Left, because of its recent failures. But, taking the UK as an example, I think pollsters are failing to measure a huge change, evident in events such as Brexit and the election of Jeremy Corbyn. The sort of people who vote for, say, Corbyn, cannot be measured by conventional techniques – they tend not to respond to phone polls, let alone join focus groups. But the anger amongst millions of young people – over housing, rent, job opportunities and so on – is immense, and growing. Add these to an older demographic which regards the establishment with contempt, and you have a lot of support for Labour, so long as it avoids Blairite centrism, which doesn’t appeal to the disaffected.

      I’m not in favour of collectivism myself – but I can see the appeal of something almost anarchist in its fervour for kicking the establishment. Anger tends to over-ride calm voter appraisal of policy – there is a lot of anger out there now, and various factors (such as an ageing population, and automation) could add to this. Again citing Britain, I think the looming economic downside is underr-estimated, though credit to the IPPR’s new report for addressing it – and with hardship goes anger. French people in 1789 didn’t want Robespierre, but didn’t really think it through – they were just poor, and angry. Something not too dissimilar may be developing now?

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