The BBC’s business guru Robert Peston poses the question over at his blog, If markets don’t work, what will? He identifies three recent examples of public authorities – the treasury, the Commodities Futures Trading Commission and Ofcom – alleging that the markets they are being paid to regulate just aren’t working, and that consumers are being overcharged.
Market failure is not a new phenomenon by any means. Even in my A-level Economics I was taught that the ‘perfect market’ quite simply didn’t exist: consumers do not have omniscient knowledge and don’t always behave rationally, barriers to entry for companies do exist, there is rarely complete freedom of decision, etc. Inevitably, therefore, we have been left with a mixed market economy, in which privately-owned and state-run companies co-exist, each bound to some extent by government regulation aiming to protect the public interest in the absence of that ‘perfect market’.
From 1979 until 2008, the pendulum swung in favour of the private sector, what Peston describes as ‘the Anglo-American political consensus of the past 20 years that the markets are normally right’. And then came the collapse of Northern Rock and Lehmans. Since when, says Peston, a ‘new ideology’ has sprung up:
… participants in markets who accumulate the biggest personal fortunes are merely those most adept at predicting the irrational behaviour of the herd. Which probably shouldn’t be seen as any more noble or as a more socially useful form of wealth creation than betting on the 3.30 at Kempton Park.
Where does all this leave us? Peston’s article poses the questions, doesn’t supply the answers (why should he?):
And finally to quote Peston:
Peston’s article concludes by quoting the Tories’ plans for the ‘post-bureaucratic’ society, utilising the internet to try and create a ‘perfect market’ for households ‘with as much relevant information as possible via the internet to make informed choices about which financial services to buy or which state school to choose.’ In short, don’t worry about private sector rip-offs: Google will sort it all out for us. You don’t have to be David Davis to spot the flaw. The immenseness of Peston’s questions dwarf the smallness of the Tories’ answer.
Peston’s questions get to the heart of our dilemmas, as we try and work out what policies will be needed to lift the UK out of this recession, and prevent such asset bubbles being created in the future. How do we create a tax system that balances equity and wealth creation; how do we balance private wealth creation and public well-being protection; to what extent can private industry be trusted to deliver public goods? The seeming certainties of the last two decades have evaporated, leaving nothing but mist in their place.
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Congrats on the excellent new look!
Were ‘we’ ever in love with completely unfettered markets?
The beneficiaries loved that they got rich and state loved the growing tax revenues, just as in the preceding period of nationalisation the benficiaries loved that they had greater access to services and the state loved their increased ability to exert direct control.
So the original question of market failure and the responsibility of the regulators is loaded with the conclusion that the regulators are failing, and we should really be asking why they are unable to do the jobs set them: is the task impossible, or are they being undermined from within by personal ambition and structural flaws imposed by the higher authority of politicians? Are the regulators constituted wisely? Are they being resourced properly?
My own opinion is that Brown either deliberately sabotaged the market machinery himself or knowingly allowed it to happen, starting from when he threw a spanner in the works by making the Bank of England independent overnight. This was done too hastily and was not thought through from all the angles. The appointments criteria to the policy committees clearly undermined it’s independence and the target setting from Downing Street meant it had no credibility that it was working to anything but political goals. The constant resistance of Eddie George and Mervyn King to Brown’s rules should have been a sign something was going seriously wrong back at the beginning.
But what about Cameron and Osborne with an ever-more powerful state in their hands? Will they cause a big mess by dropping half the eggs on the floor or will they enable a greater corporatist base to be built up from the centre by increasing state-sanctioned compulsion? Either way a large Conservative majority is a major threat to our well-being.
Despite the blatant failure of many of their policy prescriptions (e.g. privatise railways, deregulate financial markets) the free-market jihadists are about to have a field day. Taking advantage of the maxim that “a crisis is too good an opportunity to waste” they are using the dismal state of our public finances to argue for yet more privatisation. I even saw one article in the Independent kite-flying about privatising social insurance.
This is what we should be shouting about – the hidden agenda that is sprouting out like neo-liberal fungus from an array of “think tanks” (i.e. stalking horses) behind the Conservatives.
We need to be ready with the alternatives – what about competing mutual, not for profit organisations providing health care or welfare?
Ideas please!
Taxation first, regulation second. Oil speculators and currency traders should be taxed. The levels required to get a reasonable tax take are so low, that the speculators and Traders will not notice, but the Tax man will benefit
if is difficult to tax then regulation has to be resorted to. Regulation has its problems. How do you regulate a banker who lends to people he know can’t pay it back or how do you regulate a banker who buys a financial instrument that he doesn’t understand.
I’ve never understood the economic theory of ‘perfect markets’ All experience shows that markets overshoot and only in equiblium as they pass it going one way or the other, like the pendulum of a clock.
Capitalism is a good system, probably the most honest system we have. If someone cheats then eventually someone pays. The world financial crisis was caused by the Chinese cheating because they refused to let their currency float against the dollar. This did two things 1. they made huge profits, which had to go somewhere and the somewhere was US bankers. 2. the cost of their manufactured goods was so low that inflation in the West was low, which enabled the banks to lend and lend at low interest rates and make lots of short term profit. The Chinese are still not floating their currency, so when we come out of this crisis, there is another one waiting to happen.
Another perturbation is the price of oil, at present subdued, but when the world economy picks up again, what will happen to the price of oil. No one except the Liberal Democrats are taking energy conservation adn renewables seriously enough to prevent another ‘oil shock’ even bigger than before.
When Thatcher and her ‘neo-liberal’ Conservatives came to power 30 years ago there was a large excess of socialist thinking across the political spectrum and some return to a proper role for markets was certainly needed but, as ever, the devil is in the detail. If formerly nationalised businesses (many but not all of which were monopolies or near monopolies) were to be privatised, then they needed to be regulated to protect the public interest.
So far so good (to a point anyway). Unfortunately at the same time the great majority of working economists came to believe in the intellectual drivel of the so-called neoclassical school and an attitude of mind that imagines that markets are ‘perfect’ and that regulation is ‘bad’ – invariably leading to higher costs and less innovation. Regulation, they came to believe, should be as nearly invisible as possible – ‘light touch’ in the jargon.
You can see where this is going; a system that depends on regulation being run by people who don’t believe in regulation can only end in disaster.
But it get worse. The Conservatives were always a broad church comprising, inter alia, an economic liberal wing and a (landed/business) establishment wing and this played straight into the worst tendencies of both. Lots of big companies being sold off followed soon after by massive outsourcing of government business was the ultimate honeypot for its ‘friends’ who were of course delighted to help knowing full well that the regulatory oversight, where it existed, was a mere figleaf.
The way to get on in this brave new world is to have been to the right school and to be highly clubbable rather than to understand physics or chemistry. And what this elite understands (as most academics apparently don’t) is that markets are human institutions that work according to human-defined rules. With politicians and regulators naively convinced that markets are ‘perfect’ – and threfore not necessary to attend to – they have merrily proceeded to change the rules to their own advantage. An ability to game the system is the key skill and ‘trick and trap’ is the preferred approach to customer relations. Not surprisingly inequality has soared and social mobility has fallen.
By now the system has become so thoroughly corrupted that the government no longer exists to protect people from vested interests, it has come to protect vested interests from the people. Reverse that and things will soon start to fall into place but we are in for a period of great pain because we have travelled so far down the wrong road.
Can someone please kill this nonsense about “unfettered markets”. There is no “unfettered market” for anything, anywhere. I may as well criticise Robert Peston for his participation in the “unfettered socialism” of the BBC.
“The government no longer exists to protect people from vested interests, it has come to protect vested interests from the people.”
That’s what Labour and the Tories stand for, and that, in a nutshell, is what we stand against.
Jeff Randall writing in the Telegraph highlights the importance of connections in Labour’s Brave New Britain.
http://www.telegraph.co.uk/finance/comment/jeffrandall/5941721/How-the-class-war-backfired-and-put-social-mobility-into-retreat.html