Opinion: Why competition is the key issue

One of the many frustrations with our dysfunctional banking system is that we have nowhere else to go unless we want to keep our money under our mattresses.

Yes, there are the ethical alternatives, like Co-op or Triodos. Yes, there are a handful of surviving building societies. But we don’t have what other countries have: an effective banking and lending infrastructure at local level.

So when World Development Movement nominates Barclays for the Public Eye awards for the worst corporation for speculating in basic food commodities – artificially pushing the price beyond what the world’s poor can afford – what can we do about it?

We can remonstrate pathetically, which is basically where Ed Miliband’s ‘responsible capitalism’ leaves us. What we can’t do, at least on the same scale as we could in other countries, is move our money, because we don’t really have much choice – or just a choice between a handful of identical options.

The narrowness of UK banking industry dates back more than a century, to the consolidation before the First World War, and explains some reasons why our infrastructure is so unfit for purpose.

The Big Five – Barclay’s, Midland, Lloyd’s, National Provincial and Westminster in those days – date back to the long reign of Montagu Norman over the Bank of England. It is peculiarly British and peculiarly anti-competitive, yet governments have colluded in this situation for most of the century.

Nor is it just banking. We have a dwindling number of public service contractors capable of delivering the increasing size of public service contracts (many public service commissioners will only accept the biggest companies is bidders, which makes matters worse). Monopoly or the tendency towards monopoly – which is what we are talking about here – inevitably means higher prices and worse service.

The same applies, as we know, to the supermarket sector. The extraordinary privileges given to Tesco and Asda, compared to their smaller competitors, has been justified on the basis that they lower prices. In practice, it is their poor put-upon suppliers which have kept the prices down, the struggling British farmers. What rises in prices there have been has been increasing profit margins.

The Liberal Eye blog makes a convincing case that the result has been ‘efficient’ only in the sense that it has been efficient at extracting money from customers and suppliers.

This blind eye is the British disease. The ultimate moment was the Office of Fair Trading decision in October to nod through the takeover by Amazon of the Book Depository, which is the only UK competitor capable of challenging Amazon’s creeping monopoly.

This is in some ways a symptom of the dominance of two political traditions which are neither of them interested in competition. Labour isn’t interested because they don’t believe in markets. Quite the reverse, Gordon Brown and Ed Balls encouraged oligopolies on the grounds that they seemed easier to control. But Conservatives are not, in practice, terribly interested in competition either – except using the rhetoric in the public service reform debate – because they don’t believe in restraining businesses, however powerful.

That leaves the Liberal tradition as the only potential defenders of open markets – not the kind of faux free markets peddled by American think-tanks, which basically means the right of the powerful to ride roughshod over the powerless. But tragically, competition has barely emerged in Liberal Party policy in the UK since the 1950s, and only under Vince Cable has the word undergone any kind of revival.

This is now urgent. Thanks to the way our toothless watchdogs have snoozed their way through recent decades, we now have a situation where three alternative business models are vying for the prize of total control.

1. There is the Tesco model where ubiquitous shopping outlet on every high street corrode the businesses around them by using market dominance to supply everything.

2. There is the Amazon model which does much the same, but does it online. The OFT should hang their heads in shame at their collusion in this.

3. Finally, there is the Virgin model, where by a brand and a vast database is leased out to businesses in every sector.

This is competition of a kind, but it is minor competition between would-be monopolies. Whoever wins, and even if none of them win, the public loses – and we lose all the advantages that open markets have given us over the past two centuries in choice, democracy and dignity.

The result of this will be rapid inflation, choice shrinking to a meaningless one between a handful of identical options, and service standards – including in public services – will become increasingly technocratic and faceless and poorer.

If we don’t tackle this problem now, we will wake up and find ourselves supplicants to a handful of global megacorps called Tesco-Virgin and Amazon Wal-mart. Then no amount of localism will save us. Let’s make 2012 the year we tackle the robber barons.

David Boyle is a fellow of the New Economics Foundation and the author of The Human Element: Ten new rules to kickstart our failing organisations.

* David Boyle is policy director of Radix, co-director of New Weather, a fellow of the New Economics Foundation, and the author of The Xanthe Schneider Enigma Files and other books.

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20 Comments

  • Excellent article (as always) David! 🙂

  • Malcolm Todd 10th Jan '12 - 12:19pm

    “Yes, there are the ethical alternatives, like Co-op or Triodos. ”

    Then use them. (What am I missing?)

  • David Boyle 10th Jan '12 - 2:52pm

    Solutions? Well, I think of Theodore Roosevelt’s solution – major anti-trust legislation. Split them up, like the Americans did to Standard Oil and other corporates more recently. The same goes for the big banks here. Yes, Co-op and Triodos are important, but why should most other nation in Europe have local banks, local bank managers and local lending (decided locally) but not us? Why should they have that business advantage. And here is RBS in public ownership ready to be sub-divided…

  • Matthew Huntbach 10th Jan '12 - 4:08pm

    The problem is that while I like the theory of going to small boutique suppliers, in practice the convenience of a huge supplier with a big range of products wins out. We can see this with the dwindling number of small butchers, greengrocers etc. When another one closes people say “Oh dear, I’m so sorry to see it go” and then when you ask them “when did you last shop there?” they mumble because the real answer is something like “Three years ago, I do most of my food shopping in Tesco these days”.

    It’s a nice theory that the only reason we don’t have a big range of small suppliers is down to the big bad state, but it’s a theory beloved of the modern extreme free marketeers who use it in much the way the extreme socialists of my youth always had a ready excuse as to why every attempt to implement what they called “socialism” had turned in to a nasty dictatorship. It was always somehow the fault of the big bad capitalists, and true socialism was always just round the corner, all that was needed was to implement it in an even more extreme version than what had gone on before. Of course reality was that every time one turned a corner, there was another one.

    Sorry, but I just don’t believe that left to itself the “free market” would naturally develop a network of small suppliers. I feel this is a line those who find extreme free market such a fine theory they are reluctant to throw it away use in order to hide – to themselves as much as anyone else – the reality that real life just does not work as their fine theories say it should.

    The reality is that most of us use the big suppliers most of the time because of the convenience of doing so. There is not just the scale issue, but also the familiarity issue. If I go to another part of the country and see a familiar brand name there, I know what to expect. If I’m in a hurry, chances are I will go for that because I know what will be on offer, rather than trying a more local option. It’s that, not the big bad state forcing me in some way, that means I end up supporting the large scale companies. For example, if I’m in a town I don’t know and I want a quick cheap meal, I could take my chance with a local restaurant – my experience is that sometimes this leads to something really nice, other times it leads to something quite nasty. I could buy a guide book or search reviews on the web, but come on now, I don’t want to spend all my life doing this, just like I don’t want to have to research just what is the best supplier when I want to get a train to Manchester, I want to go to the station and buy a ticket and get on the next train leaving. So, if I’m in a hurry, I just want a meal, I don’t want to have to think about it or do research, I want to know pretty much in advance how much I will have to pay and what I will get for it, I’ll go to the local branch of a national chain.

    While the small number of big banks is a long-standing feature, it is not that long ago that we did have a large number of local building societies. Let us be honest – most of them have been swallowed up because they weren’t able to offer much and were vulnerable to changes in trading situations in a way large scale banks are not. Just a few years ago in a fit of “small is beautiful” idealism I opened an account with a small building society. In a couple of years it merged with a bigger one, which itself merged with another big one another couple of years later, so now I have an account with a big building society. Which does have the convenience that I can access my account in branches across the country, rather than make the trek to the one branch the original building society had – where, to be honest, I was often the only customer when I went in.

    In summary, the number of people who claim they like small suppliers is much larger than the number who actually use them when they are there.

  • A few years ago a market researcher phoned me to see if I would answer questions about my perceptions of banks. Mostly I say no because it’s a waste of their time and mine for me to answer questions that start “On a scale of one to ten…”, but I was feeling particular angry about banks at that time so I answered the questions accordingly. Right at the end she revealed who the survey was for – Barclays – and asked if there was anything particular about Barclays that came to mind. “Yes, boycotting them for their support for the apartheid regime in South Africa!” That campaign damaged the public image of Barclays for years just as campaigns against Nestle and Tesco do today. It doesn’t prevent them from being profitable companies, or change the structure of monopoly capitalism, but it is empowering to whatever limited extent to be able to feel that whatever a particular corporation does they are never going to profit from me. Sadly, though, what Matthew Huntbach says rings very true.

  • Alan Hilliar 10th Jan '12 - 7:03pm

    I very much warm to the idea of Lib Dems promoting greater choice in the market (banking or supermarkets) but I’d want to see some concrete proposals.
    If we’re really serious about the change, then I think you need some lower rate of corporation tax for start up businesses over (say) 10 years, funded by a proportionate increase in tax for the giant businesses.

    Thoughts anyone?

  • Simon McGrath 10th Jan '12 - 8:54pm

    Rather confused thinking here. What evidence is there that there isn’t competition on some of these areas? The main problem in retail banking is the exceptional reluctant of people to change banks – if they want to they can go to the building societies or the Coop – but generally they can’t be bothered.

    Not sure what this means : “The extraordinary privileges given to Tesco and Asda, compared to their smaller competitors” – what privileges ? and why not mention sainsbury’s, morrisons, the Coop, waitrose …
    if you want more competitions between supermarkets ( an excellent idea) does that mean you support their being given planning permission to open more stores?

  • Richard Swales 10th Jan '12 - 10:55pm

    Speculators in commodity futures markets provide liquidity and thereby allow producers to fix prices far in advance. Speculators attempt to predict prices far in advance, sometimes agreeing to buy later and sometimes to sell later (from other funds who take the other side of the deal) at a price fixed now, but they are only responding to news about supply and demand (some technical analysis systems rest on predicting news before it happens). So it is basically not true that speculating leads to higher prices per se.

  • David Boyle 11th Jan '12 - 1:03pm

    There are lots of things I should reply to here, but can I just take up the issue of the privileges that the Big four supermarkets get over their smaller rivals.

    1. They get tax breaks and various other subsidies for setting up their stores.

    2. They have the clout to force through planning permission in most (but not all) cases.

    3. They are able to force on their suppliers a 90 day payment period, when competitors have to do with 30 days, which means the equivalent of a two month rolling interest free loan equivalent to their entire stock.

    4. They can get their suppliers to pay for their marketing offers.

    And so on…

  • Richard Underhill 22nd Jul '17 - 6:42pm

    there are the ethical alternatives, like Co-op?? now with hedge funds?

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