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 a former Lib Dem parliamentary candidate and the author of Tickbox (Little, Brown). You can buy the book from Hive or Amazon.
Follow @libdemvoice.org on Bluesky
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Weekly Road Report - West End Ward #dundeewestend
Care homes under threat after Labour policy change
Three less conventional ways of looking at who supports Reform - The Week in Polls
Layla Moran on Gaza: "Starvation shouldn't be a weapon of war"
Peter Martin
Daniel Stylianou
Simon R
John Waller
Mick Taylor
20 Comments
Excellent article (as always) David! 🙂
A good article on identifying a problem, but rather short on proposed solutions.
“Yes, there are the ethical alternatives, like Co-op or Triodos. ”
Then use them. (What am I missing?)
The problem with competition is when there is not ability to actually compete…
I want to travel from Manchester to London via train, my choices:
1. Book a ticket and get a direct train on West Coast Mainline £56-236 depending on times chosen all travelling a Virgin Train
2. Travel via Leeds/Sheffield on a combination of trains £73-216 depending on times chosen (but take at least an 1hr longer and have no recompense if my change is delayed or missed)
Now if the 73 competed with the 236 I might have some choice, but it doesn’t it competes with the 56 so I take the direct route because there is no real choice.
If Midland Mainline operated direct Manchester London, like it did during the WCM upgrades, cost 20-50 less no matter when I travelled but took an hour longer I would have some proper choice restored. Or even if there was an alternative TOC running on WCM that structured their fares differently.
…or I can fly which can be £100 cheaper (but the security theatre just drives me crazy, as its a pointless waste of time and effort).
Malcolm, the ethical alternatives aren’t necessarily that ethical (vide the Co-Operative funding Labour MPs), and there aren’t many of them. Improved competition is good for consumer choice – and consumer choice is good for consumers.
I’d like to see the Lib Dems tackle the problem whereby a company can employ somebody part-time, and their wages are supplemented by benefits; effectively the state subsidising the employee. If the employee is working for a small company that can’t afford a full-time member of staff, that’s one thing. But when a company like Tesco does it to avoid giving staff length of service and employment protections while generating massive profits, it’s another. I’m not sure where to draw the line policy-wise, but tackling the issue of companies unnecessarily employing multiple part-timers would be a useful thing for the Lib Dems to do.
James, rail privatisation is a great example of how not to do it – we turned a state monopoly into a series of private monopolies.
With three Manchester-London trains an hour, there’s no reason for them all to be operated by the same TOC. Let three operators provide the service and let people choose who they want to travel with – the biggest difference it’ll make to their journeys is a 40 minute wait for the “right” operator to come through.
Of course this doesn’t scale down, but there’s no reason not to do this on the big lines.
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…
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.
David, Thanks for the link.
Competition is indeed the key issue and until we have integrated it with our understanding of fairness and the sort of society we want to see the Lib Dems will not have a coherent narrative.
In many, perhaps most, markets one business model tends to have the edge over rivals; over a few years this leads to a monoculture of business model if not of actual businesses. Supermarkets are a case in point. So is banking where one friend who likes to play the stockmarket was telling me just before the financial crisis broke that Lloyds Bank was a great investment because they had been relatively cautious and would likely be taken over for a juicy premium by a more aggressive firm – read one more into bad lending. (He lost a bundle but that’s another story).
So a version of Gresham’s Law applies; bad practice can drive out good. Moreover, just as in ecology, monocultures are vulnerable – when one bank stopped lending they all did because they had more or less the same business model. And probably none of them retain the knowledgeable staff needed to do other than (bad) computer-scored lending against property (which is what they now pass off as small business lending).
So, there is a strong public interest case for the government to run a regulatory framework designed explicitly to maintain diversity and prevent the emergence of monocultures except in rare cases where there are overriding advantages. In the specific case of retailing there are several things one could usefully do short of a legislated breakup.
1) Ban price flexing: the practice of pricing a product differently in different shops. Tesco has used this strategy aggressively to blow smaller rivals out of the water when they could not win fairly.
2) Neutralise the buying advantage of large size by establishing a level playing field for all players. This can be done at ether the retail level or at the wholesale level (retail price maintenance or wholesale price maintenance). In this country we used to have RPM, the USA used to have WPM (legislated by the Robinson-Patman Act of 1936 that revised WW1 era anti-trust legislation). I would require producers to adopt one or the other approach for their entire product range. Somewhat counter-intuitively this would cause retail prices to plumet and at the same time give a big boost to creative/productive sectors. And before libertarians get over-heated consider this: how is the government banning producers for setting retail prices not an intervention in the market?
In answer to Matthew, it does not follow that such changes would lead inevitably only to boutique retailers. Indeed it may turn out that they would loose because it would make it possible for smaller companies to run large stores in head-to-head competition with the big players but without the same awful uniformity.
And with small retailers (whether running boutiques or bigger stores) taking a slice of the market the biggest players would be disciplined to be honest on price. I’m sure that if my local corner shop could buy their milk at the same price as Tesco or Asda they would destroy them on price. (see David’s link for background on this).
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?
I very much like where this argument leads – LibDems as supporters of ‘open markets’ (ie not the flawed ‘free markets’ of the right and not the ‘state socialism’ ceiling of the left).
@Alan Hilliar,
how about introducing a more progressive element into corporation tax as standard, whereby it is levied in proportion to the number of people employed by the company, not according to how old it is?
I dislike time-limits for this tax, as it distorts growth incentives and discourages the elimination of marginal economies of scale which both damage the structure of the market.
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?
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.
@Simon McGrath
“The main problem in retail banking is the exceptional reluctant of people to change banks ”
Small wonder, when you encounter the identification bureaucracy to open an account or even add signatories. Added to that, is the tendency to farm out back-office services to call centres with people who know about routine services but are clueless about more difficult ones. I have been attracted to current account services with a different bank than the one I started with, and got as far as opening acounts with three in all, but found that none of them provided ALL the services I used, so a complete change wasn’t on the cards. (Of course two of the banks are now amalgamated…. Which sort of makes David’s point.)
@Simon McGrath
“if you want more competitions between supermarkets (an excellent idea) does that mean you support their being given planning permission to open more stores?”
Tesco’s is a case in point. They started in the High St., moved on to Out-of-Town supermarkets, then to hypermarkets and shopping parks, and are now attempting to saturate the filling station and corner shop sector. Last night, I met some friends who said that Tesco locally were taking over a recently failed car showroom, with a view to opening a second Tesco in a shopping parade within a mile for another Tesco small shop and two major Tesco hypermarkets. (There may be more, but the Find Tesco app. for my smartphone isn’t working at the moment.) And outside the UK, I kmow they are active in at least 5 other EU countries.
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…
The Robinson- Patman Act (see earlier comment) would fix 3 and 4 of David’s points. Basically it provides that when good are sold for resale it is illegal to discriminate between customers on price or terms. Price can differ only when there is a clear difference in cost in making the supply – hence the extra shipping cost per item of very small orders or of supplying customers in Alaska are okay. Penalties include compensation to injured parties to compensate for their loss.
AFAIK the Act still remains on the statue book but was was gutted when Reagan, in one of his first actions on becoming Peresident, instructed the Justice Dept not to initiate any new actions. So, in theory, a local hardware store can still sue Wal Mart (good luck with that!)
Occasionally it can still bite. A case in point happened a few years ago when the long serving credit control manager at a major US publisher USA went sick and it was discovered that she had been granting settlement discounts (1% or 2% off the invoiced amount to a few favoured trade customer in return for quick payment of the bill. Back of envelope calculations soon showed that to compensate other trade customers including interest would come to hundreds of millions of dollars the point being that the directors either knew about it explicitly or, by virtue of exercising limp control of operations, had, in effect, authorised staff to do as they saw fit. Fortunately for them it turned out that bribes had been paid so the company was deemed not to have officially approved the discounts.
there are the ethical alternatives, like Co-op?? now with hedge funds?