Coalition too late the hero on competition

starbucks escher

Recently MB readers were dragged down by a depressing speech from the incoming finance minister, Andrew Robb, in which he celebrated Australia’s oligopoly economy. Today we are reassured that a new inquiry will address the issue. From the AFR:

The likely new federal small business minister, Bruce Billson, said “comprehensive” terms of reference for the Coalition’s root and branch review of the national competition regime have been drawn up.

Mr Billson said the wheels were in motion to have the draft terms released for community feedback, before final terms of reference are presented to the person who will chair the review. The final terms should be available within the first 100 days of the new government coming to power – a key election promise.

“I’ve got my head around much of that, I’ve drafted some terms of reference, I’ve consulted on that and I’m keen to move that forward,” Mr Billson told The Australian Financial Review.

…A review of the competition law is targeted at creating a more level playing field for big and small business, the Coalition has said previously. Helping small business to understand what constitutes “fair commercial conduct” would be part of this.

This is welcome and maybe it can help prevent abuses in the supply chain but let’s face it, it is 20 years too late.

Two decades of soft-touch regulation by the ACCC, supported by both political parties, has already over-concentrated most sectors of the economy. Simplistic “free market” notions always end in monopoly, as Karl Marx rightly observed, putting the lie to political parties that simultaneously claim to support both open markets and small business.

There’s not much anyone can do about the lack of competition at this stage, beyond policing abuses of market power, and supporting free trade with other countries, as well as inviting inwards greenfield investment any way we can.

Certainly that’s better than kidding yourself that oligopoly is awesome.

Comments

  1. “Mr Billson said the wheels were in motion to have the draft terms released for community feedback”

    Will MB provide it’s input, officially?(I certainly hope so.)

  2. “There’s not much anyone anyone can do about the lack of competition at this stage, beyond policing abuses of market power, and supporting free trade with other countries, as well as inviting inwards greenfield investment any way we can.”

    Gosh that is sounding a bit negative.

    The tired and simplistic idea of free markets – set and forget – is the problem.

    All that is required is a move towards understanding that the role of government to foster, support and encourage competitive markets.

    In other words government regulation in a market is appropriate if it increases competition in a market.

    That could be something as simple as building open market places to allow a low rent opportunities for small traders to compete with each other and with the tenants of malls.

    It could mean relaxing development rules to allow small builders the opportunity to do what builders did 100 years ago – buy a cow paddock, build a home for their family and then add terraces along the street until they had built over the entire paddock.

    It might meaning prohibiting the granting of monopolies over the installation of vending machines in public places – A can of coke in a Sydney vending machine costs over 200% more than it does in a machine in Tokyo.

    Or prohibiting agreements whereby one drink supplier rents fridges to shop owners at low cost on the understanding that only their products will be stocked – knowing of course there is only room for a single fridge in the store.

    Lower each and every barrier that makes the decision to have a go and start up an enterprise – more difficult than it might be.

    Top of this list being of course the cost of land.

    And of course – rethink the approach to the regulation of capital flows so that the export of IOU’s (by the public and private sector) and the sale of assets and our non-renewable natural wealth are no longer our historically dominant export industries that place ongoing upward pressure on our exchange rate.

    Start thinking of competitive markets encouraged and fostered by ‘regulation’ rather than the fairy story of ‘free markets’ and we will find we are heading in the right direction.

    • There is no end of outstanding commentary and analyses on competition and how to improve it – yet nearly every market is a duopoly plus rats and mice. The sole aim of every new business is to be annoying enough to get bought out (because of fear by one that the other duopoly member buys you) and yes that is MBs fate if it continues to succeed.

      There is no political will here – the corporates own the parties. Despondency is appropriate.

      • AJ,

        “There is no end of outstanding commentary and analyses on competition and how to improve it – yet nearly every market is a duopoly plus rats and mice.”

        You really think so?

        Generally the free market ideologues proclaim the gospel of free unfettered markets and that all that results from less regulation is a thing of beauty ordained by God.

        The left generally gets squirmish about energetic competition and rather than encourage it – tries to eradicate it and build safety nets and protective devices at great cost to minimize the ‘stress’ of competition.

      • Pfh – the anti-trust laws in the US have a very long history of erudite debate. Including a longstanding discussion from a national perspective where arguments have been put that it is better to have 1 or 2 majors that compete well internationally rather than many juniors that lack scale.

        My reading and my experience is that it is very hard to justify that oligopolies generate anything other than monopoly profits and engage in overt lobbying to protect these profits.

        The turnover of Coles and Woollies is bigger than the turnover of the Australian Government – these monsters own our political process. When was the last time you saw a political decision that had a negative impact on one of these large oligopolies? There is actually two very poor outcomes to the oligopoly world:

        1. It corrupts the political process as politicians are less powerful than the oligopolies they seek to regulate – eg mining tax response, pokie response etc etc’

        2. It actually breaks down the competitive structures of the community – the big players are not actually better able to compete offshore, they are actually often worse because they are big fat and slow.

        These have been long understood and long argued, but as the party system has come more and more under control of the large corporates the first issue has just destroyed any meaningful debate on the second.

      • Well I dont disagree with the state of affairs but believe that making the arguments re oligopolies and uncompetitive markets is an exercise in ongoing vigilance.

        Whatever erudite arguments have been made should be remade again and again. Ideas take time to become familiar and develop momentum.

        The status quo will certainty not be disrupted if it is accepted as inevitable.

        Few things are truly inevitable – death and taxes are the main ones.

    • @pfh007
      Your point about renting a fridge may constitute illegal activity under restrictive trade practices legislation as it may be construed as ‘full line forcing’. Interesting case..

      • I am sure that the structure of the arrangements have been carefully veted by lawyers to dance on the right side of the prevailing law.

        Perhaps there is no restriction on stocking the products of a competitor, just the loss of special discounts and other freebies.

        The margins on soft drinks are so juicy and production is fairly generic (not to mention the contents of the bottle) that carefully calibrated ‘distribution’ models are critical to maintaining market share and margins.

        The point I am making is that whatever the law currently may be it is clearly is not effective in driving competition between drink producers at the retail level.

        If the criterion of the regulations are the degree of competition in an industry that will be a better measure of whether additional regulation is required.

  3. This has to be tied in with the financial enquiry. The big end of town gets Super money at 3 or 4% with the option of paying it or not if things aren’t going so well. Small businesses are often being slugged 12 to 14%.
    The whole environment is non-competitive. As far as I’m concerned Robb should have been asked to stand aside on the basis of his ‘oligopoly speech’

    • Yes – Based on his recent utterances, Robb should not be given a senior ministry.

      We need LNP ministers who are keen to drive competition and enterprise and help young and old hyenas nip the heels of our flabby oligopoly wildebeest.

      If the workers and small businesses are expected to work hard and compete – so should the large accumulations of capital and their managers.

    • I agree fl. I can’t understand how any business can compete with a multinational getting its cost of debt at 2-4%

      No change coming however – I won’t be selling the woollies stocks.

  4. If one ever hopes to reach an ultimate remedy for concentration of power in other markets, one must ultimately address the concentration of power in the “polity market”.

    Politicians are prepared to use the Greek “monos” for other industries, but they reserve the Latin “unis” for their own. And yet, it is concentrated political power that allows the concentration of market power to proceed.

    As we are still in “Ronald Coase Memorial Week”, let’s have another look at the “outside-the-square” approach to reforming the polity market.

    (I apologise to those keen Coasians who may already have seen a variation of this.)

    From Coase’s Alfred Nobel Memorial Prize Lecture, 1991:

    “The Russian Revolution had taken place only fourteen years earlier. We knew then very little about how planning would actually be carried out in a communist system. Lenin had said that the economic system in Russia would be run as one big factory. However, many economists in the West maintained that this was an impossibility. And yet there were factories in the West and some of them were extremely large. How could the views expressed by economists on the role of the pricing system and the impossibility of successful central economic planning be reconciled with the existence of management and these apparently planned societies, that is, firms, operating within our own economy?”

    Coase’s great insight was to identify the essential similarity between “public” planning by the state and “private” planning within a firm.

    But there is also a difference, as discussed in the famous footnote 14 to “The Nature of the Firm”:

    “It is easy to see when the State takes over the direction on an industry that, in planning it, it is doing something which was previously done by the price mechanism. What is usually not realized is that any business man in organizing the relations between his departments is also doing something which could be organized through the price mechanism. . . . . The important difference between these two cases is that economic planning is imposed on industry while firms arise voluntarily because they represent a more efficient method of organizing production. In a competitive system, there is an ‘optimum’ amount of planning!”

    Conventional, “inside-the-square” economists have generally taken this to mean that firms and states are categorically different. Firms “arise voluntarily”. States don’t.

    But if we dare to step outside the square for a moment, it provides an insight into what could be far-and-away the greatest economic and political innovation of the 21st century.

    Governments and private firms are not categorically different. They differ only in that firms may arise voluntarily while governments are permanent regional monopolies.

    (The UN Charter even contains an anti-competitive “market-sharing” agreement – the recognition of sovereignty – under which the regional monopolists have divvied up the planet and agreed not to offer services to people living in another monopolists’ territory!)

    But if we step outside the square, we might ask:

    What if states did “arise voluntarily”???????????

    Remove the difference, and you remove the modern, artificial distinction between “public” and “private”. After all, what is a “state” other than a collection of private individuals tied together by legal rights and obligations? And, on the other hand, a private firm can legally coerce individuals who are under a obligation to it just as a state can.

    In this back-to-front, upside-down interpretation of Coase, the scale and scope of states would adjust – just as the scale and scope of firms adjust – to provide the “optimal amount of planning”. Governmental authority would be optimally sized and optimally distributed provided that governments could “arise voluntarily” in a competitive system.

    Now this might seem utterly unimaginable (especially to those with little imagination). But all around the world there are in fact embryonic movements in this direction.

    The Texan “Municipal Utility Districts” which so excite Leith van Onselen may be interpreted as special purpose “micro-states” which arise voluntarily to provide specific services to their “citizens”.

    On a larger scale, Article 29 of the German Basic Law (i.e. the German “constitution”) contains the theoretical machinery for minorities to secede from their Land (i.e. a “state” within the German federation) even if the majority of the Land opposes it.

    In principle, such a mechanism could be scaled up to create a “polity market” for all of Europe, or the United States, or Australia – or the entire world.

    An essential step in this direction is the development of a “sovereignty market”, an institutionalised way of allowing the voluntary exchange and pooling of “rights to govern”. This is already seen in “multi-speed” or “variable geometry” Europe: the various “Lands” of Europe (Euroland, Schengenland, Dublinland and Bolognaland) pool specific governmental powers.

    Admittedly these have not always been efficient in scale or scope, but that’s because they’ve been created by monopoly politicians for political reasons rather than by free market forces.

    So the other element is a central meta-government, or “meta-state” (Washington or Brussels, or Canberra even) which is charged with – and limited to – overseeing the orderly incorporation of states, liquidation of defunct states, mergers and demergers, and the rules under which such states contracted into the voluntary pooling of responsibilities.

    Rather as ASIC oversees corporations but does not manage them, the meta-state would oversee states but not govern them.

    Intriguingly, corporations law itself contains statutory provisions to remedy “oppression of minorities”. The remedies include “secession” of the minority from the rest of the company under the oversight of the Courts. The assets of the firm (including its land even) may be “partitioned” between the members.

    The two limbs (sovereignty markets and the right to incorporate) work together: just as an efficient market in factors of production allows for smaller firms (with less internal planning) so an efficient sovereignty market allows for smaller states.

    Imagine an Australia structured not as a deadening, centralised, anti-compeitive, monopoly state ruled by rent-seeking politicians, but as a free market multiplicity of polities pooling their sovereignty to ensure the optimal scale and scope of planning.

    Intractable problems require imaginative solutions. On an increasingly crowded planet, improving the efficiency of collective decision-making is the biggest problem of all.

    Coase’s ideas still have a long way to play out . . . if our imaginations can match the greatness of his intellect.

    • On a larger scale, Article 29 of the German Basic Law (i.e. the German “constitution”) contains the theoretical machinery for minorities to secede from their Land

      How does this manifest itself in reality?

      Does the municipality of Mt Gambier secede from South Australia and join Victoria if their municipal constituents vote for it?

      or one chain up, Tasmania joins NZ?

      It sounds like the Federal operating as the sovereign, which holds monopoly power, but with no tangible holdings or citizens,

      …invites various states/provinces, the embodiment of citizens and tangible holdings (and affirms the ‘states own resources rule of our federation)…

      …to comprise part of its federation.

      Sovereigns compete to attract provinces?

      • I could write half a million words in response to your excellent questions but it’s late and I want to go to bed. So I’ll just touch on some of the answers here.

        First, the basic approach is to consider “government” as a utility industry like any other, delivering public services.

        Second, the principle of “structural separation” is applied to separate out the “irreducibly monopolistic” component of the utility.

        A good analogy from the utility industries is the separation of the transmission grid and the central dispatch functions from actual generation, or the separation of transmission pipelines from gas production. Separating out “irreducibly monopolistic” elements of a utility allows the remainder – for example supply of electrical energy or gas – to be structured as a competitive industry.

        In the case of the polity market, the relevant structural separation is separation of:

        a) responsibility for overseeing incorporation and liquidation of states, and other matters relating to the operation of the market (carried out by the central “meta-state”); from

        b) the actual business of delivering governmental services.

        Again, there is an analogy with ASIC governing the market in companies, but not actually governing companies themselves. Subject to ASIC’s overarching rules, individual companies are free to govern themselves and to enter into joint ventures and partnerships with other companies. If a minority of members wants to “secede” from a company, they may do so subject to oversight from ASIC and the courts.

        Now, all of this is clearly idealistic. In its perfect form, the meta-state would be strictly prohibited from entering into the “business of government” itself. However, we might well ask if such a rarefied meta-state would be able to command the allegiance of its members. It’s not impossible that it could. Europeans are getting used to thinking of themselves as both European and French, or European and German. But it is a legitimate question.

        One way to enhance the legitimacy of the meta-state would be to allow it to perform some of the functions of government. And there may be functions where it is considered by all the players that the central meta-state is the most efficient unit of organisation.

        However, you then get the problem that bedevils most federations – especially Australia – where the central government politicians are forever battling the states to accrete more power to themselves. They don’t want to oversee government; they want to RULE.

        Much of the detail of polity market design revolves around balancing the need to allow central government action without central government takeover.

        In this regard, the role of (direct) Democracy is significant. As discussed on many occasions, the megalomaniacal tendencies of central governments are plausibly due to the problem of “adverse selection” under franchised monopoly government. The Swiss federal government, for example, is prevented from attempting the takeover of the cantons by the simple expedient of the People not allowing it to do so!

        In Switzerland there have been informal cantonal secessions. Canton Jura, for example, seceded from Canton Bern in 1979 following a series of “micro-referendums” in which each municipality was asked whether it wanted to stay or go.

        Many federations formed from the union of previously independent states include guarantees to prevent just that sort of thing. The Australian Constitution, for example, expressly prohibits the removal of territory from a state without the consent of the state. (The US constitution is similar.)

        The German Constitution is different in that it expressly provides for the right of secession (within the federal system). While it has not yet been used, it is – like the corporations law provisions – a threat to those who would oppress.

        Here are the relevant parts:

        Article 29 [New delimitation of the Länder]

        (1) The division of the federal territory into Länder may be revised to ensure that each Land be of a size and capacity to perform its functions effectively. Due regard shall be given in this connection to regional, historical, and cultural ties, economic efficiency, and the requirements of local and regional planning.

        (2) Revisions of the existing division into Länder shall be effected by a federal law, which must be confirmed by referendum. The affected Länder shall be afforded an opportunity to be heard.

        (3) The referendum shall be held in the Länder from whose territories or parts of territories a new Land or a Land with redefined boundaries is to be established (affected Länder). The question to be voted on is whether the affected Länder are to remain as they are or whether the new Land or the Land with redefined boundaries should be established. The proposal to establish a new Land or a Land with redefined boundaries shall take effect if the change is approved by a majority in the future territory of such Land and by a majority in the territories or parts of territories of an affected Land taken together whose affiliation with a Land is to be changed in the same way. The proposal shall not take effect if within the territory of any of the affected Länder a majority reject the change; however, such rejection shall be of no consequence if in any part of the territory whose affiliation with the affected Land is to be changed a two-thirds majority approves the change, unless it is rejected by a two-thirds majority in the territory of the affected Land as a whole.

        (4) If in any clearly defined and contiguous residential and economic area located in two or more Länder and having at least one million inhabitants one tenth of those entitled to vote in Bundestag elections petition for the inclusion of that area in a single Land, a federal law shall specify within two years whether the change shall be made in accordance with paragraph (2) of this Article or that an advisory referendum shall be held in the affected Länder.

    • I am sorry but Coase didn’t get right the differences between big corporation and the state. He had never lived in a socialist state to understand it.

      The main difference is that you can be sacked in the big corporation, while you cannot be in a socialist state-corporation. Otherwise there is no other differences. Inside the big corporations are just the same like any socialist company, which is state owned. I have experience in both. The size matters and the bigger the size, the less efficient the business is. The big earnings then come from the monopoly position, not from efficiency.

    • After all, what is a “state” other than a collection of private individuals tied together by legal rights and obligations? And, on the other hand, a private firm can legally coerce individuals who are under a obligation to it just as a state can.
      A state can coerce with actual physical force, however.

      I think that marks a qualitative difference.

      I’d expect a private firm will also have far fewer (if any) protections of “basic rights”.

      • It’s a circular argument.

        The reason that regional monopoly states – and only regional monopoly states – “can coerce with actual physical force” is because the world as it is currently organised vests in the regional monopoly states a monopoly on “actual physical coercion”!!

        But looking outside that circle, the world need not be organised like that.

        If states “arose voluntarily” then the role of “actual physical coercion” would be taken on by states that had arisen voluntarily.

        In fact, even in the world as it is currently organised, the monopoly is not as clear-cut as it might seem. Look at federal systems in which the power of “actual physical coercion” is exercised by both the central “state” and the federal “states” (and in some cases by regional or municipal police forces).

        Or, look at the private prison industry where “actual physical coercion” is contracted out to other entities.

        Now, one might or might not agree with such contracting out. One might be of the view that the “optimal amount of planning” in such cases would see physical coercion exercised only by a monopoly body.

        But that is a matter of individual preference. Others might differ. In a polity market the actual outcome would be determined by the “firms” (i.e. the competitive “states”) which arose volunarily from the market in response to the preferences of the “customers”.

        – – – – –

        p.s.

        Regarding “basic rights”, we discussed last week on the occasion of Coase’s death the concept of “Coasian Symmetry”.

        All rights come in symmetrical right-obligation pairs. Talking of “rights” in asymmetric terms is a semantic fallacy. The word “right” has either:

        a) a positive meaning of “an enforceable preference” where enforcement is carried out (in favour of one claimant over the symmetrical claimant) by a “state-like entity” (which could be a regional monopoly state, a federal state, a polity market state, or – in more anarchic conditions – a local warlord or mafia don). A positive right may be determined positively by observing which side of the right-obligation pair is in fact being enforced by the “state-like entity” which de facto is exercising the power of enforcement; or

        b) a normative mean of “a preference which I personally would prefer to see enforced”.

        The semantic fallacy arises when the authority of the positive definition is transferred to the normative definition.

      • Just a couple more words on coercion.

        It may be observed that, even in the world as it is currently organised, those who arbitrate right-obligation pairs are not the ones who exercise physical coercion. The judges don’t step down from the bench and personally drag the defendent off to prison. That function is contracted out to other agencies within the the regional monopoly state.

        Also, judges are often deciding whether another state may exercise physical coercion. When a capital punishment case goes to the US Supreme Court, the judges are deciding whether or not one of the federal states may proceed to take someone’s life.

        The same applies in the case of capital punishment appeals from Caribbean states to Privy Council.

        Even as the world is currently organised, the division of responsibilies is more complex than it may at first seem.

  5. And there you have it. A paid corporate astroturfer coming in to protect the oligopoly. This goes on x 1mil at the political level.

    Don’t hold your breath for change.

  6. Hmmmm,

    That read more as an attempt to justify the outcomes of an ideological commitment to ‘free markets’.

    Loved the bit about the hot bed of competitive markets thriving behind Chinese walls of large advertising firms. Good grief.

    Chinese walls are not about reducing costs to clients. They are about servicing clients and charging fees when a perception of conflict of interest exists.

    “….The market is stronger than any of its participants….”

    A nice restatement of faith and belief.