Protect faith in privatised monopolies with tougher regulation
Yet the change of ownership from public to private did nothing to solve the challenge of regulating natural monopolies such as electricity and rail, or of constraining market power in industries with economies of scale. The failures of regulation and competition policy over the intervening decades are now all too apparent…
Financial investors have wrung every drop they can out of the water industryrather than reinvesting profits. In spite of a recent Competition and Markets Authority inquiry into the electricity market, even Conservative politicians are proposing price controls. Telecoms companies and their regulator Ofcom are at loggerheads. And where there has been competition, as in the airline industry, the collapse of Monarch raises doubts about consumer protection. No wonder that a study by the Legatum Institute reported wide support for the idea that capitalism is in crisis…
Capitalism is not the problem. It is regulatory policy that is in crisis. Renationalisation would not serve the public any better without careful design of incentives and accountability. The experience of the past four decades underlines fundamental challenges.
It is hard to make natural monopoly industries competitive. Even when there are auctions for licences or franchises, bidding companies know far more than the regulator about costs, technological possibilities and demand. As Nobel laureate economist Jean Tirole argues in his new book Economics for the Common Good, asymmetry of information between regulator and provider can never be wholly overcome. This understanding led to the UK’s use of fixed price bids for franchises, giving operating companies stronger incentives to be efficient. If a privatised operator misjudged costs or demand, and made less profit than anticipated, tough…
The trouble is that regulators and politicians like the idea of business stumping up if things go wrong, but not of them reaping the reward if things go well. The temptation to claw back some of the return by changing the rules is strong — in many sectors there has been almost constant change. No wonder all the businesses concerned employ teams to handle relations with the regulator — which brings the danger of regulatory capture. Some sector regulators are clearly far too lenient with “their” companies.
The current political allure of price caps — whether on electricity in the UK or mobile call charges in the EU — reflects a suspicion that capitalists are doing too well from natural monopoly industries. In some cases the suspicion may be well-founded. But this plays directly into another challenge: if low prices for consumers are enforced at the expense of profits, it will reduce new investment or prevent improvements in service quality. Or companies might simply recoup losses elsewhere….
Beyond the formerly nationalised sectors, competition and regulatory policies are also in a mess. People do not trust competition to protect consumers, regardless of the benefits it so evidently brings in so many cases. And of course, some regulation is necessary, again because of a fundamental asymmetry of information — nobody would want a free-for-all over technical or safety standards. The market cannot reveal dangerous cost-cutting by unscrupulous companies until it is too late…
Businesses always complain about red tape, of course: not because they object to the aims but because every new headline adds to the burden. In a highly regulated economy, consumers expect nothing bad to happen and are outraged when it does, so a new law is enacted and complacent expectations restored — until the next time.
Is there another way through these dilemmas? Or are we stuck with the worst of all worlds, a lack of effective competition, and regulation that is simultaneously burdensome and counterproductive? Bonfires of red tape never light up, and the public mood seems to rule it out. Regulatory independence is more important than ever, though, in febrile times; it is also harder to achieve. It is clearly time to review the structure of regulation of the once-nationalised network industries.
One approach is to combine all the sector regulators into a single body, with a clear mandate to be tougher. Smart businesses will recognise a tough, rule-based regulator is better than constant political intervention. Regulators also need to be less naive about financial engineering by investors. Economists must work out where on the trade-off between low prices now and investment later each industry ought to be — but above all, to keep making the case for competition where it is possible as well as firm regulation where it is not.
The economic consequences of Jeremy Corbyn
The question is whether Labour can actually deliver. On that one must be sceptical.
Socialism is not a new idea, but one that has been tried and tried again. It has come in three main varieties: autocratic, populist and social democratic. Autocratic socialism was that of the Soviet Union and Mao Zedong. It was a catastrophe. The social democracy of the Nordics or the Netherlands has, in contrast, been a triumph. These are among the most successful societies on the planet: wealthy, dynamic and stable.
Finally, the populist socialism so characteristic of Latin America has never worked economically. But it has at least not had the cataclysmic human results of Soviet or Maoist communism (though the outcome of Hugo Chávez’s Venezuelan experiment, much lauded by Mr Corbyn, is clearly ghastly).
Why has European social democracy been such a success? The answer is that it understands the fundamental constraints that have to shape any successful programme, particularly for a party that believes in active government. First, it must avoid the lure of magical thinking on budget constraints, at all levels of government. Resources are always limited. Second, it must recognise the crucial role of incentives in shaping human behaviour. Third, it must fully internalise the importance of a stable institutional framework in guiding these incentives. Last, it must understand that the private sector, foreign as well as domestic, must play a leading role in the economy…
The economy can function with very high levels of tax: ratios of close to, or over, 50 per cent of gross domestic product are common in the advanced social democracies. Governments can also play a big role in supporting the economy. But private initiative is essential. And that does not come because the government commands it. It comes because the government motivates it.
Why, then, has populist socialism failed? It is because it does not respect these constraints. It is undisciplined on public finances, unconcerned about incentives, contemptuous of property rights, hostile to the private sector and antagonistic to the constraining institutions. The last point is crucial. As Princeton’s Jan-Werner Müller has written, the one thing leftwing and rightwing populists share is the belief they alone represent the people against the elites. Anything that limits their ability to act as they see fit is seen as illegitimate…