The Price Of Regulation

Monday, 28 September 2015

In an earlier post, Elephants and Butterflies, written in January 2014 I suggested that the political-economic consensus around free markets may not survive the next down turn. Since writing that we have seen the growth (and potential implosion) of Syriza in Greece and Podemos in Spain, along with the SNP in Scotland. We now have the election of Jeremy Corbyn (I am not a fan) in the UK as leader of the opposition.

Much of the recent debate is around going “back to the settled battles of the 1980s” or even that the new generation of young activists don’t remember how bad utilities were in the 1970s under public ownership.

Regardless of any individual political stance, I don’t find either of these lines helpful in understanding this political phenomenon in Europe. The stance of Bernie Sanders in the USA also challenges the status quo there. While there is a lack of clarity in much of the opposition in real political and economic policy, not dissimilar to the “Occupy Wall Street” movement of a few years ago I wish to argue here that this challenge is drawing power from real deep seated dissatisfaction that needs to be addressed.

Given the inevitable partisan nature of this topic, let me make my own position explicit. I am neutral on arguments over ownership and have no sympathy with simplistic arguments that “the private sector has no role in delivering public services”. If that were the case schools couldn’t use private sector produced paper. Similarly, Trade Unions would, as Private bodies, have no role in the public sector. As my philosophically inclined friends might say the arguments over “ownership” are a category error. For me the deeper problem is the growth of the regulatory regimes over the last 30 years. The old phase “pigs don’t get heavier by weighing them” comes to mind. The status quo is around “regulated markets” where the dominant role of the regulatory regimes is predominantly economic. Also, I argue that regulators are too focused on regulating against bad outcomes rather than encouraging positive ones.

Back in the 1980s, the promise of opening up markets could be described by the following:

The Private Sector would introduce competition, choice, innovation, better service and lower prices. Regulation was a temporary phenomenon as giant public monopolies were opened up to competition. In time, free markets would take over. Private Sector capital would reduce the call on the public purse.

This would unleash entrepreneurial activity and everyone would benefit from trickle down.

We know from papers released under the 30 year rule, that John Redwood, when head of Thatcher’s Policy Unit argued against regulation of financial markets on the grounds that competition would keep the participants honest. PPI? LIBOR? FOREX? Adam Smith would have expected the outcomes we have seen.

Looking at the claims of the 1980s, I think that all of the claims are now contestable and utopian.

I am not arguing for any particular position at this stage, but wish to encourage debate about the way forward to a more reasoned and real world settlement.

This article is part of a series on the Future of Price.