Bad economics

The dominance of the prevailing economic orthodoxy makes it hard for even modest reforms to gain traction

Andrew Gamble
Andrew Gamble

The virulence of the reaction to the rather mild policy proposals unveiled by Ed Miliband in his conference speech tells us a great deal about the present state of debate about the economy, and how little affected the conventional wisdom has been by the impact of the financial crash five years ago. The complaint that has filled the airwaves and the print media is that the proposals to freeze gas prices until 2017 and to penalise property companies who hang on to unused land, are ‘bad’ economics. They might be popular but they violate basic economic laws, and therefore will not work.

There seem to be a number of assumptions at work here. The most obvious is that there is something called ‘economics’, which everyone is agreed upon, and that there are a set of immutable economic laws, which cannot be questioned. This not only forgets the public’s settled view of economists  (four economists, five opinions, and two of them held by Keynes); it ignores the wide range of views among economists about how the economy works, and the policies governments should pursue.

The incident also shows just how resistant to change or challenge the dominant political consensus on ‘economics’ has become. The idea that price controls are necessarily ‘bad economics’, when they have been advocated by so many economists at different times in the past, is only tenable if ‘good economics’ means free and unregulated markets, and that any action by government which does not promote free and unregulated markets is ‘bad economics’. The energy market might seem a rather poor example to cite in support, since although it may be unregulated (or very lightly regulated) the idea that it is free, meaning competitive, is a joke. The public knows this.

Anyone who has had to struggle with the opaque and mind-bendingly complicated pricing structures, which the privatised energy companies have visited on their consumers, grasps immediately that the energy industry as it is presently constituted is a cartel and a racket. The companies are able to manipulate their prices by playing the wholesale markets and using their complex production and distribution chains to stay profitable and protect their market positions. The companies dominate because no-one can do without energy. They have a stranglehold, and they exploit it. Ever since privatisation governments have connived with the companies to preserve their cartel.

In suggesting a price freeze Miliband was careful to say that it would be temporary, and would be in force while government sorted out the regulation of the energy companies, bringing in much tougher controls to make the market properly competitive and subordinate to consumers rather than consumers being subordinate to the energy companies. He should have been hailed by free market economists as that rare politician who wanted to make free markets genuinely free and tackle the abuses and distortions which corporate power has introduced to them. Instead he was denounced for wanting to return Britain to the dark days of the 1970s, when there were three-day weeks, winters of discontent, and socialism stalked the land.

If even a very mild and limited proposal which goes against orthodoxy can be treated in this way, it suggests how powerful this orthodoxy remains, and helps explain why it has so far proved so hard to shake the dominant commonsense about how the economy works which has grown up since the 1980s. Even the collapse of the banks in 2008 is now blamed on government. Regulation was too lax, it is said, often by the same politicians and commentators who were complaining that the ultra light regulation of the financial sector before the crash was too heavy, and was driving away business to other even more finance-friendly centres, like Iceland, Ireland and Cyprus.

What the furore over Miliband’s proposal highlights is the distribution of power in our present political economy. The people think they elect governments to look after the collective interest, but in the current era governments define the collective interest as doing whatever is required to facilitate the operations of business, reasoning that if the private sector delivers growth, jobs and rising living standards, most people will be content. The problem comes when living standards are not rising at all but falling, and some companies behave in ways which seem to most of the public as not being in their interest at all. They look to government for some redress, but government just says, ‘it’s the market; there’s nothing we can do’. But when a politician says – ‘actually this is a very bad market, there is something we can do, and here’s what it is’, the sky falls in.

Blackouts, investment strikes, shortages – the shroud wavers of the Daily Mail have been out in force, taking the side of the energy companies when they reacted furiously to Miliband’s speech.  But what is ultimately so revealing about this episode is that despite these dire warnings, three of the energy companies have used the proposed freeze to advertise their fixed low energy tariffs, with NPOWER urging: ‘Why wait for Ed? Fix your energy prices until March 2017.’ If they act now consumers can lock in a low fixed price until 2017. So it is alright when an energy company proposes it but not when the government does. The crucial difference of course is that the government scheme would be universal and would benefit all energy users. The company scheme is designed to cream off consumers from other companies, and would benefit only the few with enough time and mental agility to grab a privileged offer in the brief window it is available.

Markets do not automatically deliver the common good, and public intervention to ensure it, is not economically illiterate, but justified and overdue. Most people agree. Sometimes ‘bad economics’ is good politics. More of it is sorely needed.