Defending the market?

The free market is indeed under attack, but mostly from the self-serving ideology of the Right and its supporters in big business

Matthew BishopDuring the British Conservative Party conference, one pundit argued on BBC radio that the inheritance tax threshold should urgently be raised in order to stimulate ‘enterprise’, a long-held objective of the party.  This followed George Osborne’s exasperated conference speech, in which he claimed that only the Tories are ‘on the side of enterprise’ – and therefore ‘on the side of the British people’ – and are ‘the party of free markets and of fair markets too’.

Osborne restated his case in a subsequent discussion with the Institute of Directors, imploring its members to counter the critique of trade unions and charities and thereby ‘win the argument for an enterprising, business, low-tax economy that delivers prosperity for the people’.  He noted that, ‘for the first time in my adult life’, these principles are ‘up for grabs’.  Britain has to decide, he said, ‘whether we are a country that is for business, for enterprise, for the free market’.  Why? Because leftist politicians have abandoned the idea that ‘free markets create the taxes to fund public services’.

In neither appearance by the British Chancellor of the Exchequer did he pause to reflect on what, exactly, he means by these concepts.

So, let us consider them here, because they embody some very thorny tensions.

At the outset, it is crucial to note that ‘enterprise’, ‘free markets’ and ‘business’ are very different things. Yet in both public discourse and the governing ideology they are usually conflated.  For the Conservatives (and, unfortunately, much of the Labour Party), the interests of (big) business are generally seen to be synonymous with enterprise and free markets.  However, the opposite is often true.

We can see this clearly if we go back to Econ 101.  As every A-Level Economics student knows, the notion of a free market within neoclassical theory is straightforward.  Some of its primary attributes are: numerous buyers and sellers; perfect information so that firms are aware of excess profits being generated; low barriers to entry so that they can participate freely and generate competition, with uncompetitive firms compelled to exit, thereby bringing down prices; a tendency towards equilibrium of demand and supply so that the market clears; and, crucially, in the long run, there is high downward pressure on profits because competition is so fierce.

Obviously, this is a theoretical abstraction, which is something that our politicians would do well to remember.   As such, it may be theoretically useful.  But does it characterise any market in Britain, even remotely?

The answer is clearly no.  Most markets are far from free, and this is why the governing orthodoxy is increasingly under attack.

Take the banks (an easy target, admittedly).  Are there lots of them?  According to The Bank of England, we now have four major banking groups, down from sixteen in 1960.  Can competitors enter freely?  As the entrepreneur David Fishwick discovered in his fascinating documentary series, this is impossible.  What about creative destruction?  Well, the last time the banks were faced with market discipline, the people of Britain wrote a cheque for £1 trillion so they did not have to suffer the consequences.  And, of course, there is the question of bonuses: if we really believe in market principles, astronomical pay should be viewed as evidence of failure, because it is a sign that the market is not working.  If it were, the hundreds of thousands of people queueing up to work in the City would generate downward pressure on the wages earned there (something Paul Ormerod noted many years ago in his masterpiece, The Death of Economics).

Much the same can be said for every other major economic sector in Britain.  We either have oligopolies, where a few dominant firms destroy competition, or we have statutory monopolies (think of water or the trains) that exist, as I have argued previously (here and here), largely to extract rents from a credulous public.  Andrew Gamble made a similar point on these pages when discussing Labour’s proposed freezing of energy prices: ‘the idea that [the energy market] is free, meaning competitive, is a joke’.  So, despite Osborne’s protestations about being on the people’s side, the contemporary economic settlement actually runs counter to the interests of the British public.

What is even worse is this: not only are markets not free because corporate behemoths have cornered them, but they also do not ‘create the taxes to fund public services’ that the Chancellor claims.  As we have seen repeatedly, big business is adept at avoiding paying its dues to society, offshoring wealth and privatising public assets and profits, whilst socialising losses.  Richard Murphy estimates the tax gap today to be £120 billion, higher than the deficit!

Finally, what of enterprise?  Surely raising the inheritance tax threshold from £325,000 will generate the opposite of enterprise.  Most people with such large assets have simply been fortunate, surfing waves of property price inflation (facilitated by decades of loose monetary policy and yet another failed market in housing, both implicit state subsidies).  Allowing them to pass this freely on to their children would institutionalise the ability of some people to remain wealthy without being enterprising, arguably even disadvantaging those who are enterprising and take real risks for a living.

The Conservatives and the vested interests that support them are no more in favour of free markets than trade unions or charities.  It’s the case rather that the former rarely recognise the market failure that provides them with so much of their wealth and power; the latter, by contrast, are acutely aware of it since they are persistently faced with the deleterious consequences.

If Osborne really believes in free markets and the power of enterprise, he should advocate breaking up the cosy cartels that have rigged so many of them in Britain.  He might also consider dramatically increasing taxes on inherited wealth (unlikely, of course, given that so many members of the Conservative political elite are themselves multi-millionaire heirs and heiresses, possessed of fortunes that have generally been recycled into unproductive rentierism).

In any case, going down this road would present the governing elite with other intellectual problems: for correcting market failure requires, first, an interventionist state and, second, some recognition that certain markets should only exist in the public sector because they will always be natural monopolies (another concept we might rediscover from Econ 101).