Does competition law really do much good?
17 November 2008
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Economic Theory
Housing and Planning
21 November 2008
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4 July 2024
The newspapers have been full of reports recently about the Prime Minister and the Chancellor of the Exchequer summoning senior bankers and ‘ordering’ them to reduce the interest rates charged on housing loans. They wished to see reductions in the Bank of England’s base rate ‘passed on’ to ‘consumers’ fully, immediately and in a concerted way.
This whole sorry business reveals the rather curious nature of competition law. In many ways it does not look like ‘proper law’ at all. At a time when airline managers are dragged before the courts accused of talking to one another about passing on aviation fuel surcharges to customers, the government is capable of actually arranging a meeting and, with maximum publicity, trying to enforce behaviour that on the face of it is a blatant breach of the rules. ‘Bankers meet secretly to fix the price of mortgage loans’ somehow looks dubious. ‘Government summons bankers to force cut in interest rates’ apparently looks all right. It is not easy to think of a good reason in economics why this should be so.
The obvious argument that the government was operating in the interests of ‘consumers’ by urging a fall in price ignores the fundamental point that banks are intermediaries and that most of the ‘consumers’ of their services are actually savers and lenders. Implicitly the government was publicly forcing the bankers to conspire with each other in order to improve the fortunes of one set of people (financially vulnerable and clearly politically important) at the expense of another (a broader, more numerous group facing costs that are, to a significant extent, hidden). They were not letting competitive forces determine the winners and losers from underlying changes in market conditions.
Competition law seems particularly vulnerable to these ‘public choice’ considerations. In the end it is always about negotiating with officials rather than complying with universal principles of conduct. The present disastrous financial meltdown simply reveals this underlying reality in an unusually stark way. The Lloyds-HBOS merger would have received short shrift only a few months ago, as has widely been remarked. This presents a real dilemma to supporters of market systems. We might take the classic view that competition law is a necessary buttress to the market system. If so, I leave it to professional lawyers to explain how we can prevent the over-mighty executive branch of government (in the UK) from driving a coach and horses through it. Or we might give up on the grounds that the results are as likely to reflect political expediency as economic efficiency. It would be interesting to know what proportion of economists still hold to the classic position and what proportion think that, with a free trade policy and a clear rule that restrictive agreements are unenforceable in the courts, we could do perfectly well without the whole shooting match.
This whole sorry business reveals the rather curious nature of competition law. In many ways it does not look like ‘proper law’ at all. At a time when airline managers are dragged before the courts accused of talking to one another about passing on aviation fuel surcharges to customers, the government is capable of actually arranging a meeting and, with maximum publicity, trying to enforce behaviour that on the face of it is a blatant breach of the rules. ‘Bankers meet secretly to fix the price of mortgage loans’ somehow looks dubious. ‘Government summons bankers to force cut in interest rates’ apparently looks all right. It is not easy to think of a good reason in economics why this should be so.
The obvious argument that the government was operating in the interests of ‘consumers’ by urging a fall in price ignores the fundamental point that banks are intermediaries and that most of the ‘consumers’ of their services are actually savers and lenders. Implicitly the government was publicly forcing the bankers to conspire with each other in order to improve the fortunes of one set of people (financially vulnerable and clearly politically important) at the expense of another (a broader, more numerous group facing costs that are, to a significant extent, hidden). They were not letting competitive forces determine the winners and losers from underlying changes in market conditions.
Competition law seems particularly vulnerable to these ‘public choice’ considerations. In the end it is always about negotiating with officials rather than complying with universal principles of conduct. The present disastrous financial meltdown simply reveals this underlying reality in an unusually stark way. The Lloyds-HBOS merger would have received short shrift only a few months ago, as has widely been remarked. This presents a real dilemma to supporters of market systems. We might take the classic view that competition law is a necessary buttress to the market system. If so, I leave it to professional lawyers to explain how we can prevent the over-mighty executive branch of government (in the UK) from driving a coach and horses through it. Or we might give up on the grounds that the results are as likely to reflect political expediency as economic efficiency. It would be interesting to know what proportion of economists still hold to the classic position and what proportion think that, with a free trade policy and a clear rule that restrictive agreements are unenforceable in the courts, we could do perfectly well without the whole shooting match.
6 thoughts on “Does competition law really do much good?”
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In my book on government project disasters (’They Meant Well‘) I pointed out that politicians ensure most people have hardly any real choice in welfare services. Governments aren’t really ‘monopolists’, since they aren’t selling anything: one might call them ‘monoparechists’ — single suppliers. They act like paternalists, not like competitors. They neither understand nor value competition. Following Hayek one might call central direction ‘an obfuscation procedure’.
In my book on government project disasters (’They Meant Well‘) I pointed out that politicians ensure most people have hardly any real choice in welfare services. Governments aren’t really ‘monopolists’, since they aren’t selling anything: one might call them ‘monoparechists’ — single suppliers. They act like paternalists, not like competitors. They neither understand nor value competition. Following Hayek one might call central direction ‘an obfuscation procedure’.
Competition is valued by those who ever experienced monopoly. I did. Collapse of the finances currently is not due to competition, which is always good to welfare. It requires new type of regulation which wasn’t done in time when global markets including finance sector became the fact. As it is, e.g., done within the EU, but now on a global scale. It needs fundamental changes accepted: global economic integration with all due consequences.
Competition is valued by those who ever experienced monopoly. I did. Collapse of the finances currently is not due to competition, which is always good to welfare. It requires new type of regulation which wasn’t done in time when global markets including finance sector became the fact. As it is, e.g., done within the EU, but now on a global scale. It needs fundamental changes accepted: global economic integration with all due consequences.
Nicely put. Competition law clearly is not law at all, but the rule of opinion of the powerful. Interestingly, implicitly the purpose of these laws is to make business *less* successful. Normally they are keen on this to impose easily broken but severely punished rules about discussing fuel surcharges, pricing baked beans and so on. As soon as they want a business to succeed (i.e. not go bust) then its forgotten. Never seems to happen with the whole “murder” bureaucracy, does it?
Nicely put. Competition law clearly is not law at all, but the rule of opinion of the powerful. Interestingly, implicitly the purpose of these laws is to make business *less* successful. Normally they are keen on this to impose easily broken but severely punished rules about discussing fuel surcharges, pricing baked beans and so on. As soon as they want a business to succeed (i.e. not go bust) then its forgotten. Never seems to happen with the whole “murder” bureaucracy, does it?