Big businesses – voice or choice?

There is no shortage of those on both sides of the political spectrum queuing up to excoriate big business. The CPS has recently joined the fray, suggesting that big business tramples on the people. The polling evidence suggests that people do not like big business. But should we simply surrender the argument?

This anecdote is used by a leading advocate of the anti-big-business position (see 3:11:30). Maurice Saatchi travelled on a train and found that one of the doors was rusty; he told the company that ran the service; that company referred him to another company; and the charade continued until he ended up being referred to owners in Switzerland. This is one of the problems of big business, he argues.[1]

This fundamentally misunderstands how markets work. They do not work by giving us effective avenues for complaints. Instead, competition ensures that we have relatively little to complain about. It provides us with the option to go elsewhere. In 1994, I travelled on the trams of St. Petersburg. There were dozens of people travelling on one tram which was so rusty that I remember thinking that I could have dismantled it with my bare hands. A free economy is not better than communism because under the former we can complain to somebody in Switzerland and under communism we cannot complain at all (whilst under ‘perfect competition’ we can complain to somebody in the same town). A free economy is better because it resolves problems without the need to complain. That is why competition in schooling achieves better results for the poor. In education systems that lack competition, ‘voice’ is the only way you can improve outcomes for your children and this works better for well-educated parents than for less-well-educated parents. If only big chains of schools could compete in the market for schools, the poor would be much better served.

It is, though, argued that big firms undermine competition. But this misunderstands the role of ‘market definition’ in competition policy. When I was very young, I was often taken from local monopoly shop to local monopoly shop by my mother. I still remember that she did not think much of most of those shops. Today, in the same village (it is a very large village – indeed, it claims to be the largest in England, though there is a lot of competition for that claim) there are several national supermarket giants competing for business. Some operate within the village, some on the outskirts. In other words, there is now far more competition between (for example) five national supermarket chains than there ever was between the monopoly single-function, single-unit small shops of the late 1960s. As it happens, many of the small shops still thrive, presumably providing a decent service.

What matters is not whether a market is dominated by big businesses or small businesses, nor even necessarily the number of players. What matters is whether a market is contestable. Can the threat of entry by new players ensure that the benefits of competition are reaped for consumers? Some private businesses are more contestable than others, but state sectors such as healthcare and education are the least contestable of all.

If we do worry about a market being contestable, then we should try to reduce barriers to entry if that is appropriate – especially if those barriers are imposed by the state.

It can be argued that big businesses are rent seekers and try to erect barriers to entry in order to reduce competition. This may be true in some industries – especially regulated former-nationalised industries and, to some extent, in finance. But small businesses are not averse to rent seeking either. Indeed, it is planning regulation (influenced at the local level by small businesses) that prevents more supermarkets from establishing. It is taxi drivers (who are self-employed) who protest about Uber, and so on. Breaking up businesses is hardly an efficient way of dealing with rent-seeking.

The fact is that, though our well-off paternalistic chattering classes have a prejudice against large businesses, it is large businesses that tend to bring the rest of us cheap and reliable products. It may be possible to find a rusty door on the Gatwick Express, but it is doubtful whether the railway system would ever have been built without the large joint stock company. My hunch is that the world will become dominated by smaller businesses in the future, though we certainly should not incentivise this through the tax system. But, I really don’t care whether businesses are big or small. I just hate complaining. I want a market structure that minimises my need to complain, not a market structure dominated by small businesses just because that provides me with easier channels to complain.

[1] It could be argued that there is a lack of competition but that is an entirely different point – see below. Until 2008, it was possible to get from London to Gatwick using at least four different (big) firms by coach or train. Under reforms to the franchise system, the number of train operators will be reduced to one later this year. This is a different problem with a different solution

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.