My word, you mean competition actually works?

Well, would you look at that! Apparently competition works to the benefit of consumers! Who could have possibly predicted that outcome?

Shop prices fell at the steepest rate for at least eight years last month as the popularity of discount stores among the middle classes helped to drive down the cost of clothing and consumer goods.

The overall price of items at the till fell by 1.8 per cent compared with June last year, with the price of clothes down by 13.7 per cent year-on-year.

The figures, compiled by the British Retail Consortium/Nielsen shop price index, show the fastest drop in prices since the trade association began compiling data in 2006.

It was also the 14th month in a row in which shop prices fell, easing the pressure on households where wage-earners have suffered pay freezes.

Yes, of course, the capitalists are straining every sinew to increase the profits that they make from our need for basic necessities such as food and drink. But in doing so they find themselves competing with other capitalists who would also like to like that pelf from our pockets. That competition then limiting the amount any one shop can charge and finally leading to falling prices for consumers.

Of course, a number of people have pointed this out before, starting with Adam Smith, Bastiat had things to say on the point and even Karl Marx got it. Monopoly capitalism is to be avoided for it is without that competition, for it is that market choice that makes such a system work to the benefit of consumers.

This is all obvious to us, the initiates, of course. But we need to continue to make a song and dance about it. Yes, there really are things that governments must do that cannot be done by other actors. Yes, there really are times that said government must intervene in the economy. But for the most part that intervention necessary is simply to ensure that competition is possible.

It’s not necessary to ensure that competition is happening, only that it can. For a monopolist in possession of a contestable monopoly is unable to exploit that monopoly for fear of competition arising to contest it. It’s not even necessary to have a level or even playing field, only to have an open one.

Worth noting the next time someone starts to complain about the monopoly of the supermarkets (as they do every few years, prompting yet another enquiry). Precisely because competition is forcing prices down we’ve obviously not got an exploitable monopoly here.

The BNP Paribas $9bn. and International Financial Regulation

Over the weekend BNP Paribas accepted a US $8.9bn. fine for breaking US sanctions on Sudan, Iran and Cuba and concealing that from US authorities.  One question arising is whether the US authorities are using regulation to gain competitive advantage over foreign banks.  This was a French bank that broke no French or EU law and dealt directly with non-US sovereign countries.  Why should the US be allowed unilaterally to impose US regulations?

The technical reasons are that BNP Paribas relies on the US dollar for global trading and that they concealed their dealings from the US authorities, i.e. the sin was the concealment.  Of course, revelation of the deals would have got them into the same hot water.

Supposing all this had been in sterling in the days that the pound was the global trading currency.  Had the French then infringed some British law, would we have been able, successfully, to remove a ton of money from their vaults?  The thought is ridiculous.

The reality is that the US is using regulation to gain competitive advantage for their banks.  EU financial services have to comply with regulation in their own member states, additional EU regulation AND US regulation wherever in the world they may be trading.  US financial services have only to comply with US regulation unless they are trading in the EU.

The US authorities seem to be fining non-US banks more often and by larger amounts than US banks.  That raises the suspicion that the US authorities are partisan but it may, of course, be that US banks are simply more virtuous.

The US authorities using the extra muscle of the US unfairly is only the smaller part of my point.  The global regulatory authorities are not in competition trying to attract more companies to come under their jurisdiction by lighter touch regulation.  This kind of Darwinian evolution may apply to corporate tax rates where company HQs can, and do, move to lighter tax zones.  The regulatory authorities are trying to bring more and more companies under their control. Financial regulation is not shrinking due to competition between regulatory authorities, quite the reverse.  It is growing because of competition between jurisdictions trying to enmesh more companies in their tentacles.

Those who are against excessive regulation should not attack just the number of regulations from any one authority but attack the number of authorities seeking the regulate their business.  The fewer authorities, the better.

Unfare Competition

It’s not really a huge surprise that Brussels, the home of EU bureaucracy, has recently banned ‘cab app’ service Uber from the city. The Brussels court unashamedly declared the company “unfair market competition” to the town’s two (yes, two…) taxi companies, and drivers face a €100,000 fine if they use the app to pick up customers.

This isn’t a one-off, either; Uber’s had a bumpy ride from the start. Across the USA and Canada they’ve endured cease-and-desist letters, impounded cars, sting operations and suspended trading. Taxi drivers in Chicago are suing the city itself over them,  Berlin’s slapped on an injunction, and in France enraged taxi drivers are getting physical.

Uber hit London in Summer 2012. Given the range of ventures on the scene- Black cabs, mini cabs and fleets of Addison Lee, as well as apps like Kabee and Hailo – Uber’s operation should be uncontroversial. Not so. Instead, the Licensed Private Hire Car Association (LPCHA) has called upon TfL to ban cab app services for failing to conform to relevant legislation, citing , uninventively, public safety concerns.

Reading all of this Uber come across as renegade cowboys, tearing through cities kidnapping passengers. Reality is far more boring.

Uber’s critics deem them an unlicensed taxi company (or as per the Chicago lawsuit, an ‘unlawful transportation provider’), who blatantly violate regulations. In actual fact, Uber are a new kind of entity: an app-based, ‘logistical’ intermediary. They use GPS to connect passengers with self-employed (and in the UK, licensed) drivers, and handle payment through a registered card. Their trick is that in only ‘matching up’ independent drivers with riders, they don’t count as a taxi operator.

Additionally, in the UK private hire vehicles can’t ply for trade like registered taxis and must be booked in advance. It seems that a rider requesting a pickup through Uber counts as a booking, allowing a nearby driver to accept a request and be there in minutes. In these ways it does seem that Uber and other like it have thrown away the rulebook, but only because they’ve been ingenious enough to innovate around it. Uber’s model also brings other innovations too, such as price discrimination through ‘surge’ pricing, truly flexible work for drivers, and a highly responsive rating system of both drivers and passengers.

There’s no wonder that incumbent players are worried. But it’s sad, if not surprising, that anti-Uber sentiment comes not from governments angry at rulebreaking but businesses threatened by fresh thinking.

State intervention imposes huge costs and barriers to entry on the taxi industry (think of London cabbie’s ‘The Knowledge’, fixed taxi fares, and America, where taxi medallions have sold for over $1m) - scuppering competition and innovation. Reform of the industry with its often cozy cartels is long overdue.

Companies like Uber show other firms how they can improve their game. In fairness there is an argument for ‘leveling the playing field’; it’s not one actors want to use. When Uber works around (or even flouts) a jurisdiction’s regulation, other players can use Uber’s success as evidence that restrictions are superfluous to providing a good service, and therefore unfair on them.

Instead of demanding more relaxed regulation, however, incumbent actors have decided which side their bread is buttered, and would rather keep the status quo than improve their service. Instead of competing, they cling to the regulatory chains binding them and wail for others to be shackled by them too. They might cry the cry of public safety, but it’s the safety of their market share which they’re really concerned about.

Sadly, vested interests have had far too much success in this area. Where Uber hasn’t been banned completely, lawmakers have often caved in and introduced new restrictions. Frequently, this doesn’t stop protestors. And it isn’t just Uber who has such woes. Companies with similarly innovative models such as AirBnb and Aereo have also faced an uphill struggle of acceptance.

TfL should disregard LPCHA’s demands. It certainly isn’t up to the government to protect old industries and vested interests, but sadly so many other cities clamping down on Uber adds false weight to their claims. It’s beyond obvious that consumers, not regulators, and certainly not business rivals should be the judge of an effective (and safe) service. That said, the fact that cab app services are making so many competitors uncomfortable is a pretty good indicator that they’re doing something right.

Small firms, giant leaps, and the elephant in the room

IPPR has recently released a detailed and thought-provoking report. In Small Firms, Giant Leaps, Spencer Thompson considers the contribution small and medium-sized enterprises (SMEs) have made to Britain’s economic recovery since the financial crisis and the role they could play over the coming years – specifically in getting more people back into work. Small Firms, Giant Leaps suggests some sensible reforms that this Government should take seriously, but it falls short of dealing with the real problem; a problem so much discussed and so obvious that its mere mention is liable to induce a collective yawn: too much complex regulation.

As the report makes clear, SMEs have contributed enormously to the labour market recovery since the financial crisis – 84% of jobs growth between the start of 2010 and the start of 2013 came from SMEs: “Overall employment rose by 1.5 million between the start of 2010 and the start of 2013. Of this, 1.2 million was in enterprises with 0–249 employees. Given that they only account for two-thirds of total employment, it is clear that SMEs are disproportionately driving the jobs recovery.”

The report suggests four policies for using SMEs to the end of creating “full employment” (defined as 80% of the workforce). I’ll first consider two through four.

The second recommendation is to retain and reform statutory sick pay recovery. Obviously, businesses are less likely to hire workers who have a higher risk of getting sick and not turning up to work, and this is more weighty burden for smaller businesses. Thompson suggests targeting current support towards individuals that face the greatest sickness-related hiring risks and only making this available to small firms (those with an annual NICs liability of less than £45,000). It is estimated that this reform would cost just over £20 million, which is good deal less than the £50 million currently spent on statutory sick pay recovery.

The third recommendation is to intermediate labour markets in welfare-to-work policy: “Providers under the next iteration of the Work Programme should be allowed and encouraged to act as a temporary employment agency for claimants in particular groups, securing short-term paid work placements with employers.” The fourth recommendation is for an occupational benefit insurance scheme for SMEs. Thompson calls on employer associations – such as the Federation of Small Businesses and the British Chambers of Commerce – to work with insurers to help SMEs club together to offer occupational sick, maternity and paternity pay to their employees.

The first recommendation is less convincing and gets us to the nub of the problem. Thompson calls for more business support for new employers and existing micro and small businesses. The problem is easily identified: “those not large enough to employ a dedicated HR professional and unable to afford the cost of external support have to navigate through an often complex system of employment law and labour market regulation.” The solution, according to Thompson, is to give up to £1,000 in support and services.

Rather than setting up yet another scheme to navigate the complex regulation, the Government should exempt small businesses from as much of the labyrinthine system of employment law and labour market regulations as is feasible. Since 2001, the Government has been committed to exempting microbusiness from upcoming “burdensome” new regulations. The logical conclusion is to exempt them from existing burdens too. For those who suggest that this can’t be done, just consider that in 2012 the Government exempted hundreds of thousands of low-risk workplaces from health and safety inspections.

Information is certainly important for SMEs – the chopping of Business Link and the various changes since then must have done significant harm – but by their own reckoning regulation is the key reason SMEs aren’t hiring more. As is shown in the Figure 2.1 (page 33) of the report (see below), when asked in an FSB poll about the barriers to taking on more staff, only 5% of SMEs said it was “not finding the appropriate information”, while 32% said it was a “fear of litigation/employment tribunals”, 30% “employment law/regulations”, 16% “other regulations”, and 14% “administrative burden”.

FSB chart

Some may suggest that SMEs fears are unfounded, but the 321,800 claims accepted by employment tribunals in 2011/12 suggest that the hesitancy is based on real and present dangers. One of the costs of regulations designed to protect the currently employed is that it restrict access to those on the margins of labour markets. If your goal is 80% employment, then, whether you like it or not, deregulation is the most powerful weapon in your armoury.

Philip Salter is Director of The Entreprenuers Network.

The sale of Royal Mail was well handled

The National Audit Office, some of the media, and the Opposition (of course) are saying that the sale of Royal Mail was "too cautious" and lost "hundreds of millions of pounds" for the taxpayer.  This is nonsense, and its currency shows how little some people understand about privatization, or perhaps how much people have forgotten by not doing it.

It was the first major privatization in two decades, and the aim was not to raise the greatest possible sum for the government, but to turn a state-run corporation into a successful and flourishing private business.  This was always the aim of the privatizations of the 1980s and 1990s.  When the major state industries and utilities were brought to the stock market and put into private hands the aim was always to achieve a first-day premium so that investors would feel satisfied that it was a success, and feel confident about its future.

No-one knew what the "correct" price was for Royal Mail, any more than they did for BT, British Gas and the dozens of others.  Since they had not traded in the private sector, or had to attract private investment, no-one knew how they would be valued.  Government took expert advice knowing that it would be, at best, an estimate.  It covered itself by retaining a proportion of the shares so it could gain later from any increase in value.  In the case of Royal Mail it has retained 30% for later sale at a higher price.

The pricing was cautious, as it was in the earlier privatizations, because government wanted a successful launch into the private sector more than it wanted the highest possible price.  Privatization was always a political as well as an economic act.  Its major aim was to replace state ownership and direction of industry by commercial and (where possible) competitive private sector activity.  It did so because the private sector is exposed to improving disciplines absent from nationalized industries.

The threat at the time of a Royal Mail strike cast more uncertainty over the company's valuation, even though that threat was later withdrawn.  We now have a successful private company holding its own in a competitive market, a company that has become one of the UK's leaders, and one whose future prospects look good.  This was a successful sale, and those who carp about not gaining the maximum possible price simply do not understand what privatization is all about.  It isn't about selling off stuff for the top price; it's about building up companies that can thrive by providing goods and services in a dynamic competitive market.