ECONOMICS - by Colin TeeseNews Weekly
Competition, profit and common sense
, December 4, 1999
Sometimes things don't go as expected. Competition is one of them. Colin Teese explains.
Competition policy is, as they say, being 'gone over'. A Senate Select Committee has circulated its interim findings on the subject entitled - Competition Policy; Friend or Foe:Economic Surplus, Social Deficit? Hot on its heels came the Productivity Commission's Impact of Competition Policy Reforms on Rural and Regional Australia.
The preferred control option of economic rationalists for containing free market excesses is - for ideological reasons - unregulated competition. Like most ideologically-driven preferences, the mechanism is deeply flawed.
Indeed, an unswerving belief in the therapeutic benefits of competition can only be sustained if one is prepared to ignore its somewhat chequered and disreputable record in the evolution of modern capitalism. At the very least, competition has been the handmaiden of both the exploitative abuse of child labour and the tolerance of unsafe factory conditions.
In fact, current advocates of what is fashionably called competition policy, are deregulationists in drag, intent upon the dismantling of those controls found to be so necessary one hundred years ago.
Competition is one of the contradictions of capitalism. It is, like taxation, the enemy of profit. Yet, if you ask a businessman if he is in favour of competition, he will answer unreservedly 'yes'; though as a matter of practice he will manage his business as if the opposite were true.
And, just for the record, market economies aren't underpinned by competition, but by profits. The trick is, and always has been, how to regulate against market excesses and yet allow business the maximum freedom to pursue profits. The solution has always been government intervention in one form or another.
In Europe, and, in part, Asia, the preferred mechanism has been the legitimisation of cartels, in the belief that this is the most effective way of allowing firms to secure a reliable profit stream. The United States preference has been to enact anti-trust laws. But outlawing anti-competitive practices is one thing, enforcing laws is quite another.
Congress provided the legislative framework for regulation, but the Administration, by understaffing the examining and enforcing agencies, emasculated the impact of the legislation. Whether this was a happy compact between legislature and administration to create the illusion of competition laws, was, and remains, unclear, but there is no doubting the outcome.
Only the most blatant and outrageous abuses of monopoly and oligopolistic powers were ever seriously prosecuted - except in the case of foreign-owned companies.
Two points can thus be made about the anti-trust laws: first, they have been subject to discretionary application; second, in important respects, they became as much instruments of trade, as of competition policy. From these facts one is entitled to conclude that the United States is no more committed to enforcing anti-competition policy than is Europe or Asia, but is less inclined to say so openly.
As for Australia, we seem to have trodden the same path as the US.
Putting aside the differences in what is publicly proclaimed, the unwritten (and unspoken) law in market economies was, and still seems to be: large enterprises, of which there will normally be few in the same industry, will be deemed to be in competition, provided there is no evidence of collusion - overt or covert - between them.
Since they do not usually sell direct to end-users, the consumer interest is assumed to be protected by the operation of quite cut-throat competition at the dealer level. (Built into the sale price of the product is a dealer margin, which allows - compels? - the dealer, usually a small business, to compete.)
Consider motor vehicle manufacture and sale in Australia. By whatever means, Ford and General Motors set more or less identical prices for their competing models, with a built-in margin which gives scope for their dealers to compete on price.
And so it is with oil production and petrol sales. The few big producers effectively set prices, while the retailers are afforded a margin which allows them to compete on price.
This is a far cry from pure competition, but probably a better servant of both community and business interest, though nobody dares say so publicly.
Of course, it does not work for all enterprises. Miners, for example, selling an undifferentiated product direct to an end-user, or to a group of end-users, buying collusively, are obliged to compete on price. This no doubt explains why the index of mining stocks consistently under-performs that of manufacturing.
Farmers are similarly disadvantaged; in fact worse, since they are many small producers dealing with collusive buying strength.
Don't expect any recognition of this from either the Productivity Commission - which is supposed to advise the Government on competition policy - or the National Competition Council, which is supposed to administer it. And certainly not from economic rationalists, whose entire philosophy it undermines.
The consistent theme emerging from the deliberations of these groups is that the consumer public has more to fear from public than private monopolies. (Entirely consistent with the ideology, of course, if not with reality!)
Could it be they believe that destabilising confidence in public utilities is perhaps an effective smokescreen from behind which can be imposed on an otherwise recalcitrant community, policies of so-called micro-economic reform, privatisation and deregulation?
For all its inquisitorial powers, the Senate Select Committee appeared to be unduly solicitous of the orthodox view of competition policy. To say the least, this is disappointing.
Then again, perhaps it is asking too much that Senators, most of whom are untutored in the arcane machinations of economic extremism, match it with experts. Neither can they always be expected to know when the economic wool is being pulled over their eyes.
Consider this piece of gobbledegook from the lips of the President of the National Competition Council: 'Micro-economic reform nearly always results in the immediate loss or financial and other pain for the beneficiaries with diffuse, longer term benefits for the community at large that far exceed the level of benefit that had been derived by the small section of the community ...'.
To those on the losing side of the equation, he is in effect saying: 'Just grin and bear it. Larger gains are accruing to the wider community.' The latter, you understand, only in the longer term when it will be impossible to measure what exactly has happened and why.
The Select Committee appears to have swallowed this drivel whole.
And what of the spell-bindingly arrogant, though entirely predictable, observations of the Productivity Commission: 'Competition policy will not necessarily produce lower prices to the consumer. Indeed, consumer prices may well rise as a result of its efforts.'
Amen, to that might well be the cry of NSW dairy farmers, deregulated into oblivion in the name of competition policy.
Competition policy is about generating efficiencies, whatever the cost. What is not explained is why so-called 'efficiencies' can lead to price rises. Sounds more like public relations than economic analysis.
The National Competition Council, however, can smile all the way to an expansive lunch, the Productivity Commission having handed them a 'no lose' situation. Whichever way consumer prices move, the Council can claim success.
Incidentally, with just the faintest hint of apology, the Productivity Commission solemnly concedes to inquisitive Senators that '... the benefits so far [of competition policy] have favoured large rather than small business and metropolitan rather than rural areas'.
Unfortunately, Senators appeared to accept these observations uncritically.
No so Professor Quiggan's perfectly reasonable criticism of the National Competition Council (NCC), which they appeared to dismiss out of hand. Quiggan maintained that the NCC was set up as a Council deliberately to avoid accountability (that is to Parliament). Perhaps Quiggan's views cut too close to the bone of a Senate which allowed such legislation to pass.
What seems to have slipped completely by the consciousness of the Senate is the proposition that, just possibly, unrestrained competition may not always suit the needs of business any more than the wider community.
On the positive side, the Select Committee did try to spell out in its List of Recommendations some public interest criteria, and, as well, proposed that, as guidelines for a Council administering competition policy. It also suggested certain community service obligations should be explicitly spelled out for the guidance of the National Competition Council, and made important recommendations as to its future.
What is not at all clear is what mechanisms exist to give effect to any of the Select Committee's worthwhile recommendations, other than to suggest change to the Treasurer. He is unlikely to be sympathetic.
There is, however, one hope for change. The incoming Victorian Government has signalled its intention to poll dairy farmers about deregulation, and to reverse the Kennett Government's decision to go ahead if dairy farmers so wish.
If Mr Bracks can get away with that without adverse financial repercussions from Canberra, other States may be encouraged to follow. That, in turn, could open up the possibility of 'reform' of competition policy in a more sensible and community-oriented direction.
- Colin Teese was Deputy Secretary of the Department of Trade