Economics

Carry on cartels

Harold: For the past ten years, there has been peace.  Everyone his own manor, his own caper.  Everything’s been all right…
Billy: South London and the East End have… there’s never been better relations, really.
The Long Good Friday, Handmade Films, 1979

Fiscal discipline, central bank independence, tight monetary policies, ‘competitive’ (i.e. low) tax rates, shunning the trade unions… One by one the supposedly unchallengeable pillars of the post-1970s economic order are collapsing. Could competition policy (‘trust-busting’ in American English) be the next to fall?

A ridiculous idea, one would have thought. The man or woman in the street may have little interest in monetary policy (beyond avoiding high mortgage rates) or the ‘fiscal stance’ (beyond an understandable desire not to hand over too big a chunk of their earnings to that nice Rishi Sunak). But the enforcement of competition rules, the breaking up of ‘cosy cartels’ (such arrangements are always cosy, for some reason), the smashing of commercial and professional monopolies that have rooked the public for years – here, truly, is a popular and well-understood phenomenon that, we must all hope, will survive the ructions caused by the response to the current crisis.

I am not so sure, as we shall see shortly. But first, a little history.


Anyone aged under forty would, I confidently predict, be astonished at the lack of competition among providers of goods and services well into the 1980s. Said providers routinely arranged themselves into closed shops (making criticism of the trade unions at that time just a little hypocritical) often with the encouragement of government.

Here are some examples. The Building Societies Association set the mortgage rate every month, and, given it represented almost all lenders on residential property, what it said, went. The Finance Houses Association performed a similar function with regard to hire-purchase rates.

The main banks would, on occasion, be hauled in front of MPs or competition regulators to be asked why they all charged near-identical rates on loans and overdrafts and paid similarly proximate rates on savings. In fact, the only items on which they differentiated themselves was the giving away of free wallets, pens and piggy banks to their customers (airlines were much the same, making a great song and dance about free drinks and inches of legroom while all levying very similar fares). In the banks’ case, the hilarious rationale was that, far from being evidence of a cartel, the uncanny similarity of their offerings reflected the fact that ferocious competition had led to super-efficient price discovery.

In some ways, even more egregious than the banks were the insurers, although at least they had the excuse of semi-official encouragement. Policyholders were charged on the basis of what amounted to a common ‘tariff’, thus an 18-year-old man with a 1,000cc motor-cycle or a 40-year-old former Army or police driver now working in local government and driving a Morris Minor would pay much the same wherever they sought insurance (the former rather more than the latter, obviously).

All this without mentioning barristers’ exclusive right of audience in the higher courts, or the duopoly between the bar and solicitors, who themselves had a monopoly on property conveyancing. Or the fact that most professionals were prohibited from advertising. (This included opticians – where would junk mail be today had that been allowed to stand?)

Then we get to the cosiest of cosy cartels, the City, where stockbrokers and stockjobbers carved up the available action between them. The former had exclusive rights to deal with clients, while the latter had exclusive rights to trade in shares.

Brokers would take a buy or sell order, get in touch with a jobber and arrange the deal. Lovely jubbly. Furthermore, brokers were required to charge a minimum commission on all share deals, thus price-cutting competition was prohibited.


Let’s stay in the City as we start to look at what happened next. Labour, in office in the late 1970s, referred the broker/jobber set-up to competition regulators. In part, one suspects, this was a tit-for-tat aimed at a presumed Conservative bastion for all those attacks on the union closed shop. But it also reflected a changing view of the desirability or otherwise of such arrangements.

The responsible cabinet minister, Roy Hattersley, Prices and Consumer Protection Secretary, later recalled of his general approach at a time of high inflation: ‘Prices policy was, and only could be, an extension of competition policy – with the Government and the Price Commission [the official quango] acting as a surrogate for the pressures of the free market.’

It is ironic that a Labour Government should have lit the fuse that would not only blow up the old, clubby City (which was presumably the intention) but would usher in the era of astronomical banker and broker pay and bonuses and greatly inflate the importance of financial services in what, even in the ‘70s, had been an economy with a strong manufacturing element.

However, it is perhaps equally ironic that the Tories, triumphant after the 1979 election, declined to rescue their traditional friends in the City from the upheaval that would become known as Big Bang and which would culminate in 1986 with commercial banks being allowed to buy up brokers, jobbers and the traditionally independent merchant banks, which provided corporate financial advice and guided their client-companies round the financial markets, such as when they needed to raise funding.

Since the 2008 financial crisis, the creation of these all-in-one ‘investment banks’ has been widely seen as a mistake and steps have been taken here and abroad to ensure their activities are ‘ring fenced’ from their parents organisations’ mainstream retail banking operations. But we have yet to entertain a wider notion, that much of the turbo-charged search for ‘cosy cartels’ and their subsequent dismantlement may have been utterly wrong-headed.

Here are some examples. On competition grounds, the directory enquiry telephone service was effectively destroyed and replaced by inferior, but more expensive, versions. The maximum commission agreement, limiting the percentage cut that independent financial advisers could take from the sale of investment products, was banned on ‘competition’ grounds, giving the clearest incentive for advisers to push their clients into those products, regardless of suitability, that paid the most commission.

Then there was the edict that banks could no longer cash each other’s cheques for free (important in a pre-online, branch banking world), so they had to start charging. More ‘competition’ in legal and accounting services has led to the widespread corporatisation of what were once two proud and independent professions organised on a partnership basis.

It was competition policy that, in the ‘90s, killed off the net book agreement and, with it, many independent bookshops.

It is easily forgotten that much of the official encouragement or at least toleration of cartel-type arrangements in the post-war years sprang from the horrors of the Depression and revulsion at unfettered, unregulated cut-throat competition that destroyed jobs and wealth. With producers able to protect their margins, everyone would benefit, including the consumer, who could be confident their suppliers would remain  in business and that they would be able to carrying on drawing pay cheques.

Cosiness, I suspect, may well come back into fashion. After all, everything else has.

artwork-monopoly


 

Leave a comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.