The way politicians talk about markets is odd. This is not, I’ll admit, a novel observation. Indeed, very likely it’s not the first time I’ve made it on this blog. But it hit me again reading Heather Stewart’s interview with Chris Leslie in today’s Observer.
It is partly about reification and deification. The market is – or perhaps more accurately “the markets” are – a capricious god that cannot be tamed and must be appeased. At the same time, the market is the repository of all that is dynamic and innovative in society.
But it is also about the simplistic and uncritical way in which the issue is approached.
We should, most likely, expect that from the Conservatives. They are the party of the private sector. But even then it always strikes me that their grasp on how real world markets actually work is rather tenuous. We could see that as the triumph of ideology over intelligent analysis. If one were of a more radical turn of mind than me then one might argue that preaching entrepreneurialism, competition, consumers and choice serves a sectional interest. It intentionally throws up a convenient smoke screen to distract from the project of forging an increasingly plutocratic economy and society. Or, if we don’t want to style this as a vast neoliberal conspiracy, we might just conclude they are ignorant regarding that of which they speak. Alternatively, we could argue that even if the Government were genuine economic liberals, concerned about the concentration of power in the hands of too-big-to-control corporations, the process has now proceeded to such a degree that the political process has been captured by the corporate lobby.
But what of Labour? The various leadership candidates are busily dissociating themselves from the Miliband era – rowing back from various headline policy positions.
This is what Leslie is reported as saying:
In a calculated repudiation of the economic philosophy of Ed Miliband … Leslie argues that during the election campaign the party failed to grasp the power of consumers. He says Miliband’s Labour too often strayed into a statist, command-and-control approach to economic policy, seeking to centralise power in Whitehall, instead of handing it to shoppers, homeowners and tenants.
“It’s the Which? magazine strata of society that somehow we just didn’t understand,” he says. “They’re not necessarily always struggling; they may be doing OK. But they do want to do better, and they do want their families to do better, and they are consumers who want to be able to get a good deal.”
On policies from the energy price cap to the mansion tax – what Miliband’s outriders called the “retail offer” – Leslie says the party allowed itself to be portrayed as too keen to step in and take over where the market was failing.
“Part of the issue we always face on the centre left is the temptation to want to control and run what’s going on in a particular market,” he says. “All these retail policies in themselves were not so much the problem, but it fed into this question of whether we understood business and how markets work. And in turn, did that give people the sense that we were somehow a riskier prospect on the economy?”
Yet, moving to embrace a position on the economy largely indistinguishable from that of the Conservatives does not demonstrate an understanding of “how markets work”. For sure, it might demonstrate that you are willing to prioritise the interests of “business” but that isn’t quite the same thing. It also risks creating an existential crisis for the Labour party, but that’s a bigger issue.
I’m not sure quite whether the Which? magazine strata of society is a class in itself nor whether it has yet become a class for itself. But, if it means anything, I’ve got a subscription to Which?, and a subscription to the FT for that matter, and I think this is heading in the wrong direction.
Here’s the thing. Consumers are important, but to root the analysis in the consumer perspective is to miss something profound. To fail to recognise that markets are social structures, and that the state has a fundamental role in shaping a successful market economy, is an analytical disaster. You don’t have to be a socialist to think that. In fact, if you are serious about wanting to see a healthy pluralistic market economy – of the sort valued by economic liberals – then you are driven to that conclusion. From Adam Smith and the classical economists onward it has been recognised that markets have a tendency to combination and cartel unless they are policed effectively. Microeconomics can explain to you all sorts of ways in which markets fail, and the complementary role that the state can play in promoting social welfare. It is about a comparison of imperfect alternatives, recognising the troubling trinity: market failure, government failure and individual failure.
These sorts of concerns are about the intrinsic characteristics of goods and services and therefore the way in which markets will behave, given cost conditions, incentives and information. That markets for certain goods won’t work very well is a pretty trivial observation from an economic perspective. If you rule out by assumption the possibility that we can improve on the performance of the “unfettered” market then you might be doing serious politics, but you aren’t doing serious economics.
In his discussion of where Labour has been going wrong Leslie offers the following:
“The housing market’s a great example. It was reasonable to talk to people who were renting and say, ‘we understand your anxieties.’ But actually the solution is supply of housing, and not necessarily implying that landlords are all exploitative and opportunistic.”
… And instead of cracking down on lettings agencies, he would encourage local authorities to use digital technology to establish an open marketplace for rental properties.
“I personally feel that it’s got to be about consumer information, about blasting some transparency through these markets.”
There’s plenty here to pick apart. He’s right that supply is at the root of the problem. And when there is excess demand then short-side power is conferred on providers. They are able to extract rents and, if supply is slow to adjust, they will be able to extract rents for a sustained period of time. That is exploiting the opportunity presented. Is anyone saying that all landlords are “exploitative and opportunistic”? Seems unlikely. Yet it would be naive to say that none are.
While more information is unlikely to be a bad thing the suggestion that it is sufficient to curb the excesses of behaviour among lettings agents – which many would label both exploitative and opportunistic – is laughable. It again fails to recognise the way the market works. It fails to recognise that few consumers would choose the option of not living in a dwelling. So they are immediately at a disadvantage relative to suppliers and intermediaries. It fails to understand the difference between exchange and use value: the gap that opens up between the two allows letting agents to extract completely unnecessary renewal fees or landlords to ratchet up the rent for sitting tenants. More information might well alert more consumers to the fact that this is happening, but if these are industry-wide practices then in hot housing markets they aren’t necessarily going to have any choice but to cough up.
That isn’t an argument against markets per se. It is an argument for understanding incentives and the way markets work on the ground.
We could apply a similar analysis in other areas, such as the regulation of financial markets. But I’m not going to here. If you’re interested, Michael Sheen’s impassioned take on the issue is worth reading.
Understanding how markets work does not require embracing the sorts of positions adopted by Osborne and co. Indeed, I would argue that, from an economic perspective, you’d need to do quite the opposite. It is deeply problematic that from a political perspective, in contrast, it would appear that Labour feel compelled to fall into line.