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Competition. The (lack) of wisdom of crowds. October 1, 2008

Posted by WorldbyStorm in Economics, Economy, Irish Politics.
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Reading the front page of the Irish today I was struck by the following in the lead article.

The Bill [emergency legislation to guarantee the Irish banking system] gives the Minister for Finance wide-ranging powers to protect financial institutions and allows for competition law to be set aside to allow bank mergers, if deemed necessary to protect the stability of the financial system.

Wait, let’s get this right. The commanding heights of capitalism in this state require competition law to be set aside in order for the stability of said system to continue. Interesting stuff. Particularly considering we have been subjected to the most uncritical paeans to ‘competition’ year after year within our media. Now, one could chalk this up to saloon bar wisdom. What else? But we could also chalk it up to a ‘mythic’ discourse that has influenced and shaped our government, our economic policy and our societal structures for decades.

A cursory analysis of the Irish Times letters page over the past twenty years indicates the tenacity of this ‘myth’ (and tellingly often in the context of Ryanair, an airline operating in an industry that is hugely underwritten by concealed state interventions on a global level), and to some degree during the economic boom it wasn’t so much that critiques were incorrect as rendered near irrelevant by the sheer power of growth.

No more.

If nothing else the events of this last month, this Summer, should indicate that such – absurd – confidence and certainty was misplaced, that these nostrums were always shaky (consider the exceptions across the decades) and that absolutism in these matters, as in all else, is usually a cover for ignorance. Think of the examples that most readily spring to mind both here and abroad. Competition in railways, co-location, ‘competition’ in management within state structures and so on and so forth. Bending structures most readily suited to single providers to generally faux-competitive practices, often for no other reason than a sort of economic fadishness. I’d love to think those days are passing, but…

And some fascinating arguments clearly raged over the last number of days. For example… what of this?

The option of allowing one particular bank to fail and then moving to nationalise it was seriously considered, but it was decided that legislation to protect the entire banking system would had a better prospect of achieving long-term stability.

You know I can’t help but feel that we’re seeing the dead hand of the PDs at work there. Is it really better to bet the house on bailing out the Irish financial sector than to see one of those pillars of (im)propriety fall into public ownership, even if briefly? I’m not so sure it is, not least because the total potential cost in a meltdown situation would be damn close to the Feds bailout for the US financial sector. A lot of money, an awful lot of money – and perhaps Cowen et al are counting on that unpleasant scenario never coming to pass. Which is interesting because I’m almost, in this particular instance, as one with some conservative US opinion in washing my hand of one or two Irish banks, pour encourager les autres as it were. Certainly one nationalisation might soften the cough of that sector in the future. And might serve to further undercut the prevailing myths of the sanctity and inviolability of the ‘free’ market. Not so free to the poor benighted Irish citizen if things go bang.

Finally, what are we to make of ‘incorporeal cabinet meetings’? This was the term used to cover the following:

The decision was approved by an “incorporeal” Cabinet meeting at which Ministers were consulted on the phone through the Cabinet secretary, Dermot McCarthy.

Is that really a meeting? It sure isn’t a conference call…

Comments»

1. crocodile - October 1, 2008

The morning after the last general election, the Irish Times, leading liberal paper of record, identified in an editorial the biggest challenge facing the incoming government. Doing something about our chaotic health service? Narrowing the widening gap between rich and poor? No….competitiveness.
For the last 20 years, any attempt to press forward a better-working-conditions agenda has been trumped with the unanswerable rejoinder: ‘it will damage our competitiveness’. Indeed, if there hadn’t been any legislation in place on, say, employment rights for the disabled, ‘damage to our competitiveness would now be used to forestall it.
And it now seems pretty clear that attempts, however token, by the financial regulator or central bank to draw attention to dangerous lending practices were trumped with the same card.

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2. Graham - October 1, 2008

You’re saying that if Competition Law needs to be overridden to save the financial system, then “competition” must not be so important after all?

I guess it makes sense depending on where you’re coming from. For example, I once read somebody argue that price caps on certain items were a good idea because, among other objectives, they would help to reduce inflation. His assumptions were simple: that inflation was the same as rising prices, that inflation was a bad thing, and that therefore preventing price rises was a good idea.

I’m sure that you are far more sophisticated, WbS – and you are clearly among the majority in believing that competition laws actually work for the benefit of competition! But the truth of the matter is that a strictly competitive market would not enforce legislation against private agreements, high market shares, massive mergers, etc. The size of firms, their relative success and the manner in which they co-operated with each other would be the outcome of market forces.

So the irony about the government guarantee is that breaking competition laws is not something that makes it anti-competitive. And so from my perspective, your conclusion relates only to competition laws being unimportant, not competition itself.

I also understand that this is a good opportunity to criticise “the commanding heights of capitalism” and you are right to do so. It’s obvious that neither you nor I am in agreement with them. But it’s not the case that those in charge of the banks and the government have any particular interest in having a real laissez-faire, competitive economy. We’ve had a corporatist, inflationary, bubble economy and these people are just doing their jobs and using what’s left of it to get whatever they can get.

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3. Tomaltach - October 1, 2008

Competitive markets are always imperfect of course and diverge from the neat supply and demand curves in first year text books. Still, competition between firms in most sectors is usually (always, no, but usually) more desirable than monopolistic ones. Really, would we want one giant government bank? I certainly wouldn’t. I agree with Graham about the Irish banks not wanting a real laissez-faire, cometitive economy (neither would I want this – for me there would have to be tough regulation etc). The Irish banking sector has been notoriously uncompetitive – though there have been improvements in recent years after the arrival of Bank of Scotland etc. Here is the conundrum – unregulated, competitive markets can obviously lead to disastrous risk taking when Banks do anything to increase the size of their loan books. But neither is a single government bank desirable – as I said, would we want a financial government monopoly supplying mortgages?

In between is a regulated, government supervised, and worse case, government rescued, near competitive system. As far as I can see both government and markets are imperfect (how could they not be) and often fail. To a certain extent they each can counter some of the failings in the other – but no perfect mix is possible. But it is possible to improve on both with more rigorous and enforced accountability, transparency and democratic oversight.

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4. WorldbyStorm - October 1, 2008

Quick point, I’m actually not antagonistic to markets. In various areas correctly regulated they are optimal, hence my point about inappropriate areas for privatisation. Hence I’m not suggesting that markets and competition shouldn’t involve regulation or intervention. What I am suggesting is that this runs counter to ‘myths’ about the efficacy and inevitability of markets… unreflective and ill-digested myths for the most part. I know, for example, Graham, that you make a very logical case which is a world away from that lack of reflection. But I think it’s hard not to accept that the cheerleaders of untrammeled markets have simplified the situation to a point where any regulation was seen as a negative, and listen, even today we see the nonsense of the Conservative party arguing against regulation as if that is somehow a core problem.

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5. crocodile - October 1, 2008

The advocates of competition talk as if it has conferred some kind of blessing upon us. How often have you heard the rhetorical question – not least from the Blessed O’Leary himself: ‘would anyone like to go back to the days of paying Aer Lingus 250 quid to fly to London?’?
Well, I wouldn’t, but I resent the implication that O’Leary has introduced competition for my benefit. If he has his way, competition will result in his competitors being driven out of business, so that he, Michael, can charge us 250 quid to fly to London.
The supposed moral aspect of competition, then, applies only to the process; the ends are amoral. Meanwhile, you have to hold your nose and watch the pay and conditions of everyone in every airline head south.

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6. CL - October 1, 2008

There’s no such thing as ‘real laissez faire’, never was, never will be.
(and conflating laissez faire and ‘free competition’ is erroneous)

However the Irish govt. has opted out of the European single market,-to the chagrin of the EU competition commissioner. This remarkable departure should certainly affect the argument pro and con Lisbon.

“Neelie Kroes, the EU competition commissioner, said Dublin’s action recalled the national “go it alone” policies that had characterised Europe’s response to the Depression of the 1930s . “I would like to plead to national governments today not to act unilaterally,” she said.”-FT.
http://www.ft.com/cms/s/0/c2b092a6-8fe4-11dd-9890-0000779fd18c.html?nclick_check=1

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7. Cl - October 1, 2008

And as Reaganism dies in Ireland and around the world, Obama inches into the lead in Florida, in Virginia..and..in North Carolina.
http://www.realclearpolitics.com/epolls/2008/president/nc/north_carolina_mccain_vs_obama-334.html

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8. ejh - October 2, 2008

I find myself interested in this “incorporeal cabinet meeting”. Why did it happen?

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9. skidmarx - October 2, 2008

” In various areas correctly regulated they are optimal”

When I did a year of economics at university when I was 17, I recall my tutor asking whether market or command economies were more efficient (there is obviously a problem that the question admits no difference between authoritarian and socialist planning), and thinking that in an ideal world the command economy is at least as good as the market one as it could at least replicate what the market economy does. (I know there is an argument about the hidden hand and the drive of profit and it’s bollocks. Or at least I think so)

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10. Who’s blogging about the Irish banks and the safety net? | Maman Poulet - October 6, 2008

[…] World By Storm of the Cedar Lounge Revolution on the dead hand of the PD’s and when is a Cabinet Meeting really a Cabinet meeting. […]

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11. CL - October 6, 2008

“The gold medal for selfishness may once more be given to the Irish, who have followed the ingratitude of their No vote on the Lisbon treaty with absolute contempt towards the search for a collective solution to the financial crisis.”
http://www.ft.com/cms/s/0/afca6780-92e0-11dd-98b5-0000779fd18c,s01=1.html

And the Lisbon treaty doesn’t seem that important any more.

Will be interesting how the dollar/euro exchange rate moves.
Can the euro remain a strong currency if there is no EU coordinated response to the financial crisis?

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