Wednesday, July 01, 2009

Rethinking Competition and Ordoliberalism

Sometimes it takes me a while to pick up all the strands to create a blog post. This one started with a Stephen Bartholomeusz' coulmn on 29 May. Bartho was covering the territory that suggests that competition policy may work against consumer interests if we "pursue or preserve market structures that promote irrational competition for near term consumer benefit but at a potential cost to longer term investment and innovation".

While I don't agree with the conclusion the column does remind us that "competition policy" isn't a decided state. My own analysis in the Australian context is that competition policy had its biggest champions in Australia's largest firms. A case in point was the large firms that participated in the BTS consortium (and the other whose name escapes me) at the time of the Davidson review of telecommunications. It was similarly the large firms that complained most about the economic costs (to them) of restrictive airline policies and banking regulations.

However, as the gales of reform progressed suddenly all those large companies realised that they were als potentially the targets of this reformist zeal. The Business Council of Ausralia has notably changed from being pro-competition policy to being simply pro-market. In the latter guise they grab for the Chicago schoool critique of "antitrust" and its reliance on the idea that new entry will always rectify any market structure problem.

The extent to which competition policy is still a live issue in other markets can be seen in the Antitrust and Competition Policy Blog and the American Antitrust Institute. In Australia the conversation mostly gets conducted behind the closed doors of the Law Council's competition policy group, composed as it is mostly of law firm partners who draw their fess from BCA members.

Competition policy has separately had its critiques from the "left" - those who saw competition policy as merely a ploy to work against the social ownership of certain industries (i.e. privatisation). A more recent critique from that school comes from Steve Keen who has published a paper that shows that the maths from which the presumption of pricing at marginal cost comes is fallacious. I believe that agent-based models of firm behaviour come to the same conclusion.

All this leads me to a position that there is an activist role for Governments in making markets work. A colleague recently read a submission I'd prepared for Unwired and noted that my view on the role of Government and markets fitted the German school of "Ordoliberalism". On my reading of that he is right, but also on my reading I can see how there would be some who would take the ordoliberal view and convert it to the neoliberal view that Governments need to do a few things right (like manage a stable currency, create and enforce property rights) and otherwise get out of the way. This is one of the strands of general institutional economics. I come from a strand that marries the institutional with the evolutionary - that is the institutions need to evolve and adapt. Decision making by Government is one of those adaptations, and what it needs to do to "make markets work" changes over time.

Anyhow the ordoliberalism literature is certainly stuff I will need to include in my further reading.

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