Wednesday, July 21, 2010

Maybe there are some policies...

I've already bemoaned the tendency to report politics as personality or a horse race. However a flicker today that policy could surface.

John Durie writing in the Oz has gone back to Joe Hockey's budget reply speech and has questioned the worth of a review of competition policy. In doing so he seems to channel a Craig Emerson press release from 18 June. Some excerpts are woth quoting.

An obvious problem with the law promising to do so much is that it will plainly fail, because contrary to the view of some, its intent is to promote competition to help consumers -- not special interest groups.

This rules out small-business handouts for a start.

The new government will in fact have a big say in the future of the law because existing boss Graeme Samuel is due to step down in the middle of next year and he won't be seeking another term.

Maybe the Liberal Party will deliver the throne to University of NSW professor Frank Zumbo, who has had a hand in some of the more distorted small-business-oriented changes, like the so-called Birdsville amendments, which boosted section 46, which aims to stop abuse of market power. ...

If the review was aimed at simplifying the law rather than being a smokescreen for fictitious, unenforceable or contradictory small-business gifts, then maybe Hockey is on to something.

Former boss Alan Fels argues the competition sections could be scrapped in favour of one sentence: Any behaviour that substantially lessens competition should be prohibited unless it can be shown to be in the public interest. He has a point. Australian law should be allowed to settle, to allow the courts to set the parameters.

The underlying difficulty with all this is that the concept of "competition" is not as well defined as those commenting on it (including economists) would like to think, nor exactly what the benefits of competition are. A "standard theorist" from the orthodox or neo-classical school would talk about competition as the efficient ideal in which producers price at marginal cost. As Steve Keen has succinctly demonstrated the standard theory fails because costs don't start to rise and that individual firms face the same downward sloping demand curve as the market.

Does this mean we should give up on competition. No, because competition actually generates innovation and competition (or the market) does work as a mechanism that reveals preferences and costs across the economy. To put it simply, a central planner could set prices at cost - but they couldn't figure out how much of what to produce.

But markets have lots of design elements and all of these need to be considered to see the outcome delivered. The one thing that is sure to destroy the value of markets is excessive concentration. But equally relying upon "ease of entry" is not sufficient.

So yes the kind of intervention that worries about the survival of individual competitors is probably a good thing, not a bad one. In his defence from the attack by the Minister Assoc Prof Frank Zumbo wrote

Perhaps the Minister’s time could be better spent explaining why Australia consistently has some of the highest levels of food inflation in the developed world which is pushing up grocery prices for Aussie families.

He has a point.

Finally all of this has to be better than the other policy issue - the anti-filter brigade being driven to the choice of The Sex Party given the inability of the Pirate Party to get themselves organised.

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