Posts Tagged ‘monopoly’

Privatise the post

Wednesday, October 28th, 2009

Postal strikes begin tomorrow.

As a result of the strikes, Royal Mail have lost several lucrative contracts. Customers switch from Royal Mail during strikes, and plenty of them don’t switch back. It used to be fax machine sales that jumped during strikes — and people still used them after the strikes were over. Now scanner sales are up 25%. It is just like when Paris Metro, fed up with strikes, decided to replace train drivers with robots.

The strikers are shooting themselves in feet. They are sowing the seeds of their own destruction. Instead of getting higher wages, the workers may just end up unemployed. It is a sad thing when an unsound company is driven into the ground by above-market wage demands.

Of course, this is the problem. Royal Mail wages aren’t set by the market. In competitive markets, wages are set by the market. But where there is only one big state-owned company, wages have to be set by “national pay deals” and the like.

So you might say to the strikers: fair enough. If the only way you can raise your wages is to lobby the government, then you’ll have to lobby the government. But surely we should instead change the system so that their wages are set by the market. Then they wouldn’t have to go on strike. Private companies suffer far less from strikes that state-owned companies. And when they do, you, the customer, can use someone else. Unions flourish in the public sector where competition is not allowed: they are rent seekers out for a cut of the monopoly profit.

The proposed privatisation of Royal Mail is really a distraction. If we had competition, it wouldn’t matter who owned Royal Mail.

Currently, any firm can collect and distribute post, but Royal Mail has a monopoly on the delivery of all post weighing less than 350 grams or costing less than £1 to send. Other firms must turn post over to Royal Fail for delivery (the “last mile”). Far from being “completely deregulated”, the postal market is only “somewhat deregulated”. It’s not enough.

Royal Mail’s monopoly must be ended.

The Universal Service Obligation could be maintained to placate subsidised voters living in remote places. The government could simply insist that new firms could only enter the market if they also fulfilled the Universal Service Obligation.

(A few final points: Royal Mail should not be confused with the Post Office. Planning laws should be relaxed to allow competitors to build post boxes. And while privatisation of Royal Mail is not necessary, the money it raised would help pay off the government’s debt.)

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Posted in Politics by Hugo Hadlow | 1 Comment »

Abolish the Bank of England

Friday, November 14th, 2008

I have an article in this week’s “Varsity Debate”.

The title was “Should the Bank of England have cut the interest rate? Last week, in desperate bid to protect the UK economy from a severe recession, the Bank of England announced its decision to slash interest rates to their lowest level in 50 years.”

I argue that “The decision should not be up to the Bank of England; it should be up to us”, and that the rate should be higher, not lower, because the natural rate would be higher. As Jock Bruce-Gardyne said, “There is no economic problem that cannot be solved by a stiff rise in interest rates”.

The problem with a government set interest rate is that it disconnects the ratio between investment & consumption, and people’s true time preferences. When the government sets any price, they disconnect the relationship between demand and supply. If a price is set above the market equilibrium, more people supply the good, but fewer people demand it, creating a surplus (and an illegal “black market” selling the good at the true price). If a price is set below the market equilibrium, more people demand it, but fewer people supply it, creating a shortage. The only situation when the same amount is produced as is demanded, is when the price is allowed to be set by the market. That is the only way resources can be allocated efficiently. And this applies not just to markets for food, or furniture, but to markets for currency and for credit. An interest rate is a price like any other.

A government interest rate disconnects the relationship between investors and savers. However, a low government interest rate does not create a shortage of capital, because not only does the govenment set the price, it enters the market as a lender, and it controls the currency. The low rate means that far fewer people save for the future, but investors can still borrow even more money because the government provides it instead of the savers.

Here’s the complete version:

The interest rate is the price people demand for postponing consumption. If you would give up ten apples now for eleven next year, your interest rate is 10%. A free market will naturally find an equilibrium interest rate. If you would be willing to lend at lower than the market rate, you can lend at the market rate and make a profit. If you are only willing to lend at above the natural rate, no one will borrow from you.

Why can the government lend at below the natural rate? Anyone else who lends their money at below the natural rate will have no shortage of customers looking for a bargain, and will soon have lent all their money. And anyone lending at below the natural rate of interest is making a loss, so no one does it. No one, that is, except the government. The government cannot run out of money, because it can print it. And while an ordinary lender lending at below the natural rate will not have much effect on it, the government can affect it simply because so much of the money in the economy is on loan from the government.

The current interest rate is lower than it would be in a free market. Why does the government lend at below the natural rate? Why does it want to distort the interest rate? A low interest rate encourages more spending now. It is in essence a Keynesian policy, and shares his deep contempt for savings and thrift, because a low interest rate discourages saving and planning for the long term. After all, “in the long run, we are all dead”, so why bother to plan ahead?

Just as spending by the government will cause a short-term boom, cheap lending by the government will encourage more private spending and cause a short-term boom. Most investment is funded by borrowing, and so the more money there is available, the more investments that will be made. The extra investments enabled by extra government money would not be made in a free market: they are the riskiest investments. Government intervention destroys the natural equilibrium between savers and borrowers, causing malinvestment, followed ultimately by correcting recessions when unprofitable investments are liquidated, freeing up capital for new investment.

Make no mistake: this recession is temporary. It is an inevitable correction to bad investments encouraged by government intervention. Long-term economic growth caused by technology will not stop, but the short-term economic growth caused by cheap money must stop eventually.
Further government action, including dropping the interest rate and the resulting inflation from this expansion of the money supply, might stave off recession temporarily, but it cannot stop it forever, and will make it worse. Further government action might be justified to allay the suffering caused by previous government action, though, of course, it would have been better if the economy had been allowed to grow more slowly in the first place, so it didn’t have to recede now. But shock tactics are best: abolish the Bank of England and go straight to a market interest rate. In the long run, we’ll all be better off.

Gordon Brown was recently asked if he regretted his boast, “No more boom and bust”. He replied, “I actually said, ‘No more Tory boom and bust’”. He did indeed say this, once, so he’s not lying. But, of course, he said it without the “Tory” on many occasions. The implication is that Labour boom and bust is fine. This is the kind of drivel Brown is now reduced to spouting.

Brown is often lauded for removing government interest rate from control by politicians and handing it to the Bank of England’s Monetary Policy Committee. This has certainly removed the ability of governments to slash interest rates before an election, causing a boom, with the bust only following after they have been re-elected. However, when it was made independent, the Bank of England was charged with controlling inflation. This has enabled Brown to carry on spending massively while being able to absolve himself of responsibility for inflation.

The interest rate certainly shouldn’t be controlled by politicians. But neither should it be controlled by appointed “experts”. It should be controlled by us. Then it will reflect people’s true time preferences, enabling us to allocate resources efficiently. To prevent politicians for meddling again in the future, we should abolish legal tender laws and go back to free banking, with competing currencies, so that no one will be able to get away with inflating them. In the meantime, any increase in the government rate is welcome. We need a return to a natural interest rate. We need to return to a truly free market.

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Posted in Politics by Hugo Hadlow | No Comments »

Ideological monopolies

Saturday, October 4th, 2008

Religion in general has come under a lot of criticism in recent years. It is becoming more and more common-place to claim that religion is not only misguided but the root of much evil in the world. However, it is far too simplistic to claim that it is an institutional belief in God which has caused so many of the world’s problems. Rather it is a belief in something (anything) which claims to have a have a monopoly on truth that causes most of the evil in society. As such, we should all fear it when any ideology is accepted by a society as a given.

Derived from attacks against religion, secularism has become the watch-word for state action. Lip service is still paid to the union between church and state in the British constitution, but when it comes to government action, religion must take a back seat. Indeed, it must be pulled along clinging onto the back bumper. Of course, most people do not have a problem with this. As we all know, the Bible does teach us that homosexuality is wrong, and adulteresses should be stoned to death, and implicitly that the earth is only 6,000 years old. But for society to accept uncompromisingly the default position is equally unfortunate.

An example of the default position to creationism is Darwinian evolution. Although it is ridiculous to claim that an adherence to Darwinian evolution leads inevitably to eugenics – the evolution of the emotion of self-sacrifice discredits the notion of ‘survival of the fittest’ in every case – any idea is necessarily debased for wider consumption. This is why the inaccurate belief that evolution means ‘survival of the fittest’ has gained currency. When a state accepts this position uncompromisingly, allowing simplistic generalisations to take hold, it is not ludicrous to see how it could lead to a policy of eugenics. Absolute power corrupts absolutely.

This is the problem when one idea holds a monopoly on truth in a society. If an idea is taken as read, it can be moulded to suit the will of those in power. It is now accepted in the West that democracy is absolutely right. The underlying principle behind the Iraq War for neo-conservatives was the unwavering belief that it was right to bring democracy to a country otherwise in the grips of dictatorship. It is perfectly acceptable for individuals to accept this position, but when a society’s assumption becomes a policy of its state, alternate ideas cannot be voiced. Opposition to the Iraq War was based on the idea that it was not a war that should be fought, not that it may be wrong in principle to bring democracy to a country that had never known it.

The solution is to avoid state ideology, even if it is secular or democratic. A state needs to adopt one principle over another to function (after all, the state needs a political ideology in order to form a government), but it should not adopt such an ideology as a given in the execution of policy. For example, the argument that Britain is a ‘secular country’ should not rear its ugly head in the debate on faith schools. This argument necessarily makes religion something alien to British society in principle, thereby allowing the state to take actions without recognising the alternate position. As such, the state can take unilateral action without debate: maybe there is a God; perhaps democracy is not an end in itself for every country; conceivably nationalised industries are bad. The state must not be allowed to hold a monopoly on truth.

This is not to say that individual people cannot hold monopolistic ideas. It is impossible for someone to both believe in God and at the same time not believe in God. Either they believe, do not believe, or have yet to make up their mind. But the state cannot and should not make the same judgment. Otherwise individual liberty to believe something different is trampled and cannot be debated in society.

With monopoly comes exploitation and abuse. And a good way to prevent monopoly is individualism.

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Posted in Politics by James Arthur Sharpe | 1 Comment »