What?! Businesses like making profits?!

Against a background of Government spending cuts and a disgruntled public, Vince Cable, the UK business secretary, today gave a speech that was roundly condemned by UK businesses. I provide a selection of the more excitable and indignant retorts:

“He’s the business secretary, he shouldn’t be behaving like a liberal rabble-rouser.” Digby Jones,  a former director-general of the CBI, “the UK’s top business lobbying organisation.”

“Sorry Vince but insulting and threatening the very people who you desperately need to build your economy is not clever or statesmanlike.” – Simon Denham, Capital Spreads

“[It] just drives an unnecessary wedge between the senior management of the private sector, which will take longer to mend than the current situation warrants” – the super ubiquitous David Buik, BGC Partners (always on hand for emergency financial items on the news!)

“Business secretary Vince Cable is wrong on capitalism and wrong on Adam Smith.” Dr Eamonn Butler, director of the Adam Smith Institute.

Vince Cable has a fine economic pedigree (including lecturing at the London School of Economics and serving as a Chief Economist at Shell), so these are harsh words indeed. So what, exactly, did he say?

The main offending comment (apart from the usual bank-bonus bashing), is, as far as I can make out:

“Capitalism takes no prisoners and kills competition where it can, as Adam Smith explained over 200 years ago. I want to protect consumers and keep prices down and provide a level playing field for small business, so we must be vigilant right across the economy – whether in the old industries of economies textbooks or the newer privatised utilities and cosy magic circles in auditing, law or investment banking. Competition is central to my pro market, pro business, agenda.”

Ok, Dr Eamonn Butler, perhaps Mr Cable didn’t express the concept in the most economically rigorous manner, but his broad point is hard to dispute, i.e. firms like making money. They make more money if there are fewer competing firms. It’s not in their interests to increase competition in the market. No one can argue with this.

And only hardline purists entirely out of touch with reality could claim that all markets work perfectly, with merry competing firms stopping other firms from ripping off consumers. Most markets are nowhere near perfectly competitive. The prospect of a little bit of market power is no bad thing – it’s what gives firms incentives to produce new and valuable products and services. But too much market power (monopoly is the extreme) doesn’t tend to deliver good outcomes for consumers: usually high prices, and low incentives to produce better products at lower cost.

This is textbook undergraduate stuff (maybe even sixth form), but’s it’s interesting that some have apparently almost deliberately chosen to misinterpret what Mr Cable has to say (David Buik excused – he’d comment on anything – you can’t take it personally).

Liberal rabble rousing? No, just pointing out the obvious.

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