Occupy London should demand greater competition

Occupy London UBS - UBS You Owe Us

The Occupy London protests are still going strong with the protesters having seized an empty building belonging to UBS to create an “Ideas Bank”. Nice idea. The Occupy protests do have an important message, so it is unfortunate that so far, its main victim has been accidental – the Church of England, which descended into confusion over whether any of the protesters had valid points to make, and if so, did it justify the fact that they were making it difficult to get to the St Paul’s Cathedral gift and coffee shop?

 It hasn’t helped that the protesters’ aims have been slightly vague so far. According to their website, they are “in agreement that the current system is undemocratic and unjust.” More specific grievances are listed under their “initial statement”, and among other things include:

“We refuse to pay for the banks’ crisis.
We want regulators to be genuinely independent of the industries they regulate.”
 
Worry about lobbying is a valid concern. It is difficult to know for certain how much lobbying goes on by different interest groups, and how effective they are. Theoretically, there is nothing intrinsically wrong with different interest groups (including firms) talking to politicians and regulators about their views on different policies. But it is a concern if different members of society are better able to access and influence compared to others. And it is a fairly safe assumption that some groups (particularly large companies) have a lot of resources to throw at talking to politicians and regulators, even going as far as funding Government special advisers, as was apparently the case in the Adam Werrity affair. 
 
How do you solve the lobbying problem? One option is to go down the regulatory rules route, for example, having register of lobbying organisations and making sure that there is transparency around meetings that go on between politicians and lobbyists. But it’s pretty difficult to go round policing who’s meeting who and what people say all the time – what do you do about informal meetings between people who know each other in a social context? News of the World had a go at policing what people say (albeit for slightly different reasons), and look where it got them.

So what about turning to that amazing process by which private firms are turned into enterprises that work for the social good: competition.
 
Ah the magical alchemy of competition, whereby firms compete for consumers by providing good, value-for-money products and services. (Caveat: like all magical spells, competition has the potential to go wrong if there are other problems in the market. The classic example is firms competing to reduce prices by skimping on health and safety, or environmental protection. The answer, of course, is not to get rid of competition altogether, but to have health and safety requirements, and ensure there are incentives not to pollute, like pollution taxes. Competition, like magic in the hands of an untrained wizard, doesn’t always deliver what you expect if you don’t properly understand the market and different firms’ incentives. I’m rather warming to this competition/magic spell metaphor. It may warrant a future blog post.)
 
But, I hear you cry, you are simply an economist who has ignored the politics of the whole thing. You’ve blabbed on about free markets (I didn’t actually) and competition until we thought you were Alan Greenspan, and completely ignored the fact that you were trying to solve the problem of lobbying by big corporations.
 
Patience. I was just getting to that. (Am I sounding too smug? The competition/magic metaphor may be going to my head. I must remember that being an economist does not actually make me a wise old sorcerer).  In a competitive market, with many different firms, it is far more difficult for firms to coordinate – this makes it trickier to lobby as one large industry body. It also makes it more difficult to lobby when firms don’t have huge resources to throw at it.

A recent research paper shows that the level of competition in a country’s financial sector has a significant impact on politicians’ ability to force reforms related to financial regulation through. The paper, by Susie Lee and Ingmar Schumacher, shows that financial instability tends to be followed, as one might expect, by more regulation: but significantly, this increase in regulation is less likely to happen in countries with low levels of competition and strong lobbying.  

Now, of course, big firms will probably lobby against competition reforms. That’s where Occupy London could come in with some additional public pressure to get reforms through more quickly. It’s a concrete idea to campaign on, it could contribute to solving the problem, and crucially, just like any good lobbyist, it speaks in the same language of government and regulators in the UK, surely none of whom could possibly argue that more competition is a bad thing – especially in the wake of reports such as the Independent Commission on Banking, which concluded that there are long-standing competition issues in UK retail banking, with high levels of market concentration, made worse by events since the financial crisis, such as bank mergers. Helpfully, the report also sets out ways of increasing competition, including divestiture of assets and making increasing transparency and switching.

Occupy London: what more could you want?
 
The paper by Susie Lee and Ingmar Schumacher , “When does financial sector (in)stability induce financial reforms?”, is here.

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