Chakrabortty rides again!

And its the most godawful mess, too:

Take banking, since this week the big high street names report their results. With each disclosure of rebounding profits will come an admission that the banks are putting aside millions more to compensate businesses and households they’ve ripped off through mis-selling. And each time, Chuka Umunna or Chris Leslie will swear that Labour would bring in “challenger banks”, while the coalition will retort that “there is already greater choice on the high street” than there was under Tony Blair.

But what is the point of having more competitors if they’re all doing the same thing? Go online and look for a savings account: there are tons around – most with time-limited offers, or with fiddly rules about how much you must pay in each month. Lots of versions of the same, basic product: the providers simply competing to bamboozle customers. All hail the market!

For Labour to say that more competition will fix predatory industries is to mouth economic theory while ignoring business practice. For Ed Miliband to claim market forces alloyed with some cliches about living wages and an industrial policy will get Britain out of its deep hole is to see the country through Westminster abstraction over real-world specifics.

Britain’s model of capitalism was clearly not working long before 2008. Once you strip out inflation, the typical worker saw no wage rise for most of the past decade. So who prospered during the boomiest boom in economic history? Those at the top, often running or owning businesses well-sheltered from competition (think: water, rail, energy) and shaking them down for bonuses and dividends.

Such rampant market inequality won’t be solved by competition.

I’ve not cut nor edited anything there. He really is stating that the worst abuses came in those markets with little competition and also that competition doesn’t solve or cure market abuses.

Blimey, with this sort of logic you can describe an historian as a valid and useful commentator on the economy.

24 thoughts on “Chakrabortty rides again!”

  1. bloke (not) in spain

    No. I do think he’s a good point there.
    The banking industry is so deeply into regulatory capture there’s very little they compete over makes much odds to customers. And with little sign of that changing, how’s competition going to improve matters?
    What’s needed is new entrants to the market, peer to peer lending for example, but the existing players are determined to shut them out

  2. I agree with the previous poster.
    He is simply saying that the number of competitors is not a guarantee of competition. If an industry is allowed to collude, new entrants might not be as beneficial as you’d think. Plus natural monopolies are difficult to make truly competitive.

  3. in a competitive market we might expect/hope to see all banks offering higher interest rates on savings than they would in a less competitive market. That is to say, to discern the effect of competition, we have to compare the level of interest rates across the market with-competition against (the unobserved) without-competition, not look to see if banks are offering “different” things.

  4. Bloke with a Boat

    What b(n)is says.

    The market is so narrow because of over regulation that the banks have nowhere to go because politicians want to protect the ordinary working man from his own mistakes and because they haven’t educated him.

    We also have a consumer base that thinks that banking should be a free lunch, so every time the banks try to change the playing field by, say, doing away with free current accounts, the 4th estate and usual suspects in Westminster scream blue murder.

    There should be a basic Universal Service Obligation, say free online banking with salary and benefit payments in not charged and free cash withdrawals, and then stop the banks cross subsiding which is how they manage to lure the public in to those products that benefit the banks and not the customer.

    That on top of easy to move accounts will provide the pressure that is needed alongside removing too big to fail to make banks compete properly.

  5. It is a standard leftist pannikin of puke as employed even on this blog by, for example, DBC Reed.

    The claim is that the system we have–high taxation+ huge state regulation of just about everything+welfare (hand-outs both personal and corporate)+cronyism+you name it etc, etc is “capitalism” –by which they mean a free market. Reed was on this blog two days ago groaning about the evil of “laissez-faire” as if NuBluLabour could even spell that let alone know what it meant. The system we have owes far more to the socialism of those whining about it that it does to the market. There is just enough freedom left in it to keep it going a while longer.

    The banking industry is entirely controlled by the state and those in it are cronies of the state. Yes–“competition” in that industry is a sham (as in the energy and utilities sector)–but what else can be expected of a true cartel–one controlled by the statefor the benefit of itself and its friends.

  6. I was going to write what Luis did pretty much so I won’t add much except to say – consider ball bearings. Highly standardised component. We are not surprised to see very uniform prices for them, but that is not a sign of zero competition between manufacturers! (The reason why there is such uniformity in a competitive market is very much Econ 101 stuff.) If there were an oligopoly or monopoly then the price would still be uniform, just higher.

    Many features of bank accounts are pretty standard so no surprise the offers by various banks look so similar. When banks try to do something non-standard and innovative like bundling accounts together, Chakrabortty only complains they are trying to lure customers in.

    I’m at a loss to understand what he wants. What does Chakrabortty think a genuinely competitive high street banking market looks like? They all offer the same types of accounts, but at wildly different rates, so in practice there’s only one bank it is sensible to save at, another bank for the ISA and one for the current account? They all offer different types of accounts, so there’s literally only one bank it is possible to save at, another bank for the ISA and one for the current account? (That’d mean banks had more variety between them, which is apparently what he wants, but would also be mad. They wouldn’t even be directly competing with each other.) Does he have a definition of competition that could be met by a state-owned banking monopoly, since he doesn’t think the number of banks is the issue? I don’t get it.

    Always a bad sign when someone badmouths others for “mouthing economic theory” – generally means the writer has a different economic theory they’ve just come up with instead, and it’s usually a bit rubbish.

  7. I employ a simple rule of thumb. When I see any reference to or comment by anyone called Chakrabortty, Chakrabarti or anything similar I know it’s going to be undiluted piss, so ignore it.

  8. bloke (not) in spain

    Let’s take your ball bearing analogy. Yes ball bearings are all much the same price in a competitive market because you’ve constrained the market to ball bearings. Actually there are a lot of ways of producing a low friction rotational support. Roller bearings, white metal, various forms of nylon, Teflon, glass, air … All of which serve different purposes & have different prices.
    See where I’m going?

  9. I take Tim’s point about the general incoherence of the argument, but Chakrabortty’s point about competition between banks is fair.

    In a highly competitive market, sellers offer keen prices on the most price-sensitive goods, and seek to make their money where the buyer is less price-sensitive. So supermarkets are all selling standard milk at a pound for four pints, but prices for organic produce are disproportionately high. The banks offer free current accounts, even though the cost is no longer covered by the interest they don’t pay on the money in them, and seek to make it up by selling, or sometimes mis-selling, various high-margin financial products to their current-account customers.

  10. Bnis – the point is simply that when you have several competitive manufacturers of “the same, basic product” then you naturally find they charge about the same price. It’s what Luis said, uniformity of prices doesn’t mean the sector is uncompetitive, just that the product is homogeneous. I was tempted to be more pedantic and state a particular subtype of ball bearing or metal sheeting, anything which is standardised. As opposed to eg “a small family car” – something where different manufacturers, still in competition, may make quite different products with significantly variant prices.

    Bank accounts are more like the ball bearings. Not much in the specifications of, say, a savings or ISA account (the Ts and Cs) a bank can vary, is there? There’s a uniformity enforced by regulation and by customer expectations. So their offerings are going to be pretty similar. It’s wrong to see this similarity as due to an uncompetitive sector.

    As PaulB says, another thing banks can try to do is bundle products together, often in a way which is detrimental to the customer. But for that should we blame too little competition (as Chakrabortty seems to), too much competition (as Chakrabortty also seems to) or inadequate regulation/enforcement? (I’d suggest poor financial education as a culprit too but that one seems harder to fix.)

  11. The problem is not that the banks don’t compete on the services they offer, it is that the services they can offer are so restricted by regulations that any competition thereafter leaves the customer without much choice. I would have leaped at the chance to open an account with a bank that didn’t demand reams of documentation (fucking utility bills, for one) amidst whining about “money laundering” and “the law”, but alas I couldn’t find one.

    Until I went to Geneva, and they asked for a passport and never once mentioned money laundering.

  12. bloke (not) in spain

    “Bank accounts are more like the ball bearings. ”
    Why are they?
    I have a current bank account I pay a quarterly service charge on. Not a particularly cheap one. Last week I phoned the counter clerk to sort out a problem. I’ve known her for 3 years. We’re on first name terms.
    That’s what I’m paying for?
    “There’s a uniformity enforced … by customer expectations.”
    You’re telling me. With Brit High St banks, minimal expectations.

  13. bloke (not) in spain

    Had this documentation demand from a Brit lawyer to prepare a Power of Attorney to me from my father. Passport, fair enough. But utility bill?
    “Money laundering regulations.”
    “Look chief. I know who I am & where I live & curiously enough, so does my father. If we need money laundered we’ll find a professional. Get lost.”
    Like you, I opened bank accounts with just a passport. And the P of A I hold on someone that side required the same ID & ten minutes with a notary.

  14. Had this documentation demand from a Brit lawyer to prepare a Power of Attorney to me from my father. Passport, fair enough. But utility bill?
    “Money laundering regulations.”

    Bank clerks no longer have the necessary authority to take decisions. So they operate to (an unnecessarily defensive) checklist.

    Lawyers, who (as qualified professionals) should have the necessary authority, are playing silly buggers and making sure that if they are unlucky enough to get caught and censured by the Ineffective Regulation Authority that it will be for something they have made retire-to-the-sun bucket-loads of money for doing.

    Alternatively, they are sufficiently ignorant of the actual law (no real surprise there) that they have merely copied the checklist the banks give to no-qualifications front-desk staff.

  15. “Consider ball bearings. Highly standardised component. We are not surprised to see very uniform prices for them, but that is not a sign of zero competition between manufacturers”

    Well you obviously don’t ever actually buy ball bearings then. There is considerable price difference between same sized bearings, because there’s considerable difference between the quality of manufacturers. If you want dirt cheap, buy Chinese ones that’ll last for a while then fall apart, if you want something well made buy a Western brand such as SKF, Timken or FAG. The price of the latter is double the price of the former, for exactly the same bearing.

  16. Jim – indeed, I only picked them as they’re a canonical example of a pretty uniform manufactured product, I should have specified “to the same specifications” – or just called them “widgets”.

  17. bloke (not) in spain

    Thanks Jim because you’ve illustrated what I’ve been trying to get across.
    To stick with the ball bearing analogy, if one was putting bearings in a plastic wheelbarrow those cheepo Chinese ones would be just what one wanted. If one was building helicopters, no expense spared. But it’s the customer deciding the appropriate risk to the customer
    My Spanish bank’s an obscure Caja. It’d be completely the wrong bank if I was an international wheeler dealer. It’s the perfect bank for domestic finances. They’ve never heard of call centres. If I ring them up, we don’t have to go through security theatre. i ask her how her kid’s doing at football.
    My UK bank seems to only speak an Indian dialect..

  18. @b(n)is

    Just to totally miss the point of your post, but why would you use ball bearings in a cheap wheelbarrow? Surely that’s just ridiculously over-engineered…

    Why not support the axle in PTFE bushings and save the cost of the bearings. Should be robust enough to cart wheelbarrow loads around for a year… Then if they wear out, who cares? Cheap to replace.
    Or just use the axle on the frame and tell the user to grease occasionally…

    Also, even when building aircraft, manufacturers try to cut costs. The only industry I know of that is no expense spared it the space industry. Admittedly aeronautical design changes are checked rigorously, but they aren’t quite no expense spared.

  19. Space industry – no expense charged to the customer is spared. Actual expense…. who knows?

  20. sometimes competition is going to produce variety, sometimes it’s going to lead to uniformity of good and price.

    it’s a fair point that the UK banking industry does not offer much variety, but it’s a straightforward error to think variety is the only sign of competition

  21. bloke (not) in spain

    “it’s a straightforward error to think variety is the only sign of competition”
    But it’s a fairly good indicator, the absence of variety is evidence of absence of competition.
    Where a producer isn’t competing on price, the producer will compete on the nature of what’s being produced. That is, after all, how we get new products. So if you’re not seeing variety of products you’re seeing a constraint on the variety of products.

  22. bloke (not) in spain

    No-one. Price is almost the only area of competition.

    And here I’d say was the underlying reason for ’08 an’ all that. Because banks had been able to socialise risk, they competed on offering underpriced loans to high risk borrowers. A guaranteed to end in tears strategy.

    And they’re still doing it. J

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