The Beer Duty Campaign – why you should not sign


9:01 am - February 27th 2013

by Tim Fenton    


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This blog yields to no one in its advocacy of an occasional visit to the pub for a jar of decent quality beer. But a new campaign targeting beer duty will not be getting my signature, nor my endorsement.

The reason for this is straightforward: I also cast a sceptical eye over the dubiously crafted output of the so-called Taxpayers’ Alliance (TPA), that astroturf lobby group which claims to represent this country’s taxpayers, and is behind the beer duty campaign.

But, as Full Fact has pointed out – and they’ve cast a sceptical eye over a previous Sun beer duty campaign – the evidence behind the claim that taxation levels are at fault for the number of pub closures is not persuasive, and far less conclusive.

If there was a connection, supermarkets would not have shelf upon shelf dedicated to the stuff (which they do).

What is rather more likely is that less folks are drinking beer, and especially the mass-produced brewery conditioned variety (ie canned, keg and nitro-keg). Sales of cask conditioned beer are either holding up or increasing slightly. The cheapest watering holes in Crewe are not necessarily the most popular. They’re not the best places to have a scoop, either.

What is worse, the Campaign for Real Ale (CAMRA) has joined endorsed the campaign: perhaps its executive does not know where the TPA is coming from. Here I can be of assistance: they’re into abolishing the minimum wage, lowering the poverty line, abolishing the NHS and the BBC, trashing local bus services, and demonising the disabled, while wanting tax cuts for their rich backers.

Whereas having a pint or two down the pub is something undertaken by ordinary working people, many of whom will be in receipt of the minimum wage and tax credits, both of which the TPA is against. The overwhelming majority will use NHS services. They may watch a variety of broadcast media, but will watch and trust the BBC the most. And they are more likely to use public transport.

So they would be best advised leaving this campaign well alone.

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About the author
Tim is a regular contributor to Liberal Conspiracy. He blogs more frequently at Zelo Street
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Reader comments


Pretty sure reading private eye will quickly inform you as to why pubs are failing. Pubcos, rent, and beer ties being key features.

Well said.

Beer duty benefits pubs, rather than disadvantaging them. It is levied at a flat rate on volume of beer sold, which means that it adds about 20% the cost of a pint sold in a pub, but 50% to the cost of a can sold in a supermarket.

Without beer duty, the differential between supermarkets and pubs would be even larger, and so there would be even more incentive for people to drink at home rather than drinking out.

Cylux: all of that is true. I’m writing here from my perspective as a pub manager, currently unemployed due to two consecutive pub closures, btw.

There’s more to it, though, and one of these points relates directly to the OP.

Pubcos: yes. The mass divestiture enforced on the breweries by Major was intended to open the market but the implementation strategy meant it simply moved the ties from breweries to companies which were, effectively and in some cases actually, estate agencies.

Breweries do at least have a core interest in selling beer; Enterprise, Punch, Admiral and several others had virtually none, being primarily interested in the land value escalator of the pub estates during the boom years. That created a financial incentive for pubcos to systematically drive out businesses and sell the land, which they did quite a lot of.

The tax impact: it does affect some elements of the trade much more strongly than others. Real Ale specialists tend to stock very strong craft beers; these become very expensive. But you very rarely see some middle-aged beard tanked up on Moor’s JJJ IPA (9%) starting a fight with the rozzers.

And relating to the OP: one major impact of the tax and other regulatory changes under Labour was to massively promote the off-trade in competition to the on-trade. Pete Brown has written extensively about how wrong-headed that was. A big part of that lies in the ability of the Big Four to lose money on 5% lager multi-packs as a mechanism for drawing in grocery customers to superstores, and their commensurate cartel power to drive down the wholesale margins on craft ale. Typically, if a craft brewer manages to get onto Tesco’s shelves, they’re seeing less than 50p a bottle; the bottle and bottling process alone cost much of that.

The smoking ban has hit some classes of pub, particularly in the Midlands and Northern ex-industrial areas. Another class of pub has been seriously damaged by the steady, apparently market-driven shift towards dry-led businesses.

And the last one, which most people in my trade don’t want to talk about, is that a goodly number of pubs keep closing because they’re just bad. There’s a lot of people out there in my trade who run very, very bad pubs.

The OP is completely correct that people drink less in pubs than they used to; a great deal of drinking, via the points above, has been moved to the off-trade. This has correlated with the availability of big screen TVs at home affecting the sports-fan market. And because the mechanism is price based, and thus moves the behaviour of the poor faster than of the middle-class or wealthy, a healthy proportion of the drinkers that have been pushed to the off-trade and thus further from any possibility of supervision correlate with the problem-drinking section of the market.

4. Biffy Dunderdale

So, your argument consists of “Don’t engage with the issue. The messenger is more important than the message”. Classy.

Camra have not joined a TPA campaign, this has been one of their central campaigning points for years.
Please correct the article.

I’ve been a member of CAMRA for 20 years and I’m not going to oppose a fundamental principle just because the TPA have jumped on the bandwagon any more thsn I’d reject feminism just because the EDL might think it’s a convenient stick to beat Muslims with.

You want me to pay more for beer and drive microbreweries out of business just to stick it to TPA? Screw you – this is the worst kind of tribal politics.

7. Daniel Factor

I love the way right-wing landlords groups are trying to get the price of supermarket booze raised or even supermarkets banned from selling booze under the guise of concern for the well being of drinkers.
Bollocks, more like the are pissed off that people can buy booze cheaper in Tesco and want the price raised so people go back to drinking in their pubs.

Daniel: o.0

I’m right-wing? Really? I’m fairly sure I’m not.

What I described was an instance of market distortion by misguided regulation creating counter-productive incentives and the actions of a functional cartel, leading to anti-competitive conditions. I’m on the side of the small businesses that are being damaged by it. Not convinced that’s a right-wing view, particularly.

I also recognised that a considerable part of the pressure on the on-trade is down to regular market forces, and simply has to be adjusted to.

Shatterface: the point is, your priors are absolute rubbish. A tin of Inbev/Carlsberg/Coors mainstream swill is taxed at the same rate per volume of alcohol as a microbrew – but the tin of swill sells for under a quid, whereas the microbrew sells for two quid or more. The tax is far less significant to the microbrewer or the microbrew drinker.

Again, alcohol tax narrows the gap between swill and microbrews, just as it narrows the gap between supermarkets and pubs.

Nice as it would be, if that were true, it isn’t; having bought a very large amount of microbrew ales over the years, I can testify that the prices go up more or less in proportion to strength, but the brewer rarely gets much more than £1.20 / pint after VAT on the sale price, less with volume pricing.

Some of this is economies of scale, which is why big lager breweries -> big supermarkets can always out-compete on price (the advantage is reversed on quality). That’s fine and normal; the problem here is that economies of scale are being leveraged to permit big vendors to sell at a very narrow margin and remain profitable (brewers) and actually at a loss, as loss-leader products (big off-trade retailers). And no, minimum pricing would also result in counter-productive outcomes (again, see Pete Brown, Stonch or Michael Jackson on the subject).

There is another problem of scale in the on-trade, being that large tie firms which do not brew use their volume advantage to get very, very good wholesale deals from large suppliers, but do not typically pass those savings to the tied landlord, who is then making tiny or negative margins on beers they must, by contract, buy. The large margin introduced by the arbitrage stays with the pubco.

Now that the property escalator has crashed down, some pubcos are trying to adjust by introducing tenancies which fix that last problem; a good example would be Enterprise Inns’ Beacon Scheme, but having worked for Beacon Scheme businesses, it doesn’t necessarily produced the outcomes Enterprise or the customer want.

Bollocks, more like the are pissed off that people can buy booze cheaper in Tesco and want the price raised so people go back to drinking in their pubs.

Right, I was forgetting what great bastions of socialism supermarkets are.

Consumers of the world unite – a Tesco on every street corner and horsemeat for all!

Maybe we should double the price of wine and sherry – make the Guardian readers pay more.

Chris: I agree completely with your points on how the surplus goes.

The point is, if you buy a tin of Stella in Tesco for 80p, you’re paying 40p duty; if you buy a pint of Old Dogsbreath in a Camra pub for gbp4.50, you’re paying 40p duty. The tax is *completely irrelevant* to all of the serious and significant issues that you raise.

JohnB: the relevance of the tax is that it is considerably steeper on beers stronger than 5.5%. This was done because of a government / media perception that very strong beer is a cause of alcohol-related violence (it isn’t). Mass-market premium lagers are typically between 4 and 5.5%. UK and continental craft beers often exceed 7% and run as high as 14%.

Penalising that market, and those of us who supply that market, is not going to reduce alcohol-related crime, because people drinking strong stout or Karmeliet Tripel are not the people doing the damage. People drinking much larger quantities of beer at half the strength but a sixth of the price are doing the damage.

Which brings us back to how a beer which is subject to around 40p a can duty can be sold by large vendors in large volumes at 50p a can without everyone in the supply chain going bust, and that brings us to my detailed comments above.

I support changing the beer taxation system because of point 1, above. The rest of the points I’ve made are indeed not about the tax, but they provide some details of a high-tension dynamic balance which is heavily affecting the operations of the market in the UK. Most of them affect the on-trade generally (market conditions, brand spirit pricing, rents, and so on), while the tax in question only affects the beer.

Margins are very narrow across the trade, and with many different stressors such as unintended consequences of regulation and at least two large-scale market failures affecting the actions of the market, even small forces can create large effects on individual businesses. The significance of the the tax escalator is that it punishes craft producers and retailers, while privileging producers and retailers who have the funds to capture regulators.

CAMRA may have done good things for British beer, but they have nothing even remotely close to the influence on Whitehall and Westminster that Tesco, Sainsburies, Asda, Morrisons and Waitrose exert when their collective interests align: particularly when those interests also align with those of InBev and the rest of the big five.

“What is worse, the Campaign for Real Ale (CAMRA) has joined the campaign: perhaps its executive does not know where the TPA is coming from. Here I can be of assistance: they’re into abolishing the minimum wage, lowering the poverty line, abolishing the NHS and the BBC, trashing local bus services, and demonising the disabled, while wanting tax cuts for their rich backers.”

(1) Abolishing minimum wage. Countries that are more employment successful than ourselves such as Sweden and Germany don’t have minimum wages so I wonder whether they are really that important.

(2) Where a govt. stakes the poverty line is irrelevant and is always depended on the economic situation of the country. So whether you lower it, raise it, bin it, etc the result is neither here nor there.

(3) The TPA’s argument on the NHS is a little more complex than that, but in any event having an NHS is not the only way to do things, and lets not forget that the NHS has had some pretty colossal mistakes. Switzerland for instance has a 95% private healthcare system. People simply pay through health insurance rather than tax which means they can choose where they are treated. As for the BBC, bloody good idea. The BBC has become a giant coal burning goliath amongst race horses. Or as middle ground could we at least make the BBC subscription based so we are not ‘forced’ to pay for it if we don’t want it.

(4)Struggling to find your claims on TPA’s view of buses. Maybe you could provide a link for us.

(5) I don’t profess to be a literary genius, but I think you will find a difference between demonisation and questioning unnecessary over spend.

(6) They actually want to cut tax for everyone as their 2020 report made very clear.

16. Chaise Guevara

@ Tim Fenton

“If there was a connection, supermarkets would not have shelf upon shelf dedicated to the stuff (which they do).”

Except that supermarkets often use beer as loss leaders, selling it as a loss in an attempt to grab your £50 weekly shop from another supermarket. It’s true that a lot of pubs now rely on food for the bulk of their profit, but they can’t exactly give their drinks away.

” they’re into abolishing the minimum wage, lowering the poverty line, abolishing the NHS and the BBC, trashing local bus services, and demonising the disabled, while wanting tax cuts for their rich backers.”

The BBC should be made to repeat that everytime one of the Tpa little 1% puppet monkeys comes on spouting their lies.

It is amazing how dishonest the wealthy are that they always have to pretend they are doing this for the little people. Most of the astro turf groups in the US can be traced back to a few backers of very rich people who are too cowardly to front up to their lies. And they always give themselves nice bullshit names that sound like apple pie, and warm and lovely .

Just like ” the patriot act” should really be called “the traitors act” because if you support it you no longer believe in the rule of law. They just lie and lie and lie.

6 reveals again that he has no brain inside his head, and will do what his corporate masters say.

Seeing as you can buy a pint of beer in one pub for £3.75, and pay £3.45 for the same beer in a pub half a mile up the road tax has got nothing to do with it.

Just to reply to some of the highly relevant points made …

Yes, some pubs are just badly run. Doing the survey for the Crewe Beer Blog (http://crewebeerblog.blogspot.co.uk/) I found a number of them stuck in the rut of selling an exclusively nitro-keg range cheaply, as if this was the sole motivation for folks to walk in off the street. Very few of the pubs in this category were popular, at least during the week.

The effect of the PubCo I looked at today:

http://zelo.tv/Yzv4SK

especially the way they sell off pubs with large footprints to property developers for housing schemes and other commercial developments.

The effect of the beer tie is that Crewe’s only microbrewery can sell all it brews – but has no regular pub outlet in the town. Daft or what?

As to the obligatory TPA apologist – the 2020 Tax Commission’s cut would be bugger all use to all those who then have to spend it all on healthcare insurance. The rich, who would get a far bigger cut, all go private already. That’s what the TPA calls “fair”. Cue hollow laughter.

Tim, why haven’t you corrected the error in the OP, where you state that CAMRA have “joined” the TPA campaign? They’ve been campaigning on this for years!

“What is worse, the Campaign for Real Ale (CAMRA) has joined the campaign: perhaps its executive does not know where the TPA is coming from”.

Bit foolish to suggest people shouldn’t join a campaign unless they agree with every other thing the campaign promoter believes. It would fuck 38 Degrees and most other campaigns you support which only work if they create a broad coalition, not a small sect of true believers.

22. Chaise Guevara

To chime in with a few others here, I don’t think there’s anything wrong with CAMRA saying it agrees with the TPA on this particular issue. It doesn’t have to endorse all of the TPA’s other policies in the process. In fact, it’s far more annoying when people reject things they actually agree with just to disassociate themselves from the person who said it.

23. Chaise Guevara

@ 11 Shatterface

“Right, I was forgetting what great bastions of socialism supermarkets are.

Consumers of the world unite – a Tesco on every street corner and horsemeat for all!”

Nobody’s saying that the supermarkets have, like, totally got our backs, man. The suggestion is that some landlords are trying to get the government to make their jobs easier by forcing supermarkets to be less competitive, making things more expensive for consumers in the process. And before you say anything, it’s the effect on consumers I care about, not on supermarkets.

Also: in all seriousness, do you actually care about the whole horsemeat thing?

Tim Fenton @19:

Turns out we agree on most of my points :)

Chaise @23:

I would argue from inside that industry that what’s actually happened is that a series of government policies have pushed customers toward the off-trade (i.e. that market distortion fueled by misguided regulation has happened); and that in step with this, cartel actions by the Big Four supermarkets have further deformed the marketplace.

In so far as I can be taken to represent a publicans’ point of view, which is actually quite far, I am not trying to make supermarkets less competitive, I’m trying to stop the government giving extra assistance to the market players who already exercise functional cartel powers.

Chris,

What would be the 3 most important policies a govt could implement to reverse the trend and support pubs?

26. Chaise Guevara

@ 24 Chris

What are these policies and cartel actions? Honest question, I’m not all that knowledgeable. From an outside perspective, what seems to be screwing pubs is things like the recession, the beer tie, and the general trend away from local communities (i.e. that we commute more, and move more, and therefore not all our friends are in a three-mile radius).

27. Daniel Factor

@Shatterface. Ha ha just shown your middle class snobbery towards supermarkets.

I never implied supermarkets are bastions of socialism by selling alcohol cheaply.

28. Daniel Factor

@shatterface…

“Right, I was forgetting what great bastions of socialism supermarkets are.”

And pubs are. Sorry I thought they existed to make a profit just like any other business.

Planeshift and Chaise: I’m going to try and cover both queries here, apologies for how long it’s going to get.

First, Chaise: I’ve tried to cover the bases in my earlier comments. The general trend against locality definitely affected some pubs of a particular class; I was involved with one such in North London, a backstreet boozer in 7 Sisters that you couldn’t find unless you knew it was there and which had been kept in business by the six streets in each direction and the people who lived there. But the recession? Yah, that’s made it hard, mostly at the tenancy end (borrowing money to invest in a pub? yeah right), but the trade’s been being steadily hammered into a new size and shape since 1993.

The Big Four supermarkets have been exerting both massive political lobbying power, and running fairly consistent loss-leader strategies for better than 15 years now. That’s the cartel and it shows up everywhere; heard anything about dairy protests? Same issue. If you want to be a volume trader, you’ve got to get the Big Four; and the Big Four leverage that reality to drive wholesale prices to frankly uneconomic levels. This directly privileges very large distributors over craft.

The misguided policies have been several but there are two really big ones. First, the enforced divestiture in 1993-4. Really good idea to break up the vast brewery tie estates, because they were hugely anti-competitive, but the method used ended up creating unintended consequences.

Second, in the Labour years a kind of Whitehall farce developed of the

1. Something must be done!
2. This is something!
3. Therefore we must do it!

variety. The duty escalator is part of that, the repeated hikes in duty rate are part of it, the echo-chamber between nanny-Labour and the Murdoch press were part of it, the rehash of licensing and entertainment law was part of it, the smoking ban was part of it, and so on.

The problem they were trying to fix was ‘problem drinking’ == post-alcoholic street violence and associated crimes. Virtually none of the meddling they did with the licensed trade has had any effect on that type of drinking at all, except to move it from pubs (where there is at least a responsible party to deal with it) to homes and the street. About the only thing they did which generally speaking was good was relaxing the stupidly restrictive opening hours.

Right, now addressing Planeshift’s question: there’s two views on that, one being what they can do now, and the other being what they could have done then but have now missed the chance to.

Addressing the second one first: here’s an example. If Major’s cartel-breaking plan had been better thought-out, we might have seen the intended result, which is the vast majority of tie houses becoming independent freehouses. That would have had several positive effects, including avoiding the branded industry problem, would have seen the microbrew revolution take off much faster (and that’s where a lot of sector growth has been happening for years now). It would have avoided the estate-agent pubco problem Tim F. and I have both mentioned above, and so on.

But, and it’s a big but, a lot of what has happened to the sector is not to do with market distortions, it’s to do with market forces.

A goodly chunk of the shift from wet-led to dry-led pubs was simply going to happen for normal free-market reasons, and everyone was going to have to deal with it. That drove the smoking ban, not the other way round; gastropubs are a product of natural market forces.

Equally, a significant shrinkage in the national total pub estate was just going to happen; we simply don’t drink enough per capita to support a mid-20th Century density of pubs any more. Most specifically we don’t go out to drink in the kind of patterns which led to the pub on every second corner of every urban area back in the day.

EU politics introduced a new set of cheap and nasty competitors into the ‘get very drunk’ sector of the market in the form of Czech, Polish and other bulk, crap lagers. That was always going to drive a particular category of business to the off-trade. And so on; there’s more details in each of my other comments.

What could the government do now? Shockingly little that would work. It’s not that they might be able to prevent a major market distortion and realignment; a major market realignment has been happening progressively for some 20 years now, a much more significant one than the one which happened when keg superseded cask as our primary dispense medium.

Fixing the duty rules so that the craft beer market isn’t specifically penalised would help the kind of pubs *I* like to run, but I’m not sure it would do much for the beer market as a whole, unless you’re the kind of person who thinks that type of pub has a higher intrinsic value than yet another backstreet VDE or redundant Wetherspoonses. I happen to be one of those people.

Recognising that social damage from alcohol has virtually nothing to do with the strength of drinks and almost everything to do with either personal, or the shifts in social, drinking patterns would definitely help. It might stop the government trying to penalise responsible drinkers while actively promoting irresponsible ones (facilitating the move to very cheap off-trade beers).

This one is functionally impossible, but getting consumer and craft producer organisations like CAMRA, SIBA and so on equal influence on the government with the Big Four supermarkets would make one hell of a difference. In the meantime, lets have the same for dairy farmers, market gardeners, and I’d like a pony, please.

The final breaking of the tie as a legitimised concept would be the single biggest thing they could do that would improve the industry. Get more landlords completely free of the exploitative contracts, the high prices, the constant threat of being sold for flats, and the three-ring binders of the branded industry. But, once again;

There’s a place in the new shape of the industry for the branded trade. It does a job that people want, and increasingly over the last ten years it’s been doing that job quite well. The massive market realignment is simply a fact; it’s happened, it’s going to carry on happening, and that’s the way it is. However, because of the way it happened, much too much of the pub trade is in the grip of tie operations of various degrees of nefariousness or incompetence, and that’s quite simply bad for the trade.

o.0 Ok, so that got long, sorry.

CAMRA – along, with others in the beer sector, started the campaign against the beer duty escalator quite some time ago. The TPA is very late to the party. CAMRA is not joining their campaign, they are joining ours.

32. Chaise Guevara

@ 29 Chris

“The Big Four supermarkets have been exerting both massive political lobbying power, and running fairly consistent loss-leader strategies for better than 15 years now. That’s the cartel and it shows up everywhere”

Loss-leader strategy isn’t a cartel. It’s the opposite of a cartel. It’s an attempt to freeze out the direct competition (i.e. other supermarkets and smaller retailers, not pubs) by gaining someone’s entire weekly shopping trip by taking a hit on booze profits. Lobbying isn’t quite cartel behaviour either, although I admit it’s in the same ballpark when several huge companies all pull in the same direction.

From my lay perspective, I admit that both of those policies you describe sound like bad policies. Also, I like this:

“1. Something must be done!
2. This is something!
3. Therefore we must do it! “

Chaise: re the politician’s panic response, I nicked it from Yes, Minister; and I suspect they didn’t invent it.

Regarding the other point: kinda sorta. The loss-leader strategy to drag people into superstores is in part aimed at the other superstores but it is very largely aimed at those who compete with the superstores as a class; local shops, corner shops, in the beer sector pubs, and so on. It is in part two that you see the action of a cartel; all of the big supermarkets adopt a functionally identical strategy and between them they control so much of the market that this becomes an effectively co-ordinated anti-competetive force in the market.

But when I said ‘cartel’ I was mostly talking about their effect on wholesale pricing. They are collectively the only channel for any producer to rise from local to national distribution in a number of sectors (e.g. dairy, and bottled or canned beer). Their collective strategy of simply refusing to pay a reasonable price, secure in the knowledge that all the others will also do this and have proved themselves reliable in that bet for over 15 years now, has led to quite extraordinary profits for the cartel and to grinding market failures in several sectors: in part by vastly privileging those suppliers who are already able to match the Big Four’s economies of scale and brand bargaining power. It deforms the market, creates a barrier to entry, and damages other business models by leveraging cross-market dominance. That’s an effective, if not legally provable or preventable, cartel.

34. Chaise Guevara

@ 33 Chris

I think what’s happening here is that you’re not talking about literal cartels, but using the term to cover anything that has similar effects to a cartel. Loss-leading and its effects on pubs, for example, would only be a cartel if the supermarkets had gathered together and secretly agreed to sell really cheap beer so they could drive pubs out of business, then hike prices back up once the competition was dead.

As for the dairy stuff, I’d say that’s just capitalism in action. Which is exactly why capitalist systems need regulation to protect the small from the big.

Chaise:

I think what’s happening here is that you’re not talking about literal cartels, but using the term to cover anything that has similar effects to a cartel.

Yes, absolutely. I was even explicit about it, using the term ‘functional cartel’. I’ve been out of the academe for some years, but when I was reading History (mid 90s) there was a standard use of that term to indicate situations in which the collective interest of certain actors was so clear that no collusion was necessary to produce the market effects of a cartel. It comes up a fair amount in examining industrial history, and is clearly true of the Big Four (or Six, depending on how you count).

It is in the interests of all of them to drive down wholesale margins as far as possible and keep retail prices as high as possible, because that concentrates the margin of the entire supply chain in their bank accounts. It is also within their power to do so by collectively relying on each other to be smart actors and hold the line.

They happen to have such a dominant market share between such a small group of actors that it didn’t require collusion for them all to notice that they held this power. That’s a market deformation which occured without need for active collusion. That’s what the term functional cartel means.

Something very similar is true of the Too Big to Jail financial institutions: cf. the bear raid on Citigroup after the repeal of Glass-Steagal, and the HSBC money-laundering fiasco. ‘Everybody’s doing it’ becomes an excuse that is accepted at face value by regulators, governments and the press.

As for the dairy stuff, I’d say that’s just capitalism in action. Which is exactly why capitalist systems need regulation to protect the small from the big.

Presuming that by ‘capitalism in action’ you mean the action of the free market, no it isn’t. In a free market, prices reflect costs, value and margins at each point along a supply chain. In this market they do not. That’s a market failure. Now, it’s possible that you mean that chronic market failures are, in fact, ‘capitalism in action’. If you were, I could certainly see where you were coming from. There’s an apposite Adam Smith quote on my blog sidebar :)

@19. Tim Fenton

It is amusing that you believe that because someone pays through a private system instead of NI and income tax that they will be unable to afford it. You ignore the very real fact that there are poor people in Switzerland yet they are still treated and to a higher level. There are other ways to skin a cat.

Take the NHS off a pedestal and lets consider alternatives that could improve the situation for everyone. It is a system in the throws of disorder. We have scandal after scandal. These are not the signs of a system which we can be happy to file away.

You acuse others of being apologists yet you can’t see your own hypocrisy when you blindly worship the NHS, but I would expect nothing less from a Labour’s faithful labrador.

37. Chaise Guevara

@ 35 Chris

Fair enough – not saying you were wrong, more that I got confused :-)

Regarding dairy, I’d say that the free market is what creates this kind of failure. Its proponents like to claim that a free market delivers perfect value based on supply and demand. But it doesn’t, because of power imbalances.

The values that people like to paint onto the free market disappear when you have a monopoly, or, in this case, an oligopoly. As far as I can tell, things like this happen because the free market has no mechanism to stop powerful players exploiting their position in the market. Or look at things like the company store – without checks and balances, you can get people desperate enough for work that they can be manouvered into 1) buying all their goods from their employer, and 2) ending up in debt to their employer regardless of how careful they are with money.

The absolute classic example of the free market’s failures goes as follows: there is a large chain of stores selling thingamijigs, a popular product. A small businessman figures out a way of making thingamijigs far more cheaply, and takes out a loan to open a single store. In theory, he should see his business grow and grow, forcing the chain to improve its value offering to keep up. But instead, the chain drops its prices to way below cost at its outlet down the road from the small businessman’s store. In doing so, it drives him out of business (it can take the cost hit to itself due to having all those other stores), then puts its thingamijig prices back to where they were once he’s bankrupt.

I’m not even commenting on whether the free market is a good thing. I’m just saying it doesn’t do what it’s claimed to do.

@37. Chaise Guevara

There is no doubt that there can be ‘market failures’. No free market believer worth half a gram of salt denies this. It is an economic reality. However, what you are assuming is that by definition free markets include no regulation. This is simply untrue and works on an absolutist interpretation of a free market.

The question is to what extent a market should be regulated. If you ask the vast majority of libertarian or free marketeers that know half a thing about economics whether they agree with regulation such as the competition commission they will agree with you.

“free market delivers perfect value based on supply and demand.”

No what they are saying is that it provides the most efficient system for the allocation of resources when compared to other systems so far created because it enables individuals to take individual decisions to impact their own circumstances, and does not ham fistedly blanket regulate like in a centralised economy.

Again, this does not mean there aren’t market failures. Lets consider a prime example. Standard oil in the late 19th and early 20th century was a collosal oil company that as an effective monopoly able to abuse that position. There was a market failure here for competition because Rockefeller used his considerably powerful brain to combine what no one had before, and enable to bringing of oil from ground to sale in record time and in record profits. He was the first and before anyone could offer viable competition he had wrapped up the market. The role of the regulatory authorities however, through one of the first and biggest cases under the Sherman Act was to break Standard Oil up so that there was then room for new entrants into the market and it created a competing market out of the pieces of Standard Oil. So this is a good thing, and whole heartedly supported by those who support a free market. I am not really sure about the impact of employee stores. Only a hand full of companies have the type of diversity you are talking about and it really doesn’t impact upon teh vast majority of people.

The large chain store example you use is also an example of a market failure and has yet again been addressed by competition authorities around the world (its called predatory pricing) in cases such as AKZO, France Telecom, Tetra Pak II, Amazon Fr. There is also a growing consensus among competition lawyers that in fact the impact of predatory pricing is not actually as big as suggested, and that in fact innovations such as you state are far more focused around increasing quality for the same money, or increasing time to market for the same money, and in this respect, smaller companies are becoming far more able to compete with big ones.

The answer however is not to broadside markets with heaps of government regulation because the government and their lackeys think ‘they know best’.

The issues you raise aren’t new. They have been mulled over and digested by lawyers, judges, economists, and politicians. Even Hayek, one of the staunchest protectors or a free society, understood in great detail the need for a rule of law and its importance in protecting the market from situations where monopolies arise. However, he correctly pointed out as well, that the vast majority of monopolies have actually been created through government regulation, rather than a failure of the market. The banks in this country are a prime example.

Chris: thanks for this thread, genuinely enlightening commentary from the sharp end. I note that John Q Publican (former/current, not sure which, landlord in Hackney) is still around these parts on other threads; would be interested to see his take on this thread and on your comments.

The only one I fervently disagree with is this:

EU politics introduced a new set of cheap and nasty competitors into the ‘get very drunk’ sector of the market in the form of Czech, Polish and other bulk, crap lagers. That was always going to drive a particular category of business to the off-trade. And so on; there’s more details in each of my other comments

- I’m an industry guy and a drinker, and I thoroughly welcomed all of the new EE lagers to the UK. Up until we had a serious EE migrant contingent, lager in the UK was vile piss or Stella; it was solely EE admission to the EU that created a scenario where you can go to any pub in London and have a pint of decent lager. And I think that (with the partial exception of AB InBev’s Staropramen) the EE lagers are well worth a drink.

Freeman: can you please shove off, you’re not relevant.

Too Big to Jail financial institutions

Nice work!

Chaise @37:

Fair enough – not saying you were wrong, more that I got confused :)

I also occasionally use historiographical terms as if they were normal in, say, journalism or politics, where they usually aren’t.

Regarding dairy, I’d say that the free market is what creates this kind of failure. Its proponents like to claim that a free market delivers perfect value based on supply and demand. But it doesn’t, because of power imbalances.

Now; I may go wrong here, because the history of macroeconomics as a discipline is something I know a bit but not in detail. IIRC, what you’ve just described is the classical view of economics.

The advent of the EMH combined with post-Keynesian views changed how we look at, or rather how we define, ‘market failure’. If you apply the idea that the efficiency of free markets at allocating scarce resources is a function of information, then cartel actions represent a market failure, even if they are what a ‘free’ market automatically leads to in practice, if you wait long enough.

The EMH most certainly does not claim that free markets are ‘good’ in the sense that, say, motherhood is ‘good’; but its modern versions do suggest that markets which are not ‘free’ are also less efficient resource allocators and are therefore less ‘good’. Under that argument, regulatory intervention in a market can actually make it more ‘free’ == efficient as an allocator of resources. Classic examples here are the case of natural monopolies (highways) and the case of ignored externalities (pollution).

The functional cartel I was describing fairly clearly interrupts the efficient allocation of resources within the marketplace. It allocates a great deal of one scarce resource (money) to the distributor, thus allocating inadequate resources to both the producer (dairy farmers) and the consumer (they get less milk for their pound). That is, therefore, a market failure.

UKLiberty @40: :) I can’t claim to have come up with that on my own, but post-LIBOR / money-laundering and Obama’s DOJ walking away from any substantive attempt to hold the wankers accountable, TBTJ is getting a lot more airtime alongside TBTF.

JohnB @ 39:

Chris: thanks for this thread, genuinely enlightening commentary from the sharp end. I note that John Q Publican (former/current, not sure which, landlord in Hackney) is still around these parts on other threads; would be interested to see his take on this thread and on your comments.

Well, thank you very much :) As it happens, I am Spartacus; JQP was the pseudonym I wrote under in 2008-2010. When I started writing again very recently I decided to do so under my own name. There’s a brief explanation of those two decisions here. Recent comments from JQP on LibCon were made before I took the decision to start writing as myself. Now, back to the beer:

I’m an industry guy and a drinker, and I thoroughly welcomed all of the new EE lagers to the UK. Up until we had a serious EE migrant contingent, lager in the UK was vile piss or Stella; it was solely EE admission to the EU that created a scenario where you can go to any pub in London and have a pint of decent lager. And I think that (with the partial exception of AB InBev’s Staropramen) the EE lagers are well worth a drink.

Interestingly enough, I really like Staropramen (though I first drank it ‘over there’, and before InBev bought it.) :)

We’re talking at cross-purposes here. I’m all in favour of promoting world beers, and have done a considerable amount of it in my work. There are many good EE ‘pilsner’ lagers; for the obvious reason that they invented the damn things. But they also aren’t what I was talking about. I was talking about the influx which occurred slightly later: we started importing quality keg beers for the speciality market some time before we started importing bulk, cheap-as-shit canned beers for the get-drunk-fast market. (When Stella and Kronenbourg came to the UK, both were quality, tasty beers. Their quality declined in step with their volume increasing)

There is a category of 5% lager brands which you will never see on draught in a pub, but which you will see on the shelves of every Polski Sklep and in the hands of half the chavs in England. They are legendarily bad-tasting, brewed to low standards but in truly phenomenal quantities in cheap-labour countries, and have precisely one USP in the market; their corner-shop RRP by the single unit is as low as the special-offer-sale prices on Carlsberg and Stella 24-packs.

There is a section of the market-place for whom those beers are exactly what they want. In parallel with the misguided governmental measures I mentioned above, they influenced the movement of a statistically significant chunk of the problem-drinker market away from pubs and into the street.

On another note, though; there are a couple of really excellent English lagerhaus around these days. I’ve been an evangelist for both Moravka and Freedom in places no-one had heard of either of them, and thoroughly enjoy both beers.

43. Richard W

There is a massive difference between market failure and creative destruction. Confusing the two will only ever lead to wrong conclusions. I would disagree with Freeman who says free marketeers do not deny market failure. There are plenty of free market fundamentalists around who claim that in the absence of regulation a free market will lead to an efficient allocation of resources. They also claim that it is the regulation that causes any market failure. Such fundamentalist beliefs are utter tripe, and it is the difference between fundamentalists and people who believe freeish markets are generally a good thing but outcomes can be improved with smart regulation. He self-evidently is not taking a fundamentalist position but there is no point in denying that the fundamentalists exist.

Being out-competed in a competitive market is not a market failure. The losers in creative destruction want to believe creative destruction and market failure is the same thing because they believe being a participant in a market entitles them to a guaranteed profit. The world owes me a living theory of market failure. A one-man band high street shop closing down because the supermarkets ate his lunch by attracting his customers is not market failure any more than Manchester United attracting more fans than Stockport is a market failure. Preventing that happening would not lead to a more efficient allocation of resources. He would be better off and his customers would be worse off, there would be no Pareto Improvement. That type of scenario is creative destruction and creative destruction is how economies become more efficient and incomes rise.

The railways displacing the canals and stagecoach was a classic case of creative destruction. Moving people and goods from A to B was something that could easily be replicated if one could figure out ways to do it better than the incumbents. It was not market failure that the incumbents were left worse off, when everyone else was better off. I am pretty sure they all appealed to the government for protection from competition, established players usually do.

The common denominator is always doing something that can easily be copied. Any participant in a market doing that is always vulnerable to being out-competed or a new industry rising to sweep the old away. However, the new way of doing things replacing the old is never market failure. Woolworths going bust because others copied their business model and did it better was not market failure. Classic creative destruction.

Smart regulation that genuinely improves outcomes for most people can be a good thing, not just regulation as an end in itself. Regulation that relies on the cleverness of the regulator is regulation that will fail. The regulation has to work even with the dumbest regulator. After the nuclear industry the financial services industry is the most regulated with 4000 civil servants at the FSA. I will leave it for others to judge how well that regulation worked. Getting the balance right between being opposed to protectionism and regulation that actually makes matters worse is not easy. However, that is the goal that a good economy should seek to attain. In the jargon the economy reaches Pareto Optimal outcomes.

@39. john b

“Freeman: can you please shove off, you’re not relevant.”

Well I am pleased my comment prompted that response. Sign it hit a nerve, but no, I will not shove off.

@41. Chris Naden

“even if they are what a ‘free’ market automatically leads to in practice, if you wait long enough.”

Mmm, not really. The creation of monopolies out of suitably fragmented and competitive markets has almost always come from a government interference, in fact I am struggling to think of a circumstance in which a competitive market has bred a monopoly without intervention by the state.

@43. Richard W

Oh they exist, but as I said not worth half a gram of salt. Free markets in no way represent anarchy. There is a problem however. When you say regulation is good, which obviously some level is, people immediately opt for a system where far too much is introduced. Part of the problem with financial/competition regulation for instance is that there are too many bodies which complicate matters and cause problems. Why do we for instance have the SFO, FSA, and Ombudsman? All these purposes could be served through one body, very closly aligned with the courts and be a branch of the CPS.

I must admit that I have trouble following what you are saying, but your last paragraph touches on an important point. The problems with regulation arise when you depart from firmly set basic principles. Ever more regulation creates ever more complexities and loopholes. Regulation must have an oversight aim. No more. Where regulators dare to venture into every issue and circumstance they become unstuck. Fraud for instance is clearly defined, and has a wide ambit, yet because of the miriad of other regulation it has been neutered to the detriment of the market and its customers.

It is not necessarily about ‘smarter’ regulation, but less of it, and ensuring it focuses on broader principles and then leave the interpretation to judicial discretion for individual circumstances, and the appeal system as protection.

Freeman:

The creation of monopolies out of suitably fragmented and competitive markets has almost always come from a government interference, in fact I am struggling to think of a circumstance in which a competitive market has bred a monopoly without intervention by the state.

Dude. Microsoft. Bell. Randolph Hearst. One of those was within the last fifteen years, and that’s just in America.

46. Chaise Guevara

@ 38 Freemen

the majority of libertarians and free marketers I meet are online, which tends to skew things towards the extreme, so I probably see an unrealistic amount of people who believe in pretty much no regulation apart from contract enforcement.

Obviously someone who says they believe in the free market doesn’t have to take that to the extreme, literal sense. I have, however, noticed that a lot of people will argue that any regulation they dislike is bad purely because it’s regulation, as if say “regulation is bad” is a tautology. If they actually believe that, they have to justify things like predatory pricing. But often they will have regulations they do approve of, with no explanation of why the rule changes in these cases.

Incidentally, while I use the innovation example of predatory pricing for simplicity’s sake, I think the practice is more dangerous when the smaller competition isn’t doing anything new, but rather making non-original improvements. Like a convenience store that sets up next to a supermarket offering similar prices, but far better customer service.

“The answer however is not to broadside markets with heaps of government regulation because the government and their lackeys think ‘they know best’.”

Given that you agree with some regulation, and that regulation is generally enforced (directly or indirectly) by the government*, isn’t there a risk here that you’re applying double standards?

*Under “indirectly” I here include voluntary codes of conduct set up by industries who know that the government will otherwise intervene.

47. Robin Levett

@Freeman #15:

Countries that are more employment successful than ourselves such as Sweden and Germany don’t have minimum wages

It’s a side issue, but this is wrong. Germany has a statutorily set minimum wage in some important market sectors. It also has collectively agreed minimum wages enforceable by law covering 60% of the labour force.

Sweden has collectively-negotiated minimum wages across the board; which is why you get headlines and stories like this:

“Sweden’s minimum wages ‘too high’: OECD”

http://www.thelocal.se/45122/20121217/#.UTOwrmepzY4

@45. Chris Naden

You didn’t read what I said. Here it is again:

“The creation of monopolies out of suitably fragmented and competitive markets has almost always come from a government interference, in fact I am struggling to think of a circumstance in which a competitive market has bred a monopoly without intervention by the state.”

As I said, the ‘creation’ of monopolies ‘out of’…fragmented…markets. I specifically used that wording because I had spent several paragraphs explaining that revolutionary companies can by chance produce a merket failure, and that is what regulation is needed for.

@46. Chaise Guevara

“Given that you agree with some regulation, and that regulation is generally enforced (directly or indirectly) by the government*, isn’t there a risk here that you’re applying double standards?”

No not at all. There is a very clear distinction between judicial courts independent from the executive, and enforcment groups such at the SFO, HMRC, or FSA. These bodies are given pseudo judicial powers to regulate. The problems are invariably caused by an over zealous application by these bodies rather than a court applying pre-existing laws.

I raised the issue to draw a distinction between the two ideas. What I meant by govt lackies was the difference between the competitive pressures of the market determining firm behaviour, and govt reg determining it. The govt has systematically shown that they are unable to take account of the unintended consequences that result from their intervention.

“Like a convenience store that sets up next to a supermarket offering similar prices, but far better customer service.”

But that is pointing out the very competitive nature of the market I was referring to. All goods and services within a market have a price, and when the market mechanism is able to operate, that price reflects the value that consumers place on those services. So if shoppers value the service provided by the small shop and choice to spend more because of the provision of that service then the small firm will attract customers. Must of the problem however is the vast majority of small frims offering absolutely nothing new or better over the big firms. They usually offer less selection, higher prices, and the same level of service.

@47. Robin Levett

It is indeed a side issue, but you are quite right, but it has been through the collective bargaining that it has become enforcable. It has come through each industry and its workers saying “we need X amount for the work we undertake”. It has not been created by an overreaching central policy of “everyone shall be paid X”. It is in fact the perfect example of the market in operation. That is a market lead choice, not govt imposed. Sweden is set in precisely the same way. The distinction once you think about it is huge, and very powerful.


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