Three Ways To Fix Britain’s Broken Competiton Regime
Speech to Westminster Forum
Rt Hon Liam Byrne MP
Chair, Parliamentary Network on the World Bank and International Monetary Fund:
Since the creation of the Competition and Markets Authority in 2013, competition has stalled, big companies have got ever bigger, and productivity has flatlined.
In the spiritual home, of the free market this is a problem.
And for my constituents the problem isn’t theoretical.
For them, it’s meant higher prices and lower wages for much of the last decade.
In their extraordinary study, the IMF foundmarkups, which are a good proxy for rising market power of leading firms, rose 38% across advanced economies - but by 60% here in Britain.
That’s why I think John Penrose is right to say, UK competition and consumer choice has weakened in the last two decades.
Now as we face a decisive decade ahead, packed with challenges, we need to fix our broken competition regime.
Today, I’d like to offer three thoughts about how the central challenge:
how does Brexit Britain stay in lockstep with the Biden White House and Brussels where new regimes will re-write the rules of the last fifty years for the markets of the West.
First things first.
We have to understand the basic flaws in the economic thinking that have characterised laissez faire economics for the last fifty years.
Just as behavioural economics helps us see how markets are inherently prone to bubbles so a re-appraisal of Joseph Schumpeter reminds us that markets also tend to monopoly.
Philip Aghion’s new book on the economics of Joseph Schumpeter is a timely reminder of the basic insight some forgot.
Everyone here will remember Schumpeter’sfamous dictum that capitalism is driven forward by a process of creative destruction.
What people sometimes forget is the flipside of creative destruction that Schumpeter observed, is the destruction of competition.
And in fact that shouldn’t surprise us.
Just over 20 years ago I walked into my first strategy class at the Harvard Business School with renowned professor Michael Porter.
What we were taught in Michael’s class wasnot so much the celebration of competition, but how to destroy it - because that’s who firms maximise profit, and post super normal returns.
Yet Michael’s class wasn’t the most popular at Harvard.
That class was a class called ‘building information age businesses’.
I literally pleaded with the professor in a rainswept Cambridge car park to be admitted to the class and I wasn’t the only one.
Everyone wanted to know how to harness new technology to build the businesses of the future.
What everyone was trying to figure out was, as the famous HBR article how to ‘use architecture to win wars’.
We were trying to lock in customers in a way that maximised the value of the business that now had unparalleled scale and scope with next to zero marginal costs.
And in the 20 years since I left Harvard we’ve now seen a combination of the lackadaisical regulators in the west and the market Leninists in the east, create a global economy that is now dominated by what I’ve called Technopolies.
In China, the market Leninists became well practised at using a whole range of tools to shelter markets, support local firms, only to now watch those firms grow if anything, too powerful.
President Xi is now taking concerted action against Jack Ma or Didi to clip their wings.
And though western politicians rail against unfair Chinese competition the truth is the West was lax.
Our Technopolies use big tech, big brand and big data to dominate their markets and big balance sheets to buy-out the competition and lock-in customers.
Into these firms, like shovelling coal into a furnace, governments have poured hundreds of billions of pounds of free science and technology subsidies while in turn the firms poured hundreds of billions into brand-building, together creating the sort of barriers to new competition which would make Michael Porter proud.
Today, global spending on Research & Development is in the region of $2 trillion a year. But the world’s top 1000 R&D investors account for almost a trillion of that.
Brand spend multiplies the advantage.
The world’s firms spend around $618 billion on advertising. But, the world’s largest 200 companies spend $163 billion of this, over a quarter.
Amazon now spends $27 billion on both R&D and advertising. Google’s parent, Alphabet spends a combined total of $19 billion. How can any firm compete with that? The evidence suggests they can’t.
Worse, these firms were allowed 'kill in the crib' startup competitors which threaten the data monopolies the big firms aspire to build.
Google bought 215 businesses since 2000.
Facebook has bought 69 companies since 2007including WhatsApp merger, which helped consolidate its data monopoly with a treasure trove of 1 billion users.
Our competition regime has been blown apart.
Now the wind is changing.
Now what we’ve heard in the reports of the last couple of years is an excellent debate about the scale, the scope, the speed and the sanctions needed by modern regulators.
John Penrose is surely right to say that it is time that we had a new competition act.
I hope today’s conference put some kinetic energy into that idea.
But before we get any further down the track, I want to flag three basic questions where we need a better consensus.
The first challenge is philosophical –
Andrew Tyrie proposes an overriding consumer interest duty for stronger regulator.
That’s not the new view in Washington.
There, we see a new debate that takes aim atthe commercial power of the firm, not simply the consumer welfare enjoyed by the firm’s customers.
That a big shift from the philosophy ofcompetition policy since Richard Bork’s 1978 book, [The Anti-trust Paradox], which arguedrising prices signal harm - but if a company is lowering prices to consumers size is not a worry.
Lina Khan, the new chair of the FTC is leading this.
She’s leading what’s been called the ‘new Brandeis’ school of public policy, which recognises as Brandeis once said that
"far more serious even then the suppression of competition is the suppression of industrial liberty".
In her 2017 paper [The Amazon anti-trust paradox] Kahn argued that harm is about more than prices.
If companies like Amazon use predatory pricing and data lock-ins to drive rivals out of business, consumers suffer from a lot of choice and competition. And so do workers.
I think this wider approach is wise because not least because it is so hard to quantify the impact of competition on better prices.
The CMA here in the UK estimates its work is worth perhaps £1 billion to consumers in an economy where we spend £1.4 trillion.
Crucially, this new philosophy welcomes us to consider broader questions of not simply monopoly but - monopsony.
The reality that in many parts of our country the predominance of certain firms in effect hold down wages in poorer communities.
Since 2000, in our country, output per hour is up 19% - but wages are up 15%.
Workers are producing more but not getting paid for it.
President Obama’s CEA was on the case;
‘There is increasing recognition among economists and policy makers’ it wrote ‘that employers often have some degree of monopsony power in labour markets”
These ‘superstar firms’ as economists like David Autor argue, drive down workers share of the national pie, hoovering up high profits and pushing wage share down.
Of course people say that if you don’t like the jobs on offer you can always move.
You can get on your bike.
But that ignores the reality that our broken housing market means people can’t afford to move.
It ignores the reality that our broken care system means that many families are tied to a place because they care for others.
In other words many workers have a Hobson’s choice - which is no choice at all.
Second we have to think about how we act faster.
When we confront firms that are determined to move fast and break things, we know that we need stronger upfront rules to police the marketplace.
Now we don’t quite know how Europe’sDigital Markets Act will settle down.
But we can see Lina Khan proposing new approaches to precautionary rule-making to prevent conduct that constitutes ‘an unfair method of competition’- especially when private litigation is unlikely to materialise.
Like for example the noncompete clauses in employment contracts that cover 28 million Americans and limit their employment options.
(See Lina Khan and Rohit Chopra, the case for unfair methods of competition rule-making).
This approach to precautionary rules based on good analysis of patterns of unfair behaviour seems to me a better approach than endless cases in courts that so many can’t access.
Now for the future, it is vital that the UK finds ways of collaborating closely with the United States and Europe to closely study - and quickly act;
To move quickly to revise rules against unfair competition that hurts consumers - or workers - backed by a strong political mandate.
This has two institutional implications.
First, we may consider whether for example, the OECD should take a much stronger coordinating role just as they have on questions of international tax.
Second we need to radically improve Parliamentary oversight.
Once upon a time we had select committees to study EU legislation. Mr Cash spent years on them.
It may now be time for specific select committee focused on competition rules.
This would allow Parliament to opine quickly on proposals which the CMA should lead, based on their scrutiny of unfair behaviour.
Finally, we will need to grip the nettle of industrial policy.
In Europe Commissioner Mellanox has already emerged as an advocate of stronger European champions. Many in Congress will make the case for American champions too.
Meanwhile, here in Britain, the government is clear that industrial policy, procurement policy, subsidies will all be more flexible -which means more available.
As we try to decarbonise the economy and solve new real-world challenges together with the private sector, the truth is that public investment will be needed to cover risky investments, that the private sector simply won’t make.
It won’t be long before we are debating unfair subsidies, or unfair contracts, or risky mergers and acquisition where important local firms full prey to foreign takeovers.
The appalling misbehaviour of Melrose closing down GKN in Birmingham is just the latest example of how today’s regime needs to improve.
Personally I don’t see good ways round this without new safeguards for the public interest.
In cases of intellectual property investments, this means the state retaining a share of the intellectual property we help fund so that the taxpayer gets a yield on the investments we make.
But on the other, we need legally in forcible obligations that by on directors personally in return four waving through mergers and acquisition is which we think pose a risk the jobs.
So let me conclude with this.
Many of these ideas are a departure from the thinking there was informed public policy for five decades.
But these ideas are not novel to economics.
Rather they seek to renew I’m much older tradition of the moral economy that once with the guide to lawmaking here in the House of Commons.
There is no better example than the debates we had here in parliament about the Limited liability Act in the 1850’s.
It was the founding act of modern capitalism.
It allowed shareholders to combine their capital without fear of liabilities when things went wrong.
It is what you might call the exorbitant privilege of companies.
But almost without exception parliamentarians who rose to speak in these debates rested their argument on how limited liability would help advance the ‘common good’.
Today, our competition isn’t working hard enough for consumer, for workers, and for citizens.
We need reforms to ensure that the privileges we grant two firms advance the good of all.
And that competition policy that actually works for the common good.