Breaking news: unions play a central role, for good and ill

Welcome back to a tripartite world, where Labor has returned to power and its union mates are back inside the tent – and at last week’s jobs summit could be seen moving in their furniture. For those who don’t remember the 1983 glory days of Bob Hawke, Paul Keating, consensus, the Accord, and former ACTU secretary Bill Kelty as an honorary member of the cabinet, it will take some getting used to.

For those who’ve been watching only since the John Howard era, it may even seem unnatural. One of Howard’s first acts upon succeeding Hawke and Keating in 1996 was to delegitimise the unions.

He allowed the tripartite committees to lapse, and didn’t reappoint the ACTU secretary to the board of the Reserve Bank. I doubt if many even informal links between ministers and union leaders continued.

The Libs didn’t know the union bosses, and didn’t want to know ’em. They were the enemy – always had been, always would be. Big business bosses, on the other hand, would be privately consulted and were always welcome to phone up for a quiet word with the minister.

This, by the way, helps explain the Reserve Bank’s pro-business bias. Its board is loaded with business worthies - who are there to help keep the central bankers’ feet on the ground – and its extensive program of regular and formal “liaison” with key firms and industries, doesn’t include asking union leaders what they think’s happening.

If you wonder why Reserve governor Dr Philip Lowe’s remarks about wages can sometimes seem naive – even out of “boomer fantasy land” – it’s because he only ever hears the bosses’ side of the story. And I doubt if they ever shock his neoclassical socks by talking about how they exercise their market power.

It’s easy to justify the Liberals’ delegitimation of the unions by noting that, these days, only about 14 per cent of employees belong to a union. But if you find that argument persuasive, you’re revealing your ignorance of our wage-fixing institutions.

Most workers are subject to an industrial award, and there’s a union (and an employer or employer group) on one end of every award, and almost every enterprise agreement. In the Fair Work Commission’s annual wage review – which sets the wages of about a quarter of all employees – it’s the ACTU that stands against the employer groups arguing that times are tough, and they couldn’t possibly afford a rise of anything much.

So, to say the unions have what economists would call a giant “free-rider” problem – a lot of people happy to receive benefits without paying for them – is not to say they shouldn’t be given a seat at the table.

Liberals, business and their media cheer squad may be appalled by sanctification of the unions, but at least Labor’s making it clear it wants business to keep its seat at the table. It will be consulted. This too is Labor’s inheritance from the Hawke-Keating experience: to the extent possible, keep business on side.

The ACT’s second-biggest industry – lobbying – will be busier than ever. It’s third-biggest – consulting – not so much.

What all agreed at the summit is that Labor has taken over an economy with many structural problems that need fixing. Not the least of these is that the wage-bargaining system is broken.

What we learnt last week, from everything ministers said and from the 14-page “outcomes document” is that, in marked contrast to its predecessor, Labor does intend to fix things.

The whole summit, tripartite business is about giving all the key players a say in how things are fixed, giving them a heads-up on the government’s intentions, and an introduction to the minister. About winning support – or, at least, acquiescence – from as many of the powerful players as possible, to minimise the political risks of making changes.

Under Labor’s tripartism, the three parties aren’t equal. The government will, in the end, do what it decides to do. The unions start well ahead of business, because of their special relationship with a Labor government.

They have a further advantage over business: solidarity. The many unions are used to speaking with one, unified voice through the ACTU, whereas business fractures into big versus small, and rival employer groups. The unions know all about playing one business group off against another.

What business has to decide is whether it wants to stay in the government’s tent or walk out. Because, in business, pragmatism usually trumps idealism, my guess is that business will play ball for as long as Labor looks like staying in office.

After the summit ended, the ACTU’s statement said it had always “been clear that we need to get wages moving and increase skills and training for local workers in order for unions to support lifting skilled migration levels. We welcome that this summit has delivered those commitments.”

It was all a talk fest? No, a deal was done and that quote reveals just what the deal was. However, a big part of the business side didn’t support fixing the wage-bargaining system by returning to “multi-employer” bargaining.

What’s clear is that the government will be pressing on with some form of multi-employer bargaining. What isn’t yet clear is what that form will be. Until it’s finalised, business will be busy inside the tent pushing for whatever modifications it can get.

With Labor back in power and the unions back walking the halls of power, it’s important to understand the relationship between the two arms of the “labour movement”. Whereas the relationship between the Libs and business is quite informal, the relationship between Labor and the unions is highly formal. They’re not mates, they’re close rellos.

Historically, the unions set up the Labor Party to be their political arm. To this day, those unions that pay dues to the Labor Party still wield considerable influence over it and the members of the federal parliamentary caucus.

Labor parliamentarians are affiliated with particular unions, which gives some of the bigger unions considerable influence over preselections, on who gets to stay leader of the party, and on certain policy matters.

When Labor is in government, businesses in certain industries use their unions to get to the government. This explains why Labor governments haven’t done as much as they should to tighten up our competition law.

And whereas Howard left the Libs with a visceral hatred of industry super funds, Labor’s links with the unions – and the unions’ links with the ticket-clippers of the super industry – mean it can’t always be trusted to favour the interests of super members over super managers.

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Don't expect great productivity if we give business an easy ride

An unwritten rule in the economic debate is that you can say whatever you like about the failures of governments – Labor or Liberal; federal or state – but you must never, ever criticise the performance of business. Maybe that’s one reason we’re getting so little productivity improvement these days.

One reason it’s unwise to criticise big business is that it’s got a lot of power and money. It can well defend itself but, in any case, but there’s never any shortage of experts happy to fly to its defence, in hope of a reward.

But the other reason is the pro-business bias built into the standard demand-and-supply, “neoclassical” model burnt into the brains of economists. It rests on the assumption that market economies are self-correcting – “equilibrating” - and so work best when you follow the maxim “laissez-faire” – leave things alone.

So if markets don’t seem to be going well, the likeliest explanation is that intervention by governments has stuffed them up. Business people always respond rationally to the incentives that governments create, so if what business is doing isn’t helpful, it must be the government’s fault.

In theory, economists know about the possibility of “market failure”, but many believe that, in practice, such failures are rare, or of little consequence.

All this explains why almost all discussion of our poor productivity performance assumes it must be something the government’s doing wrong, which needs “reforming”. You’ll see this mentality on display at next week’s jobs and skills summit.

Which is surprising when you remember that, for the most part, productivity improvement – producing more outputs of goods and services from the same or fewer inputs of raw materials, labour and physical capital – occurs inside the premises of businesses, big or small.

Fortunately, one person who understands this is the new assistant treasurer, Dr Andrew Leigh, a former economics professor, who this week used the Fred Gruen lecture at the Australian National University to outline recent Treasury research on the “dynamism” of Australian businesses – how good they are at improving their performance over time.

The news is not encouraging. One indicator of dynamism is job mobility. When workers switch from low-productivity to high-productivity firms, they earn a higher wage and make the economy more efficient.

The proportion of workers who started a new job in the past quarter fell from 8.7 per cent in the early 2000s to 7.3 per cent in the decade to the end of 2019.

Another indicator of dynamism is the “start-up rate” – the number of new companies being set up each year. It’s gone from 13 per cent in 2006 to 11 per cent in 2019.

Over the same period, the number of old companies closing fell from 10 per cent to 8 per cent. So our firms are living longer and getting older.

The neoclassical model assumes a high degree of competition between firms. It’s the pressure from competition that encourages firms to improve the quality of their products and offer an attractive price. It spurs firms to develop new products.

Competition encourages firms to think of new ways to produce their products, run their businesses and use their staff more effectively, Leigh says.

“In competitive industries, companies are forced to ask themselves what they need to do to win market share from their rivals. That might lead to more research and development, the importation of good ideas from overseas, or adopting clever approaches from other industries.

“Customers benefit from this, but so too does the whole economy. Competition creates the incentive for companies to boost productivity,” he says.

As Leigh notes, the opposite to competition, monopoly, is far less attractive. “Monopolists tend to charge higher prices and offer worse products and services. They might opt to cut back on research, preferring to invest in ‘moats’ to keep the competition out.

“If they have plenty of cash on hand, they might figure that, if a rival does emerge, they can simply buy them out and maintain their market dominance. Monopoly [economic] rents lead to higher profits – and higher prices.”

Taken literally, “monopoly” means just one seller, but economists use the word more broadly to refer to just a few big firms - “duopoly” or, more commonly, “oligopoly”.

One indicator of the degree of “market power” – aka pricing power – is how much of a market is controlled by a few big firms. At the start of this century, the market share of the largest four firms in an industry averaged 41 per cent. By 2018-19, it had risen to 43 per cent. So across the economy, from baby food to beer, the top four firms hold a high and growing share of the market.

And the problem’s even greater when you remember that the rival firms often have large shareholders in common. For instance, the largest shareholders of the Commonwealth Bank are Vanguard and Blackrock, which are also the largest shareholders of the three other big banks.

But the strongest sign of lack of competition is the size of a company’s “mark-up” – the price it charges for its product, relative to its marginal cost of production. In the textbook, these mark-ups are wafer thin.

Treasury estimates that the average mark-up increased by about 6 per cent over the 13 years to 2016-17. This fits with the trend in other rich economies. And the increase in mark-ups has occurred across entire industries, not just the market leaders.

It seems that rising market power has reduced the rate at which labour flows to its most productive use, which in turn has lowered the rate of growth in the productivity of labour by 0.1 percentage points a year, according to Leigh’s rough calculations.

If so, this would explain about a fifth of the slowdown in productivity improvement since 2012. Lax regulation of mergers and takeovers has allowed too many of our big businesses to get fat and lazy, even while raising their prices and profits. But don’t tell anyone I said so.

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Our hidden inflation problem: business has too much pricing power

Why is Reserve Bank governor Dr Philip Lowe so worried about getting inflation down when so much of the rise in prices comes from foreign supply constraints that will eventually go away, and so much of the rise won’t be passed on to workers in higher wages?

Because what he can’t admit is that inflation won’t fall back to the target range of 2 to 3 per cent until the nation’s businesses decide to moderate their price rises. And they’re not likely to do that until those rises reach the point where they’re driving away customers.

It’s said that using monetary policy (higher interest rates) to control inflation is a “blunt instrument”. The only way to discourage businesses from raising their prices is to get to their customers’ wallets - by cutting real wages, increasing mortgage payments and having falling house prices make them feel less wealthy.

When explaining problems in the economy, economists use two favourite analytical tools. First, determine how much of the problem is coming from the supply (production) side of the economy, and how much from the demand (spending) side.

Second, determine whether the problem is “cyclical” or “structural”. That is, has it been caused by the temporary ups and downs of the business cycle, or by longer-lasting changes in the economy’s structure – the way it works.

I’ve argued that most of the surge in prices has come from the supply side: a horrible coincidence of supply disruptions caused by the pandemic, the Ukraine war, and even climate change.

This matters because monetary policy can do nothing to fix disruptions to supply. All it can ever do is batter down demand.

It’s true, however, that this main, supply-side problem has been worsened by the effect of strong, government-stimulated demand for goods as services.

As for the cyclical-versus-structural distinction, it’s relevant because, as Lowe never tires of reminding us, monetary policy is capable of dealing only with cyclical problems. Its role is to smooth the ups and downs in demand as the economy moves through the business cycle.

But here’s the problem: higher interest rates aren’t working to reduce inflation the way they used to because of changes in the structure of the economy.

In particular, employees and their unions now have less power to insist on wage rises sufficient to keep up with price rises than they did when last we had a big inflation problem. But big business now has more power to raise its prices.

Partly because globalisation has moved much manufacturing from the high-wage advanced economies to China and other low-wage economies, and partly because of the decentralisation and deregulation of wage-fixing and the decline in union membership, most workers pretty much have to accept whatever inadequate pay rise their chief executive (or premier) chooses to give them.

This is why all the concern about inflation expectations becoming “unanchored” is so silly. Businesses have the power to act on their expectations of higher inflation, but workers no longer do.

This is why the rate of unemployment can fall far below what economists, using data going back decades, estimate to be the NAIRU - “non-accelerating-inflation” rate of unemployment - without wage inflation accelerating.

When thinking about inflation, macroeconomists – including Lowe, I suspect - often assume our markets are competitive, and that the markets for all goods and services are equally competitive.

But as Rod Sims, former chair of the Australian Competition and Consumer Commission, and now a professor at the Australian National University, has written, markets in Australia are generally far from strongly competitive.

“Many sectors ... are dominated by just a few firms – think beer, groceries, energy and telecommunications retailing, resources, elements of the digital economy, banking and many others,” Sims says.

“This means the dominant firms have some degree of market power. That is, they can set prices at higher levels knowing competitors are unlikely to undercut them and take market share from them.

“When there is high inflation, dominant firms often realise they can increase prices above any cost rises because consumers will be more accepting of this. They will often do this subtly over time.”

In concentrated markets, firms can also easily see the effects on their few competitors, and they can watch and follow each other’s behaviour. They are confident that none will break ranks on price rises because there are benefits to be had by all.

Firms with market and pricing power are also less likely to restrain prices in response to interest rate rises, Sims says. This is because it’s not competition, but dominant-firm behaviour, that’s driving pricing decisions.

As well, market power is usually associated with reduced production capacity. How often do we see reductions in combined capacity following a merger of two competitors? When demand increases, there’s then less capacity available to serve it, so we see prices rise more than they otherwise would have.

What all this means is that it may take longer for interest rates to work to slow inflation, so patience may be needed rather than further increases. And, Sims says, there could be a role for publicly exposing high margins, to put pressure on to reduce them.

Another point he makes is that this inflation owes much to price shocks in the key, highly regulated gas and electricity industries. In these cases, the best answer is to make their regulation more anti-inflationary, not just jack up interest rates further.

The micro-economic reforms of the Hawke-Keating government have made our economy much less inflation-prone than it was in the days when inflation was last a major problem.

Meanwhile, however, we’ve allowed the pricing power of big firms to grow as successive governments of both colours have resisted pressure from people like Sims to tighten our merger law, and state governments have maximised the sale price of their electricity businesses by selling them to business interests intent on turning the national electricity market into a three-firm vertically integrated oligopoly. Well done, guys.

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Perrottet's bold re-election bid: the world's first teal budget

A budget can tell you a lot about the government that produced it, especially a pre-election budget.

This one reveals a reformist Premier anxious to persuade us his government has reformed itself. It’s your classic, all-singing, all-dancing pre-election affair, offering increased government spending on 101 different things.

In his effort to get re-elected, Dominic Perrottet has left no dollar unturned. Enjoy, enjoy.

But recent lamentations in Canberra remind me to remind you: whoever wins the state election in March, next year’s budget won’t be nearly so jolly. If there’s bad news in the offing, that’s when we’ll get it.

For a government going on 12 years old and up to its fourth premier, this budget should be the Coalition’s swansong. But Perrottet wants us to see him as new, young, energetic and reforming.

On the face of it, proof of his reforming zeal is his controversial plan to press on with replacing conveyancing duty with an annual property tax, despite Canberra’s lack of enthusiasm for helping to fund the loss of revenue during the transition.

Most economists would loudly applaud such reform. On close examination, however, the budget’s first stage doesn’t add up to much.

Even so, let’s not forget that the desire to make their people’s lives radically better has become almost non-existent among today’s self-interested politicians.

Perrottet wants a return to co-operative federalism, and will happily work with a Labor Victorian premier and Labor prime minister to achieve it.

And the reform doesn’t stop there. This pre-election budget is also the first post-election budget following the crushing defeat of the Morrison federal government. The NSW Liberal Party, with the least to learn from Scott Morrison’s many failings, is also the one that’s learnt most.

Genuine action on climate change, measures to improve the treatment of women in the workplace and the home, promoting co-operation rather than conflict and division, increased spending on early education, childcare and hospitals, the educated talking to the educated, Perrottet’s rejection of the pork barrelling condoned by his predecessor – this budget has everything.

I give you ... Australia’s first teal budget.

Much of the credit needs to be shared with the new Treasurer, Matt Kean. He is a reforming Treasurer – with many of his predecessors’ mistakes needing reform. This budget is mercifully free of the funny-money deals that blighted so many previous efforts.

The spirit of positivity that pervades the Treasurer’s fiscal rhetoric also infects his confidence that the budget will be back to surplus in a year or three, and the debt will one day stop growing. Should this optimism prove misplaced, there’s always scope for adjustment after the election.

The government is rightly proud of all it’s done building new metros, light rail and expressways. But the Coalition’s original desire to get on with a hugely expensive transport infrastructure program while limiting the state’s debt and preserving its triple-A credit rating, led it into crazy arrangements to hide much of the debt by, for example, paying businesses such as Transurban over-the-odds to do the borrowing for it.

Now Sydney, much more than any other city, is girdled by a maze of private tollways, most with a licence to whack up the tolls quarterly or annually by a minimum of 4 per cent a year. What was that about fighting inflation and the cost of living?

This was always a way of keeping official debt down by shifting the cost onto the motorists of present and future decades.

This ill-considered mess has proved so costly to people in outer-suburban electorates that the latest “reform” is for taxpayers to subsidise the worst-affected motorists – and thereby the excessive profits granted to the tollway companies.

Another false economy was to fatten the sale price of privatised ports and electricity companies by attaching to them the right for the new owner to increase prices and profitability. This has played a small part in all the trouble we’re having now making the National Electricity Market work for the benefit of users rather than big business.

In my home town, a formerly secret deal to enhance the sale price of Port Botany is effectively preventing the Port of Newcastle from responding to the looming decline of the coal export trade by setting up a container terminal.

And all that’s before you get to the creative accounting madness of transferring the state’s railways to the still-government owned Transport Asset Holding Entity.

Perrottet, who was up to his neck in that trickery, seems to be making a better fist of Premier than treasurer. And Kean seems a better Treasurer than his many Coalition predecessors. But will that be enough to cover all the missteps of the past?

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Why Albanese needs to protect capitalism from the capitalists

One of the first things Anthony Albanese and his cabinet have to decide is whether the government will be “pro-business” or “pro-market”. If he wants to make our economy work better for all Australians, not just those at the top of the economic tree, Albanese will be pro-market, not pro-business – which ain’t the same as saying he should be anti-business. Confused? Read on.

It’s clear Albanese wants to lead a less confrontational, more consultative and inclusive government – which is fine. He’ll bring back into the tent some groups the Morrison-led Coalition government seemed to regard as enemies: the unions, the universities and the charities.

Conversely, it’s obvious he wants to retain big business within the tent – as, of course, it always is with the Liberals. Business is so powerful the sensible end of Labor never wants to get it offside.

Trouble is, over the years in which the Hawke-Keating government’s commitment to “economic rationalism” degenerated into “neo-liberalism”, big business got used to usually getting its own way – even if the process needed to be lubricated with generous donations to party funds.

If Albanese is genuine in wanting to govern for all Australians, he’ll have to get big business used to being listened to but not blindly obeyed. Which means he and his ministers will have to resist the temptation of having the generous donations diverted in the direction of whichever party happens to be in power.

Labor could do worse than study a recent speech, Restoring our market economy to work for all Australians, by the former boss of the Australian Competition and Consumer Commission, Rod Sims. He is now a professor at the Australian National University’s inestimable Crawford School of Public Policy, home to many of the nation’s most useful former public servants.

Sims starts with an important disclaimer: “I am a strong proponent of a market economy. All the alternatives do not work well. Further, our market economy has delivered significant benefits to all Australians.

“For it to endure, however, it needs improvement. Without this, it and our society will be under threat.”

Couldn’t have said it better myself. Sometimes people criticise an institution not because they hate it, but because they love it and don’t want to see it go astray. And capitalism is too important to the well-being of all of us to be left to the capitalists.

So, what’s the problem? “Running a market economy, where companies are motivated by profit, can only work as expected if there is sufficient competition, and we don’t have this now. We currently have too few companies competing to serve customers in the markets for many products; we need policies that promote competition, not thwart it,” Sims says.

A market-based economy is one where decisions regarding investment, production and distribution to consumers are guided by the price signals created by the forces of supply and demand, he explains.

But here’s the key proviso on which the satisfactory functioning of such an arrangement is based: “An underlying assumption is that there are many suppliers competing to meet consumer demands.”

Right now, that assumption isn’t being met. Sims quotes Martin Wolf, of the Financial Times, saying “what has emerged over the last 40 years is not free-market capitalism, but a predatory form of monopoly capitalism. Capitalists will, alas, always prefer monopoly. Only the state can restore the competition we need.”

What? Wolf is some kind of socialist? Of course not. Sims puts it more clearly: “A market economy also needs the right regulation in place so that companies pursue profit within clear guardrails.” We need some changes to Australian consumer law to provide these guardrails, particularly an unfair practices provision.

Market concentration – meaning there are only a few dominant companies seeking to meet the needs of consumers in many product markets – is high in Australia. “Think banking, beer, groceries, mobile service providers, aviation, rail freight, energy retailing, internet search, mobile app stores and so much more,” Sims says.

He quotes the Harvard economist Michael Porter, a corporate strategy expert, writing as long ago as 1979 that companies achieve commercial success by finding ways to reduce competition, by raising barriers to entry by new players, by lowering the bargaining power of suppliers including their workforce [No! he didn’t include screwing their own workers, did he?] and by locking in the consumers of their products and services.

“Companies don’t want markets . . . with many suppliers all with relatively equal bargaining power,” Sims says. “Instead, what firms seek is market power where they can price, or pay their suppliers, as they want, without being constrained by other competing companies.

“They seek above-normal profits based on using some form of market power.”

This is not controversial, he says. “Every businessperson would agree. None wants to work in a competitive market where they simply seek to outperform their competitors. They want an edge from some form of market power.”

Too much market power in our economy can cause a range of harms to many Australians and to our society. “The most obvious harm is higher prices, which occur particularly when supply is limited relative to demand.

“When supply is plentiful, however, market power means pressure comes on workers and other suppliers.”

Sims points to the way the profits share of national income has been rising at the expense of the wages share. He also notes concerns about the lack of innovation in Australia, as well as our low productivity.

Guess what? When so many markets are dominated by a few big firms, the resulting lack of competitive pressure reduces the incentives to invest, create new products and do other things that increase productivity.

The message for the new government is clear: keep giving big business what it wants – weak merger and competition laws, plus prohibitions on union activity – and the economy will continue performing poorly. Profits will keep growing while household income shrinks.

And it will prove what the Liberals have always said: Labor’s no good at running the economy.

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Competition boss warns faith in market economy under threat

In his parting remarks last week, veteran econocrat Rod Sims, boss of the Australian Competition and Consumer Commission, offered some frank advice to his political masters and big business.

Let me put it even more frankly than he did: if governments don’t require businesses to improve their behaviour, voters and consumers could lose faith that they’re getting a fair shake from a lightly regulated economy and fall for populist solutions that make things worse for everyone.

Though business leaders make speeches in praise of competition, the truth is businesses hate competition. Why wouldn’t they? It makes their jobs much harder. To the extent the law allows, they buy out or bankrupt small competitors, and take over big ones.

In its public statements, the Business Council poses as wanting economic “reform” in the interests of us all. Behind the scenes, it lobbies governments hard to preserve big businesses’ ability to take over competitors and to impose unreasonable terms in transactions with small businesses.

Politicians make speeches about the importance of small business because all those owners add up to many votes. But pollies yield to the lobbying of big businesses because they make generous donations to party coffers, which can be used to buy votes through advertising and the rest.

It follows that the competition commission and whoever’s running it get a hard time from business interests. The more effective that person is in seeking to achieve “effective competition”, the more criticism they attract.

Whenever they take court proceedings that fail, there’s much crowing by business commentators. Elsewhere, competition regulators are attacked for being sleepy and toothless watchdogs.

Of course, public servants are too discrete to say all that. So let’s switch to what Sims actually said in his valedictory speech to the National Press Club. It was frank - by the standards of econocrats.

“When I arrived at the commission [11 years ago] I mentioned my main objective in chairing the commission was ‘that Australians see that a market economy and strong competition work for them and that they see the commission working tirelessly for the long-run interests of consumers’, he said.

“We must recognise that a market-based economy is fragile, as its organising principle relies on companies and businesspeople pursuing their own self-interest. This is not an obvious way to organise things.

“For this to work to the benefit of all Australians requires, at a minimum, strong competition between firms and strong enforcement of the Competition and Consumer Act.

“In our society, large established businesses have a strong voice, which is not surprising as the largest firms employ many people and supply Australians with many of their needs.

“Often, however, the understandable interest of large established businesses in short-term advantage sees them, I believe, work to the disadvantage of their own long-term interests,” he said.

Large established businesses had opposed all the main changes to the competition Act when they were introduced, he said. For example, laws against misleading and deceptive conduct.

“I would ask, however, how many specific interventions and extra red tape would we now have that would damage our market economy, if we did not have this general provision?”

The competition Act largely had economy-wide laws, whose effectiveness underpinned the necessary wide acceptance of the market economy. “Perceptions of unfairness and inequity will see faith in a market economy eroded,” he warned.

Last year Sims proposed a tightening of our merger law. Big business was loud in its disapproval. Distinguished corporate lawyers insisted the present laws were working fine. Business commentators were dismissive.

Last week Sims said “large established businesses and their advisers will oppose these changes, but my guess is that well over 90 per cent of Australians would support them. Further, I think such changes would strengthen our market economy, and would benefit the vast majority of Australian businesses.” (He means the smaller ones.)

When Sims took over the commission in 2011, it had a near-perfect success rate in its court actions. He took this as a sign it was being too cautious in its efforts to enforce the law.

Eleven years later, “we have a good win/loss record, including recent guilty pleas in cartel cases, including by individuals in two criminal cases. I recognise, however, that we have had some losses, including in a recent high-profile case.”

The commission’s record on enforcing the protection of consumers “includes creative wins against companies such as Trivago (where we unpicked its algorithm) and Google, and we have seen penalties imposed by the courts for breaches of the Act increase from $1 million being seen as high, to recent penalties of $50 million against Telstra, $125 million against VW, and $153 million against AIPE, a vocational education provider.”

Let’s hope Sims’ successor is just as diligent in protecting the market economy against its own excesses.

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Here's a novel idea: Australia needs more competition, not less

Business has many tired ideas for reforming the economy and improving productivity, most of which boil down to: cut my tax and give me more power to keep my wage bill low. But a veteran econocrat has proposed a new and frightening reform: make our businesses compete harder for our custom, thus making it harder for them to raise their prices.

Treasurer Josh Frydenberg has asked the Productivity Commission to undertake a five-yearly review of our (dismal) productivity performance. And this week Rod Sims, who’s departing after 11 years heading the Australian Competition and Consumer Commission, offered a few helpful hints in a speech to the National Press Club.

Sims says “the Australian economy suffers from high levels of market concentration [markets dominated by a few big firms] to the detriment of consumers, small business and productivity”.

He argues that the pandemic-related supply shortages and logistics problems we’re facing are worsened by market concentration in so many areas and by our infrastructure bottlenecks.

“We need to address this through competition law, to prevent anti-competitive abuses of market power, and through general infrastructure reform,” he says. He’s referring mainly to road, rail, air and sea transport facilities, and also to utilities – electricity, gas and water.

Australia’s infrastructure is generally high cost, he says, compared with other countries. “Why do we keep privatising assets and claiming success when huge amounts are paid for the asset?”

My answer: when state Treasuries are run by bankers rather than econocrats, that’s what they think they’re supposed to be doing.

Sims says that often, “these huge prices are the result of closing off competition, or because a monopoly was deliberately sold without any regulation of the prices that can be set for users who have no alternative but to use the monopoly asset”.

“Such behaviour can dramatically affect existing users and could be considered a continuing tax on the community,” he says.

Governments need to sign up to a checklist before infrastructure assets are sold to avoid provisions which restrict competition and to ensure there is appropriate regulation where monopoly or significant market power will exist after the sale to private interests, he says.

“Let’s acknowledge this issue and fix it so that Australia can avoid even higher priced infrastructure in future.”

Another infrastructure challenge is ensuring the regulatory arrangements for the National Broadband Network are appropriate.

“After [the federal government] spending $50 billion on the NBN, the objective must not be a commercial return on the [$50 billion] sunk investment. It must be making the best use of this great asset.

“The prices that allow the NBN to get a commercial return on all its outlays, and the prices that make best use of this expensive asset, are very likely quite different,” he says.

We all saw the benefit of having the NBN completed in time for the pandemic lockdowns. That’s just a taste of the benefits if we get the NBN’s pricing right. Prices must allow the NBN to keep investing as needed, but must also see optimum use made of the network.

That is, the goal should be maximising the network’s benefit to the whole economy, not creating a new business that can exploit the pricing power that usually goes with a monopoly network, then selling it off to the highest bidder (or continuing to own it while overcharging customers).

Another area where we’re not getting enough competition, are paying prices that are too high (often in ways that aren’t visible) and are crimping productivity improvement is “digital platforms”.

Sims says we have an internet dominated by a few gatekeeper companies: Google has 95 per cent of searching activity, Facebook dominates social media, and Google and Apple dominate the app market, particularly on mobile devices.

“I am proud that the ACCC is at the forefront of world efforts to identify the harms from digital platforms and potential solutions to them,” he says.

While it’s true that these giants innovated their way to success - bringing many benefits to ordinary internet users – it’s equally true they also acquired a huge array of companies that could have been competitors, which has extended their reach and cemented their power.

They also engage in many activities, from “product bundling” (where to get the ones you want, you have to pay for stuff you don’t want) to “self-preferencing” (where they put their own products at the top of a list, and rival firms’ products at the bottom). Over time, this has lessened competition in various important digital markets.

The digital giants also have access to, and control, a massive amount of data, which has seen harms ranging from that seen with Cambridge Analytica, to profiling people so as to maximise sales by exploiting consumers’ vulnerabilities.

Then there’s the many examples of inadequate competition in banking. Sims quotes just three. First, the price of the most important financial product, a home mortgage, is unknowable without huge effort and cost, which benefits banks and harms borrowers.

The still-being-rolled-out “consumer data right” (that is, it’s your data so you should be able to have it forwarded to a rival business) should help this a lot. And Sims wants consumers to be continually informed by a “prompt” of what typical borrowers are paying, so they know when to start shopping around.

Second, to reduce “debanking” – where banks find excuses to refuse to move money that has been arranged through the new “fintechs” and money remitters – the government should set up a scheme these digital non-banks can use to prove their controls are adequate to detect money laundering.

Third, now the digital giants are getting into the now largely cashless world, outfits such as Apple Pay must be stopped from preventing other providers of digital wallets making use of its “near field technology”.

Funny how it’s never occurred to the Business Council and other business lobby groups wringing their hands over weak productivity that an obvious solution to the problem is to make firms compete harder for their profits.

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If you want to shop in competitive markets, you’ll have to fight for it

The lockdown is dragging on so long and its end point is so uncertain that it’s easy to become anxious and despondent. That’s especially true of the young, who’ve had less experience of bad episodes eventually passing. The rest of us know they will, however long it takes. But it may help if we switch the focus to what we’ll do to make the world a better place once things return to normal.

One conclusion the young are justified in reaching is that the world is run by well-off older men (present company excepted) intent on making the world better for themselves, even if that comes at the expense of others.

A question for the coming federal election is which side is more likely to restrain the rich and powerful rather than help them in their quest.

It’s true that people near the very top have continued doing better, while the rest of us have had very modest pay rises. In healthy market economies, vigorous competition and continuous investment in better machines increases the productivity of workers, which is reflected in higher real wages.

There’s been very little of that over the past decade and one reason for this seems to be a decline in competition between the few big businesses that dominate so many of our markets.

When companies get bigger by taking over their competitors, this gives them more power to increase their prices and profits (and executive salaries) without them becoming more efficient or paying their workers more.

The list of Australian markets dominated by a few large firms is long, including banking, supermarkets, insurance, electricity and gas retailing, domestic air travel, pathology testing, mobile phones and internet service providers, not to mention internet search and social media platforms.

It may surprise you that, contrary to what happens in other advanced economies, companies seeking to merge don’t need permission from the ACCC, the Australian Competition and Consumer Commission.

Many choose to consult the commission, but if they press on with a merger the ACCC thinks will increase their “market power”, its only recourse is to take them to the Federal Court and convince it that the merger would “substantially lessen competition” in the future.

This isn’t easy. The executives generally assure the judges that something so dastardly has never crossed their mind, and their assurances are believed. The last seven times the commission has sought to get mergers blocked, it has failed.

It’s not the court’s job to come back a few years later and see if those assurances were honoured by the rich and powerful men whose evidence the judges found it so easy to believe.

So, in a speech last week, commission chair Rod Sims sought to start a public debate on “market concentration” and proposed that the proponents of mergers be legally required to notify the commission of their intentions, then wait for the deal to be assessed and cleared before proceeding. The proponents could appeal in court against any decision they didn’t like.

Sims says competitive markets work much better for consumers, and increase innovation and productivity.

“While the available evidence is not definitive, it appears that market power [to raise prices] is increasing in Australia. This trend has also been observed in many advanced economies, including by the International Monetary Fund,” he says.

“Without action, market power in Australia will become further entrenched; and will certainly not reduce.”

Market power is hurting Australians in many ways, he says. Consumers are paying more than they should for a wide range of goods and services.

It’s also “squeezing the incomes of farmers. For example, chicken growers and dairy farmers have little option but to sell their produce to large buyers with substantial bargaining power.” Farmers purchase many of their supplies from only a few big sellers.

“Many small businesses and farmers are largely reliant on Coles and Woolworths to access grocery shoppers ... This power imbalance places small businesses and farmers in precarious positions with consequent damage to our economy.

“In digital markets, we are exchanging access to our personal data and attention for so-called ‘free’ services, but have little choice, knowledge or control over how our data is being used.”

Now, if you’re sitting down, I’ll tell you something that will amaze. Jennifer Westacott, chief executive of the Business Council of Australia, can’t see what the fuss is about. She fears the proposed changes would be “another blow to investment”. (By which I assume she means businesses “investing” in the takeover of other businesses.)

As for Treasurer Josh Frydenberg, he has no enthusiasm for Sims’ reforms. He says the lockdown means we need to encourage business and growth, not throw up regulatory barriers. (I suspect we’ll be hearing a lot more of that convenient argument between now and the election.)

Do you see why Sims wants to start a public debate? If this issue is left for the Treasurer and the big-business lobby to sort out behind closed doors, nothing will change.

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Reduced competition between businesses is harming productivity

In the search for explanations of the slowdown in productivity improvement, the world’s economists are closing in on one of the significant causes: reduced competition between the businesses in an industry, giving them increased “market power” – ability to raise the prices they charge.

Research by various Treasury economists has found evidence of this happening in Australia. And this month US President Joe Biden acted to increase competition in various markets where it had been lacking.

A new study by Jonathan Hambur has added to earlier research by Treasury people finding that Australia’s private sector has shown less “dynamism” – ability to become more economically efficient over time – during the past decade or so.

Hambur has used a database of tax returns covering almost all Australian businesses to find that their “mark-ups” have increased by about 5 per cent since the mid-noughties.

To economists, a firm’s mark-up is the ratio of the prices it charges compared to its “marginal” cost of production – that is, the cost of the last unit it produced.

Hambur says that, while part of this increase seems to have been caused by technological change, it also shows an increase in firms’ market power and a decline in competition.

If so, this would explain about a fifth of the slowdown in the rate of productivity improvement we’ve seen over the past decade, since we already know the same period has seen slower reallocation of resources from low-productivity to high-productivity firms.

We measure productivity by comparing the quantity of the output of goods or services with the quantity of inputs of raw materials, labour and physical capital used to produce the output. Increasing output per unit of input is the main way we’ve been able to keep improving our material standard of living over the past two centuries.

And one of the ways an economy increases its productivity is by more of the production being done by the firms that are best at turning inputs into outputs at the expense of the less-efficient firms. Resources (inputs) are thereby “reallocated” to their most efficient use. What causes this reallocation to occur? Price competition between the firms in an industry.

Many people assume big companies can set whatever price they like. But this can’t be true. Even in the case of a single firm selling an important product, if the monopolist uses its considerable market power to set a price that’s simply too high for many people to afford, it will get to a point where it loses more from the sales it no longer makes than it gains from the extra profit it makes from those people still willing and able to pay the extra.

This is why economists say a firm wanting to maximise its profits is able to charge no more than “what the market will bear”. How much the market will bear depends mainly on the strength of the competition it faces from other firms selling the same product.

The textbook, neo-classical model of a “perfectly competitive” market – which is hugely oversimplified and has never existed in the real world – tells us the many firms in a market are able to charge a price no higher than their marginal cost of production (remembering that the “cost” includes a rate of profit just sufficient to discourage the owners of the firm from taking their financial capital to another market).

In this case, each firm that survives in the market will be able to charge only the identical market price set by the marginal cost. A firm that tries to charge more than the market price will sell nothing, whereas a firm that charges less will sell out immediately, but then go out backwards because it hasn’t covered its costs.

In the real world, there are a host of possible reasons why firms are able to charge a price higher than their marginal cost, and so make excess profit: because customers don’t know where to find the products that are cheaper but just as good, because customers are bamboozled by advertising and phoney “product differentiation”, because economies of scale and improved technology allow firms to get bigger and reduce their average cost of production.

Firms pursue scale economies and other innovations in the hope of making excess profits, but theory tells us that competition from other firms will end up forcing them to pass their cost savings on to their customers in the form of lower prices. The consumers always beat the capitalists.

When competition isn’t strong enough to make this happen, however, firms can and do earn mark-ups well above their marginal costs. Now Hambur has confirmed this happens in Australia. Worse, our mark-ups have increased over the past decade, telling us competition has weakened further and given our businesses greater market power.

With US economists finding similar evidence of reduced competition contributing to America’s own productivity slowdown, it’s not surprising to see President Biden acting to increase competition. Earlier this month he signed an executive order urging federal government agencies to crack down on anti-competitive practices ranging from agriculture to pharmaceuticals.

He denounced the present era of business monopolies. “Rather than competing for consumers [businesses] are consuming their competitors; rather than competing for workers they are finding ways to gain the upper hand on labour,” he said.

“Let me be very clear, capitalism without competition isn’t capitalism, it’s exploitation.”

Biden directed the Department of Justice and Federal Trade Commission to carefully review mergers and even challenge deals already put through.

He directed the trade commission to deal with competition concerns about the behaviour of Facebook, Apple, Alphabet’s Google, and Amazon, and to limit “killer acquisitions” where large internet platforms buy out potential competitors.

The justice department will launch a review of merger guidelines to determine whether they are “overly permissive”.

So, what could our government do about our own decline in competition? Well, we could start by tightening our own merger laws so the Australian Competition and Consumer Commission can be more successful in its efforts to protect us from anti-competitive takeovers.

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Why people can be much nicer than economists assume

There’s a lot you can learn about the world of work – and human nature in general – from studying economics. Then again, there’s a lot you can’t learn from conventional economics – and, indeed, from the bum steers it can give you.

Consider this. The 18th century Scottish philosopher Adam Smith is said to be the father of economics. He wrote two monumental books, the second of which, The Wealth of Nations, contained the famous observation that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest”.

The worthies who developed conventional economics – and its “neo-classical” model of how markets work, the main thing taught in economics courses – seized on this idea to describe an economy populated by profit-maximising firms and self-interested consumers, all of them competing with each other to get the best deal.

They developed Smith’s reference to the “invisible hand” of competition in markets to show how this self-interest on all sides miraculously ends up satisfying everyone’s wants. Hence modern economists’ eternal banging on about the benefits of competition.

But Smith’s first book, The Theory of Moral Sentiments, said something quite different: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, thought he derives nothing from it, except the pleasure of seeing it”.

So what’s it to be? Are we totally self-interested, or do we care about the wellbeing of others? Are we individuals competing against each other for the biggest bit, or are we caring souls who co-operate with others to ensure everyone gets looked after?

Short answer: we’re both. But study conventional economics and you’re told only about the selfish, individualistic, competitive side of our nature. The moral, collective, co-operative side is assumed away. Government is seen not as a force for good, but as an alien force whose intervention in the market risks stuffing things up.

If you wonder why so many of the predictions economists make prove astray, that’s part of the reason. But some years back, two American economists associated with the Santa Fe Institute in New Mexico, Samuel Bowles and Herbert Gintis, wrote A Cooperative Species, to try to balance the story.

In the process, they provide a more convincing explanation of why humans have become the dominant species on Earth – for good and ill.

They focus on the way humans co-operate with each other in many circumstances – including when hundreds of us work for a single business, which competes with other big businesses - and argue that we co-operate not only for self-interested reasons, but also because we are genuinely concerned about the wellbeing of others.

We try to uphold “social norms” of acceptable behaviour, and value behaving ethically for its own sake. For the same reasons, we punish those who exploit the co-operative behaviour of others.

“Contributing to the success of a joint project for the benefit of [your] group, even at a personal cost, evokes feelings of satisfaction, pride, even elation,” they say. “Failing to do so is often a source of shame or guilt.”

We came to have these “moral sentiments,” in Smith’s words, because our ancestors lived in environments, both natural and as constructed by humans, in which groups of individuals who were predisposed to co-operate and uphold ethical norms tended to survive and expand relative to other groups, thereby allowing these “pro-social” motivations to proliferate.

So they explain our motivations for caring about the wellbeing of others: we do it because it makes us feel good. But they also explain the distant evolutionary origins of our disposition to co-operate and its perpetuation to the present day.

Co-operation – engaging with others in a mutually beneficial activity - was part of the behaviour of homo sapiens when we were still living on the African savannah. We formed bands to make us more successful in hunting big animals.

But though co-operation is common in many species, human co-operation is exceptional in that it extends beyond our close relatives – whom we look after in obedience to our evolutionary urge to replicate our species – to include even total strangers. And we co-operate on a much larger scale than other species except the social insects, such as ants and bees.

We co-operate in political and military objectives as well as more prosaic everyday activities: collaboration among the employees in a firm, exchanges between buyers and sellers, and the maintenance of local amenities among neighbours.

So, though they don’t see it in these terms, economists focus on a form of co-operation that involves “reciprocal altruism”. Buyers benefit sellers; sellers benefit buyers.

But human co-operation goes much further, in that it takes place in much larger groups and in circumstances that are unlikely to be repeated. Why do people tip while passing through a country town? In my own town I have reason to care about my reputation. But if I’m in your town, why does it not occur to me to cheat you in some way?

Much experimental and other evidence shows that people gain pleasure from co-operating, or feel morally obliged to. On the other hand, people enjoy punishing those who exploit the co-operation of others, or feel morally obligated to do so.

“Free-riders,” as economists call them, frequently feel guilty and, if they are sanctioned by others, they may feel ashamed.

We may have started out co-operating to hunt wild animals and mind other people’s children, but today we co-operate to enjoy the benefits of “the division of labour” (we each specialise in something we’re good at), of market exchange and the pursuit of economies of scale (in irrigation, factories, information networks) and even warfare.

And we made all this work better by inventing governments capable of enforcing the rights to property and providing incentives for the self-interested to contribute to common projects.

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Phone users have a reason to cheer ACCC's black eye

How much do you pay for your mobile phone contract – a lot or a little? Do you wish there was more price competition in a market dominated by three big companies, Telstra, Optus and Vodafone?

The Australian Competition and Consumer Commission has been stymied in its efforts to make that possibility more likely.

Last year the competition commission blocked a plan for Vodafone (one of the world’s biggest mobile phone companies) to "merge" with TPG (a mainly fixed-line phone and internet service provider) on the grounds that it could substantially lessen competition in the mobiles market.

Earlier this month the Federal Court overturned the commission’s ruling and allowed the merger to proceed – to much cheering from big business, which loves seeing the interfering competition regulator get a poke in the eye.

But phone users have nothing to cheer about. A chance to get more effective competition in the mobile phone market has been lost. Any threat of disruption to the comfortable life of the three-firm oligopoly – which already controls almost 90 per cent of the market – has been removed.

The competition commission thought the merger would do little to increase competition in the mobiles market, whereas allowing the smallest of the big-three oligopolists to take out the one outsider that could have threatened their cosy oligopoly – TPG – made it unlikely their cosy arrangement would ever be disrupted.

It thought this because, under the leadership of its swashbuckling chairman, David Teoh, TPG had turned itself into a company big enough to challenge Telstra and Optus in the internet provider market by acquiring various smaller providers and offering more competitive prices. And it had already spent $1.26 billion preparing to build a mobile network, before the government refused to let it partner with the Chinese-owned leader in 5G technology, Huawei.

Were the merger to be prevented, the commission believed, there was a good chance that TPG, with its record as a disrupter of markets, would revert to its plan to break into the mobile market, and do so by undercutting the incumbents’ prices.

The court rejected the competition regulator’s argument, primarily because it accepted Teoh’s assurance that he’d abandoned his plan to break into the mobiles market and wouldn’t return to it.

The court ruled that “it is not necessarily the number of competitors that are in the relevant market, but the quality of the competition that must be assessed. Further, it is not for the ACCC or this court to engineer a competitive outcome”.

Sorry, your honour, not sure what you mean. It’s certainly true that assessing the competitiveness of an oligopolistic market is more complicated than counting the number of dominant firms. The complexity comes in assessing the nature of the competition.

But what does it mean to “engineer” a competitive outcome? If it means the competition regulator and the court can’t do anything that would increase the likelihood of an industry being disrupted by a new and aggressive entrant, it’s telling us the law is biased in favour of maintaining the status quo and thus protecting the comfortable lives of the incumbents.

Does it mean the only views the authorities may hold about how the future may unfold for the industry must come from what the companies seeking permission to merge say about their intentions, not from the evidence economists have gathered about how oligopolists seek to compete in ways that maximise their profits and limit the benefit to their customers?

One of the main ways the rich countries have become rich is by firms’ continuous pursuit of economies of scale. The inevitable consequence, however, is that most of our markets have become dominated by a small number of huge firms with considerable power to influence the prices charged – especially if they reach an unspoken agreement to avoid competing on price.

The big question for public policy is how to ensure the gains from scale economies flow through to customers in lower prices and better service, rather than being retained as “super profit” in excess of the “normal profit” needed to cover the firm’s cost of capital and the risks it’s run. This is why economists have built up a great body of empirical knowledge about how oligopolists behave.

The court found that increasing the number of big players in the mobiles market from three to four (should the merger be blocked and TPG resume its plan to enter the market) would do little to increase competition, whereas allowing Vodafone to buy out the potential entrant and so become closer in size to its two rivals would improve competition.

Sorry, both conclusions run contrary to what the empirical evidence tells us was likely to happen. Remember, the chief tactic the world's digital megafirms have used to protect their pricing power is buying out small outfits looking like they could become a disrupter.

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News from the shopping trolley: retailers are doing it tough

If I told you that a big reason we're feeling such cost-of-living pressure is the increasing profits of the big supermarket chains, department stores, discount stores and other retailers, would you believe me? A lot of people would.

But that would just show how little we understand of the strange things happening in the economy in recent years. The economy in which we live and work keeps changing and getting more complicated, the digital revolution is disrupting industry after industry, but we have far too little time to check out what's happening – especially behind the scenes – so we rely on the casual impressions we gain along the way and on our long-held views about who's ripping it off and who's getting screwed.

Which are often off-beam. Perhaps because in many respects it's a good news story, few people realise the way digital disruption is putting retailing - a pretty big part of the economy, and a big part of household budgets - through the wringer.

If this meant retail staff were being laid off in their thousands we'd have heard about it. If it meant big retail chains were jacking up their prices, we'd have been told.

Instead, increased competition between retailers is making it much harder than usual for them to put up their prices, and causing some prices to fall.

It's all explained by Matthew Carter in an article in last week's Reserve Bank Bulletin, using data from the Australian Bureau of Statistics and the Reserve's regular contact with many medium and large retailers.

The article covers about a third of the "basket" of goods and services bought by Australian households, the changing prices of which are measured by the consumer price index. That is, not just food and other things you buy in supermarkets, but clothing and footwear, furniture, household items and much else, though not motor vehicles and fuel. Nor other classes of consumer spending not done through retailers, such as the costs of housing, healthcare and education.

Since the early 2000s, the increased competition in retailing has come first from online shopping – competition not just between local and overseas retailers, but between those local retailers who use the internet and those who don't, as well as between those who do.

The other main source of increased competition in retailing is the arrival of big new international companies, such as Aldi, Costco and, of course, Amazon, which is both online and a big new arrival from overseas. (The article doesn't mention two other disruptive developments: the advent of "category killers" such as Officeworks and Bunnings, and the decline of the department store.)

The basic model of markets used by economists assumes that businesses compete with each other mainly on price. In real-world Australia, however, the two, three or at most four big companies that dominate most markets much prefer to compete via product differentiation, marketing and advertising, and avoid price competition.

That's what online shopping has changed. And it's not just that the internet has made it infinitely easier for shoppers to compare prices. It's also that, on the net, it's much easier to compare prices than to compare colours or quality.

And when a big foreign player decides to try to break into an established market, price competition is the main way it tries to gain market share.

The result is that retailing has become more price conscious. And retailers are telling the Reserve Bank that their customers have become more price sensitive – which isn't surprising considering how slowly their wages are growing.

Nor does it matter much that, so far, not many people do their grocery shopping online, or that Aldi is still much smaller than Woolies or Coles. The others have protected themselves from losing market share by matching their rivals' lower prices.

Another effect of digitisation is to make it a lot easier for retailers to change their prices (as well as to find out what their rivals are charging). And the greater price consciousness of their customers means that 60 per cent of retailers now review their prices weekly or even daily.

This means many retailers more frequently discount their prices - put them "on special" - and make the discounts deeper.

The Reserve Bank's survey of retailers shows the main reasons they lower prices is because their competitors have cut their prices or because demand has weakened.

Carter has analysed the Bureau of Statistics' industry statistics and found that the net profit margins of both food and non-food retailers had fallen by about 1.75 percentage points (that's 1.75¢ in every dollar of sales) since 2011-12.

It may not sound much, but it is – especially in supermarkets, which are low-margin, high turnover businesses. Further analysis confirms that this decline comes from reduced ability to mark-up wholesale prices, rather than higher operating costs.

However, retailers are fighting back, trying to improve their mark-ups by offering more own-brand products (cuts out the wholesaler) and more premium brands (higher mark-up), while some non-food retailers are joining the supermarkets in moving from the traditional "high-low" pricing strategy ("specials" and frequent "sales") to an "everyday low price" strategy. By selling more, they gain more power to bargain with wholesalers.

Of all the things that are making our lives tough, higher retail prices ain't one of them.

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ABBA was right: Rockonomics shows the winner takes it all

Why do we live in the era of superstars – whether people or businesses? Why is there such a thing as winner-take-all markets? Why do the top 1 per cent of households get an ever-bigger slice of the pie?

Short answer: because the digital revolution is disrupting far more of the economy than we realise.

It’s explained in the new book, Rockonomics: What the music industry can teach us about economics and life, by Alan Krueger, and summarised in his article in the New York Times, from which I’ll quote. Krueger, an economics professor at Princeton University, died in March at the age of 58.

Krueger says the first economist to explain the growing income gap between superstar businessmen and everyone else was the great English economist Alfred Marshall, in the late 1800s.

Marshall argued that a remarkable development in communications technology, the undersea telegraph, allowed top entrepreneurs “to apply their constructive or speculative genius to undertakings vaster, and extending over a wider area, than ever before”.

Ironically, Marshall used the music profession as his counterexample. Because the number of people who could be reached by a human voice was so limited, it was unlikely that any singer could better the £10,000 that the great soprano Elizabeth Billington was said to have earnt in a season.

What the superstar businessmen had, but Billington and her rivals lacked, was the ability to scale up at no prohibitive cost. Of course, Krueger notes, the other thing you need to become a superstar is what economists call “imperfect substitutes”. In English, you must have your own unique style and skills.

Today, of course, music is a most extreme and obvious example of superstars and winner-take-all markets. Why? Because technological advance has provided the economies of scale lacking in Marshall’s day.

Start with amplification of the human voice and then musical instruments. Then, the advent of enhanced recording technology. Finally, the internet and digital streaming of individual tracks anywhere in the world.

“Scale magnifies the effect of small, often imperceptible differences in talent. With the ability of scale, the rewards at the top can be much greater for someone who is slightly more talented than his or her next-best competitor, because the most talented person’s genius can reach a much greater audience or market, in turn generating much greater revenue and profit,” Krueger says.

Album sales and digital streaming clearly reflect the superstar phenomenon, he says. In 2017, the top 0.1 per cent of artists accounted for more than half of all album sales. Song streams and downloads are similarly lopsided.

But a strange thing has happened. Because digital recording has made it so easy to copy and share recordings, the revenue earned by artists and record labels has collapsed. These days, musicians make most of their income from live performances – from nobodies playing in pubs to superstars touring the world’s major venues.

Krueger says that, in 2017, the top 1 per cent of artists increased their proportion of total concert revenue to 60 per cent, compared with 26 per cent in 1982.

Another funny thing: it's now so cheap and easy to record your performance and get it onto the internet, where it’s available to the whole world, that anyone can do it. But does that make you famous? No way. The amount of music available on the net is so vast that the chances of your genius being discovered are tiny.

If you’re already famous, it’s easy to become more so. We hear of some unknown’s YouTube video getting a million clicks, but these are the exceptions. And if that happens it does so because something about the video is exceptional, and because a cascading network of people hear about it and recommend it to their friends. Do you make any money out of it? Probably not.

What happens is not a normal, “bell-shaped” distribution of listens – or dollars – but a “power-law” distribution in which a small number of people get huge scores, which quickly fall off until you get to everyone else getting next to nothing.

In 2016, Krueger says, the most popular artist, Drake, was streamed 6.1 billion times, followed by Rihanna (3.3 billion streams), Twenty One Pilots (2.7 billion) and The Weeknd (2.6 billion). Move down just 100 places and you get to Los Tigres del Norte (0.5 billion).

See how quickly it falls away? That’s a power-law distribution. So is the “80/20 rule”.

Krueger says that the whole United States economy has moved in the direction of a superstar, winner-take-all market. Since 1980, more than 100 per cent of the total growth in income has gone to the top 10 per cent of households, with two-thirds of that going to the top 1 per cent, while the share of the remaining 90 per cent has shrunk.

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Economists: lonely, misunderstood angels in shining armour

If you’re tempted by the shocking thought that economists end up as handmaidens to the rich and powerful – as I’m tempted – Dr Martin Parkinson wishes to remind us that’s not how it’s supposed to be. The first mission of economists is to make this world a better world, he says. But don’t expect it to make you popular.

Let me tell you about a talk he gave on Friday night. It was a pep talk to the first of what’s hoped to be a regular social gathering for young economists come to Canberra to study, teach or work in government or consulting.

Apparently, working in Canberra can be a tough gig if you don’t know many economist mates to be assortative with.

Parkinson’s own career has had its downs and ups. He was sacked as Treasury secretary by Tony Abbott – who feared he actually believed in the climate change policy the Rudd government had him designing – then resurrected by Malcolm Turnbull as secretary of the Department of Prime Minister and Cabinet, the Treasury secretary’s bureaucratic boss.

He began the pep talk with a story about the woman with only six months to live, who’s advised by her doctor to marry an economist so as to make it seem like a lifetime.

That may be because, as Parko says, economists are trained to be analytical. To be rigorously logical and rational in their thinking. (I define an economist as someone who thinks their partner is the only irrational person in the economy.)

“Economics gives you insights into the way the world works that other professions cannot,” he says. Economists see things that others can’t. Sometimes that’s because the others have incentives not to see them.

As Upton Sinclair famously put it, it’s difficult to get someone to understand something when their salary depends on them not understanding it.

Ain’t that the truth. The endless bickering between our politicians explained in a single quote. And the economists’ limited success in persuading people to take their advice.

Economists are trained to see “opportunity cost” which, according to Parko, is “the core tenet of the profession”. “This under underlies everything we do.

“This leads us to positions that are often counter-intuitive [the opposite of common sense] and unpopular – but are right.”

True. It may amaze you that so much of what economists bang on about boils down to no more than yet another application of opportunity cost: be careful how you spend your money, because you can only spend it once.

It’s a pathetically obvious insight, but it’s part of the human condition to always be forgetting it. So it’s the economist’s role to be the one who keeps reminding us of the obvious. If economists do no more than that, they’ll have made an invaluable contribution to society – to making this world a better world - and earned their keep.

But here’s the bit I found most inspiring in Parko’s pep talk. “Economists are not ‘for capital’ or ‘for labour’ . . . We do not see the world through constructs of power or identity, even though we see the importance of them.

“We are ‘for’ individual wellbeing regardless of race, gender, sexual orientation or capabilities. Because of this, we are often against entrenched interests and for those without a seat at the decision table.

“Economists view the past as ‘sunk’ [there’s nothing you can do to change it] and argue for decisions about the future to be made free of sentiment and in opposition to special interests. Now, this is in sharp contrast to the incentives in our political system, which favour producer interests over that of consumers.”

Ah, that’s the point. The ethic of neo-classical economics is that the customer is king (or queen). Consumer interests come first, whereas “producer interests” (which include unions as well as business) matter only because they are a means to the ultimate end of the consumers’ greater good.

Economists believe in exposing business to intense competition, to keep prices no higher than costs (including a reasonable rate of return on capital) and profits no higher than necessary. Competition should spur innovation and technological advance, while ensuring the benefits flow through to customers rather staying with business.

Business doesn’t see it that way, of course. Unlike some, my policy is to tell business what it needs to know, not what it wants to hear. Some people – suffering from a touch of the Upton Sinclairs – tell themselves this makes me anti-business. No, it makes me pro-consumer. That’s the ethic we so often fall short of.

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Who pays for Google and Facebook's free lunch?

There may be banks that are too big to be allowed to fail, but don’t fear that the behemoths of the digital revolution are too big to be regulated. It won’t be long before Google and Facebook cease to be laws unto themselves.

It’s the old story: the lawmakers always take a while to catch up with the innovators. But there are growing signs that governments around the developed world – particularly in Europe and Britain - are closing in on the digital giants.

And here in Australia, the Australian Competition and Consumer Commission is busy with the world’s most wide-ranging inquiry so far, which will report to the newly elected federal government in June. The commission’s boss, Rod Sims, gave a speech about it a few weeks ago, and another this week.

Sims says the commission’s purpose is “making markets work” by promoting competition and achieving well-informed consumers, so as to deliver good outcomes for consumers and the economy.

With this inquiry into the operations of “digital platforms”, he acknowledges that they have brought huge benefits to both our lives as individuals and our society more broadly.

“They are rightly regarded as impressive and successful, and very focused, commercial businesses. Google and Facebook are rapidly transforming the way consumers communicate, access news, and view advertising,” Sims says.

Each month, he says, about 19 million Australians use Google to search the internet, 17 million access Facebook, 17 million watch content on YouTube (owned by Google), and 11 million double tap on Instagram (owned by Facebook, along with WhatsApp).

The inquiry has satisfied itself that this huge size gives the two companies considerable “market power” – ability to influence the prices charged in certain markets.

“However,” Sims says, “being big is not a sin. Australian competition law does not prohibit a business from possessing substantial market power or using its efficiencies or skills to outperform its rivals.”

But the dominance of Google and Facebook does mean their behaviour should be scrutinised to see if it is harming competition or consumers.

To this end, the inquiry is focused on three potential areas of harm. First, the well-publicised issues of privacy and the collection and sale of users’ data.

Second, the digital platforms’ role in the advertising market, which is moving increasingly on line, where it’s estimated that 68¢ in every digital advertising dollar is going to Google (47¢) and Facebook (21¢).

And that’s not including classified advertising, the loss of which has been the biggest single blow to this august organ.

Sims says Google sells "search advertising", aimed at making an immediate sale, whereas Facebook sells "display advertising", aimed a making consumers aware of the product.

The pair sell ad space in their own right while also facilitating the advertising space sold by others, particularly the media companies. But the opacity of their algorithms and arrangements make it hard to know whether they favour their own ads over other people’s.

Advertisers say they don’t know what they’re paying for, where their ads are being displayed or to whom. This makes it harder for media companies to capture their share of advertising moving online.

Of course, higher costs for advertisers translate to higher prices for consumers.

Third is the digital platforms’ effect on the supply of news and journalism, the primary issue given to the inquiry.

Sims says newspapers and free-to-air radio and television are a classic example of a “two-sided market”. They serve consumers but, rather than charging them directly for the service as other businesses do, they cover their costs and profits by charging advertisers for access to their audience. (Newspaper subscriptions and cover prices accounted for only a fraction of their costs.)

Digital platforms aren’t just two-sided, they’re multi-sided. They, too, provide their services free, and charge advertisers, but also collect and sell to advertisers information about their users’ habits.

Google and Facebook select, curate, evaluate, rank, arrange and disseminate news stories. But they use stories created by others; they don’t create any news stories of their own. If they did, we could see this as no more than tough luck for the existing news media.

But as well as using the existing media’s stories to attract consumers and advertisers, about half the traffic on the Australian news media’s websites comes via Google and Facebook. So they have “a significant influence over what news and journalism Australians do and don’t see,” Sims says.

With the existing media having lost so much of its advertising revenue to the platforms, it’s not surprising they’ve had to get rid of at least a quarter of their journalists. There are a few new digital-only news outlets, but even they are having trouble making it pay.

Trouble is, news and journalism aren’t like most commercial products. They not only benefit the individual consumer, they benefit society as a whole. “Society clearly benefits from having citizens who are able to make well-informed economic, social and political decisions,” Sim says.

So news and journalism is a “public good” – if left to the profit-making private sector, not as much news and journalism will be supplied as is in the interests of society.

Public goods are usually paid for or subsidised by governments using taxpayers’ funds. If we want the benefits of Google and Facebook without losing the benefits of active, independent and challenging news media, taxpayers will have to help out.

Sims is canvassing several proposals before completing his final report. Since the former newspaper companies have realised they’ll never get much of a share of digital advertising, they’re now putting more hope in persuading their regular users to pay directly by buying subscriptions.

With the long-established attitude that everything on the internet should be free (or, at least, seem free), they’re finding it hard going.

That’s why I think Sims’ best suggestion is making personal subscriptions to the news media tax deductible, provided the outlet is bound by an acceptable code of conduct.

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It’s not business-bashing, it’s the public’s moment of truth

With the federal election campaign being fought over which side will do the better job of re-regulating the banks, the energy companies and business generally, big business seems to be going through the stages of grief. It’s reached denial.

According to the Australian Financial Review, the Business Council of Australia is most put out that the Morrison government has yielded to pressure from Labor and some Nationals to support a bill making it easier for smaller businesses to take legal action against big businesses.

Apparently, Scott Morrison and his lieutenants had the temerity to make the decision without giving the council an opportunity for private lobbying.

Which would have been intend to avoid “harmful unintended consequences,” including any possible drag on the economy. Of course.

Apparently, it’s just another instance of the growing level of “business bashing” in this campaign.

Sorry, guys, you’ve got to have a better argument than that. Accusing your critics of business-bashing or teacher-bashing or bank-bashing is what you say when you haven’t got a defence and are succumbing to a persecution complex.

It makes you and your mates feel better, but that’s all.

It’s a refusal to accept any responsibility for the bad performance of which people are complaining. Since it’s entirely the fault of others – usually, the government – any attempt to make me and my mates bare our share of responsibility can be explained only by ignorance and malice.

Such denial offers big business no way forward. Much better to admit there’s a fair bit of truth to the criticisms and accept that your performance will have to be a lot better.

The Business Council needs to admit to itself that this is not some passing phase of populist madness, it’s the end of the line for the “bizonomics” that micro-economic reform degenerated into – the belief that what’s good for big business is good for the economy.

The simple truth is that, when you go for years abusing your market power, the electorate eventually wakes up and hits back, threatening to toss out any government that isn’t prepared to set things to rights.

Now the scales of economic fundamentalism have fallen from our eyes, who could doubt that big businesses use their superior power – including their ability to afford the best legal advice – to unreasonably impose their will on smaller businesses, just as they impose incomprehensible and utterly non-negotiable terms and conditions on their customers. Like it or lump it.

One of the greatest weaknesses of “perfect competition” – the oversimplified model of market behaviour that permeates the thinking of economists, both consciously and unconsciously – is its implicit assumption that the parties to economic transactions are of roughly equal bargaining power.

In the era of oligopoly, however – where so many markets are dominated by four or even two huge corporations - nothing could be further from the truth.

It’s thus perfectly reasonable for governments to intervene in markets to bolster the bargaining power of the smaller and weaker parties – whether employees permitted to bargain collectively and go on strike, small businesses helped to seek legal redress from much bigger businesses, or customers protected from misleading advertising, high-pressure selling and other abuses.

It’s because economists’ thinking is so deeply infected by their model’s unrealistic assumptions that they fell for the notion that merely providing consumers with more information on labels and in “product statements” (quickly sabotaged by being turned into pages of legalese) would protect them from exploitation.

Though oligopolies have existed for decades, economists have put remarkably little effort into studying how they work and, more particularly, how they can be regulated to ensure the economies of scale they have been designed to capture are passed through to their customers.

The trouble is that oligopolies do all they can to avoid competing on price.

A part of this is offering a range of products that are almost impossible to compare with other firms’ products.

In the complex, busy world we live in, it’s utterly unrealistic to expect ordinary consumers to devote hours of precious leisure time to checking to see whether their present provider of bank accounts, credit cards, mortgages, mobile phones, electricity, gas and even superannuation is quietly taking advantage of them.

This is the case for government regulation to impose standardised comparisons and default products, statutory guarantees, legal obligations to act in the client’s best interests, and much else.

The other thing we’ve learnt in recent times – from the banking inquiry and many other examples – is that if businesses large and small are confident they won’t get caught, there’s no certainty they’ll obey the law.

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Politicians, economists will decide if bank misbehaviour stops

In the wake of the Hayne report on financial misconduct, many are asking whether the banks have really learned their lesson, whether their culture will change and how long it will take. Sorry, that’s just the smaller half of the problem.

You can’t answer those questions until you know whether the politicians and their economic advisers have learned their lesson and whether their culture will change.

Why? Because the game won’t change unless the banks believe it has changed, and that will depend on whether governments (of both colours) and their regulators keep saying and doing things that remind the banks and others on the financial-sector gravy train that the behaviour of the past will no longer go undetected and unpunished.

One of Commissioner Hayne’s most significant findings was that almost all the misbehaviour he uncovered was already illegal. Which raises an obvious query: in that case, why did so much of it happen?

Hayne’s answer was “greed”. That’s true enough, but doesn’t tell us much. Greed has been part of the human condition since before we descended from the trees. But greed has been channelled and held in check by other factors – particularly by social norms that disapprove of it and find ways to censure people who aggrandise themselves are the expense of others. In old times, social ostracism was enough.

So, since banks and other financial outfits haven’t always been willing to exploit their customers the way they have recent decades, the question is: what changed?

One explanation is that the economy’s become a bigger, more complex, more impersonal place, where the exploiter and the exploited don’t know each other. Where the exploitation is carried out by four of the biggest, most sprawling and intricate computer systems in the country.

Where I can spend my obscenely large pay cheque without seeing the faces of the people I’ve ripped off flashing before my eyes. Indeed, in my suburb, all of us get huge pay cheques. And I don’t feel guilty; some of them get much bigger cheques than me.

But another part of the explanation must surely be that things started changing after the triumph of “economic rationalism”, the introduction of microeconomic reform, and the deregulation of the financial sector in the second half of the 1980s.

In the highly regulated world, there was less scope and less incentive to mistreat customers. Competition was limited and there was little innovation. Deregulation was intended to spur competition between the banks and give customers a better deal.

I’m not saying bank deregulation was a bad idea. It did bring innovation (we forget that banking and bill-paying are infinitely more convenient than they were) and you no longer have to live in a good suburb to get a loan from a bank.

And the banks do compete far more fiercely than they used to. It's just that they compete not on price (as the reformers assumed they would) but on market share and which of the big four achieves the biggest profit increase.

In this they’ve behaved just as you’d expect oligopolists to behave.

In the meantime, economic rationalism sanctified greed (the “invisible hand” tells us the market leaves us better off because of the greed of the butcher and the baker) and economists invented euphemisms such as “self-interest” and “the profit motive”.

Then, after economists got the bright idea of using bonuses and share options to align management’s interests with shareholders’, big business elevated “shareholder value” to being companies' sole statutory obligation.

Now, however, when Hayne says the banks gave priority to sales and profits over their customers’ interests, everyone’s rolling around in horror.

And politicians and econocrats are feigning surprise that financial regulators, long given a nod and wink to dispense only “light” regulation of the players (and denied the funding to give them any hope of successful prosecutions), did just as they were told.

Unless the econocrats and their political masters are willing to accept the naivety that marred bank deregulation, the harm ultimately done to bank customers – ranging from petty theft to life-changing loss – and the system’s susceptibility to political corruption, the banks’ culture won’t change because the will to change it won't last.

The existing prohibitions on mistreatment of customers need to be made more effective, as proposed by Hayne but, above all, the law needs to be policed with vigour – including adequately resourced court proceedings – so the banks realise they have no choice but to change.

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Unhealthy, unhappy lives aren't fair exchange for higher incomes

In his Australia Day address, social researcher Hugh Mackay said that "the Australia I love today – this sleep-deprived, overweight, overmedicated, anxious, smartphone-addicted society – is a very different place from the Australia I used to love".

He identified three big changes: the gender revolution, increasing disparity in wealth, and social fragmentation.

He approves of the first, but laments that we’re "learning to live with a chasm of income inequality" and that social fragmentation means Australians are become "more individualistic, more materialistic, more competitive".

The third big change, he said, posed the biggest challenge – preserving social cohesion.

Earlier this month, the playwright David Williamson lamented that, since the advent of neoliberalism, "the world has become a nastier, more competitive, more ruthless place".

"There’s no perfect society, but I don’t think it needs to be as brutal as it is now."

As we move on from our officially required season of national navel-gazing – "yes, but what does it mean to be Australian?" – these concerns are worth pondering.

Economists object to being blamed for every ill that’s beset our country in the past 40 years. Where’s the proof that this economic policy or that has caused a worsening in mental health, they demand to be told.

It’s true that few developments in society have just a single cause. It’s also true there’s little hard evidence that the A of “microeconomic reform” caused the B of more suicides, for instance.

But there’s a lot of circumstantial evidence. After all, the specific objective of micro reform was to increase economic efficiency by making our markets more intensely competitive. The economists’ basic model views us as individuals, motivated by self-interest, and the goal of faster growth in the economy is aimed at raising our material standard of living.

And if some of our problems stem from changing technology – pursuing friendship via screens, for instance – can economists disclaim all responsibility when one of their stated aims is to encourage technological advance in the name of higher productivity?

Economists assume that economic growth will leave us all better off. Most take little interest in how evenly or unevenly the additional income is shared between households.

The Productivity Commission’s recent and frequently quoted report, finding that the distribution of income hasn’t become more unequal, refers to recent years, not the past 40. And the report averages away the uncomfortable truth that the incomes of chief executives and other members of the top 1 per cent have increased many times faster than for the rest of us.

Sometimes what’s happened since the mid-1980s reminds me of the old advertisement: are you smoking more, but enjoying it less?

Our real incomes have grown considerably over the years – even for people at the bottom – and economic reform can take a fair bit of the credit. It can take most of the credit for the remarkable truth that, unlike all the other rich countries, we’ve gone for 27 years without our least fortunate experiencing the great economic and social pain of recession and mass job loss.

But though most of us are earning and spending more than ever, there’s evidence we’re enjoying it less. Our higher material living standards have come at the cost of increasing social and health problems.

Is that so hard to believe when the key driver of our higher incomes is more intense competition between us?

Economists generally take little interest in social and health problems, regarding them as outside their field. But though problems such as loneliness, stress, anxiety, depression and obesity were with us long before the arrival of neoliberalism, they seem to have got worse since the mid-1980s.

Last year, Dr Michelle Lim, a clinical psychologist at Swinburne University, and her colleagues produced the Australian Loneliness Report, which found that more than one in four Australians feels lonely three or more days a week.

It’s most common among those who are single, separated or divorced. Compared to other Australians, the lonely report higher social anxiety and depression, poorer psychological health and quality of life, and fewer meaningful relationships and social interactions.

Turning to increased stress, it’s an inevitable consequence of living in bigger, faster cities and working in more competitive workplaces. Our bodies respond to stressful events with a surge of adrenaline, which increases our reaction speed and helps ensure our survival.

Trouble is, our bodies aren’t designed to cope with repeated stressful events and adrenaline rushes. Our readiness for fight or flight doesn’t decline, and we remain permanently aroused, which damages our health, making us more at risk of a heart attack or getting sick in other ways.

If more "jobs and growth" and the higher incomes they bring are intended to make us happier, maybe governments would do better by us if they switched their objective from increasing happiness to reducing unhappiness.

For instance, if the banks are now being criticised on all sides for putting profits before people, why are governments – facing an epidemic of obesity and diabetes - so respectful of the food and beverage industry’s right to continue fatten its profits by fattening us and our kids?

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