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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Why much of what we're told about taxes is off beam

There are lots of ways to describe the subject matter of economics, but the ponciest way is to say it’s about “the study of incentives”. It’s true, but a less grandiose way to put it is that conventional economists are obsessed by prices and not much else.

If you’ve heard someone being accused of knowing “the price of everything, but the value of nothing”, that phrase could have been purpose-built for economists. Read on and you’ll see why economists so often make bad predictions and give bum advice.

The early weeks of most courses in economics are devoted to explaining the economists’ version of how markets work. How the demand for a particular good or service interacts with the supply of the particular item to determine its price.

Over time, movements in the price act as signals to both the buyers of the product and its sellers. A rise in the price tells buyers they should use the now more-expensive product less wastefully, and maybe start looking for some alternative product that’s almost as good but doesn’t cost as much. On the other hand, a fall in the price tells buyers to bog in.

To the sellers, however, the price signals sent by a price change are reversed. A price rise says: this product's now more profitable, produce more; a fall in the price signals that supply is now less profitable, so produce less.

You can see how changes in the price act as an incentive for buyers and sellers to change their behaviour.

You see too how, following some disturbance, this “price mechanism” acts to return the market for the product to “equilibrium” – balance between the supply of it and the demand for it. It sets off what real scientists call a “negative feedback loop”: when prices rise, it acts to bring them back down by reducing demand and increasing supply; when prices fall, it brings them back up by reducing supply and increasing demand.

Note that all this is about changes in relative prices – the price of one product relative to the prices of others. It ignores inflation, which is a rise in the level of prices generally.

The way economists think, taxes are just another price. And there’s no topic where people worry more about the effect of incentives than taxes – particularly the effect of income tax on the incentive to work.

Consider this experiment, conducted in 2018 by two (married) economists from the Massachusetts Institute of Technology, Esther Duflo and Abhijit Banerjee, with Stefanie Stantcheva of Harvard. Duflo and Banerjee were awarded the Nobel prize in economics in 2019.

The three surveyed 10,000 people from all over America, asking half of them questions about how people would react to several financial incentives. Half of these respondents said they expected at least some people to stop working in response to a rise in the tax rate, and 60 per cent expected people to work less.

Almost half of the 5000 respondents expected the introduction of a universal basic income of $US13,000 ($17,000) a year, with no strings attached, to lead people to stop working. And 60 per cent thought a Medicaid program (providing healthcare for people on low incomes) with no work requirement would discourage people from working.

But here’s the trick: the economists asked people in the other half of their 10,000 sample the same questions, but how they themselves would react, not how they thought other people would. Their responses were significantly different, with 72 per cent of them declaring that an increase in taxes would “not at all” lead them to stop working.

As Duflo and Banerjee summed it up in their book, Good Economics for Hard Times, and in an excerpt in the New York Times, “Everyone else responds to incentives, but I don’t”.

It’s possible those people could be deluding themselves – after all, most people believe they’re not influenced by advertising, when it’s clear advertising works – but in this case the hard evidence shows financial incentives aren’t nearly as influential as is widely assumed.

The first place to see this is among the rich. “No one seriously believes that salary caps lead top athletes to work less hard in the United States than they do in Europe, where there is no cap. Research shows that when top tax rates go up, tax evasion increases . . . but the rich don’t work less,” they say.

And we see it among the poor. “Notwithstanding all the talk about ‘welfare queens,’ [and the use our Morrison government has made of similar talk to justify keeping the JobSeeker dole payment low] 40 years of evidence shows that the poor do not stop working when welfare becomes more generous,” they say.

“When members of the Cherokee tribe started getting dividends from the casino on their land, which made them 50 per cent richer on average, there was no evidence that they worked less.”

It’s true that in many circumstances – but not something as deeply consequential as decisions about how much work to do – differences in prices will influence the choices people make. In a supermarket, for instance, many shoppers will reach for the cheaper jar of peanut butter.

But when we’re making decisions about bigger and more consequential issues – such as whether to work and how much of it to do – monetary incentives such as the rate of tax on it, go into the mix with a multitude of other, non-monetary incentives.

Such as? “Something we know in our guts: status, dignity, social connections. Chief executives and top athletes are driven by the desire to win and be the best. The poor will walk away from social benefits if they come with being treated like a criminal. And among the middle class, the fear of losing their sense of who they are,” Duflo and Banerjee conclude.

Why do economists so often make bad predictions and give bum advice? Because they keep forgetting that a model of economic behaviour that focuses so heavily on prices leaves out many other powerful incentives.

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