The Foundational
Economy: A different starting point
If the exhibits in Part II show
that the market experiment had many unpredictable and unanticipated outcomes,
how does that register in the UK’s core sectors? ‘The
End of the Experiment?’ develops three case examples of ‘foundational
economy’ activities that demonstrate what’s gone wrong over the past 30 years
and how we could do things differently for better economic and social outcomes.
Our starting point is that is
that all markets are embedded in politics and that we currently have a problem
with political planning. The cases of i) telecoms and broadband, ii) supermarkets
and dairy, and iii) retail banking are services most of us use every day. The
cases show the increasing prevalence of ‘point value’ calculations and trader
mentalities within large, quasi-monopolies, where cashing out often comes at
the expense of national outcomes and social objectives. All reveal different
fault-lines in their business models that work against societal interests as
well as the limits of a generic ‘competition and markets’ framework.
Let’s follow the money and
find the faultlines
‘The
End of the Experiment?’ cases show how, in different ways, we have ended up
with socially and economically dysfunctional outcomes. This is unsurprising
when much of the foundational economy is dominated by shareholder value driven
business models. There are some generic overlaps such as confusion marketing
but all in all three cases the key drivers are financial because giant PLCs
compete on two dimensions: (1) the product market to win customers; (2) the
capital market to generate the narratives
and numbers expected by stock market investors.
The former publicly owned BT in
its modern guise shows a marked reluctance to invest in a national network of
fast broadband. This unsurprising result is the legacy of privatisation where
BT demonstrates a preference for distributing dividends - £20 billion
distributed since 1984 – and buying back its shares. The outcome is that its
super-fast fibre optic broadband terminates at the cabinet adjacent to, rather
than on, the premises. The government’s aim of rolling out super-fast broadband
nationally meets BT’s corporate requirements, but does it necessarily meet
social needs, particularly when the company expect the state to subvent an
extension of the network to rural areas?
Supermarkets present themselves
as supporters of British farmers, but a point value mindset often harms stakeholders
as suppliers are squeezed upstream. In dairy farming the farmers are visible
and vocal complainants, but the invisible and silent victims are often the milk
processors in the middle of the chain. In the decade since 2001, processors’
share from a litre of milk has declined from 35% to 19% while supermarkets have
maintained margins through a form of predatory contractualism.
Retail banks’ rely on the pressure
selling of products to customers where the proceeds are applied to cover branch
costs. This is a necessity under a shareholder value driven model in the
context of free banking. This often results in numerous mis-selling scandals –
the fines for which are treated as a basic cost of doing business. The policy
response is nearly always to encourage new entrants, without any understanding
of either the destructive competition in the product market or the unreasonable
capital market demands for high returns on equity which underlie the dysfunctional
business model.
Is this the outcome of market
competition?
All three cases play out in
different ways but all have socially and economically dysfunctional outcomes.
All manage to deliver acceptable stock market returns (although some
supermarkets are under pressure). But all crucially depend on their supply
chain positioning at key pinch points which gives them power over suppliers or
customers. The pursuit of ‘point value’ strategies means that position is
exploited to extract value immediately at the expense of a stream of benefits
over time. Value is maximised at the point of transaction to benefit the
shareholder; profits are levered on suppliers and customers without regard to
the social/national interest.
The 30-year experiment has above
all enshrined generic competition as its mantra. And to varying degrees, with
governments of different hues, this is the principle that has underpinned
policy. So within this context, how, in such a large portion of the economy,
have these PLCs maintained return on equity and profit margins? Equally, how have PLCs limited the effects of
competition when firms are competing amongst themselves inside each sector?
The key features that have
prevented the erosion of margins and returns are (a) the companies avoid direct
price competition through confusion marketing which is actively used in all
three sectors (e.g. bundling to make comparisons difficult); (b) PLCs inside
sectors operate using similar business models –often narrated to emphasise
differences –that create an opera of stereotyped competition with emphasis on a
part e.g. service, plus (c) PLCs using ‘point value’ as a means of exploiting
local power relations to take margins off other stakeholders.
There are alternatives but
they require vision and framing
The normal treatment of corporate
excess and scandal is to claim that it is the result of ‘market failure’ which
requires ‘more competition’. These framing devices dominate the rhetoric of Select
Committees, policy reports and other outputs. The recommendations are always
generic: encourage new entrants, educate consumers, limit monopoly excess. In
doing so, the frame narrows our field of the visible and limits our imagination
about what alternatives are possible.
The success of this framing has
been overwhelming. But there are many other experiments beyond the free market that
perhaps meet social and economic need more successfully. These experiments
focus on co-operation and co-ordination to rebuild fragile or fragmented supply
chains that resulted from the 30 year experiment. They include modest
innovations by local authorities in the UK trying to re-glue the supply chain
fragments by co-ordinating private sector partners; building agglomerations of
expertise and overlapping functions in their area. These experiments also
emerge spontaneously in the private sector: for example, Morrison’s vertically
integrated meat supply chain secures supply and investment-driven efficiencies.
Similarly Tesco’s intervene in the milk supply chain by guaranteeing, via the
processors, a minimum price per litre that effectively puts a floor under
competition. Alternative forms of ownership may also change the characteristics
of competition: municipally owned utilities in the US compete successfully
against PLCs, despite operating with quite different priorities. These
different examples do not necessarily require central state planning or
co-ordination since they involve the rebuilding supply chains from the bottom
up.
These are all experiments related
to building the foundational economy.
Looking at the three cases in the
book it might be easy to conclude that these are just examples of ‘bad company
behaviour’. But that would be an alibi and deny the need for something more
than just the restatement of more competition and more markets with the usual bolt-ons
like industrial policy. But doing something different requires a fundamental
reframing of our problems that should include interventions through licensing
for social objectives. However, that will require political will not generic
fixes for the generic rhetoric of market failure.
Manchester Capitalism
