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John Penrose is MP for Weston-super-Mare and a former Cabinet Office minister. This article forms a chapter of his paper ‘A shining city upon a hill: Rebooting capitalism for the many, not the few’.

Every so often, capitalism goes wrong. Waves of bank failures in the early days of the industrial revolution led to the Bank Charter Act. Exploitatively poor working conditions led to progressively more effective Factories Acts to improve safety and equity for employees. The Great Depression gave birth to modern competition laws, to protect customers from being exploited by over-mighty companies.

Each of these moments happened because capitalism had started to behave in ways which seemed immoral. Creating wealth is wonderful, but not at any cost and the tariff in human health or dignity had become too high. So, each time, the system had to change. Society demanded new laws to shape and frame free markets so they still drove vigorous economic growth, but humanely and without exploiting the weak and vulnerable. Capitalism was updated, modernised and rebooted.

Here we are again

We are at a similar moment today, with many people feeling the entire system is rigged; stacked against them by a complacent, comfortable, out-of-touch global elite. For most people, wage growth since the 2008 banking crash has been anaemic at best, while a tiny number of merchant princes have become extraordinarily rich. And for some lower-skilled workers (but not all, and not higher-skilled ones) zero-hours contracts feel like exploitation.

Plus, too many of life’s basic, unavoidable essentials don’t work properly: housing is far more expensive (for renting or buying) than any previous generations had to deal with; energy firms rip off loyal customers with sky-high prices as soon as they forget to switch; railways are crippled by strikes and new timetables cause meltdown; water firms don’t fix leaky pipes but still impose hosepipe bans; broadband works slower than it’s supposed to.

Failed and stale – a debate that’s gone wrong

So the status quo isn’t working, and people are casting around for answers about how it should change. But in times of trouble we turn to what we already believe, and the discussion about what those alternatives might be has got stuck in a formulaic and repetitive debate about failed and stale options from the past.

To its credit, the political left has realised there’s a problem, but has retreated into comfortingly familiar arguments about why capitalism itself is fatally flawed, to which the only solution is socialism, state ownership and renationalisation. The political right has followed them, refighting the intellectual battles of the 1970s and ’80s by explaining why the left’s answers are wrong, but without offering a modern, attractive and fair alternative vision instead. And populists of both the left and right are exploiting this ideological vacuum, fanning the flames of unaddressed problems and grievances with divisive, often-racist ideas which would destroy wealth and set communities against each other instead.

Modern capitalism for the many, not the few

We need a modern, forward-looking way to fix these problems. Answers to previous crises have been political as well as economic, because capitalism is more than just commerce, and citizens are more than just customers, too. Markets aren’t the ‘law of the jungle’ as some anti-capitalists believe; their rules aren’t laws of nature or of physics which are inherently uncaring and impossible to change. They are political decisions, made by humans, and we can alter them if they aren’t working properly.

The right kind of rules are fairly simple. They include strong, free and independent political, judicial and regulatory institutions so contracts can be enforced, staff aren’t exploited, and products are safe to use. And they frame free markets so the rules put customers in charge, rather than politicians, bureaucrats or company bosses. Politicians call this democracy or people power; economists call it the ‘consumer surplus’, and industries (or countries) which do this are, in general and over time, more efficient, productive and competitively successful than those which don’t. In other words, democratic capitalism works best when its rules favour the many, not the few.

Societies which get their rules right tend to be more democratic, and socially progressive too, because putting customers in charge means putting citizens in charge at the same time, as the two graphs below show. It means unfairness, rip-offs and injustice can’t last for long, because the people who are being ripped off don’t have to put up with it. They can change things, whether it’s by switching to a different brand of toothpaste, or voting for a different government. They’re the bosses.

We need to update and change Britain’s rules so they put customers (and citizens) in charge, to reflect the way our society is today rather than how it was after the Second World War. A modern, alternative view of how Britain’s new, post-Brexit, digital society should reward hardworking consumers of all ages. Capitalism for the many, not the few.

The balance of power: is the customer still king?

First we need to understand the economic forces which are fuelling discontent with the way ‘the system’ works. The balance of power has been shifting away from consumers and towards the public, private and non-profit organisations which supply us with goods and services. This matters for two reasons: firstly, if British consumers end up paying more than they used to for the same things, because they haven’t got the same bargaining power as before, it makes Britain’s economy less efficient and productive. And secondly, it fuels the feeling that the system is stacked against ordinary people, in favour of big businesses and giant bureaucracies.

The antidote is to make the customer king (or queen) again. To reassert consumer power over and above cosy stitch-ups between big bosses and the organisations they run. The simple-but-fundamental ability that, if we don’t like what we’re getting from one company, we are free to switch to another one that’s cheaper, or better quality, or faster, or slower, or has kinder staff. And where we don’t have the whip hand, because we’re buying something that’s so complicated or long-term it’s hard to tell in advance whether it’s right for us, or where it binds us into a long-term contract which we can’t change if we made a mistake, we expect the law to protect us from being ripped off unfairly.

Bigger firms mean smaller customers

Britain’s economy has been getting more concentrated. Big companies have been getting bigger, which gives them more power to charge higher prices, or lower quality, or pay their staff less, or all three at once. The chart below shows how this trend is going the wrong way for most UK industries and the economy as a whole:

And this second chart shows the impact of all that extra power on their profit margins and the prices we pay in the shops:

Maintaining this balance of power, so companies can’t get so big they’re able to take their customers for granted, is the job of our competition authorities: the Competition and Markets Authority (CMA) and the European Competition Authorities, too. These charts show they haven’t done the job successfully for several years and, once we leave the EU, the CMA (and possibly local Trading Standards teams) will need to be strengthened significantly so they are up to the task.

New economy, new challenges…

The new digital economy is altering the balance of power as well. Digital data means the public, private and non-profit organisations that provide us with goods and services know far more about us than before. Knowledge is power, and we’ve gone from a pre-digital world where a very few organisations (like our banks, or firms where we’d taken out a loyalty card) knew a little about our spending habits, to one where our online data footprint means firms know far more about us than those few pre-digital account-holders could ever have dreamt.

The effects aren’t all bad, of course; there are important economic and business benefits, too. Firms and organisations which know more about us can tailor what they’re offering to our particular needs, without having to guess. They can suggest interesting, useful products or services we might need, which we might never have found otherwise. They can save us time by remembering our preferences, from favourite colours for sweaters to aisle or window seats on trains, so we don’t have to explain what we want from scratch every time. And, because loyal customers are good business (they’re cheaper to sell to, and a valuable source of competitive insights) they can target us with rewards from free flight upgrades to discounts on our next purchase.

But these improvements in economic efficiency, speed, convenience and customer understanding come with a price tag attached. For example, once we’ve set up our online shopping preferences with a particular supermarket, it’s much less likely that we will go to the trouble of setting up and maintaining another one for a rival firm. That means we shop around much less, compared to the pre-digital world when we could simply walk into a rival store next door. We become ‘sticky’.

The digital world doesn’t just provide more and better data to spot which of us are sticky and which are not. It also makes it easier to design interactions (like those online shopping preferences) that make more of us stickier than before. And since firms and organisations with sticky customers know they’re less likely to switch, there’s more danger they’ll take us for granted. Some already use the ability to identify sticky customers to exploit and rip them off: energy firms offer sky-high ‘default tariffs’ rather than their best deals to customers who rarely or never switch, and some insurers offer higher prices to people who renew their policies automatically each year, instead of threatening to leave.

…and some old challenges

It’s not just new challenges either; some old problems are being given fresh legs in the digital world as well. For example the new economy has created enormous new ‘natural monopolies’ like Google or Facebook, because network effects (where bigger firms can offer keener prices or better products and services than small ones) inevitably lead to single, enormously dominant firms or organisations in many areas. These aren’t new problems; the old non-digital economy has plenty of natural monopolies too, in industries like telecoms and post, water and energy, and banking. Normally UK, EU or USA competition authorities would worry these organisations were exploiting customers, but if the products are given away free the pre-digital laws which protect us from monopolies gouging customers with overpriced, poor-value goods and services don’t apply so clearly in a digital world.

But that doesn’t mean there’s no harm. Monopolies create a monoculture of missed opportunities, where customers get less variety and choice than if there were lots of rival firms vying for business. And they create the statistical certainty that, at some stage, the monopoly organisation will do something damaging – whether it’s a data breach, a child-protection failure or attempted electoral vote-influencing – which consumers won’t be able to avoid because there’s no decent alternative available. Either way, concentration of knowledge and power in so few hands makes the system more brittle, and rip-offs more likely to be serious, when things inevitably go wrong.

A new Competition Act

Britain’s competition watchdogs don’t have the resources they need to reverse the current trends and make British competition sharper and tougher, particularly after Brexit when they will have to take over areas which are currently covered by EU Competition authorities in Brussels. And their powers are based on the UK’s most recent Competition Act which was passed in 1998, in the era before email, Facebook, Twitter, Uber and the World Wide Web. They’re as out of date as the horse and cart.

Both the watchdogs and their powers must be updated to cope with these new-economy challenges, so consumers get the huge advantages and benefits which the digital economy can offer, without being exploited in new ways at the same time.  We will need a new Competition Act, enforced by a modernised and expanded Competition and Markets Authority. Plus a specialist new network monopoly regulator to replace Ofcom, Ofgem, Ofwat and all the others. And possibly a more muscular approach to local Trading Standards teams, as well. Only then will we restore the balance of power so customers are the undisputed kings and queens of the new digital economy as well as the old, analogue world.

14 comments for: John Penrose: Rebooting Capitalism 1) A market designed for the many, not the few

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