Thursday, 24 October 2013

Go with the Flow

There has been predictable chuntering, from both right and left, about the the government's decision to award the Hinkley C contract to a consortium of nationalised industries. A hyperventilating Allister Heath spies the dark legacy of corporatism, while John Harris wonders at the paradox of Tories, who decry the erosion of sovereignty by the EU, encouraging French and Chinese state ownership of British infrastructure.

Heath seems to genuinely believe that a free market in energy is possible, particularly if a "capitalist approach" is adopted - i.e. abolish renewable subsidies, ignore carbon reduction targets and go large on shale gas. Leaving aside the possibility that the last of these might prove disappointing (new sources of energy are always over-hyped, e.g. nuclear), his heroic vision assumes that the invisible hand will do its stuff: "This would allow prices to fall, improve customer service and allow innovation: at some stage, for example, solar panels could become so cheap that they genuinely make renewables competitive". You might wonder how falling electricity prices (presumably shale gas-generated) would trigger the innovation required to make solar panels as cheap as chips. History suggests that innovation will be stimulated by rising prices, not falling ones. The Jevons Paradox suggests we'll just leave the lights on and sod the planet.

The central flaw in Heath's argument is that a truly competitive energy market is impossible. This is because: a) the commodity is a basic need, which we all require for survival, so consumers have limited powers of market exit in protest at high prices (wearing an extra jumper is not a solution); b) the barriers to market entry limit suppliers (you can't easily start an energy business in your garage); and c) there is limited substitutability, i.e. most of us are not in a position to forage for wood any longer. Many commodities have one or two of these features, but few have all three. Where this occurs, you're looking at a natural monopoly. Energy, like its fellow utility water, is a natural monopoly cloaked by a fictitious market. There has not been a true competitive market in the energy sector since coal was delivered in sacks.

Heath proposes to "make it easier for companies to develop infrastructure", but the key infrastructure for retail is the "local loop", i.e. the pipe or cable into your home or office, which will always be a monopoly unless someone fancies investing in massive redundancy. In such an environment, ensuring there are half a dozen retail suppliers means the de facto creation of a cartel. This does not meet secretly each month in a bunker to fix prices, because it don't have to. The "conspiracy against the public", as Adam Smith called it, is quite open. The government will always underwrite wholesale prices because of energy's strategic importance (you can't have hospitals and factories closing due to a price bump), and the cartel will always inflate margins as far as it can. Energy company profits are in part economic rents.

In contrast, Harris avoids indulging in an alternative fantasy (if you ignore the implicit nostalgia for nationalised industries), but he also fails to point out why the apparent paradox of the Tories' antipathy to government intervention is limited to the British state. The answer is that Cameron, Osborne and Johnson owe their primary allegiance to finance capital, which means that the flow of foreign money into the UK, whether for large infrastructure projects or Central London property, is good in and of itself, regardless of whether it originates with a sovereign wealth fund or a rich individual. The movement of capital, and the opportunities it gives rise to for fees, speculation and leverage, is what matters to the City. For this reason, Cameron & co are equally happy for UK funds to be invested in nationalised industries abroad. They love doing business with the Chinese, not just because of the scale of the opportunities, but because an economic dictatorship is a reliable business partner, one that can better guarantee fees and returns without worries over regulatory restraint or market volatility.

The City is comfortable with nationalised industries and state planning where it can interpose as the facilitator for cross-border capital funding and other financial services. The one thing it does not like is state direction of capital domestically, as this diminishes its role as middle-man. The growth of the City as a global financial centre since the 1970s means that its fortunes are no longer largely dependent on the domestic capital market, but that market remains highly attractive in the areas of government-underwritten infrastructure and property due to the combination of high yields and low risk, the product in turn of privatised natural monopolies and, in the case of housing, induced scarcity.

Hinkley C, Royal Mail, HS2, mortgage subsidies and the continuing hostility to controls on City activity are all of a piece. It is all about maximising the flow of money, not the "march of the makers". While the Tory party will continue to champion deregulation, low wages and tax cuts for its small capitalist base, if only to drown out the siren call of UKIP, the cause of economic nationalism died with Margaret Thatcher and her obsession with British Airways' livery.

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