pitching the market against the market

With rumours of the private-non-dom-equity-Northern-Rock-subprime-recession swirling around and people feverishly adding a third kitchen to their garage in the hope of insulating their homes from the financial weather, it is beginning to feel like interesting times are upon us. Martin Jacques says we are about to experience "the biggest geopolitical shift since the dawn of the industrial era". Elsewhere people are beginning to wonder exactly what it is that those non-tax-paying billionaires actually do, and why society lets them. Partly we are all getting excited by the novelty factor of economic instability, which, given there is no suggestion yet of rising unemployment, makes rather a stimulating spectacle. So I've been musing.

As I have discussed previously, capitalism and markets are two different things. The distinction is perhaps clearest in Fernand Braudel's Afterthoughts on Material Civilisation and Capitalism. Markets exchanges are, he says, 'transparent', and "involve no surprises, in which each party knows in advance the rules and the outcome, and for which the always moderate profits can be roughly calculated beforehand". By contrast, capitalism involves "unequal exchanges in which competition - the basic law of the so-called market economy - had little place and in which the dealer had two trump cards: he had broken off relations between the producer and the person who eventually received the merchandise...; and he had ready cash which served as his chief ally".

One of the unfortunate aspects of contemporary Britain, it seems to me, is that markets now function extremely well where there is capital at stake, but not very well where there isn't. The market for houses works really very well indeed, whereas the market for sandwiches is a joke. The left has often argued in the past that markets do not function in the idealised fashion that neo-classical economics imagines - people do not behave like 'homo economicus', rationally pursuing the best value product available, but put up with what's available, which has been produced with little fear of being undercut or improved upon by a rival. This critique is not nearly sharp enough. Instead, I would argue, we need more of homo economicus in certain areas of society, and less of him in others.

Start with the sandwich market. At present we are offered a 'choice' between an oligopoly of three or four chains, all spending so much money on advertising and formulaic minimalist interiors, that they haven't got enough left over to spend on a filling, so have to make up for this with mayonnaise. The main alternatives are those italian sandwich bars, which are scarcely any more appetising.

Yet if real, vigorous competition were to arrive - a new cafe selling better food, for a decent price - would anyone notice? If it was in the toytown world of Borough Market, maybe, but elsewhere people would be either too distracted to spot it or then too busy to remember it. The problem in such situations, as the left liked to complain about markets, is inadequate information and rationality. Whereas the discerning New Yorker would discover such a place, tell their friends, and carry on eating there until an even better option had arisen, the Londoner dolefully heads off to Pret for another 'Bacon Mayo Supermayo'. They are not only failing to circulate information adequately for market mechanisms to work (we lack a culture of researching or discussing such things) they are behaving irrationally (obeying the adverts not calculating the value).

(For a more politically live example, but one which is less close to my heart, think of grocers and supermarkets. The problem, as the competition commission keeps pointing out to people, is that people dislike supermarkets, but they still shop in them. If you really like small shops so much, start using them - but you will then have to deal with the hassle of working out which ones are the best value for money.)

Now take the housing market. Here it would be nice to imagine a world in which people clung on to old buildings for sentimental reasons, avoided buying in areas whose history they weren't familiar with, and designed their kitchens around their own cookery whims. Ha! Instead we sell off the family home as soon as an adolescent from Foxtons has come knocking with a property valuation, plot the latest property news across the country in newspaper supplements and trade press, and do whatever the estate agents tell us our kitchen needs. I heard a not incredible story the other day that home-owners in London are all installing 'islands' in their kitchens on the advice of Foxtons employees, who only under the illusion that they're cool because that's what Foxtons happen to have in their highstreet offices!

Oh for a little less homo economicus, and a little more humanitas! In one area of society in which we would like information to circulate badly, for people to behave irrationally, and for competition to fail, none of these things is close to being the case. Can you imagine there being a worthwhile insider tip about the UK housing market any more? That's how well it is functioning. Thanks to a culture of frantic calculation and greed, consumers are doing precisely what economists expect of them, meaning that this market is working impeccably, 

So here's the flaw in Braudel's dichotomy. Markets require consumers to exercise rational judgement, to be able to compare quality as well as price, and to break off relationships as soon as they cease to be advantageous. But this is a tiring and time-consuming exercise, that doesn't interest many people, at least not in Britain. Which? magazine serves our interests, but  it is OK! magazine that satisfies our desires (one might say we opt for exclamation marks over question marks). Only when there is the promise of something altogether more empowering, exclusive and unfairly-gained - those characteristics that Braudel viewed as anathema to markets - do we suddenly start to behave in the rational, self-interested, calculating fashion that proponents of markets suggest. Only when there is the prospect of transforming ourselves from traders to capitalists do we suddenly discover the art of intelligent, ruthless trading, with all of the research, calculation and time commitment that that involves. It is a sad paradox.

Comments

[bge]

Um, Will, where do you think Pret, Eat and the others came from? Hasn't it occurred to you that they were started by capitalists who thought that they were filling a gap in the market? And that they spread because they were successful - that people abandoned the italian death-vans for them? Do you really think that there is no competition in the London lunch market?

What makes me laugh is that actually there are no equivalents of Pret or Eat in NYC - only the equivalents of the horrible italian sandwich shops we still have here in odd corners of London. So your illustration is the wrong way around... And have you EVERY seen any advertising for any of the sandwich chains? I haven't

Oh, and a point for your sub-editor - impressive quotes from obscure theorists are somewhat undermined by the confused idea that non-doms (who are not connected to private equity or sub-prime, BTW - they're more like russian oil men) pay NO tax. They pay lots of it - just not in the UK. A common mistake, to be fair, but still a mistake.

Sorry to focus on incidentals rather than the main point, but I'm not sure that you have one ;) Precision, Precision, Precision!

[Will Davies]

bge - we seem to be talking at cross purposes. I think you've misunderstood my post, and I certainly can't make any sense of your comment.

My main point is: capitalism involves a transformation of egalitarian market relations (think eBay) into asymetrical relations of power (think Tesco). British culture lends itself to the latter, whereby people either roll over and allow themselves to be dominated or obsessively seek out positions of domination. We're less interested in markets where the equality is guaranteed as both a premise and a consequence.

You have, like you say, failed to address this, but instead chosen to attack me for quoting an 'obscure theorist'. If you got less wound up, and concentrated on trying to work out what I'm saying, then maybe you could offer a critique, which I'd then be interested to read.

[stet]

Braudel is super straight -- and super famous.

[bge]

I wasn't wound up, just slightly amused at the way you deployed a long sequence of analogies *all* of which fall apart under examination.

Hmm. Asymmetrical relationships? If capitalism is asymmetrical, where are the symmetrical relationships with which you would contrast it? Peasant agriculture, where there's one middleman who tells the farmer the price? Or State ownership, where the only counterparty allowed is the state? Anyway, it’s more complicated. Ebay is a corporation, that has an asymmetrical relationship with its users (c.f. the recent ‘sellers’ strike’). Tesco is a powerful buyer to farmers – but just look at how Sainsbury’s position has deteriorated over the last 10 years to see where the symmetry lies in supermarkets’ relationship with consumers.

It might be more accurate to say that change in market conditions, driven by technology (ebay), business process innovation (Tesco) or whatever, happens continuously, that it often result in shifts in pricing power relationships, and that these move in different directions depending on the details of the case. The impact of the internet on the travel industry has been to create far more ‘symmetry’ – while ever increasing development costs has had the effect of reducing the airlines to a choice of just two aircraft suppliers… there is no one-way process here.

Getting back towards sociology, there is a trendy (clothes, I think) shop in Toyko called 'Not Found' - the name chosen to make it impossible to find on Google. Word-of-mouth only, please.

[bge]

Anyway, there are areas where there is not much free flow of information. (London sandwich shops are a very bad example, but who cares) - assymmetry. This has generally poor consequences. Fine. Economists spend lots of time talking about this.

There are also areas where the fact that there is a free (symmetrical) flow of information makes it harder for ME IN PARTICULAR to buy something cheap – in other words, harder for me to buy your asset for less than someone else would pay because you are ignorant (the London property market is indeed a good example of this). But is this a bad thing? (Are you associating the free flow of information with speculative bubbles? Not sure I’d agree with that one. )

Or are you saying that you’d like less money-grubbing in some things - housing, say (and not out of any self-interested desire to afford a family house in London on a 30-something’s salary, but because of concerns about social cohesion, community and all that stuff) And more money-grubbing in things where you can’t find what you want, like sandwich shops?

If so, fine, but how? Julian Metcalfe didn’t like the lunch choices available in London, so he started Prêt a Manger. There is a free market in sandwiches. But how do you move things the other way - to restrict other people’s freedom of action? This is covered under ‘market failure’, which is not a topic short of literature!

[Andrew Brown]

I meant to come back to your point about if "competition were to arrive - a new cafe selling better food, for a decent price - would anyone notice?"

I kind of think we might, I'd certainly try Leon again and if that goes well will recommend it to my friends.

[Will Davies]

bge - thanks for your expansion on all of this. Your economic analysis all looks very valid, and I'm sorry that you still don't seem to get what I'm talking about. For instance, I am NOT talking about symmetry/assymetry in the sense of 'information symmetries'; I am NOT suggesting that bubbles are caused by free flow of information (surely, if anything, the opposite of the truth); I am NOT outlining some regulatory programme.

I also happen NOT to be an economist, whereas perchance you are. It's frustrating not to be able to explain myself, but I doubt I can do a better job than the initial post, so better just leave it I think. However I reject the implication that I have mis-applied some textbook economic logic, when I have never subscribed to a textbook economic logic in the first place.