The unintended consequences of Labour’s price-capping policy will be shortages, corruption and widening inequality. This outcome is inevitable. It is clear the moment you work out what will happen to a fish dealer.
Alfie Bass is a Portsmouth fish-dealer employing a dozen or more people. He is squeezed from below by fishermen who want the best price for their fish, and from above by wholesalers at Billingsgate market, and restaurateurs buying in bulk, who want the lowest possible prices. Alfie has only remained in business for forty years by being very clear about negotiating price. He has to acknowledge the fishermen’s right to a margin, and explain to the wholesalers his need for a small margin, and still arrive at a competitive price in a market where the other South coast fish dealers and those in Normandy and Brittany vie for business. He has a good reputation and is trusted by all parties. You can’t fool any of them anyway, as they all talk to each other. If he wasn’t honest and clear he would not have lasted.
Price is the key mechanism. It changes hourly sometimes, according to the weather, the tides, the movement of shoals of fish, the size of catches, and the euro exchange rate. It is a delicate, and sensitive instrument at the heart of all that makes the business swing. The competition, and the incentives built into the price negotiation, keep Alfie Bass honest.
Now suppose that a well-meaning Labour minister of Food in Mr Corbyn’s government decides to price-cap fish, so that poor people can eat more cheaply. (Price capping is Labour’s manifesto policy in the energy market and in the rental housing market). The first consequence of the price cap reducing the price of cod will be that Alfie Bass sends all his cod to the markets in Normandy and Brittany where he will get the proper price. Before half a day has gone by, the Minister has achieved shortages in the shops, and turned an honest man into a criminal smuggler.
Only the worst fish will be sold at the fixed price – fish that a week before he would have thrown away – and within a week or two a black market will develop at Alfie’s back door, selling good fish to rich customers. The poor get rubbish, if anything, after queuing, and the gap widens between the privileged and the poor. Alfie is now a black marketeer.
Ah, but Alfie and his employees and his dependent fishermen will be compensated by subsidies, I hear you cry! Maybe, depending on how Labour intends to pay for the cheap fish. If they just intend to force Alfie to sell cheaper, the consequences will obviously be shortages, dangerously poor quality and a black market. If they fund it through subsidies the consequence for Mr Bass and his business is that instead of concentrating on fishing, keeping the fish fresh and getting it to market as soon as possible, his main job will become claiming subsidies. If he turns over £200,000 worth of fish a week, and half of that is subsidy, then snaffling subsidies will be the way to earn a living for his family. He will fill in forms for an ignorant bureaucrat in Whitehall, who does not chat with fishermen and restaurateurs on the dockside, and does not understand tides, and fish. Just like all the other fish-dealers, Alfie will be tempted to weigh all his stock twice, or thrice, for inflated claims, to claim for rotten fish, which on paper looks as good as real fish, and to game the system.
When it becomes clear that the market is no longer honest an inspector will be sent down to the fish dock to check the catch weights as trawlers come in. But £200,000 a week is a goodly amount to split between claimants and the temptation to collusion and corruption with a little double-claiming will be very strong.
And how are the fishermen paid? If through general taxation, then everyone is paying for the fish anyway. We are not avoiding the cost. Using bureaucratic subsidy-claiming is the worst possible way of getting good value for money, so in the end we will all pay more. We will be weighed down by taxes, vegetarians as well as pescatorians.
If you insert an expensive bureaucracy between the fishermen and the fish-eaters you incentivise corruption, inefficiency, and turn everyone involved at every stage into cynics. Give the poor money so that they can afford good food, by all means, but don’t bugger up the price mechanism that keeps everyone honest and keeps the market in fish lean and fit.
Those notorious East German shortages, long Polish queues for basic goods, all that notorious Chinese corruption, the thriving Soviet black markets for the elites, characteristic of all socialist economies, are not some weirdness attributable to nasty Communists (nothing to do with us Socialists). They are the inevitable results of price-capping, and will be playing on a street corner near you very soon.
The main thrust of this article is argue against price capping in all circumstances, so to use a fish dealer as a metaphor for broader economic scenarios is a little disingenuous
But to take your point
Alfie Bass (the best aptronym of the year!) operates in his chosen space as a dealer and is the pivot between the producer and the wholesale markets, and as such does not add value to product and merely passes it on at a profit. Is this function really necessary?
If there was a cooperative (say) of fisherman that landed their catch, sorted it and then distributed via local fish markets, the profits could be increased and shared without any requirement for government controls (other than health standards and conservation issues) I am sure Mr. Bass would not be unemployed as his skills as a negotiator would still be required, but his risk would be much reduced as he was part of a larger group and he would be working for all of the group, not his own narrow interest
The argument that price capping distorts the so called free economy is true and all the time we live in a mixed economy then price capping is a valuable instrument to counter price fixing by monolithic companies and cartels. The negative aspects can countered by government policy in via the tax system. Even the Tories concede this point and an energy price cap was part of their manifesto too, so much for it being a socialist policy!
The argument that it is socialist policies that cause shortages, evidenced by the old Eastern bloc countries, is more to do with an enforced vision of a centrally planned economy backed up with a tight control of social policy (yes communism) I don’t think Jeremey’s wildest fantasies would take us down that particular path, but a reigning in of rampant capitalism is surely due given the recent collapse of Carillion and the impending implosion of Capita, Interserv and others
The transport system, Health service and utilities should be kept in the public domain, and run as services, not as companies whose law enshrined purpose is to make profits for shareholders as its only purpose, leading to greed and corruption and tax evasion on a much greater scale than any fish dealer would be involved in.
You say, “The argument that it is socialist policies that cause shortages, evidenced by the old Eastern bloc countries, is more to do with an enforced vision of a centrally planned economy …” Yes, central planning and price capping are the main planks of socialist economies, along with nationalisation. All three are in the Labour manifesto. To be fair, you could hear the same dangerous promises from today’s confused Tories. They too boast of an “industrial strategy,” centrally planned, though since most of them don’t believe in any such thing it will no doubt fall flat. George
You see the collapse of Carillion as a lesson in “rampant capitalism”. But just think of this: who lost all the money when the public services they provided were not well enough run? Private investors. Who loses all the money when a nationalised industry provides the services badly and becomes sclerotic and inefficient? Yes, taxpayers, and there is no end to it. You do not get an ambitious new company willing to take on the challenge, you just keep haemorrhaging millions decade after decade.
Carillion, it could be argued, is a case of capitalism actually working, because they were not properly run or efficient, so they went bust. The cosy relationship which allowed too many large contracts to be awarded to them even when they were already in the shit, is more worrying.
The real scandal is some of the PFI deals that have gone on over the years, as documented by private eye magazine. Should have been obvious that if you buy a hospital on a credit card, you will pay a lot more in the long run. Thanks Gordon Brown, for supercharging PFI usage.
I appreciate your point about price capping, George. However my main thought when reading your article was “Houses and flats are not fish”. For a start, you can’t send your stock of houses to Europe to get a better price!
Price capping of rents takes place successfully in Germany, and this and other tenant-friendly policies help the economy by providing stability for workers and better health this less strain on various government services; more sense of community etc etc. So I think there is an argument for it.
The other thing with housing is that your argument applies in a truly free market, but housing is anything but, due to the Planning system and other factors.
I seem to be suffering from some sort of incipient senility here as this page seemed to be largely about Zen philosophy or satori etc etc but now it appears to be about the price of fish in Billingsgate market. I think George that your entry into the political arena has opened a “can of worms” or to be exact a “can of fish”!!