Today I’ll give you a follow up to yesterday’s Money Morning that questioned the usefulness of the Australian Competition & Consumer Commission (ACCC).
If you missed it you can click here to bring yourself up to speed.
Well, it seems as though your editor was wrong.
Based on the feedback Shae’s been getting into the Money Morning mailbag most people seem quite happy to pay higher prices for things.
Not only that but it seems as though your editor is a ‘slave lover’ due to our comments attacking the minimum wage.
So, are we really wrong? Does the ACCC really do a useful job? And is the minimum wage a spiffing idea?
Or, as your editor believes, does the ACCC actually contribute towards less competition which harms businesses and consumers? In fact, could it be argued that the ACCC creates monopolies?
And does the minimum wage actually increase the standard of living? Furthermore would the absence of a minimum wage result in slavery?
Even though I’m fearful of repeating some of what I wrote yesterday I’ll quickly go over those points again, before introducing you to the closest thing we have in Australia to a free market.
As we see it, the ACCC is nothing more than a clever disguise. It’s the front man that exists to give you the impression it’s looking after your interests.
Here’s the bad news, it’s not. The ACCC is the classic example of regulation and bureaucrats being put in charge of managing other regulations and bureaucrats. It’s like hiring a team of people to dig holes and then another team to fill them in again.
If the government hadn’t made business conditions so restrictive in the first place there would be no need for a ‘policeman’ or ‘watchdog’ to keep an eye on things.
The common misconception is that the ACCC ensures competitive markets. That it ensures consumers are not exploited by businesses. Again, this is untrue.
In fact the opposite is the case. Government regulations ensure that markets are uncompetitive.
That’s what governments and regulations do I’m afraid.
Look at almost any industry in the Australian market and you’ll see that regulations have restricted competition. Things may not have reached monopoly status, but there are many instances of duopolies. And even where there is the appearance of ‘competition’ the reality is that red tape prevents real competition from happening.
Yesterday we used the ACCC decision to stop Coles from offering a 40 cent discount as an example of the consumer getting stitched up again.
Many Money Morning readers wrote in to say the ACCC was right. That if Coles had been allowed to offer this deal it could help to put local traders out of business.
However, the argument is flawed. Because it isn’t Coles those readers should be attacking, it’s the regulations that have allowed Coles and Woolworths to reach this level of market dominance.
Coles and Woolworths have merely used the regulations to their advantage.
The result of this decision is that consumers will be charged more and Coles will make a larger profit. That’s not a win for the consumer.
A real win would be if red tape for businesses was reduced that made it easier for new businesses to enter the market. So that rather than having some dopey bureaucrat deciding what is a fair price and what isn’t, the market (you and I) would decide.
Thanks to the ACCCs decision and all the mad regulations that have gone before it, companies such as Coles and Woolworths are effectively told it’s against the law for them to discount prices.
But does that help their competitors. Probably not. The two of them have already achieved close to a duopoly status. They can use their sheer size for their own benefit. The ACCC like other bureaucracies will always provide more benefits to an incumbent business than to a new competitor.
And as for the ACCC creating monopolies, again that’s obvious, of course it does. OK, it doesn’t do it alone, it needs the support of government and the big industry players to help out. But a ‘competition’ regulator will always preside over the reduction of competition.
It’s impossible for it to be any other way.
But what about the minimum wage? That’s a subject no-one wants to talk about. If anyone dares argue against a minimum wage then you’re accused of being a Scrooge or a slavery-lover.
The other side is that the minimum wage guarantees unemployment.
The main beneficiaries of a minimum wage are those that already have a job. Although of course, that doesn’t mean they are completely safe from the side effects of minimum wage foolishness.
As the following example shows…
The facts are simple and beyond question. If you’re an employer with a staff budget of $100 per hour, if the minimum wage per person is $10 per hour then you can employ ten people.
Simple.
But if the minimum wage increases to $11 per hour then that business can only afford to employ nine people.
As I say, it’s simple, we aren’t talking complex economic theory or applied mathematics, we’re talking basic Year 3 maths.
As I’ve written about with other business costs such as higher interest rates and superannuation, the employer has three options, they either reduce their profit, they raise prices to the consumer or… they cut jobs.
Or maybe they do a mixture of the three. Maybe they cut out a member of staff but give the remaining staff an extra 10 cents above the minimum wage as an incentive to increase productivity.
Those nine staff are probably pretty happy at getting a pay rise, but it’s at the expense of their ex-colleague who’s been retrenched.
What does the retrenched worker do? Well, he has to hope that there’s a business willing to pay him $11 per hour because that’s the minimum wage. Even though he may be happy to accept $10.50 or even his old wage of $10 per hour.
But no, that would be against the law. Because it’s not only illegal for an employer to offer a job below the minimum wage but it’s against the law for someone to offer to work for below the minimum wage.
How does that make any sense?
“Ah,” minimum wage fans say, “If there wasn’t a minimum wage it would lead to slavery.”
Is that a fair argument? The argument is that if there was no minimum wage then wages would be continually driven down to zero, or at least barely to subsistence levels.
Again, while this sounds like a genuine concern, the argument is nothing short of nonsense.
In a free market where employers and employees play on a level playing field there would be no need for a minimum wage. Employers and employees would be subject to contracts of employment agreed upon between the two parties.
Employers quite naturally would try to secure the best worker for the least pay, while the worker would try to secure the easiest job for the most pay.
Naturally there’s nothing wrong with that. Who wants to do a tough job for little money? No-one. We’d all rather put in the least possible effort for the most amount of money.
With no minimum wage, pay rates would be set according to what employers and employees are willing to agree to. If an employer doesn’t pay enough then he/she will either end up with no workers or he/she will only attract the least productive workers.
A competing business on the other hand that is prepared to pay more would attract a more productive worker. That’s because the employer would know he is paying more and therefore would expect more from his workers than those who work for the less generous firm.
And think about it this way. In a free society there can’t be slavery. Why would you work for someone if they aren’t paying you? You wouldn’t.
So the whole “no minimum wage equals slavery” argument is ridiculous and irrelevant.
Abolition of the minimum wage and adherence to a genuine free market is the only way to move towards more employment. The minimum wages guarantees that Australia will have unemployment forever.
But what about that mythical free market I mentioned above. “That’s not possible” I hear many people say.
Well it is…
Let me introduce you to it. It’s a perfect example of buyers and sellers meeting. It’s where there is no monopoly or duopoly interests (although arguably, this particular market is a form of monopoly in itself). And it’s where the consumer gets to pay as much or as little for a product as they choose.
Of course, if they don’t pay enough then they may not get the product. And if the seller demands too much then they may not sell it. That’s why it’s a market.
If you haven’t guessed already, I’m talking about Ebay.
While it isn’t a perfect market, it is as close as we are likely to get to a free market. But it’s exactly how other markets should operate. Merchants from across Australia and across the world can sell their products online to millions of people.
They can choose to sell their products for as much as they like. However, if they have too high a price other merchants recognize the opportunity to undercut them and still make a profit.
Buyers can bid prices as high as they want. If they want to pay top dollar they can. If you don’t want to pay top dollar you don’t have to. You can wait. And chances are if you look hard enough you’ll find something for a price you’re willing to pay.
Funnily enough, we haven’t heard too many stories about monopolies or price gouging or uncompetitive discounts or cartel activity on Ebay.
Why is that? Is it because the government and ACCC have legislated to ensure a perfectly competitive market place? Or is it really because there is very little involvement from regulators and government which has allowed the free market to work exactly as it is supposed to work?
We think, actually we know the latter is the case.
Other Stuff on the Markets
The S&P/ASX200 closed at 4,846.20 up by 53 points, while overnight on Wall Street the Dow Jones Industrial Average was down by 50 points to 10,041.48. In Europe the FTSE100 finished at 5,243.40, down by 0.72% and the CAC40 dipped at 0.54%.
The price of gold in Australian dollars is trading at $1,143.55, while in US Dollars it is trading at $1,056.64. And the price of silver in Aussie dollars is $18.97 and in US Dollars it is $17.52.
The Aussie dollar gained a little versus the US dollar, trading at USD$0.9231, and improved against the Japanese Yen JPY83.87.
Crude oil closed overnight at USD$79.12
For the biggest movers on the market yesterday click here…
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Kris as you can tell, people aren’t too keen on getting rid of competition law. You are fighting an uphill battle on this one mate, because consumers know that companies “rip them off” (I will get to what this means). Consumers are therefore generally supportive of regulatory measures that they think can lessen the chances of them being ripped off.
Now firstly, you have conflated your argument from yesterday with a fresh argument. You did this by saying the following:
“Many Money Morning readers wrote in to say the ACCC was right. That if Coles had been allowed to offer this deal it could help to put local traders out of business. However, the argument is flawed. Because it isn’t Coles those readers should be attacking, it’s the regulations that have allowed Coles and Woolworths to reach this level of market dominance.”
These are two separate issues:
1) ACCC decision to stop Coles from 40c/litre discount
2) Red tape (ACCC and Government) that has allowed the Coles/WOW duopoly to form in grocery market
Now I was arguing about 1), but you wanted to lump it with 2), to strengthen your argument. We are not discussing 2), so I will focus on 1).
Yes you can argue the whole regime is flawed, but you highlighted a specific regulatory decision, so therefore you should debate the matter on these grounds.
Your claim for 1) seems to be that the market is so dynamic, so innovative and so responsive, that any pricing strategy employed by a large market player should be allowed. You seem to think the market will react, prices will adjust and consumers will be better off in the long run, always. Is this correct?
Now I understand the logic and I think in some cases you may be right, but to generally claim that competition law is hurting competition, you lose credibility.
Your blind faith in the markets fails to acknowledge that markets can be imperfect for long, long periods of time. A firm that has supply over a vital resource can sell well above the cost of that good. So consumers, naturally, can feel “ripped off”.
I presume you think that the price is the price and its not the Government’s job to presume to know the ‘right price’. But consumers do feel like they know the right price. They might not be able to explain how to calculate it and sometimes they are wildly mistaken, but generally consumers do not want the sellers to be making exorbitant profit margins. This is what being “ripped off” means.
The free market is there to benefit consumers and producers have to work within the rules established by the Government. The Government is elected by the people (consumers) and if the people think that the industry is exploiting their control over a resource, then the people will force the Government to regulate the industry. Producers will react and adapt, but the ones that can’t play by the rules are going to be punished. The free market is therefore regulated by Democracy. You do believe in Democracy, I presume.
Your gripe therefore doesn’t seem to be with competition law, it seems to be with the fact that people/consumers don’t see the beauty in the unhindered operation of free markets. They are worries that the market wont sort it out and that some rich smuck that has control over a vital input, is using it to make bucket loads of money. Do you expect people to rely on some invisable hand for eternity?
I agree that most of the time the market determined outcome will be better, but there are examples where this never occurs and consumers lose out. Becuase consumers vote, you will always have to grapple with competition law.
Puntpal – you have been worshipping false gods.
PF – I worship nobody. Who were my supposed fake gods?
PuntPal – Come on you think these guys are clever, but they have feet of clay.
I agree with Kris that it would be best if the government just kept their hands out of the market altogether. But I also agree with Peter Fraser in comment #1 that it’s also not practical in our case.
I think the role of a competition regulator is dubious when it comes to well established industries with large players, such as retail with Coles & Woolies. I can understand that there is a limited case for government to intervene in ‘failed’ markets. But the problem is who decides which markets have failed and what constitutes a working market. Sometimes there is no demand because no-one wants that product or service at the price/conditions offered. Alternatively, the product or service can’t be supplied at a price that people want to pay. If that is the case, I object to a government stepping in with a ‘fix’. I would imagine that the ‘fix’ would invariably favour the seller over the buyer. It’s very difficult to get it right, so interference should be avoided as much as possible.
The minimum wage is also an emotive issue. Taking a completely hands-off approach may be economically effecient, but developed countries rather like the idea of ‘civilised improvements’ that come about through increased regulation. I guess a lack of minimum wage regulations (or at least regulations that are there but not enforced) would have us looking something like Bangladesh. Sure some employers do the right thing and pay wages that attract good people and therefore act to better their businesses. But just as many complete screw their workers. And then there are workers who due to their skills (or lack thereof) are not in a strong enough bargaining position to negotiate a reasonable wage for themselves. Hence the role of unions.
I certainly don’t like to think of myself as a socialist, but I think so-called Western democracies like to think of themselves as civilised. And that means extending a helping hand to those who can’t always help themselves. In general, I think most people are happy to wear a bit of economic inefficiency to achieve that aim.
Ralph – you’re a socialist!
;p
Sandra!
You’re gonna make me cry! How about a free marketeer with some compassion?
Money Morning, Oct.21: “If you’re an employer with a staff budget of $100 per hour, if the minimum wage per person is $10 per hour then you can employ ten people. Simple. But if the minimum wage increases to $11 per hour then that business can only afford to employ nine people.”
Poppycock. If you’re a typical employer, your staff budget is not fixed but comes out of the productivity of your staff, and you will keep hiring staff as long as the marginal product exceeds the marginal cost. Moreover, the marginal cost is not simply the minimum wage, but is increased by marginal on-costs (e.g. State payroll tax and that Federal payroll tax dressed up as a superannuation guarantee) and reduced by marginal subsidies.
Money Morning adds: “we’re talking basic Year 3 maths.” Yep, and that’s the problem: we haven’t progressed to basic microeconomics.
The marginal cost of hiring can be reduced not only by reducing the minimum wage, but also by reducing the tax wedge between the marginal cost of labour to the employer and the marginal benefit to the employee. The latter option doesn’t require any loss of public revenue (although Money Morning wouldn’t mind if it did). Neither does it require any reduction in public revenue from wages (although that would be a good idea). It only requires a reduction in the MARGINAL taxation of wages (see e.g. “Employment tax credits: the ‘marginal’ approach to full employment“).
Whether you concentrate on tax reform or minimum wages depends on whether you’re interested in full employment or class warfare.
Sorry – the link doesn’t work. Let’s try plain text: http://www.onlineopinion.com.au/view.asp?article=8685 .
“In a free market where employers and employees play on a level playing field there would be no need for a minimum wage. ”
Sadly there are very few markets where there is a truly level playing field. Certain segments of society are more vulnerable to unfair and unscrupulous employers- and we as a society have decided to deal with this by having a minimum wage. We could go in the other direction and protect vulnerable employers by imposing a maximum wage as well…..
One of the things I value about Australia (as opposed to my country of birth, the USA) is the willingness to imagine that one day those protections might be needed for ourselves and our family, which means there is support for them. In the US, even those who would benefit the most from public healthcare, or minimum wages above the poverty level, can be persuaded to vote against them on the theory that one day they will be wealthy and not want to pay for those things.
There are things the government does that can be seen by many as foolish and counterproductive ( the $900 stimulus the “boost” for firs home owners) but there is no opportunity to disagree in a meaningful way. There are also things that the government does that the general population has made clear they want to have stay, and have a societal purpose. minimum wage and competition oversight fall into the second category.
There is not, and never has been, a successful, completely free market. No one truly wants one. Businesses don’t, they want their monopoly. Workers don’t, they want to have the upper hand and consumers don’t because they suspect they will lose.
And Ebay- it is a monopoly itself- and one that isn’t doing so well anymore
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