What will make banks care about their customers?

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Yesterday I gave evidence to the Parliamentary Commission on Banking Standards, on competition (lack of) in retail banking – alongside two distinguished former competition regulators, John Fingleton and Clare Spottiswoode. The transcript will be published later. My message was that banks are mistaken when they say they are competing vigorously with each other – just look at the cut-throat rates on offer in the ‘best buy’ comparison tables. My experience on the Competition Commission for eight years taught me that big firms always regard their competition as intense but they can’t distinguish their intense oligopolistic rivalry from a competitive market. That intense – often loss-leading – rivalry over a narrow range of goods for a small group of customers is cross-subsidised by high margins on other extensive areas of business. (Indeed, you can tell what the banks think of the small group of mobile customers they are competing over from the fact that the industry term for them is “rate tarts”.)

Most bank customers are inert. Switching banks is a huge hassle. If it goes wrong, the consequences are an even bigger hassle, causing enormous potential disruption to bill payments and so on. The only alternatives available will be just as poor in terms of service quality or rates offered. The lack of switching and the cross-subsidies between different groups of customers are clear signs that competition in retail (and SME) banking in the UK is inadequate.

Understandably, there has been a lot of focus since the crisis on tougher regulation. But regulation alone will not improve things for customers. If you rely on regulation to improve service standards, banks will focus on their regulators. It will take competition to get them to focus on their customers. Indeed, more and more regulation will make it harder to get new competitors into the market, and the regulators are not sufficiently focused on using competition as a tool to achieve their aim of improving consumer outcomes – after all, regulators regulate. Competition works indirectly but it is a powerful force for serving consumers, and in particular for innovating and anticipating customer needs.

There is a good example in the Competition Commission’s decision to break up the BAA airport monopoly. The counter-argument was that there are economies of scale, and it’s a complex business, with break-up disruptive and uncertain. But who would have predicted that after the divestment, Gatwick Airport proved able to clear the unexpected snow off its runways quickly and efficiently in December 2010, while Heathrow, still in the hands of the old monopolist, was paralyzed for days?

I’ve not quite finished Anat Admati’s and Martin Hellwig’s [amazon_link id=”0691156840″ target=”_blank” ]The Bankers’ New Clothes[/amazon_link]. It’s absolutely excellent at skewering the bogus claims the banking lobby makes about the consequences of increasing equity requirements and limiting bonuses. It addresses regulatory issues.

What it doesn’t do is consider the competition question. Indeed, in all I’ve read about the banks in recent years, competition issues have been overlooked. There is a misperception that “too much” competition contributed to the crisis, I think, but that’s to make the same mistake of confusing a competitive market with oligopolistic feuding in some areas. The empirical evidence is mixed but leans firmly towards indicating that more competitive banking systems are more stable – the banks tend to be smaller so the “too big to fail” problem is less acute, and smaller banks are simpler so regulators (and their boards) can monitor them more easily.

The Parliamentary Commission on Banking Standards was, though, clearly well aware of the importance of increasing competition and new entry. More power to their elbow.

[amazon_image id=”0691156840″ link=”true” target=”_blank” size=”medium” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It[/amazon_image]

Naked bankers?

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I started reading the proofs of a book due out in March, [amazon_link id=”0691156840″ target=”_blank” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It [/amazon_link] by Anat Admati and Martin Hellwig. The title refers of course to the Hans Christian Anderson fairy tale, The Emperor’s New Clothes, in which the emperor is revealed to be naked by a seemingly naive question.

Just a few pages in to the introduction, I can tell I’m going to love it. Sample quotation:

“A major reason for the success of bank lobbying is that banking has a certain mystique. … Many of the claims made by leading bankers and banking experts actually have as much substance as the emperor’s new clothes in Andersen’s fairy story. But most people do not challenge these claims, and the claims have an impact on policy.”

And:

“Politicians seem to be taken in by the lobbying. For all the outrage that expressed about the crisis, they have done little to address the issues involved.”

Not just politicians – I refer to the Financial Times (print edition) headline earlier this week on the weakened liquidity rules accepted by the BIS: “Years of lobbying pay off for banks” (watered down subsequently online to ‘Basel bends on liquidity rules’).

More on the naked bankers when I review the book in due course.

[amazon_image id=”0691156840″ link=”true” target=”_blank” size=”medium” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It[/amazon_image]

What’s the internet? Start here

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It’s more than 16 years since I started writing about the economic and social effects of digital technologies, and some technical knowledge has stuck as well. It was always obvious to me that the internet was going to have – eventually – a revolutionary impact on society. But I do remember discussing my first or second book with a Very Eminent Economist who said that the internet was nothing more than a reduction in transactions costs, and as good economic models already included those, we didn’t need to bother thinking any further about it.

Anyway, despite knowing some things about matters digital, I’ve just devoured John Naughton’s [amazon_link id=”0857384252″ target=”_blank” ]What You Really Need to Know About the Internet: From Gutenberg to Zuckerberg[/amazon_link]. Although it covered some ground that I found familiar, there was plenty of new insight and information too, all written in his characteristically clear style. So for example, if you’re not sure about the difference between the World Wide Web and the Internet (and that’s lots of people, no shame in it), you’ll learn loads from this book.

It gives a terrific overview of a wide range of the business, economic and social trends resulting from the internet and its uses (including the Web). There is both historical context and reflection about future trends. The chapter on the flaws of the copyright regime is excellent, a really useful short introduction to the main issues.

One quibble I would have is that John concludes that economics has little to offer as a perspective on the digital world because it is the science of allocating scarce resources. Apart from the fact that time and attention are the new scarce resources, economics has a lot to offer in thinking about the structure of network markets. (My Very Eminent Economist of the 1990s will have changed his mind by now.) Having said that, I agree with the book’s contention that ecosystem thinking is particularly fruitful.

There were also some lovely details. I enjoyed the quotation from George Miller of ‘The Magical Number Seven Plus or Minus Two’ fame: “My problem is that I have been persecuted by an integer.” And I loved it that the reference to Douglas Adams’ [amazon_link id=”0434003484″ target=”_blank” ]The Hitchhiker’s Guide to the Galaxy[/amazon_link] was footnote 42. What else?

[amazon_image id=”0857384252″ link=”true” target=”_blank” size=”medium” ]From Gutenberg to Zuckerberg: What You Really Need to Know About the Internet[/amazon_image]

The vital role of the informal economy

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I’ve just read Robert Neuwirth’s 2011 book [amazon_link id=”0307279987″ target=”_blank” ]The Stealth of Nations: The Global Rise of the Informal Economy[/amazon_link]. It’s an enjoyable read about the two years the author spent visiting street market vendors and smugglers in Lagos, Guangzhou, Saõ Paolo and Ciudad del Este. His aim is to make us appreciate the entrepreneurialism of the informal economy, which he labels ‘System D’ (rather than use Keith Hart’s original terminology), in order to distinguish it from the informal economy of organised crime with its dealing in illegal drugs, arms and exploited women.

If you like learning about how different markets work (and what true economist doesn’t?), then you’ll find lots to interest you in the book. There were also some terrific facts – for example that the poet Arthur Rimbaud gave up literature to become a trader of this and that in North Africa (p70); or that Nietzsche had written about the role of trust in the economy (p181):

“The fact of credit, of the whole of world trade, of the means of transport – in all of this a tremendous, mild trust in man finds expression.”

However, the strength of detailed reporting is paired with a weakness of analysis. It doesn’t help that Neuwirth has an odd idea about economics and economists. “Economists hate System D,” he claims (p130). He describes the people working in a Lagos street market and writes: “In economic terms, these multiple jobs are wasteful and redundant.” The language introduces value judgements that economists do not typically make, although politicians might.

An economist might point out that System D is low productivity. Or that reducing frictions (such as high import tariffs, or excessive regulations for registering and running a business, for example) would change the cost-benefit calculation for entrepreneurs and bring more of them into the formal economy. Although they (or their customers or workers) would pay more tax, they would have more scope to grow and their employees would have to formal benefits such as protection in employment legislation. But these observations don’t warrant the description given in the book.

I do agree with Neuwirth that the informal economy should be more widely studied and appreciated. The IMF/Schneider figures on the informal economy do indicate that it has been growing in size relative to GDP over time, and the current economic crisis is bound to be accelerating its growth. As the book points out, those people who do argue for stamping out what they would see as unacceptable intellectual property piracy or tax evasion are wrong to assume that the money that goes into the informal market would all be switched to the formal economy. Shoppers who will buy a £20 ‘Louis Vuitton’ handbag are not lost customers for the real £1600 Louis Vuitton version. (Indeed, there are Chinese factories making both the ‘real’ and the ‘fake versions of some items, in different shifts.) Not everybody who will buy a product will buy it with the extra 20% sales tax.

One other point the book makes, that I’d have liked to see developed further, is the capacity of the informal economy to regulate itself collectively. There’s a brief discussion of a dispute-resolution court set up by a market traders’ association in one of the Lagos markets. This example of collective self-regulation in the absence of an effective state is fascinating.

So overall, there are some frustrating aspects of this book, but it’s a lively read about an important and fascinating subject.

[amazon_image id=”0307279987″ link=”true” target=”_blank” size=”medium” ]Stealth of Nations: The Global Rise of the Informal Economy[/amazon_image]

More forthcoming economics books in 2013

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A few days ago I highlighted some forthcoming titles from major university presses. Here are some tempting forthcoming books from other publishers. Again, this is certainly not exhaustive and if any publishers or authors want to notify me of books they have coming out in either half of this year, I’ll gladly do another post on what’s in the offing. The selection also reflects my own interests, of course.

From WW Norton I picked out:

[amazon_link id=”0393081109″ target=”_blank” ]Full Upright and Locked Position: Not-So-Comfortable Truths about Air Travel Today[/amazon_link] By Mark Gerchick. “Sit back, relax and enjoy the flight”, pilots intone but the reality of commercial air travel—a business obsessed with efficiency and the bottom line—has little to do with soaring serenely above the clouds.”
[amazon_image id=”0393081109″ link=”true” target=”_blank” size=”medium” ]Full Upright and Locked Position: Not-So-Comfortable Truths About Air Travel Today[/amazon_image]
[amazon_link id=”0393073777″ target=”_blank” ]The Bonobo and the Atheist: In Search of Humanism Among the Primates[/amazon_link] By Frans de Waal – a new book from the leading primatologist. He has written very thoughtfully before about what lessons primatology holds for how we should understand human decisions.
[amazon_image id=”0393073777″ link=”true” target=”_blank” size=”medium” ]The Bonobo and the Atheist: In Search of Humanism Among the Primates[/amazon_image]
[amazon_link id=”0030818524″ target=”_blank” ]The Second Arab Awakening: Revolution, Democracy, and the Islamist Challenge from Tunis to Damascus[/amazon_link] By Adeed Dawisha – on a subject I certainly know too little about.
Wiley has some promising political economy titles coming out. I read in draft
[amazon_link id=”1444338285″ target=”_blank” ]Banking Across Boundaries: Placing Finance in Capitalism[/amazon_link] By Brett Christophers, which is a fascinating history of the parallel evolution of the banking industry both in geography and in our conception of what matters in the economy. Real food for thought, post-crisis.
[amazon_image id=”1444338285″ link=”true” target=”_blank” size=”medium” ]Banking Across Boundaries: Placing Finance in Capitalism (Antipode Book Series)[/amazon_image]
[amazon_link id=”0745661637″ target=”_blank” ]Africa Emerges: Consummate Challenges, Abundant Opportunities[/amazon_link] by Robert Rotberg looks promising and catches the current mood about Africa.
[amazon_image id=”0745661637″ link=”true” target=”_blank” size=”medium” ]Africa Emerges: Consummate Challenges, Abundant Opportunities[/amazon_image]
[amazon_link id=”0745661696″ target=”_blank” ]Politics in the Age of Austerity[/amazon_link] by Wolfgang Streeck and Armin Schafer – the blurb says:
“With the need to consolidate budgets and to accommodate financial markets, the responsiveness of governments to voters declines. However, democracy depends on choice. Citizens must be able to influence the course of government through elections and if a change in government cannot translate into different policies, democracy is incapacitated.”

From Penguin, a handful that look interesting. I like tales of companies or industries, so this caught my eye. [amazon_link id=”1846145686″ target=”_blank” ]Buttoned up[/amazon_link], Fantastic Man: “Gert Jonkers and Jop van Bennekom are the creators of Fantastic Man, a singular modern men’s style journal. Here they use the history of the button-down shirt to tell the story of contemporary London’s cutting-edge fashion, design and people.”

John Cassidy has a new edition out of [amazon_link id=”0141036516″ target=”_blank” ]How Markets Fail: The Logic of Economic Calamities[/amazon_link].

[amazon_link id=”0670919411″ target=”_blank” ]Start It Up: Why Running Your Own Business is Easier Than You Think [/amazon_link]by Luke Johnson, a self-explanatory offer from the famous entrepreneur and FT columnist.

[amazon_link id=”1844882772″ target=”_blank” ]The Untouchables The people who helped wreck Ireland – and are still running the show[/amazon_link] by Shane Ross, also self-explanatory.

[amazon_image id=”1844882772″ link=”true” target=”_blank” size=”medium” ]The Untouchables: The people who helped wreck Ireland – and are still running the show[/amazon_image]

And for everyone who liked [amazon_link id=”1612191819″ target=”_blank” ]Debt: The First 5000 Years [/amazon_link](a fascinating although flawed tome), [amazon_link id=”1846146631″ target=”_blank” ]The Democracy Project: A History, a Crisis, a Movement [/amazon_link]David Graeber. They obviously can’t settle on the title as the blurb says: “Future Possible not only tells the story of Occupy Wall Street’s origins but, more importantly, explains how the movement works and how readers can replicate its method in their own communities.”

[amazon_image id=”1846146631″ link=”true” target=”_blank” size=”medium” ]The Democracy Project: A History, a Crisis, a Movement[/amazon_image]

Profile Books doesn’t seem to have any upcoming economics or business books, but I liked the look of [amazon_link id=”1846684781″ target=”_blank” ]Underground, Overground: A Passengers History of the Tube [/amazon_link] by Andrew Martin – the 150th aniversary of London Underground is almost on us – and [amazon_link id=”1846684021″ target=”_blank” ]Invisible Romans[/amazon_link] by Robert C Knapp, about the lives of working Romans.

[amazon_image id=”1846684781″ link=”true” target=”_blank” size=”medium” ]Underground, Overground: A Passenger’s History of the Tube[/amazon_image]

Finally, one of my Twitter correspondents, Dr Dave O’Brien has this out from Routledge later in the year: [amazon_link id=”0415817595″ target=”_blank” ]Cultural Policy: Management, Value and Modernity in the Creative Industries.[/amazon_link]