Thinkers and politicians have been debating the limits and failures of markets since the beginning of capitalism. However, the question of which spheres of society are appropriate for free markets is increasingly pertinent, given the current economic and political context. Since the financial crisis, there has been greater awareness of the fallibility of the neo-liberal model, leading to curiosity towards, if not embrace of alternatives. Politically, the Red Tory and Blue Labour movements have revealed major currents of anti-market thinking within both major UK parties.
Against this backdrop, the work of social psychologists like Barry Schwartz, Sheena Iyengar and Dan Gilbert is deserving of close attention. Among the various problems with free markets that they identify are three observations:
Economic interactions have a fundamentally distinctive character, and require us to relate to people in a different way. The relationship between buyer and seller is a fundamentally antagonistic one: the salesman is trying to squeeze as much money out of their customers as possible, while the buyer is trying to get away with paying as little as possible for their goods. This creates an atmosphere of mistrust and suspicion – can you believe the advice from the shop attendant, or be sure that they aren’t trying to cheat you? This, in turn, is likely to colour our attitudes and behaviour in non-economic contexts.
The very act of consumer choice can be overwhelming and reduce welfare. To be confronted by the wide array of options in many modern markets is disconcerting, and often unpleasant. It demands time and energy to establish all your options, to research them and to reach a decision. Often, this can seem more effort than it is worth, and lead to paralysis, or decisions being postponed. I go into a shop looking to buy a new laptop and discover there are twenty different brands that meet my specifications. So I have to go home, look them up on the internet and read all the reviews. By the time I get round to going to the shop again, I’ve had to struggle for two extra weeks with my old laptop, and spent much longer than I wanted to worrying about it
- Moreover, once the choice is made, the options foregone are likely to continue to haunt us. Every time our purchase falls short of perfection, we are likely to be reminded of the fact that there might be a better option out there, which we have given up.
What are we supposed to do with these arguments? The clear implication is that liberalisation has gone too far, and that some markets ought to be restricted. But which ones? How much choice is enough?
These are big questions, and broad-brush answers will inevitably ignore the vast diversity of different markets. The best way forward is to take the social psychologists’ criticisms as a general set of considerations against free markets, and to take different markets in turn to see if the freedom they involve is worth the psychological cost.
I think that the British retail markets for gas and electricity exemplify many of the problems identified by Schwartz et al, and where the anti-market theory can produce some concrete policy prescriptions.Since the late 1990s, the government has sought to encourage a competitive market for consumer gas and electricity, with the idea that the fear of losing customers to nimbler rivals will incentivise energy companies to keep prices down for everybody.
The question of whether this project has been successful in reducing energy costs is a difficult one to answer. Prices fell after the privatisation of energy companies, but this coincided with a period of global excesses in energy supplies. It has also been suggested that initial savings came as a result of ‘asset sweating’, resulting in under-investment, and storing up higher energy bills for the future. UK consumers pay less for their energy bills than the rest of Europe, but again this comparison may be misleading. Different tax systems make like-for-like comparison extremely difficult. Britain’s offshore gas reserves have also been a factor in keeping energy prices lower.1
All this means is that it is an extremely technical question, beyond my knowledge or expertise, whether a liberalised, competitive market means cheaper energy. However, the evidence is ambiguous enough to suggest that the benefits may not be that great. What I want to suggest is that there are other considerations that should be taken into account when we decide how to structure our energy market besides the question of how to make energy as cheap as possible. A competitive energy market may have costs which outweigh the minor, perhaps non-existent benefits it brings.
The current market in energy exemplifies the flaws identified by the psychologists above. In the first place, it is a market riven by deep mistrust. The vast majority of energy consumers believe that energy companies are keeping prices unnecessarily high, or are deliberately complicating the information they give to consumers. Now, there are probably few markets where consumers genuinely believe that companies have their best interests at heart. However, in the energy market there is an unusual sense that suppliers are trying to exploit the ignorance of their customers.
On the second point above, switching energy company is among the more unpleasant consumer processes facing people in the UK. The options available are notoriously complex, and difficult to compare. Even if the government and the regulator Ofgem succeed in their attempts to simplify this system, this will not mean that it will be obvious to each household which is the best supplier and tariff for them. There is still the problem that a proper comparison of energy tariffs requires consumers to accurately predict how much energy they are likely to use in the future. Moreover, choices between fixed and variable tariffs involve an element of gambling on how much prices will rise or fall by. Inevitably, then, people refuse to participate in the market – having to take higher energy prices because they cannot face the hassle and time investment of switching. An Ofgem report classified 80-90% of consumers as ‘passive’ or ‘disengaged’ from the market.
The British energy market typifies the third great vice of modern markets, too – it is a choice that never goes away. Given the volatility of the energy market, with deals constantly hovering in and out of view, consumers are increasingly expected to be thinking about their energy provider all the time. This is not an unpleasant decision that you can grit your teeth and get through once every few years. No, for an energy consumer to properly participate in the market, they need to be ever-vigilant – for example, by signing up the ‘Cheap energy club’, which exhorts them to “Constantly monitor your tariff”.
Perhaps these psychological ill effects are outweighed by the price benefits of the current system. Or perhaps there are ways of reforming the market to reduce or improve the choices faced. However, given expressed public support for re-nationalisation, these issues seem worthy of discussion.
1 For more of an overview of the benefits and failures of privatisation see this Which? report, or this article by James Meek