On Miliband: shaping dysfunctional markets is not socialism

Left versus right. Big state versus small state. Unionista versus free-marketeer. Scargill versus Thatcher. New Labour versus Old Labour.

Viewed through this Oxford PPE-lens, Ed Miliband just promised to use the power of the state to intervene in the free market. Indeed it was quite some shock to hear a political leader announce a “freeze” in energy prices. As Iain Martin points out in The Telegraph, the same applies to the promise to seize unused land banks (“use it or lose it”) from house-builders. “Red Ed is back” we are told.

But I think it is probably more helpful to say that Ed Miliband is basically smashing this lens through which a generation of politics and professional political-watchers have seen Britain. This is going to be tough for what Karl Rove once described as “the reality-based community”. The Labour leader is changing the “reality” of what market intervention means.

Housing & energy not free markets

Firstly, a government that responds to a private debt crisis by subsidising mortgages with taxpayers’ money may find it rather difficult to critique departures from the “free market” norm. Unless giving taxpayers money to house-builders is Adam Smith’s invisible hand, but taking money from energy companies is a fiendish form of Trotskyism. (And right now the Treasury through Help to Buy is literally adding to the national debt by transferring borrowed cash to house-builders).

Of much greater importance: housing and energy are not free markets. High house prices should evoke a greater supply of houses which then brings down the price so people can afford them, bringing supply and demand into balance. That would be a free market. The reality is as far from “free” as you can imagine. The housing market in the UK is not a market for houses, it is a market for mortgage credit (more here).

In energy, essentially two or three pipes of gas from Norway and Holland, and ships from Qatar, determine wholesale gas prices. Six companies pretend to compete, but have fairly similar fundamental costs. Lo and behold, you get what looks like a cartel. But I’m not sure there’s much shady coordination of prices. It costs what it costs. Competition is not quite a sham, but it is far less effective than in the decades when a myriad of firms were digging up the North Sea seeking the cheapest supplies of hydrocarbon. Britain is now a price-taker in international markets.

So now we have established that these markets are not free, it is basic public economics that it does not follow that intervention in the remainder of this market is bad. This is a précis of the “theory of the second best” developed by Canadian economist Richard Lipsey and Kelvin Lancaster in 1956.

Rent control

In housing: most economists think that rent control is mad. That is because high rents are a market signal for extra supply. But that signalling process does not work in Britain. Ideally it would. But half a day spent in Hertfordshire back gardens has rather convinced me that it is probably better to presume that rural councils will not allow more homes to be built.

The political economy of this is not just about spoiling views. Homeowners have a vested interest to vote against house-building. Up and down the country, localism has now baked this fundamental inelasticity into the housing market. It’s not going to change. If you think it is, attend any parish council planning meeting. That is why housing completions in England were at a record low in 2012/13.

So with a fixed supply, is rent control still stupid? Possibly. Actually, we don’t know.

Red Ed?

All I do know is that in some supposedly free market nirvanas there are some savage controls and extra stamp duties on landlords etc (more on this tomorrow). But controlling living costs for the great mass of British people through freeing up planning, a spot of compulsion for house-builders, does not sound like Marx or Engels to me.

Do not forget that Barack Obama is still in the White House, partly on the back of the massive intervention of “keeping GM alive”. No doubt many of those crying socialism would have lined up with the bank lobby and the bank chiefs against sensible macroprudential regulation of credit during the calamitous British boom (i.e. when it was actually needed).

So is Ed Miliband bringing back market intervention? It sounds like a stronger state, certainly, but it is not exceptional even in the G7.

Will it work? No idea, depends on the details.

Is it socialism? No. So far it is the deployment of the hand of state to guide the market to achieving a social objective, which in turn could help the economy by improving worker living standards, incentives and hopefully productivity. In fact it sounds a bit like The Big Society. The Conservatives have floated a version of this with mortgage subsidies, Labour are floating controlling energy prices.

It is the new world, and you can see it across the world in the successful emerging economies (and in the conservative parties of Germany, for example). It requires that our politicians are smart and judicious. That is a worry. Let’s hope that they are. I have my doubts.

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