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25 years on from privatisation, why the invisible hand needs restraining

June 15, 2013

New report: Addressing the poverty premium

Back in the 1980s, with the privatisation of our major utilities, we were being sold not just shares but also the promise of better-functioning basic services. Stimulated by competition, we’d be getting them at lower prices, with better services levels, responsive to our needs.

Today, I suspect few of us are bowled over by the services we get from competitive private markets in the delivery of essentials such as electricity, the internet and basic financial products. Private suppliers are frustrating in a different way than their public predecessors. Their responsiveness seems to be to what gives them commercial advantage, not necessarily what customers need or want – especially when that’s  simple  access to gas, electricity, the internet or banking, on stable terms that don’t require you to be an expert, “active” consumer to avoid being ripped off.

It seems to me that these markets create various cross-subsidies that are not always socially desirable. One kind benefits people with the resources and expertise to shop around effectively, at the expense of those who do not. While some losers will be time-poor busy professionals with ample means, the complexity of products means that others will be people with lower skills or limited access to the internet. In addition, disadvantaged groups often have less financial flexibility, giving them fewer options for example to take up direct debit deals which can be highly discounted.

Another kind of cross-subsidy can effectively be from low users to high users, with the latter getting better value for money. For example, pay as you go mobile phone charges have become more expensive, as companies try to lure us all into contracts with hundreds of tempting minutes, to ensure that we pay a minimum amount. Interestingly, my calculations suggest that even though the average unit cost of communications has gone down over the long term, the minimum amount that a household has to spend to be connected has gone up. We’re having to spend a lot more overall keeping in touch than when a landline was our only requirement, now that we also require broadband and a mobile for each family member.

My new report on the “poverty premium” shows why all this matters a lot for people on low incomes: spending on basic services with variable prices comprises a large chunk of a family budget – at least as much as food. This calculation includes borrowing as a basic cost faced bv households, to finance larger household goods, and looks at the greater amounts people on lower income spend on credit. Higher spending of this type magnifies the effects of income poverty.

The good news is that regulators in the energy and credit markets are thinking in new ways about how to protect consumers in these industries. In both cases they’re looking at how they might supervise the design of products to ensure they are fair – rather than simply requiring  product terms to be “transparent”, and intervening only when complaints are made. Maybe we’re finally escaping from that 1980s delusion that market forces will always provide the most effective protection – and realising that Adam Smith’s “invisible hand” sometimes needs to be firmly guided  – especially when providing people with the essentials of life. 


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