THE distinguished economist Lord (Lionel) Robbins once referred to the market as a “perpetual referendum” in which everyone votes, pound by pound, between countless goods and services produced by unnumbered suppliers around the world, competing in quality and price to satisfy customers. This quest to capture votes and obtain profit leads to improved products, cost-cutting innovation and enhanced productivity and wealth.
In our current malaise, it is easy to forget important trends are changing the world around us. Globalisation is speeding up competitive processes and creating endless new market opportunities. And IT has put this progress on speed, changing the very nature of markets themselves.
Chicago economist professor Luigi Zingales highlights the example of an iPhone app or a social media website. Competition in these markets occurs at the design phase of development. But once there is a clear “best” product, this can capture a whole global market for a period, with high rewards. Look how MySpace dominated social media until Facebook existed, or Facebook itself today. More industries like this are developing – where it costs little to produce more of the product, or the value of the product is enhanced by the number of people using it.
The development of these industries challenges policymakers. The nature of the markets may generate more inequality, because the global rewards to the best innovators are likely to be huge (and education is not sufficient to dampen inequality). Likewise, distinguishing between entrenched monopolies and contestable markets, where businesses have high market concentration through having the best product, is tricky.
A key to our future success is whether we embrace or reject this inevitable change. On the one hand, we can resent that global marketisation offers high rewards to entrepreneurs, and demand punitive taxation to share the proceeds (at the risk these innovators will base their talents elsewhere). We can vote for generalised anti-rich populism, fail to distinguish between rent-seekers and innovators, and label all incumbent firms “big business” which need to be tackled and regulated, despite the barriers to entry this creates. We can pretend the government knows how markets will evolve, and try to pick winners and favour certain sectors.
Or we can take a pro-market approach by breaking down cronyism and rent-seeking, while recognising that a temporary high market share may not be the sign of an uncompetitive market but of providing the best products which enrich our lives. We can encourage established companies to locate here, but be more concerned about why Britain hasn’t produced its own Facebook or Twitter. We can celebrate the success of innovators, accept that inequality might increase, but find rewards for success more tolerable so long as anyone with talent or an idea has the potential to be upwardly-mobile and educational access is broadened. And we can recognise that markets are fast-changing and unpredictable – the exact reason why government can’t pick winners.
Ryan Bourne is head of economic research at the Centre for Policy Studies.