jueves, 1 de junio de 2006

Competition: the secret weapon that keeps progress going.

Vía Times Online (UK)

Competition: the secret weapon that keeps progress going
Companies do not want competition, but it is vital if we are to progress, writes Irwin Stelzer

JACQUES CHIRAC and the French hate it. The Germans can’t decide. The Spanish once liked it a lot, but are now being a bit more standoffish. The Italians have too many other things on their minds to even think about it. Gordon Brown is a long-time lover, or says he is, and the European Commission’s Neelie Kroes is a big fan. These are the varied attitudes towards the American economic model and its emphasis on market competition.

That model has produced steady economic growth, low unemployment and stable prices in America — no small achievement in a world in which technology and globalisation have accelerated the rate of economic change. One reason the economy has been able to grow so rapidly without triggering inflation is that productivity has risen at a record pace, in part because American policy favours competition over cartelisation, free trade over protectionism. If you doubt that, compare the growth of productivity in an America willing to live with what the great economist Joseph Schumpeter called “the perennial gale of creative destruction”, and France, where students and workers dream of secure, lifetime employment.

That contrast is no accident. It reflects the difference between a competitive and a cloistered economy. In the first, firms are allowed to die when faced with challengers that offer consumers better products at lower prices. In the second, the thrust of policy is to preserve businesses threatened with extinction by takeover or by harder-working, more efficient rivals.

In short, it reflects the difference between an America that decided in the 19th century to keep its economy open and competitive by refusing to tolerate monopolistic bullying by the likes of John Rockefeller’s Standard Oil, “malefactors of great wealth”, as Teddy Roosevelt called them, and a France that has always seen it as proper for the state to protect incumbents — save for a king, queen and some priests.

The effect of competition policy on a nation’s economic performance is one reason that Kroes, head of the European Commission’s competition enforcement unit, is attempting to crack down on dominant firms that use their muscle, rather than mere efficiency, to stifle competition. She is circulating a discussion paper that aims to strengthen the EU’s competition regime.

Kroes can count on the support of Britain, which, thanks to Gordon Brown, has put in place a vigorous competition policy. At Brown’s insistence, and over the opposition of dirigistes in the cabinet and business executives who prefer an easy life, British competition policy now includes the criminalisation of cartel behaviour. Even more important, the chancellor insisted that first-class enforcers be appointed to run the Office of Fair Trading — first, the brilliant Oxford economist John Vickers and then the tough-minded team of chairman Philip Collins and chief executive John Fingleton.

Kroes will need all the support that Brown can give her, not only because many of her European masters are unenthusiastic about making their economies more open to newcomers, domestic or foreign. She has to face the unfortunate fact that American policymakers seem to be having some doubts about the efficacy of America’s long-standing opposition to illegal behaviour by dominant firms.

The Bush administration has launched an effort to persuade antitrust officials in the EU to be nice to Microsoft, and forgive it its sins, or at least not penalise the company for them.

Bill Gates and Co have been ordered by the EU to surrender the illicit portion of Microsoft’s monopoly position, and pay a £320m fine. Enter the US government, which has launched a veritable blitz on Microsoft’s behalf. It has communicated its “substantial concern” at Microsoft’s treatment to European trust buster Kroes; it has had its embassies in all 25 EU countries notify those countries that Washington is on Microsoft’s side in its efforts to wriggle out from under adverse findings by the European competition authorities — no trivial matter, since these countries must ratify any decision by the antitrust authorities to fine Microsoft.

It is not known whether C Boyden Gray, the new American ambassador to the EU and a lobbyist for Microsoft when it was battling the US Justice Department, participated in the decision to launch this campaign, or is helping to implement it.

Meanwhile, back in Washington, the Federal Trade Commission and the antitrust division of the Justice Department have announced a series of hearings to examine whether existing restrictions on firms with dominant market positions should be relaxed. Why such hearings are necessary when an independent commission has just completed its own review and is preparing its report is unclear. And it is puzzling that a free-market orientated government is willing to risk weakening the competitive forces that do away with direct government regulation, often a cumbersome and not very successful process.

Competition forces firms to provide consumers with reasonable prices and acceptable quality: the invisible hand makes the long arm of the regulatory authorities unnecessary. Eliminate competition, and the regulators take over, setting up expensive procedures to help them guess what the market would have produced if competition existed.

The history of regulation in the telephone, electric, gas and airline industries should have believers in free markets, and opponents of government meddling, lined up to save other industries from a similar fate. Brown may have a tendency to micromanage the economy, but he knows that without effective competition to set prices in most markets, even he would be daunted by the task of running the private sector of the complicated British economy.

Besides, like American supporters of vigorous antitrust enforcement, Brown is keenly aware that by preventing dominant companies from creating barriers to the entry of newcomers, competition policy helps to preserve social mobility. If incumbent firms are left free to engage in predatory or exclusionary tactics, or to conspire to throw their combined weight at any new competitor, the new entrepreneurs who spring up to challenge the establishment, and on whom Brown is counting to create the jobs of the future, will never amount to much of an economic force. Google was invented by two kids in a dorm and could have been strangled at birth by Microsoft if the government’s antitrust suit had not inhibited Gates and his colleagues.

Most important of all, we are entering an era in which the wealth of nations will depend on their ability to innovate, to discover better ways of doing things, and new things to do. If we know anything about innovation, we know that we cannot rely exclusively on the laboratories and research operations of existing firms to provide all the drive an economy needs if it is to move forward.

Schumpeter’s “gale of creative destruction” is good news for innovators and bad news for incumbents. Progress destroys the value of existing assets, and replaces those values with new ones, as wireless communication is threatening the value of wires in the ground by creating an increasingly attractive alternative means of communicating, and low-fare airlines are forcing incumbent carriers to raise their games.

Dominant firms know this, which is why they try to lever that dominance into control of other parts of the industry, or, in the case of software, force equipment manufacturers to buy their monopoly product to the exclusion of products developed by emerging competitors.

Good competition policy does not allow that. It does not allow mergers that substantially lessen competition. It does not allow dominant firms to freeze out competitors by offering unjustifiable discounts or threating to stop supplies to companies that buy a competitor’s products. But competition policy most definitely allows firms to grow just as big as their initiative and efficiency will carry them. Yes: we want firms to become dominant if they have the proverbial better mousetrap; but we don’t want to let them use that dominant position to control the market for cheese, which other firms can provide more efficiently.

If you doubt the importance of competition and flexible, open markets in increasing the wealth of nations, look again at the upper chart. Or consider the lower one.

Rigidity, protection, failure to promote competition — all impose heavy costs on those least able to bear them. Keep that in mind when small retailers want to limit the competitive reach of supermarkets, established airlines want to prevent newcomers from gaining access to airport gates and slots, dominant firms force their customers to eschew the offerings of smaller rivals, and businessmen and dirigiste cabinet ministers whinge that the chancellor and the OFT are pursuing pro-competitive policies that upset the business community.

Carried to its extreme, protection of incumbents can produce what Edward Luttwak, an adviser at the Centre for Strategic & International Studies, describes as the experience of the old Soviet Union: “In the absence of market competition, old and inefficient firms continued merrily along instead of releasing resources for those newer and more efficient ... Creative destruction is the true secret of capitalism that the KGB never discovered.”

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