City traders need price controls to keep their drinks bills down

When commentators mythologise about evil capitalists charging unfair prices for their goods, they usually juxtapose them with some (economically) poor unfortunate who is unable to exercise choice and so is obliged to part with more of their hard-earned and scanty resources than is fair.

Outside the exercise of monopoly provision of essential services, there is little truth behind these claims. One must eat and drink, and one must be clothed, sheltered and warm. But one does not need a mobile telephone, so no matter how high the prices of mobile telephony, no purveyor of telephones or air-time can “gouge” the poor consumer: if one does not believe the price worth paying, one simply does not buy.

Nonetheless, the image of the poor consumer is an emotive one (“There but for the Grace of God go I”), and is often used to justify government intervention in pricing. Where natural monopolies obtain, regulators oversee prices, but since time immemorial there have been calls for price controls on goods that are freely traded in the market. Both the last years of the Ancien Regime and early Revolutionary France were rocked by battles over whether food prices should be capped; Britain and America experienced rent control (and wages control) in the middle of the last century.

Misguided though these policies are, food and shelter are at least essentials, and the supposed beneficiaries poor. But wine critics know little of poor people, and have their own constituencies (and their own livers) to worry about. Thus the call by wine critics cited in The Times today for a cap on the mark-up restaurants can charge for wine does leave a rather sour and flat taste in the mouth, lacking any overtones of oak or so much as a hint of summer fruits.

Price controls to protect the rich from being exploited are rather futile. Swillers of 1964 Petrus Pomerol Bordeaux operate in the ultimate luxury market. They are more than capable of determining whether an additional £2,900 a bottle is worth paying for dinner at the Dorchester Grill as opposed to Gordon Ramsay’s establishment down the road.

Fortunately, the call will fall on deaf ears. For one thing, it is too reminiscent of the Conservatives introduction and maintenance of the Corn Laws to protect the incomes of rich landowners. But more significantly, it exposes all the stupidities of price controls in any market.

Good wines have been laid down for a long time. Thus those who bought early benefit from their foresight. The owners of the Dorchester note that one could not buy bottles as cheaply as Mr. Ramsey is now able to sell them. He has made a shrewd investment. If the Dorchester were required to sell at a lower price, they might be unable to make any profit at all, and so would simply not sell the wine. Thus supply would fall. In more immediate products a similar problem exists: if one caps rental prices, fewer houses are made available for rent; if one caps sale prices, fewer are built.

In fact, the whole system is based on the assumption that there is a natural and fair price for a product. There is not, or at least if there is it is the price at which both seller and buyer are satisfied. Every purchase is an example of individuals happily swapping one resource (ultimately their labour) for another, and outside the essentials there is always an element of choice. Prices are dictated by supply and demand. Any attempt to interfere with that – to require that prices be kept lower or higher – will merely reduce either supply or demand. Some of us may choose to buy Fair Trade tea and coffee, but if all tea and coffee were elevated in price to ensure a larger income for farmers, consumers would simply drink less tea and coffee, either undermining the benefits of the elevated price or forcing some farmers our of the industry altogether.

Martin Isark may argue that excessive mark-ups “It discourages experimentation and dampens enthusiasm for trading-up”, but capping the mark-up to “£10 a bottle for most wines”, as Malcolm Gluck suggests, is likely to squeeze the middle out of the market. Restaurants will only keep cheaper wines on which they can make a good profit, and very expensive wines that do not fall foul of the new regulations. Thus trading up will be even more difficult, as a large chasm will open up in the middle that it is not worth restaurants servicing.

Ironically, the city traders who have been blowing record bonuses recently know all this. It is not they that are calling for price controls. They are probably getting their full £2,900 worth of value from the exclusivity that results from being able to pay vastly more than other people for an identical product. No genuinely poor people are suffering here. But perhaps the “relatively poor” – which in this case means wine critics struggling on mere five and six figure salaries – will have to accept that enjoying a 1982 Le Montrachet Bouchard Pere & Fils over dinner is simply not worth the price.

The road-user pricing to serfdom

Gridlock is coming, is both a literal and a figurative sense, and only Douglas Alexander can save us. If that doesn't send a shiver down the spine (or perhaps send you off into peels of laughter), the alternative should cause you to break into a cold sweat.

The petition to “Scrap the planned vehicle tracking and road pricing policy” has now received over 1.4m signatures. It says something of the pace and popularity of this petition that the editorial in today’s Times referred to just 1.3m signatories. Like the proverbial snowball, this is gathering ever more size and momentum as it cascades downhill.

I have explained before that the thinking behind this petition is confused and wrong. At the time I also warned, in passing, that no government could ignore a petition that garnered more than 30m signatures: the majority would have spoken, and to deny it its head would be all but impossible. The question, however, is whether a government can even ignore one with 3m signatures, or (the imminent test) half that. The pressure is clearly great: how often have opponents of the war in Iraq – Liberal Democrats among them – argued that the government should have changed its policy when a million people marched through London on 15 February 2003. But where would such a policy lead us?

If just 3.5 per cent of the voting public – just 2.5 per cent of the population – can divert a democratically elected government from its course, is this a sign of direct democracy in action, or is the government caving into a well motivated and vocal minority. It strikes me as no surprise that millions of people object to this, or indeed any other, government scheme – especially one that involves taxation. Every change has winners and losers, and both winners and losers will be numbered in millions. The question should not be whether the losers bleat most loudly, but whether the overall social benefit is greater than the cost, and (for those of us of a liberal bent) whether the proposal represents an abuse of the minority by the majority. Where road-user pricing is concerned, it is clearly a case that the social benefit outweighs the cost without the minority being unduly coerced. The government (in the form Mr. Alexander) should continue to make the case for road-user pricing and face down the protest.

This move towards “Direct Democracy” is in fact a dangerous trend. There is a good reason why we practice an alternative, “Representative Democracy”. We cannot all be experts in every field; decision-making is a full time business, and few of us have read the parliamentary committee reports, research institute papers and academic studies that underlie much of the decision making of government. Government also needs to be strategic, whereas the will of the majority (an amorphous body, constantly in flux, the make-up of which is constantly changing as it coalesces around new ideas and opinions) is momentary and fickle, precisely because the majority has no permanence.

More sinisterly, it can be anti-democratic. As both public choice theory and the petition about road-user pricing tell us, it is easier for minorities to mobilise than for majorities. Because minorities are smaller, they are easier to pull together, while the benefits of successful lobbying are shared less widely, so for any individual the spread between cost and benefit is closer than for a majority, where the benefits are spread broadly and the costs of mobilising high. This is why single-issues of dubious popularity often capture the media’s attention and bend governments to their will.

But if Direct Democracy lends itself to minorities, it lends itself to populist demagoguery even more. Caesar dominated Rome through plebiscites, a practice that was aped my Mussolini. To this day the German constitution bans federal referenda because they were the tools of Nazism.

And here I can see the real nightmare emerging. If the government backs down in the face of opposition form just a tiny fraction of the polity, it will set a trend that will lead to more than just motoring gridlock. Almost all important government policy is controversial, and all controversial policy will be paralysed by petitions and polls. A situation akin to that in Switzerland, where votes for women were blocked until 1973, or the United States, where differently-constituted majorities simultaneously try to cut taxes and increase public spending, would be the least of our fears. A government unable to legislate has a certain appeal to the libertarians among us, but it would undoubtedly be only the beginning.

As important and popular social and economic reform was stymied, and the government was rendered increasingly unable to respond to real problems, a new popular opinion would rise: that a strong government, a strong leader, was needed to push through change; to break the gridlock. We have seen it before. Popular frustration leads to the election of a strongman who offers to over-rule petty objections and push through progress. At first it is welcome, and the benefits are tangible: Hitler built the autobahns and Mussolini made the trains run on time; no need for road-user pricing when you have slave labour and threaten to shoot the train drivers! The benefits of today are paid for tomorrow, as freedom is lost and democracy forgotten. It is the road to serfdom.

A sportsmanlike attack on the polluter pays principle

The Times is clearly a kind employer that likes to develop its staff, because occasionally it lets specialist columnists loose on its general comments page. So it was on Tuesday when Martin Samuel, “Sports Writer of the Year at both the What the Papers Say awards and the Sports Journalists' Association Awards”, wrote a typically ill-informed piece about waste disposal and the polluter pays principle.

There is a simple logic to his point that he does not ask for his food to be over-packaged or to be inundated with unsolicited mail, and that it is therefore unfair that he should have to pay for unwanted waste. Why it is beyond his wits to return his junk mail to the sender I do not know? If we all sent our junk mail back it would quickly dry up, as the sender would be hit by the cost of disposal and either they or an increasingly-unamused Royal Mail would have to pay for the return postage.

The problem with Mr. Samuel’s basic argument is that he thinks packaging is something that is done to us by supermarkets against our will: “We did not ask for green beans from Zambia to be available 12 months a year, cased in two layers of Cellophane and a black plastic tray.” Perhaps not, but if we did not buy them they wouldn’t be available. The fact that they are suggests there is a market for them; somebody, somewhere is thanking The Lord (or Tesco) that they can make that Green bean tempura they’ve been planning since Boxing Day. The rest of us are thanking whomever we see fit that companies constantly vie to offer us new opportunities – some of which we like and some of which we reject. Mr. Samuel could chose not the buy the green beans if he wanted – just as he could return his unwanted mail – and he would not have to pay to bin the waste, but again that thought seems to have escaped him.

Supermarkets do over-package goods, of course, but they undoubtedly do so for a reason. Having stood next to shoppers who are prepared to spend precious minutes of their lives hunting for the most perfect pepper, I can see why supermarkets want to cushion their wares. More to the point, though, if there is a demand for less packaging, the supermarkets will package less. Next to the GM-free, organic, fair trade, locally produced, low-carb, tuna friendly products will be the low-packaged section. The market, Martin, will provide, but only if there is a demand. Demand will be generated when the polluter pays.

Mr. Samuel has no time for the “Polluter pays” principle, however. The problem, it seems, is that he does not consider himself a polluter – at least, not by choice. Instead, he harks back to a world where wardrobes did not come flat packed but were delivered by men you called “mate”, though more often than not they were actually bought in jumble sales and had a broken leg, because Ikea had yet to drive down the price of new furniture. He longs for local shops (less choice, lower quality) and more people in manufacturing jobs (lower wages, more expensive products).

The polluter pays principle does not “presume that when we wake in the morning we are immediately the bad guys”, but it does recognise that we all have an impact on our environment and that the way to minimise that impact is to make people pay proportionally to the amount of pollution they create. At present, we pay through our taxes so that low-polluting poor people (who buy neither shrink-wrapped green beans nor lots of new furniture) subsidise rich people with houses to furnish and dinner parties to host. Similarly, it would not matter if “Tony Blair’s winter holiday equates approximately to waste pollution from your side of the street for the next 12 months” because Mr. Blair would pay for the pollution from his holiday while your side of the street would pay (individually) for the pollution they created.

Using the price mechanism to ensure that polluters pay for their wastefulness while the conscientious are rewarded with low bills is fair. It is also an effective way of making individuals pressure companies (silently, through a billion tiny purchases). It is a fairly simple but incredibly effective means of solving societies ills in an equitable manner. However, it is economics, which isn’t a subject that I imagine they discuss much over the Sports Desk.