Tuesday, 22 March 2011

Market failure?

In the past, I’ve sometimes heard the view expressed that, if a market economy functions efficiently, there should be no need for consumer pressure groups like CAMRA. There’s an example here in a comment on one of my Opening Times columns.

Tim Worstall makes an interesting post addressing this point, arguing that, far from being a sign of market failure, the presence of pressure groups is an integral part of the efficient functioning of markets:

And thus, far from CAMRA (or any other such voluntary organisation or banding together) being something which should be unnecessary in a market economy, they are exactly the manner in which a market economy works: voluntary, not directed, cooperation to achieve the desired goal(s). That spontaneous order coming from the application of the innate human abilities to use agency and cooperation to achieve a collective desire.
In the late 1960s and early 1970s, business was much more in the grip of a corporatist viewpoint and took the view that standardisation and economies of scale were desirable and, to a large extent, customers should be “sold” what the company was willing to make. In this situation it made sense to band together in a pressure group to demonstrate to suppliers that there was a demand for a particular product*.

Nowadays, in the age of niche marketing, mass customisation and the “long tail”, things are very different. Today it could be said to a much greater extent that the presence or absence of real ale in a pub accurately reflects the market demand and is not an imposition from on high. Some pubs have it; others don’t, and it should be fairly straightforward to establish whether it brings any benefit to trade.

Edit: there's another post on this subject on the Left Outside blog entitled The Campaign for Real Ale; Capitalist or Not?

* in fact, I get the impression that, while CAMRA undoubtedly brought things together in the early 1970s, there were already clear signs of consumer dissatisfaction with keg beers in the marketplace.

8 comments:

  1. It was fun reading all that today. Tim really grinds lefty gears, but then he would seeing as he's difficult to counter on market economics, whereas lefties completely misunderstand markets.

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  2. PC, I agree with your nice simple view. In this case, what appears correct at first blush is in fact correct.

    @ DP, I'm not convinced that TW is a real fan of free markets at all. He opposes Customs Duties (correctly) but thinks that VAT is an OK tax (when actually, it's exactly the same as Customs Duties but several times worse).

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  3. DP: there's nothing like a good political generalisation to establish the tone of the thread. There are plenty of right-wing free marketeers who don't seem to understand the market, many of them in government now.

    The principle of supply and demand is so often not used in the pub industry that I sometimes wonder whether PubCos are run by anybody with business experience at all. Several pubs around here have had popular beers removed by the pub owner because it didn't fit with their "vision" for the pub, even though in one case it was the best seller. One pub lost its real ale altogether - the licensee told me he was selling more than enough to keep it on, but they wanted to "reposition" the pub as a pool hall with bottled lagers and alcopops (an experiment which lasted under a year).

    In what way is this supply and demand? And in what alternate universe does such stupidity negate the need for CAMRA and its ilk? And who is to say that a lot of British businesses aren't run in a similarly moronic fashion? I.e. don't give the punters what they want - tell them what they want.

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  4. The point is made on the Left Outside thread that a lot of conventional economic analysis (of both "sides") doesn't sufficiently go into how innovation interplays with markets.

    Surely any business operator has a right to try something new and see if it works. If it does, good, if it doesn't, it's his own risk. Just like your pool hall example.

    And the key point is that CAMRA effectively IS part of the operation of the market, not something that stands outside it.

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  5. Curmudgeon: your 2nd paragraph - I think you've missed my point. Yes, the company has the right to change things, but I was actually questioning their business competence when they continue to score such own goals: a frequent occurrence in the pub trade. I could quote more examples.

    Your 3rd paragraph - obviously some truth in that, but then it's also true that every individual beer drinker is part of the market too. I'm not sure that this a particularly useful insight.

    Instead of silly swipes at lefties (referring to PC's comment), or right wingers for that matter, it would more fruitful to wonder why in a supposedly free market economy, those who run capitalist companies can be so often useless at understanding what supplying what the customer wants actually means.

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  6. "there's nothing like a good political generalisation to establish the tone of the thread."

    Indeed. Well bitten. (They're not very good at the concept of property rights either) ;)

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  7. PC: "well bitten"? Master of the snappy putdown, but incapable of coherent argument or answering my points.

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  8. Hmm, the last comment, while directed at "PC", seems to refer more to "DP".

    I entirely accept your point that some pubs seem spectacularly badly run, but on the other hand it may be that the market for proper traditional pubs serving cask beer isn't actually any greater than that served at present, so converting pubs to that kind of format rather than wacky jazz bars may not in reality be a recipe for success.

    Having said that, a free market system allows entrepreneurs to test the proposition far better than any alternative.

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