In a new book James Kwak describes the curse of “economism”. This is the tendency for people to engage in public debates about economic policy brandishing nothing more than a supply and demand curve and a conviction that all government interventions in markets are inevitably destructive.
Purveyors of economism treat all markets as simple and identical. They disregard context and assume perfect information from participants. They reason as if they have read only the early chapters of an introductory economics textbook and that they never grasped that the models described in those chapters are useful abstractions, not descriptions of the real world.
There’s been a lot of economism in the debate about the Conservative proposal for price caps on certain residential energy tariffs (just as there was when Labour under Ed Miliband promised an overall price freeze two years ago). Fearful outcomes apparently range from a collapse of investment in new supply to a Venezuelan-style social collapse.
The first challenge to the simplicities of economism is detail: an analysis of the characteristics of the market in question. Around 70 per cent of UK households, despite much prompting from ministers and advertising from switching websites, are not getting the message that they could save money by changing suppliers when their fixed-term contracts come to an end.
Now this could be because they enjoy paying over the odds for their energy, which seems unlikely. It could be because they love their existing supplier too much to ever think about changing, which again seems somewhat implausible. Or, more likely, it could be because they are baffled by the artificial complexity of the tariff contracts offered and feel too intimidated and confused by the concept of a market in domestic energy to switch.
Of course, a third of people do switch supplier, leading to complaints that capping the standard variable tariffs of the non-switchers will undermine this functioning element of the market. Yet this brings to mind the polite curate who told his host that his boiled egg was “good in parts”. It’s difficult to argue that a market is functioning only in parts.
If a majority of customers don’t switch, that undermines the pressure on providers to provide a good service to anyone. It’s no coincidence that the heart sinks at the thought of having to ring one of the major providers to question a bill – and that the “big six” come out notably badly on customer satisfaction surveys.
Another solvent for economism is some history. Electricity was once provided, in the majority of areas, by local authorities as a kind of public good. There followed a national monopoly after the Second World War.
And controls were only last month re-imposed by the regulator on charges on pre-payment metres (which are a common feature of the homes of the poorest). Intervention and tight regulation have been the norm in the residential energy sector for most of its history.
It is now seventeen years since the residential energy supply market was liberalised. But most people stubbornly refuse to be liberated. One can take the view that further effort is required to nudge them into the switching habit.
Or another, reasonable, conclusion is that domestic energy may simply never be the fast-moving and competitive market that was once envisaged and that some form of limited price control is now justified to put a stop to the egregious gouging of vulnerable customers by complacent private incumbents.
In his 1953 poem The Solution Bertolt Brecht satirically lamented that the people had forfeited the confidence of the government and that the time had come to dissolve the people and elect another. We should beware the temptation to blame customers for letting down the residential energy market.