Saturday, June 25, 2005

Competition expands markets

The Australian Federal Treasurer, Peter Costello, correctly used one of Adam Smith's statements to great effect last week, as reported by Katherine Murphy in The Australian.

He was talking about the activities of lobbyists around the Australian parliament building:

"Adam Smith famously said in The Wealth of Nations people of the same trade seldom meet together even for merriment and diversion, but rhe conversation ends in a conspiracy against the public or in some contrivance to raise prices" and in consequence Costello said: "Everytime I see a lobbyst walking the hall of Parliament House I think of that quote".

Excellent advice.

The particular issue exercising the Treasurer's mind is the future of QANTAS, the airline. The issue has divided the Government and its backbench members. Some want to revert to the traditional Australian preference for protection (so does QANTAS). Others prefer competition.

Those who favour protectionist controls, quotas and regulation believe in the fallacy that demand for a product or service is a fixed pie and that competition will mean fewer pickings for each airline. So, if Singapore Airlines is allowed to compete with QANTAS on the Australia-US route then inevitably QANTAS will be the loser.

Those in favour of competition believe that new traffic will be generated by new forms of service, competitive pricing and customer oriented services. State protected monopolies have no incentives to focus on customers, but every incentive to focus on themselves as producers. This is so well established it barely requires additional evidence.

What the Australia USA route needs is more competition, not the dreadful duopoly of two airlines. Katherine Murphy mentions that Virgin is interested in the same route. Now that really would be something. Having flown all three airlines, my money would be on Virgin driving up standards. (it would certainly match the high qualities of Singapore Airlines).

However, Australia is prone to throwing regulatory bodies into the way of change and competition. And it has a thing about "foreign ownership" too. I hope Peter Costello can take the "heat" that falls upon anyone opposing domestic monopolies and protectionists, a phenomenon also commented upon by Adam Smith.

In the case of MPs in Smith's day who opposed monopolies, he said:

"neither the most acknowledged probity, nor the highest rank, nor the greatest publick services can protect him from the most infamous abuse and distraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists." ("Wealth of Nations": Book IV.ii.43)

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