Ed Miliband's promise to introduce more competition into banking has faced some intelligent criticism. But it also raises some fundamental tradeoffs we face in thinking about states and markets. These are:
1. Shareholder value vs a vibrant market. Jonathan points out that the fall in bank shares after Miliband's speech is just what we'd expect to see as investors anticipate lower monopoly profits. This highlights the fact that a truly healthy market is not good for shareholders, simply because it means that profits are low and risky. If you want to see a well-functioning market, look at the fruit and veg traders on Leicester market. None of them goes home in a Bentley. For this reason, any attempt to introduce genuine competition will be resisted by fierce lobbying.
2. Anti-statism vs pro-markets. Miliband's call for state action to increase competition isn't as paradoxical as it seems. It's consistent with Polanyi's claim that the emergence of a market economy requires all sorts of state interventions. Insofar as this is the case, supporters of a free market economy cannot be anti-statist.
Of course, this view has its critics. It's possible that, in the long-run, bank competition will be increased by market developments such as alternative currencies and P2P lending. And Eamonn Butler claims that deregulation would increase bank competition.
I agree, up to a point; red tape often favours incumbents and deters entry. But I suspect that even in a dereglated industry, entry into banking would be difficult simply because of high capital requirements and the need for goodwill and brand power to induce depositors to trust the new entrant.
3. Competition vs stability. Joseph Schumpeter noted that competition "incessantly revolutionizes the economic structure" and unleashes a "perennial gale of creative destruction". A truly competitive banking system would be an unstable one, with some banks collapsing. This is not a bug, but a feature; productivity increases precisely because (pdf) firms exit the industry.
This, though, poses the question: do we really have the systems in place that would allow majorish high street lenders to go bust without seriously adverse effects upon lending and confidence? Does Miliband really want to test this?
This point generalizes. Schumpeter was, of course, not the first to note the instability of a competitive economy.94 years earlier, some guys wrote:
Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned.
Which brings me to a fourth trade-off - that between a market economy and old-style conservatism. The Oakeshottian conservative, who is averse (pdf) to change, should see much to fear in a truly dynamic market economy. There are - as Polanyi recognized - strong reasons why most advanced societies have retreated from free market economics.