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Government and industrial efficiency

Widespread dissatisfaction with the rate of economic growth has meant that governments have paid increasing attention to the performance of British industry. As far as the private sector is concerned, policies to improve industrial efficiency are mainly confined to financial inducements and exhortation. The emphasis has been on investment (the installation of new capital equipment) and research. Attempts to stimulate investment in private industry have taken the form of investment grants (the government contributes directly to the cost) and various tax concessions on investment expenditures.

Economic growth demands large expenditures on research and development, but this involves great risks, especially in the development stage. The development of the industrial process may cost ten or twenty times as much as the original research. Developing an airliner, for example, costs more than 1 billion and the same is true of its engine. These costs will take more than 12 years to recover. It is most unlikely that this type of research and development would be undertaken in the UK without state subsidies.

The government also operates its own research and development institutions, and several government agencies exist to offer advice and help to firms introducing new technology (i.e. for innovation). In recent years the government has provided financial assistance towards the costs of developments in micro-electronics, office automation, comput-eraided design, robots and aerospace. Financial support for innovation is available for all firms, both large and small.

It is believed that the UK's economic growth and ability to compete in world markets depends very much on the existence of a skilled and adaptable labour force. Even when unemployment was very high during the 1980s, several sectors of industry were reporting serious shortages of particular types of skilled labour. This was one of several indications that the UK's training effort was lagging behind those of some other industrialised countries. The government has responded to this problem by greatly extending the facilities for training. There are now several government-financed schemes to train young people, to train those who are employed and who wish to change their jobs, and to train redundant and unemployed workers. Most of these schemes are operated by the Manpower Services Commission. In addition, schemes have been prepared which will introduce more work-related education and training into schools.

The government takes an interest in industrial performance in many other ways. It has played a leading role in the development of management education and took the initiative in setting up the British Institute of Management. It provides a wide range of services to assist exporters most notably with the Export Credits Guarantee Department which, by providing a kind of insurance against the possibility of default by overseas buyers, reduces the risks attached to trading overseas.

Many authorities hold the view that the relatively slow growth of productivity in British industry was at least partly due to constant changes in government economic policy which, by creating uncertainty, made firms very cautious about embarking on expensive longrun modernisation programmes. In the 1960s the government attempted to deal with this problem by setting up some machinery to assist with long-term planning. It established the National Economic Development Council with members drawn from the trade unions, the employers, and the government. Its task is to propose measures which would remove obstacles to economic growth and improve Britain's economic performance. Its proposals aim to provide some basis for the government's economic policies, and the setting out of its findings, it is hoped, will encourage industry to frame appropriate development plans. The NEDC indicates desirable policies; it has no executive powers.

 

The public interest

The great problem with this approach to monopoly is that it requires some indicators of what is meant by 'the public interest'. The people who have to administer the policy have to come to some decision on whether the trading practices they find in the business world are operating in the public interest or against it. Unfortunately the legislation has not given any very clear guide lines. The 1948 Act laid down that in judging whether a monopoly was operating contrary to the public interest the investigators should consider all matters which appear in the particular circumstances relevant and among other things the need to achieve the production, treatment and distribution by the most efficient and economical means of goods of such types and in such quantities as will best meet the requirements of home and overseas markets.

The 'other things' to be taken into account included, the organisation of industry and trade in such a way that their efficiency is progressively increased and new enterprise encouraged; the fullest use and best distribution of men, materials, and industrial capacity in the UK;- the development of technical improvements, and the expansion of existing markets and the opening up of new markets.

These guide lines have been described by one former member of the Monopolies Commission as a string of platitudes, much too wide and general to be of any great assistance to those who had to reach some conclusion on a particular case. One problem of course is that some of these objectives might, in particular circumstances, be incompatible.

For example, a measure which leads to greater efficiency may lead to greatly increased local unemployment. It is interesting to note that the 1948 Act did not specifically mention 'competition' among the public interest criteria. The 1973 Act provides more guidance in the fonn of a new definition of the public interest. This include such phrases as 'the desirability of maintaining and promoting effective competition', the need for 'promoting through competition the reduction of costs and the development of new techniques and new products, and... facilitating the entry of new competitors into existing markets'. The emphasis is now much more on competition as a means of stimulating efficiency, but the 1973 Act clearly lays down that 'all matters which appear relevant' must be considered, and it makes particular mention of the need to maintain a balanced distribution of industry and employment in the UK. The aim of promoting competition, therefore, will not be the overriding consideration. An increase in monopoly power (e.g. by merger) which, it is believed, would improve employment prospects in, say, a development area would most probably be judged to be in the public interest.

If the authorities are going to control monopoly, they have to define it in such a way that a monopoly situation can be clearly identified. The most widely used indicator of monopoly power is that of the market share. In the 1948 Act monopoly was defined as a situation in which at least one third of the supply of a commodity is accounted for by one firm or group of firms under unified control. The 1973 legislation has reduced the market share which is considered to be prima facie evidence of monopoly to one quarter.

The market share test is probably the most workable measurement for administrative purposes since it is fairly easily measured. It does not follow that, in itself, it is a good guide to monopoly power. A firm with one quarter of the total market may have great market power (where the rest of the market is shared by numerous small firms), or it may face very keen competition (where the rest of the market is supplied by four or five firms of almost equal size).

Another test of monopoly power is the level of profits. It is usually assumed that the existence of profit levels substantially above those being eared in similar industries (or in industry generally) is evidence of the exercise of monopoly power. But, again, this is not conclusive evidence. Such profits may be due to greater efficiency as compared with competitors, and the Monopolies Commission has shown that the existence of monopoly power may reveal itself in low profits due to the inefficiency of companies sheltered from competition.

Monopoly might also be identified by the nature and extent of the barriers to entry. The existence of such barriers would certainly be a factor in deciding whether monopoly conditions existed, but it might be very difficult to measure their effectiveness.

 

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