Sunday, 29 April 2012

Ethical Question of Economic Competition

I read an article by Jonathan Wolff in an applied ethics textbook. There, he tackles the 'seldom asked' question of the ethical difficulties created by having economic competition, the hallmark of free market capitalism. Why is it OK to intentionally inflict economic harm by opening a shop next to your rival’s, but not OK to steal?

Wolff ponders the idea that when we act as consumers, we might be exploiting producers. We only want them to compete to provide the side effect of lower prices and better quality. It’s a competition we want no one to win (as monopolies affect our own interests).

He rejects the defence that producers are voluntarily taking part in the competition; exploitation often includes some sort of willingness. He doesn’t think that it’s a defence to say producers also act as consumers. He only sees a defence in the idea that we, as consumers, don’t sufficiently disregard producer interests to make us exploiters. The welfare state and bankruptcy laws support those producers (business owners and employees) who fail or flounder.

He then goes on to say that we, as consumers, do exploit those producers who, for reasons of their own domestic situation (read: live in developing countries), don’t have sufficient safety nets. Those are the people whose lives we sufficiently disregard as we pursue our own ends.

I hope Wolff is right when he says the questions he tackles are usually unasked, otherwise I have a bit more reading to do before I can comment on his article. But here are my thoughts.

First, is that the ethical side to capitalism is not always ignored. Wolff recognises that socialists and Marxists do consider it, and they consider it well – see G.A. Cohen for an exemplary piece about how fear and jealousy are the driving capitalist emotions.  Second, I don’t think he deals well enough with the idea that the exploited employees and the exploiting consumers are the same people. How can a society all be exploiting itself? Maybe this criticism works less well in his true exploitation scenario. My third criticism would be that Wolff starts off thinking about the ethics of competition generally, a big and interesting topic, and moves to say that we exploit third world producers, a point that, however well made here, has been made many times before. My fourth criticism is that he’s a tiny bit wrong when he says we don’t want anyone to win the competition. Current competition law (in theory and practice) has no problem with monopolies per se. This leads to the fifth problem. Competition rules are to try to benefit society, and he doesn’t  really engage on what is the better option. Are minimum wages really enough to salve our consciences? There is still, on his account, a degree of exploitation. My sixth (and a very minor) issue is that he never makes explicit why stealing is worse than competition (there are no or few beneficial side effects of letting people steal).

But more importantly, I think, is where he places the blame. If me buying a shirt from Fyodor Ltd is part of a global system of capitalism whereby Mr. Droog in another country loses out, why am I to blame? If Mr Droog is Fyodor’s employee, then surely the primary exploiter is the one who is paying under-the-odds for labour so as to make profit for themselves. And if Mr. Droog works for Dostoyevsky Ltd, and they go bust in some other country because I bought a shirt from their rivals, are there not sufficient other actors to blame before going to consumers? Directors at Dostoyevsky for failing to take the best decisions? Directors at Fyodor for gaining an unfair advantage by undercutting or being anti-competitive? The civilians and politicians of the other country for failing to provide the safety net? The international political community for failing to find globally applicable minimum standards that are enforced?

I think the problem is his focus on exploitation. He explicitly recognises that it is the competitors who do harm to each either, and we encourage it. But it is that encouragement that is exploitation as he defines it. The initial harm doesn’t fit the exploitation definition that he’s discussing.

Business ethics are a tricky field, and it’s not a bad thing for consumers to remember the knock-on impact of their choices. But to focus on them, and forgetting the other actors, seems to me to be focussing on the addicts, not the dealers. 

(Discussion of 'Economic Competition: Should We Care about the Losers?', Wolff, in Hugh LaFolette (ed) Ethics in Practice, 3rd Ed.)

Tuesday, 10 April 2012

Scrapping 'Dishonesty' from the Cartel Offence

Section 188 Enterprise Act 2002 provided that:
An individual is guilty of an offence if he dishonestly agrees with one or more other persons to make or implement, or to cause to be made or implemented, [cartel] arrangements [between at least two companies].
I wrote last time about the different situations in the US and UK. I mentioned that the UK wasn’t a great criminal enforcer of competition law infringements, and that this ‘cartel offence’ wasn’t doing a great job.
Well, maybe that’s about to change. The Government has decided that it wants to scrap the ‘dishonesty’ element of the offence. This might be good news in that:
  •   We might see more prosecutions.
  •   Those prosecutions are more likely to be successful.
  •  As such, the offence will have more ‘bite’ and thus be a better deterrent.

This is because the dishonesty test is one that comes from case law (R v Ghosh[1]), and it is arguably a bit tricky to apply to ‘complex’ commercial agreements. Ghosh needs the defendant (D) to fall below the normal standard of honesty (objective test) and to know he was being dishonest by that standard (subjective test). A jury member knows what he thinks of theft, he might not know how dishonest he considers cartelling. And this will affect both whether he believes cartelling is dishonest by reasonable standards, and also whether he thinks D would know that.
On the other hand, we could be worried, in a couple of different ways:
  • Serious offences should always have a ‘mens rea’ element – D needs to have a sufficiently guilty mind. This isn’t a parking ticket, this is five years in jail – D needs to be wilfully bad.
  • The reason we weren’t prosecuting often or successfully enough was because the body responsible (the OFT, soon to be merged with the CC) lacked expertise and experience.

These skirt the fundamental issue. It is the more woolly issue of to what extent we should criminalise anti-competitive conduct. Getting rid of dishonesty widens the offence, both in law and in fact. Some conduct that previously wasn’t criminal now would be. Some conduct that was criminal but too difficult to prove will be easier to prove. I don’t know where the limits should be. But I am a little worried that the global trend to tougher enforcement means that we’re making tougher and tougher laws without fully exploring how well the original law could ‘work’ at limiting anti-competitive conduct whilst still being careful that we don't over-penalise those who engage in that conduct.
 Further, in this particular case, we’ve bypassed the need to explain to the public, or persuade a jury, that price fixing is dishonest. As a result, the cartel offence makes scant effort at earning its place in the public conception of what is ‘wrong’. Another time, I’ll write a comment on public attitudes to anti-competitive practices. It will be tightly related to this piece.

[1] [1982] EWCA Crim 2

Wednesday, 4 April 2012

Competition Law and Criminal Enforcement (on either side of the Atlantic)

Competition law is one of the major reasons why this blog is called Business Behaving Badly, and why I try to focus on naughtiness, harms and wrongdoing rather than corporate (or white collar) crime. In Europe, competition law is largely a regulatory scheme based on fines, and with a few individual carved-out exceptions, is not ‘criminal’ law. However, in other jurisdictions, notably the US, criminal enforcement of competition law is far more widespread.
This reminds us that crime is ‘socially constructed’; that we have to think very carefully about what conduct we want to consider as criminal; and the fine distinctions between systems that can yield different results.
Here, we’ll simply look at the competition/criminal law interface either side of the Pond, and I’ll speculate as to why those differences exist.
The US
The US is the granddaddy of competition law – the law that regulates practices contrary to the market competition that is fundamental to a capitalist system[1].
According to the US Department of Justice (DOJ), cartelists are ‘generally prosecuted criminally’, whereas those who, in EU parlance, abuse a dominant position are generally dealt with in civil law. Criminal prosecutions can lead to corporate fines of up to $100million (or twice-the-gross-gain resulting from the violation), individual fines up to $10million, and up to 10 years in jail (I often wonder what the world would look like with a base-12 counting system).
In the US in 2010, the average jail term for these offences was 30months, and a total of 26,046 days were spent in federal jails for antitrust violations, equivalent to 71 people spending their whole year in jail. Fines reached $555million, down from $1billion the year before.
The UK and the EU
In Europe, criminal law plays a far smaller role. The European Commission is the major competition law enforcer, and it does not impose criminal sanctions. Instead, it administers fines (or sometimes behavioural and structural orders) to companies that violate the relevant provisions.
Member states still have a role to play, and indeed, the national competition authorities (NCAs) increasingly work better with each other and with the Commission. And some states have criminal sanctions available.
The UK has one – the Cartel Offence. It originally provided that an individual who dishonestly agrees to engage in hard-core cartel activity (price fixing, bid rigging, etc) could face five years in prison, and/or an unlimited fine. So far, there has only been one successful prosecution, in R v Whittle (Peter) [2008] EWCA Crim 2560, and in that case, all three defendants admitted guilt. In fact, the case is more interesting in looking at difficulties where actors violate competition laws of different countries. In Whittle, the three defendants had been arrested in the US, and had made plea bargains there. The dishonesty element is being scrapped, which we’ll talk about next time.
Why the Differences?
So why are the Americans keener on criminalisation? I will suggest four reasons, all quirks of history. No doubt other reasons could be found.
  1. The US got their first. The DOJ says, criminalisation is the best deterrent to cartelists. The global trend in enforcement is to states using ever tougher deterrent. It is unsurprising that the first big economy to deal with competition law got to the fiercer deterrents first.
  2. The EU. The EU is the prime actor in European competition law, but it doesn’t have competence to create and enforce criminal law. This stems from the EU’s history as an economic union, and so certain issues of political sovereignty have not been ceded. Criminal law is one of the most sensitive. Instead, various countries have begun their own piecemeal processes; but they have not been the prominent enforcers in the past, and there remains concern about how varying offences can co-exist in the EU – both as to consistency and the problem of double (or multiple) jeopardy.
  3. Criminalising culture. The US is more predisposed to locking people up. It has, by far and away, the highest rate of incarceration in the world. Land of the Brave, maybe, but a lot of US ‘homes’ aren’t all that fussed with ‘freedom’. That may or may not be a good thing.
  4. The US has more private enforcement – my Uni notes say that in the US, 90% of competition cases are not brought by the regulators, versus about 15% in the EU. This must affect the balance of enforcement, and maybe pushes the state away from adding fines to damages, and instead encourages penal enforcement.

[1] That is sweeping. The economics underneath competition law is complicated, and some argue competition law is contrary to the guiding hand of a true free market. Less extreme positions still challenge some competition law rules, which, it can be and is argued, actually chill or prevent competition and could harm consumers. In a quiet moment, I'll try and summarise competition law on here.