The Grantham Grocer Fallacy
By Robert Phipps
Grantham is a market town in the English county of Lincolnshire. It lies in gentle countryside and is about as English a place as you can find. It was here that the future British Prime Minister, Margaret Thatcher, was born as Margaret Roberts, and here her father, Alfred Roberts, owned a grocery shop.
former Roberts' Grocery Shop in Grantham
Where Margaret Thatcher grew up
Margaret Thatcher embraced a free market ideology, and her view of it can be both illustrated and accounted for by the grocery trade in a place like Grantham, particularly as that trade would have been in the 1930-40 period - when she was growing up and at her most impressionable. By the theory, in a free market the "best" emerges by competition, and the inferior goes to the wall; no political or other outside interference is necessary or desirable. Better grocers in Grantham, selling higher quality food, and/or offering better value for money, would put force inferior grocers to pull their socks up or go out of business.
In this free market theory there is an assumption, usually unspoken, that the customers are all-knowing and all-wise; an assumption that they know who the good and bad grocers are, can recognise good and bad groceries, and know what a fair price should be. Otherwise they would return to a bad grocer, paying too much for bad goods, and keep the bad grocer in business without improvement, contrary to the theory. The customers are therefore supposed to learn who the good and bad grocers are - by word of mouth, from their own personal experience, and perhaps from written reviews.
I have no reason to
doubt that Alfred Roberts was a good grocer and that he and his family,
including the young Margaret, had the satisfaction of seeing the
business thrive though hard work and conscientiousness. For them,
the Free Market worked. Even "standards" were unnecessary; if Mr
Roberts sold mouldy cheese to a customer, that customer would buy
from his rival along the High Street next time. So he made sure his
cheese was fresh. There was no need for "cheese standards".
And not just that one customer. In a place such as Grantham at that time people would have shopped mostly in their own High Street, which would have been within walking distance of where they lived. In walking in those days, neighbours came across each other and talked, so a bad grocer would soon have had a bad reputation all over town.
When Mrs Thatcher [Note 1] became the Prime Minister in 1979 she and her ministers set about applying what I shall call the "Grantham Grocer Principle" (or just "the Principle"), as part of the policies that became known as Thatcherism, to the British economy as a whole. This involved the privatisation of many nationalised industries (including water, electricity and railways) in a fragmented way (to create competition between them), the withdrawal of government support for strategic but ?unprofitable? industries (including steel, coal, vehicle manufacture and scientific research laboratories), the deregulation of other strategic and infrastructure industries such as bus services, and the deprecation of formal standards and requirements. If entities could not rise and keep afloat of their own accord, then according to the Principle it was better that they did not survive at all.
This process was continued indiscriminately by later governments long after Margaret Thatcher's retirement, including by Labour and coalition governments, partly on idealogical grounds but perhaps more importantly because such policies reduced day-to-day government expenditure (both in subsidies and administration) during a period when the promise of tax cuts was found to be the main vote-winner at elections.
However there are a number of reasons why the free market theory does not work in many cases.
In 1930's Grantham, word would soon have spread about a bad grocer. As mentioned, housewives would have chatted with their neighbours on such topics, and they could have peruse the wares and compare the prices of every grocer in Grantham within the space of half an hour. The stock was straightforward - cheese, butter, bread - and the total of such items bought constituted for many the bulk of their expenditure. People could focus on groceries, the occasional clothing or toy purchase, and the even more occasional mega-purchase such as a radio or (for the better-off) a car. Life was simpler and more frugal then.
But today people hardly speak to their neighbours [Note 2]. With car ownership and dispersal of employment [Note 3], their social circle can be 100 miles in radius, so comparing local tradesmen is not a likely topic of conversation. Besides, there are now too many consumer product categories for statistically meaningful advice to be available within their social circle or within the time frame of a conversation. There are TV's, gardening gadgets, PDAs, laptops, mobile phones, cars, garages, cameras, music players, ISP's, and a multitude of other categories that were simply not available or not relevant to most of Grantham's inhabitants in the 1930's. And within each of these categories there are usually a multitude of alternative brands on offer today.
On the other hand we are drowning in an excess of advice on products and services today. On the Internet it is there in overload, but of every conflicting opinion and of doubtful reliability. Some is placed by marketing agents posing as individuals (astro-turfing) and many customer review pages are linked to retailers' websites where adverse reports are often deleted. It is possible to get to the bottom of it, but that takes more time than most people will give or have available,
In 1930's Grantham, if a friend or neighbour said that a particular grocer sold stale bread, there was no reason to doubt it and little room for misunderstanding.
However, with the more complex items and services around us today, or bigger items in the 1930's for that matter, things are not so straightforward. Even when given good advice, with the facts laid before them, people may not take heed or act wisely. They may be well aware that both reliable and unreliable opinions are available aplenty, and are not capable of distinguishing between them, so they distrust them all and take a guess.
still, they may not even react to their own experience -
perhaps because they simply do not demand or expect any better, or
deny their own bad experience as a psychological defence against having wasted their money. The sheer
complexity of many modern hi-tech items goes against many (or even
most) people understanding the points of what they are buying.
|Blue Screen of Death on an Airport Indicator|
An example is the poor quality of the Windows 3.x, 95, 98 and ME operating systems sold by Microsoft during the 1990's. These were apallingly insecure and unstable, and among more technically savvy users their "Blue Screen of Death" was a standing joke; but others convinced themselves that computers behaved that way inevitably, or even denied to themselves that the crashes happened at all. Yet people still returned to buy the next release in the series.
Advertising is vastly more extensive and sophisticated now than they were prior to the late 1950s (when TV advertising began in the UK). It intentionally distorts buyers' decisions and thus value for money and quality are not the arbiters they are assumed to be in the Grantham Grocer Principle.
The impression given by advertising has, for many, become the surrogate for quality. This impression does not even need to be directly "good" - simply the amount of "air time" or column inches gives the effect. Very little modern advertising even raises the subject of quality, and aims only to put the product into the viewer's mind.
Branding is now a very different affair from that up to about the 1980s. Until then, most companies would be proud of how long they had held their brand name (in niche markets like beer some still are), and the brand was a stable indicator of a certain point on the price/quality curve. Today however brand names are bought and sold among companies as an asset, on the basis that some buyers still believe that they necessarily represent a certain quality. The concept of branding is thus a much weaker indicator of quality than previously; if a buyer returns to a certain brand because he has found it satisfactory, the new item migh be made by a company unrelated to that which made the one he bought previously. This is quite unlike the Grantham grocer who was recognisable in premises and in person.
Even if we manage to find advice given in good faith on the choice of a product, it can range from "brilliant" to "absolute rubbish", and everything between. It can be of little use to our trying to make a choice. Poor judgement can be the cause, as already mentioned, but another is that many goods and services, particularly high-tech ones, are multi-faceted, and different people expect and look for different features. This is very different from groceries where the items are simple and their quality tends to be a one-dimensional measure. Milk is simply fresh or sour. Eggs are good or bad; and no egg is good in parts.
One person may dismiss a
particular camera as "absolute rubbish" because it lacks a
red-eye reduction feature, while another describes it as "brilliant"
because it has a litle voice that tells them when flash should be used. A third
user might consider both features irrelevant. It is valid for users
to value particular features, but in giving advice to others they
usually fail to point out what exactly is swaying their opinions, assuming that others have the same priorities as themselves. Such opinions are therefore of little use for the learning process
essential to the Principle.
Even professional reviewers can be guilty. Which? magazine once compared high street bank current accounts, and in the testing it operated all the accounts in exactly the same way. But the banks had different charging rules and in practice the customers would be likely to play to those rules; at least I suspect typical Which? subscribers would. Their recommendations were therefore misleading. Professional reviewers can also be bribed and anyway follow fashions among themselves; in the IT world they are notorious for being favourable to Apple's products for example.
A hundred years ago, in any village there would have been just one set of woodworking tools, the village carpenter's, and one set of metalworking tools, the village blacksmith's. These tools would have been worked hard and inferior ones would have been quickly discarded and replaced by better. Apprentices learned from their masters the tools to buy, or not, and indeed tools gravitated towards a standard and optimised design. Craftsmen tend to have strong and accurate opinions on the quality of the tools of their trade.
But today a high proportion of the population owns such tools. In fact we can consider "tools" in the widest sence to include things like cameras and food mixers. However, most tools owned by amateurs are little used; DIY stores generally have more floor space allotted to selling tools than to the materials they are meant to work on.
the number of tools sold to amateurs swamps the number sold to
professionals, and most amateurs have little idea of the quality
of a tool when they are buying it, and never discover its capacity or otherwise for prolonged hard work.
Thus, some power tool makers seem to have evolved a business model of selling to amateurs attractive looking but inferior and relatively cheap items that barely outlast the guarantee period even if used only moderately, leaving some heavier users very angry [Ref 1] and resolving never buy that brand again. Nevertheless, there is always a steady supply of uninformed first time amateur buyers to sustain the business model. So, makers of inferior tools do not go out of business as they should according to the Grantham Grocer principle, they thrive,
have several tools in regular use that are probably over a hundred years old,
bought second-hand by my grandfather, including garden shears, a spade,
a trowel, hammers and scrapers. I have also had modern versions
that have come and gone as they failed or did not handle as well. A century of free market
evolution and innovation has resulted in a reduction in
quality rather than an increase.
[For an amusing comparison between amateur and professional tools, read the incident of the "Hole Hawg" in Ref 2]
The Thatcherite politicians were strong advocates of "choice", particularly choice for the consumer. They saw it as essential to the workings of the Grantham Grocer Principle, allowing the customers to gravitate to the "best" supplier (or two) so that the inferior ones were driven out of existence.
Of course, to an extent this was self defeating because the "best" supplier could come to dominate the market, thus reducing choice and then perhaps resting on its laurels. A Thatcherite would counter that new suppliers should arise to keep the previous best from ever becoming a monopoly. However this does not always happen if the product is some kind of system to which the customer has become committed, and has involved his investment in some way.
Ignoring for the moment whether the dominant company is the best or not, one example of this is Lego construction toys, where having started with perhaps a modest set of pieces, further purchases will also be of Lego so that the pieces fit together.
The prime example is home and office computer systems where the Microsoft Windows+Office monopoly has held now for about 20 years. It arose because Microsoft struck deals with PC makers to pre-load their machines with Windows [Ref 3], forcing most people to buy it with the PC. The marketing people then fostered the impression that Windows was integral to PCs, for example with the "Designed for Windows" stickers. Most users remained unaware that alternatives to Windows even existed, or thought that an alternative might cause damage, invalidate the guarantee, or was shady if not downright illegal. Yet this situation arose (and persists [Ref 4]) under a supposedly free market.
For the Grantham Grocer Principle to work, people need to be able to recognise "value for money", a favourite phase of Thatcherites. But while the Grantham shopper will be familiar with the going price of cheese and milk, it is not so easy to discover the "fair price" (if there is such a thing) for less familiar things, especially services.
There are many things of which I would not have the faintest idea of
the fair price, nor would most people, I suspect; for example, hiring
a rubbish skip, laying a driveway, re-pointing a chimney stack, and
buying replacement remote control for a TV. I hired a rubbish skip
once and obtained quotes from four companies, all surprisingly high
but similar. Later I learned that these "four" companies
were in fact the same one with several names.
Repairs to cars or other technical items are a particular blind spot, as most people will have no idea even what is wrong with them, let alone the nature of the work and parts needed for the repair.
Though last in my list, this is one of the major failures of the Grantham Grocer Principle. Groceries are typically bought at least once a week, and possibly every day, especially in 1930-1950 Grantham when few people had refrigerators. So if you found a good grocer you could stick with them for the time being because they were not going to change much week by week.
However, if your dealings with a business are on a longer time scale, there are more likely to have been changes in the meantime, so previous experience loses relevance. Advice from others also loses its relevance; if you do not need to have your house re-roofed more than once in your lifetime your neighbour is not likely to need to either.
Businesses which fall into this category are hotels, car dealers, garden machinery vendors, solicitors, and estate agents. Estate agents are the extreme case because most people will not deal with one more often than once in 10 years, and even then it is likely to be a different agent in a different town [Note 4 expands on this].
Even restaurants; I eat out from time-to-time but tend to go around different ones, so I might not return to a particular restaurant for several months. By that time the menu, chef, waiters, owner and even the name can have changed, and the value of my previous personal experience is set to zero.
This article is not meant as an argument against the free market. It is meant to show that expecting the free market always to work as it might among grocers in a small town is a fallacy. Mrs Thatcher never liked or understood large industries, especially technical and heavy industries. Her government started a process of fragmenting and privatising the nationalised industries, trying to make them analogous to a mass of "small grocers" and service providers, supposedly competing with each other.
The result has been to move many of these industries abroad, or into foreign ownership on British soil. Rail freight for example was painstakingly (and at great cost) broken into small segments for privatisation, but these were almost all bought by a single company and re-combined. Now it is mostly owned by the nationalised German Railways (Deutch Bahn) - ironic, as Mrs Thatcher was so pro-British and pro-privatisation.
Some businesses, apparently, are just more efficient when they are larger. Even grocery : today (2012) the Roberts shop in Grantham is a chiropractic clinic and there is an Asda grocery superstore 100 yards away, just before a bridge under the railway she hated so much. [Note 5].
Even the most avid free-marketeer accepts some degree of government regulation - for example there are laws against sabotaging your rival's premises and murdering their staff. But being hands-off to the degree advocated by Thatcherism can lead to runaway abuse such as has been seen with Microsoft software and the Murdoch newspapers.
Some claim that whatever company comes out top must have the best product, because the market is the acid test and businessmen are "hard-headed". Apart from falling foul of many of the above points, this view confuses "best" for the seller with "best" for the buyer, and it exhibits a laziness or weariness in letting others decide for you. In any case, the "hard-headed business man" is a myth; I have known quite a few businessmen and they generally acted on whims; the only reason some did not go bankrupt is because their rivals were even more incompetent. Nor does anyone become very rich by being hard-headed, like backing a horse that is certain to win. To get very rich you must take breathtaking risks, analagous to betting the farm on a 400-1 outsider; few will win but those that do, albeit more by luck than judgement, get hailed as business "geniuses".
Open industrial standards, actually frowned on by the free marketeers, are (or would be) one of the greatest facilitators for a free market and technical improvement. For example, if electronic document formats had an open standard, without the need to pay royalties to a particular company (who might set the fee impossibly high if they do not like you), this would prevent that software company from dominating the word processing market. Similarly, if there were a standardised set of TV remote control codes then replacement remotes would be far cheaper than they are now. Only then would there be the competition that free-marketeers advocate.
The suggestion of standardisation like that can however create howls of protest even from many consumers, who seem to believe that their favourite company would thereby be dragged down to some lowest common denominator. Yet where standards exist people seem to be unaware of them, and they would be undoubtedly extremely upset if they were removed. They might for example find that a different type of petrol was required for every different type of car, with the car maker able to control the price, and they might find that they could not easily find light bulbs to suit their local electricity supply.
Note 1 : "Mrs"
was her title at the time. On retirement she become Baroness
Note 2 : In retirement, Mrs Thatcher lived for a period in the smart London suburb of Dulwich. On one occasion, journalists seeking a story quizzed the next door neighbour about her; but the neighbour said that they had never spoken to each other. [RETURN]
Note 3 : Dispersal of employment was caused not least by Mrs Thatcher's own government. My own industry being privatised was fragmented by region and my part moved from London to Bristol. Norman Tebbit famously advised "get on your bike", but people rather got in their cars, and some of my colleagues were still commuting from London a decade later. [RETURN]
Note 4 : Footnote on Estate Agents
Estate Agents are an exteme example of failure of the Grantham Grocer Principle. Having sold two houses recently, it is astonishing how high their fees are, compared for example, with the solicitor's fees for the same sales. Yet the solicitors appeared to have much more work to do.
I do not doubt however that the estate agents' fees are necessary to cover their costs, because they are so inefficient. When I called into the estate agents they appeared to have little work to do, and put away magazines when they saw me enter.
A look at any one of those agents' stock of houses showed it to be quite small (and partly shared with rival agents) and given that each house might take many weeks or months to sell, the rate at which they sold houses (and received a fee) must be similarly low - hence the need for high fees to pay their salaries and costs. Several estate agents could easily be combined into one, achieving greater efficiency, and the fees be lower, but as soon as this is done new estate agents spring up, diluting the stock again.
So why are there not more "efficient" agents driving the others out of business, according to The Principle?
The main reason is that people do not choose an estate agent on efficiency. Unless you are a professional property dealer, you will have no idea how efficient they are, because most people sell houses from a different location each time and at widely spaced intervals - intervals long enough that few (if any) estate agents will even be found of the same name in a given town.
From the buyer's point of view, you do not choose the estate agent - you choose the house. Nor do you pay the agent's fee. When you are planning to move into an area you probably know nothing of the local estate agent's efficiencies; you will simply look in all the agents' windows, choose some houses to view, and buy the one you like. No-one says "I am going to buy a house from Bloggs and Co because they are competitive and efficient!" In fact from the buyers point of view it is inconvenient that these houses are not all in the hands of one agent.
Thus the Grantham Grocer Principle achieves nothing in a market which is completely free and therefore perhaps ought to be a shining example of it in practice. [RETURN]
Note 5 : Mrs Thatcher is believed to have travelled by train on just one occasion in her ten years as Prime Minister. However the railways were not privatised by her government, but by the John Major government that followed. Conservatives hate railways because they believe they are nests of trade-unionism. Liberals hate railways because they are run in a necessarily authoritarian way. Socialists hate railways as they see them as transport for the upper classes. [RETURN]
Ref 1 : Reviews of a Ryobi garden strimmer [RETURN]
Ref 2 : "In the Beginning was the Command Line", an essay by Neil Stevenson [RETURN]
Ref 3 : "Microsoft - A History of Anticompetitive Behavior and Consumer Harm ", EU paper [RETURN]
Ref 4 : "Microsoft confirms UEFI fears, locks down ARM devices", an article by the Software Freedom Law Center [RETURN]