Simon Ward FICS: Perfect Competition?
Explaining the shipping market to outsiders is never easy, defending it is another thing altogether. It might be fascinating for people to know that the majority of physical trade in the world moves by ships, that it is uniquely efficient and environmentally friendly, despite what the apparently environmentally conscious think, but this does not explain how, or even why, the market works the way it does. We just shrug our shoulders, and say “because.”
I suspect we react this way because maybe some of us, including me, are not too keen to question it too deeply, even more the ethical concerns it raises. Phrases like “Our Word Our Bond” are aspirational, or how we would like people to see us as we do our business, but do not explain the workings of the business itself. Over the last few weeks I have had occasion to think more deeply than usual on how and why our markets work, and perhaps more importantly, how and why we do it, and justify it to myself. I must admit it has at times made me feel uncomfortable.
When I first started as a shipbroker I was struck by the concept that the tramp markets, particularly the dry bulk chartering market, was held up by economists as an (almost) perfect model of competition, as if this was some accolade we should be proud of. It is this assertion that perhaps has tempted so many techies to try their hands at building a platform, or something, to take advantage of this perfection and put us inefficient brokers out of business. It is telling that this has not happened so far.
That it hasn’t is probably down to a number of things including a misunderstanding of what competition actually means in the shipping world, and an underdevelopment of maritime economic theory in the academic world.
Pure or perfect competition is a theoretical market structure in which the following criteria are met:
- all firms sell an identical product (the product is a "commodity" or "homogeneous")
- all firms are price takers (they cannot influence the market price of their product)
- market share has no influence on price
- buyers have complete or "perfect" information – in the past, present and future – about the product being sold and the prices charged by each firm
- resources such a labour are perfectly mobile
- firms can enter or exit the market without cost
You can see why people may be tempted to think that competition in the dry cargo market is perfect, or nearly:
- all firms are price takers
- market share has no influence on price
- resources are perfectly mobile
- all firms sell an identical product
Others, like the Baltic Exchange, would argue that the buyers have complete or “perfect’ information, but as any broker knows, only those who have done the deal really know the ‘price’: no two charterparties are the same, and there are costs and value in clauses that don’t mention the freight rate or hire. As for entering or exiting the market at no cost: dream on! Ships are expensive, and even the most ‘efficient’ cargo operators have to invest some money to make a profit. And whilst all firms do sell an identical product, i.e. transportation of cargo by sea, again, as no two charterparties are ever the same, by definition the product cannot be the same either.
When I asked my students a while ago to give me a simple definition of the shipping industry, one hand shot up and its owner said:
“Capitalism, pure capitalism!”
Needless to say it wasn’t the answer I was looking for; if anyone’s interested my definition would be: The employment of ships in exchange for payment.
Alternative definitions include esoteric ramblings on trade, comparative advantage, connecting the world together, and so on, but I objected to the notion that shipping was pure capitalism, maybe because of my struggles to bend classical, and neo-classical economic theory to fit shipping. It doesn’t. Classical and neo-classical economics came out of the dawn of the industrial era, and was primarily concerned about making, and then pricing, and selling, stuff. As far as I am concerned, it applies therefore to shipbuilding but not to shipping. To make stuff, you need to buy raw materials, do things to them to make them useful to a buyer that will then pay you more than you have paid for the materials and the labour to do stuff (and all the other factors of production stuff) so you can make a profit. Then there follows a whole load of theory about the rationality or otherwise of economic behavior, and a whole load of other theories that spin off from that.
What I think my student was trying to express was that it seemed to her that shipping was a complete free market or laissez-faire activity, where, in another definition:
…private individuals are completely unrestrained in determining where to invest, what to produce or sell, and at which prices to exchange goods and services, operating without checks or controls But here again the terminology loses us as far as shipping is concerned, mainly because of the political connotations, and definitions, of capitalist societies and the notions of ‘left’ and ‘right’. But as we know, the international shipping market has no colour or politics as such, because it is stateless, offshore, paradoxically the connection between different ideas and systems without being of one.
And then there’s the money of course. In the good times, the money flows like water, and in some cases even trickles down to the bottom of the industry. In the bad times, the money dries up, and the squeeze, especially on those at the bottom of the industry, is harsh. But to accuse all shipowners of being heartless capitalists (that word again) is missing the point, as well as being wrong.
If a capitalist is defined as a person who uses their wealth to invest in trade and industry for profit in accordance with the principles of capitalism, then it is no wonder that for those outside the industry, and those outside business, shipping looks heartless. It is, but not because the capitalists, the investors, are heartless. There are some owners who have behaved heartlessly, amorally as well as immorally (I am not sure which is worse), but there are many owners, my clients for a start, who certainly think about the effects of their actions in running their businesses, and in fact stress themselves about how their decisions, or how their companies and ships, have affected the lives of people that come into contact with their particular part of the business. They usually have no easy answers to these very difficult questions. The reason why shipping looks heartless to outsiders is not because the people who work in the industry are heartless, it is because the economic system itself has developed outside political systems.
I do not mean that the peculiar economic model of tramp shipping is perfect competition, because it plainly isn’t. It is because it is one of the only economic systems in the world that is not regulated by any state or organisation. Sure the United Nations regulates international shipping, but look at the five ‘pillars’ of the International Maritime Organisation:
- Safety of Life at Sea
- Prevention of Pollution from Ships
- International Safety Management
- International Ship and Port Facility Security
- International Maritime Labour Convention
All these have economic consequences, but none of them, by necessity, seek to impose a political, that is a particular economic system, on international shipping. The shipping market is not a political system where we know how we should act in order to conform to what society expects of us; we have to navigate this economic system on our own. When I am asked how a person can maintain their ethical balance, their integrity, in such a heartless and difficult industry, I always answer “it all depends on how you wish to live.” This may seem an easy answer but it is not: how we react to the challenges of such freedom reveals our strength and fragility as individual human beings. The option to blame ‘the system’ is tempting, but futile.
In explaining the shipping market to outsiders, I should stress that it is an economic system regulated by how we react with each other, and by that I mean, of course, that shipping is all about relationships. How we conduct ourselves will define our professional and personal success, which is also why there is no such thing as perfect competition. It all depends on how we wish to live, and that responsibility remains ours alone.
Simon Ward started his career at a ship-owning company in Liverpool. He became a Ship Sale & Purchase broker, also in Liverpool, in 1993 before moving to London in 1997. In 2008 he moved to Greece to open and run HSBC Shipping Services Ltd in Piraeus. Despite moving back to London at the end of 2012, he returned to Greece in 2013 to open a new sale & purchase venture in Piraeus with Ursa Shipbrokers, reaffirming his longstanding commitment to the Greek shipping industry.
A Member of the ICS since 1995 (and a prizewinner in the qualifying exams), he was accepted as a Fellow in 2009. He is now also heavily involved with the Institute’s education team, and advises the ETC on matters concerning Ship Sale & Purchase.
He teaches Shipping Business and Ship Sale & Purchase at the Greek Branch of the Institute of Chartered Shipbrokers.