Part of the excellent Al Jazeera documentary series about Russia, which addresses the problems facing many Russians today. The global economic crisis, conflicts with neighbouring countries and the drop in oil prices all played their part in the demise of the Russian people. There is a very good interview with the former Central Bank Chairman Viktor Gerashchenk who held the position during Yelstin’s reign. He explains very simply how you grow your economy and that there must be money in the banks so that companies can borrow and invest. Buying US Treasury Bills was loaning money to the US and paying for their deficit. Meanwhile the infrastructure and public services declined rapidly causing a lot of anguish amongst the people. You can’t suddenly jump from a socialist system into the free market. Worth a look.
Following on the theme of economic systems and North Korea, below is a documentary from the BBC Panorama programme. John Sweeney goes undercover in North Korea and finds out what life is really like. The documentary shows: State ownership, State control, price controls and extreme government failure in poor quality goods and services, massive shortages, and crippling unemployment. He does venture over the border to South Korea where the experience is in stark contrast. Good video to finish off the market systems topic.
Teaching economic systems with my AS Level class and I use this great satellite photo to introduce the topic. I usually get students to write down what they understand by the photo. You should get a range of answers from – “they have no nightlife in North Korea” to “North Korea has a controlled economic system and it is blacked out from failure of the electrical grid except for Kim Jong Il’s palace”.
I got the image from the book Nothing to Envy: Ordinary Lives in North Korea. The book looks at the lives of six defectors from the repressive totalitarian regime of the Republic of North Korea and how it collapsed catastrophically into poverty, darkness, and starvation under the dictator’s son, Kim Jong Il.
I posted on this issue last year when Kim Hill (Radio NZ) interviewed Paul Mason – author of Post Capitalism (now out in paperback). Mason makes the point that we are going to live through a long transition from capitalism – the state and the market to post capitalism which is the state, the market and the shared collaborative economy. With technology taking a lot of the jobs in traditional industries in the UK he states that further development in this sector is not the way of creating new jobs. He talks about delinking work from wages by just paying people to actually exist – rather than tax to exist.
Liam Dann (NZ Herald) wrote a piece about Amin Toufani’s presentation at SingualrityU summit in Christchurch where he talked about people in the labour force having to learn, unlearn, and learn again – unlearning should be core competency. However as there maybe many people who will struggle with this concept Toufani believes that a universal basic income (UBI) may need to be adopted – see RSA video below.
Recent events – UBI
- Switzerland held a referendum on a basic income in June this year but it was comprehensively turned down.
- Finland is going to run a U.B.I. experiment in 2018
- Y-Combinator, a Silicon Valley incubator firm, is sponsoring a similar test in Oakland USA.
Why has the UBI become such a popular talking point?
- The automation of a lot of jobs has left people very concerned about redundancy.
- The modern economy can’t be expected to provide jobs for everyone
- The UBI is easy to administer and it avoids paternalism of social-welfare programmes that tell people what they can and can’t do with the money they receive from the government.
- Potentially drives up wages and employees will compare their wages with the UBI.
- Easier for people to take risks with their job knowing there is the UBI to fall back on.
- It takes away the incentive to work and lowers GDP
- UBI – not cheap to administer and would likely cost 13% of GDP in the US
- In the Canadian province of Manitoba where the UBI was trialled, working hours for men dropped by just 1%.
- The UBI would make it easier for people to think twice about taking unrewarding jobs which is a good consequence.
- In the developing world direct-cash grant programs are used very effectively – Columbian economist Chris Blattman.
- In New Jersey young people with UBI were more likely to stay in education
If the U.B.I. comes to be seen as a kind of insurance against a radically changing job market, rather than simply as a handout, the politics around it will change. When this happens, it’s easy to imagine a basic income going overnight from completely improbable to totally necessary.
James Surowiecki – New Yorker – 20th June 2016
We discussed Contestable Markets in my A2 class today and I used this clip from Commanding Heights to show how regulated the US airline industry was during the 1970’s. Regulations meant that major carriers like Pan Am never had to compete with newcomers. However an Englishman named Freddie Laker was determined to break this tradition and set-up Laker airways to compete on trans-atlantic flights. He offered flights at less than half the price of what Pan Am charged. Alfred Kahn was given the task by the then President Jimmy Carter to breakup the Civil Aeronautics Board (the regulatory body) and he wanted a leaner regulatory environment in which the market was free to dictate price. There is a piece in the clip that shows how ludicrous some of the regulations were:
When I got to the Civil Aeronauts Board, the biggest division under me was the division of enforcement – in effect, FBI agents who would go around and seek out secret discounts and then impose fines. We would discipline them. It was illegal to compete in price. That means it was illegal to compete in the discounts you offer travel agents. So we regulated travel agents’ discounts. Internationally, since they couldn’t cut rates, they competed by having more and more sumptuous meals. We actually regulated the size of sandwiches. Alfred Kahn
When the CAB was closed down competition was the rule and the industry had vastly underestimated the demand for air travel at lower prices – a very elastic demand curve – see graph below.
In the A2 course contestable markets is a popular essay question and is usually combined with another market structure.
What is a contestable market?
• One in which there is one firm (or a small number of firms)
• Because of freedom of entry and exit, the firm faces competition and might operate in a way similar to a perfectly competitive firm
• The threat of “hit and run entry” from new firms may be sufficient to keep the industry operating at a competitive price and output
• The key requirement for a contestable market is the absence of sunk costs – i.e. costs that cannot be recovered if a business decides to leave a market
• When sunk costs are high, a market is more likely to produce an price and output similar to monopoly (with the risk of allocative inefficiency and loss of economic welfare)
• A perfectly contestable market occurs only when entry and exit into and out of a market is perfectly costless
• Contestable markets are different from perfect competitive markets
• It is possible for one incumbent firm to dominate the industry
• Each existing firm in the market produces a differentiated product (i.e. goods and services are not perfect substitutes for each other)
There are 3 conditions for market contestability:
• Perfect information and the ability and or legal right to use the best available technology
• Freedom to market / advertise and enter a market
• The absence of sunk costs
• Liberalisation of the US Airline Industry in the 1970’s and the European Airline Market in late 1990s
• Traditional “flag-flying” airlines faced new competition
• Barriers to entry in the industry were lowered (including greater use of leased aircraft)
• New Entrants – easyJet- Ryanair
Below is a great animation from RSA in which Ha-Joon Chang (South Korean institutional economist specialising in development economics) explains why every single person should know some basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel. He mentions the nine schools of economic thought which are Austrian, Behaviourist, Classical, Developmentalist, Institutionalist, Keynesian, Marxist, Neoclassical and Schumpeterian. Furthermore, he makes the point that given the complexity of the world and the partial nature of all economic theories, you should be humble about the validity of our own favorite theory. Therefore keeping an open mind about its usefulness in society.
A lot of what he talks about is in his excellent book entitled “Economics: A User’s Guide”.
In the 2016 Cambridge AS Economics syllabus there is a new topic which looks at the areas of privatisation and nationalisation in an economy. Below are some notes on the topic.
Nationalisation is when a government chooses to take an industry into state ownership in order to safeguard the supply of a good or service.
Privatisation is the transfer of ownership of property or businesses from a government to a privately owned entity.
Potential Benefits of Privatisation
- Improved Efficiency – private companies have a profit incentive to cut costs and be more efficient.
- Lack of Political Interference – Governments are motivated by political pressures rather than sound economic and business sense.
- Short Term view – A government many think only in terms of next election
- Shareholders – a private firm has pressure from shareholders to perform efficiently
- Increased Competition – more firms mean greater competition and efficiency
- Government will raise revenue from the sale – only a one off benefit and future dividends are lost.
Potential Benefits of Nationalisation
- Natural Monopoly – Many key industries nationalised were natural monopolies. This means the most efficient number of firms is one.
- Externalities – Some of the nationalised industries had significant positive externalities. A government can run public transport system could invest in public transport to help improve the economic infrastructure.
- Welfare Issues – Some industries play a key role in the welfare of consumers and citizens. Government provision means that needy groups can be looked after and provided with basic necessities.
- Industrial Relations – Labour unions often favour nationalisation because they feel they may be better treated by the government – rather than a profit maximising monopoly.
- Government Investment – Some industries require long-term investment to improve services over time. This long-term investment may not be profitable in the short-term, so without government intervention they may suffer from lack of long term investment.