The Billionaire Class

Going onwards from my previous post, this 2 minute video really summarises the type of substantial change Bernie Sanders promises.

I favour positive change above all else, there is considerable irony in the fact that we are so averse to change yet evolution is all about us using change to adapt and survive. So the same must be done in economics, and it starts with an overhaul of how governments approach the economy.

 

 

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Individualism & Collectivism

Hayek

 

The concept of socialism must be defined it its aims and the actions it proposes to take in order to achieve them. He recognises that its general use is to describe the ideals of social justice, equality, and security. However it becomes more specific in the way that this is brought about such as the abolition of private enterprise, private ownership of the means of production, and the use of central planning.

Hayek laments that many proclaimed socialists are only looking at the first aim of social justice or equality but “neither care nor understand how they can be achieved”. Therefore he understands that there is dispute in that some people support the ends but not the means, and it also raises the question of whether socialisms ultimate aims can be achieved simultaneously.

Here he begins to breakdown the problem that socialism proposes, first by noting that central planning can result in two separate ends in regards to distribution of income, where one use of it may result in equal distribution, similar use of it may result in income reaching the hands of few. Thus, he states that socialism must be approached as a species of collectivism. As collectivism claims that we are interdependent which conflicts with Hayek’s libertarian outlook in that each individual is sovereign of his/hers decisions. So this conflict also applies to socialism, in that there is a loss of an individual’s sovereignty. However, he does mention that the root support of planning comes from rational thought. In that we plan our own decisions, and governments before putting through policy plan in considering bad or good action, or wise or short-sighted action. However he argues that modern socialism does not take the stance of liberal planning in that a framework should be erected in order to achieve this aims, he states that socialism looks to establish is a central direction for all economic action, where all resources are consciously directed. He summarises the dispute in the question:

“For this purpose is it better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals is given the best scope so that they can plan most successfully; or whether a rational utilisation of our resources requires central direction and organisation of all our activities according to some consciously constructed “blueprint”

In order to argue his point he clarifies that a libertarian approach must be accompanied with the correct infrastructure and institutions in order to make competition and the benefits of market forces actually work and to not simply leave things be. I believe that it is here that Hayek begins to develop the point where a system must travel down one road completely or risk failure. In that he expands upon his point citing that legal framework is one example of ensuring competition achieves its purpose. Furthermore, competition should not be supplemented by conscious direction as it is a method in itself which provides the adjustments to our behaviour without the intervention of authority. Then he delivers an integral point: “any attempt to control prices or quantities [he previously mentions how competition solves this problem, e.g. market forces creating price signalling] of particular commodities deprives competition of its power of bringing about an effective co-ordination of individual efforts, because price changes then cease to register all the relevant changes in circumstances and no longer provide a reliable guide for the individual’s actions.”

I think that at points like these it seems that Hayek portrays himself against any form of corrective intervention, however he fully realises the existence of negative externalities or factors that may corrupt competition’s benefits. He simply asks the question “are the advantages gained greater than the social costs which they impose” as a condition in which intervention is decided. Hayek considers both the existence of negative and positive externalities, and where price signalling through competition seems to have failed. He argues that the fact we may bring in direct regulation through authority where it is difficult or impossible to develop regulation for competition is not proof to suppress competition where it may function. Here he states that in “no system that could be rationally defended would the state just do nothing”, for the system to be effective however the need for state activity needs to be realised but also stress the creation of effective competitive system by “continuously adjusting legal framework” (alongside the already well-established institutions) thus reducing the occurrence of fraud, deception, exploitation, etc. as the existence of asymmetric information, moral hazards, adverse selection are all realised, and can be acted against appropriately.

Finally, Hayek states the point that not only is complete centralisation an unbelievably difficult task, but more so the sheer loss of freedom in that one single centre decides everything. He argues that there is no middle position, that by going down one path you must commit to it consistently he states that:

“Both competition and central direction become poor and inefficient tools if they are incomplete, they are alternative principles used to solve the same problem.”

“Planning and competition can be combined only by planning for competition, but not by planning against competition.”

It is determined that planning is inevitable, a necessity in ensuring that competition works well, Hayek only critiques the planning that is working against competition, as he has stated before not only due to economic outcomes, but on the fundamental principle of maintain political freedom.

 

International Trade

Trade

Advantages

Allows Countries to Specialise:

  • Become more efficient in the production of a specific good maximising their input factors
  • Access to economies of scale, this provides incentive to buy goods from a country who is “better” at producing them

Cheaper Products:

  • There is usually a gain in consumer surplus, assuming a free trade scenario the imported good would be below the domestic market equilibrium price.

Wider Market for Goods and Services:

  • A greater variety of goods and services will be available as a result of trade
  • This may allow countries to access products that would otherwise be unavailable

Creation of International Competition:

  • Through access to international markets firms are exposed to competition so there is a need to become more efficient, productive, or innovative.
  • In theory it should also crowd out bad products, as there is a readily available substitute which may be of a cheaper price and better quality.

Increase in Global Employment:

  • There is the entire logistics industry surrounding trade, thereby more trade greater need for logistics
  • Additionally, there is the shipping, rail, and aviation that is an integral factor in the movement of resources and goods providing another source of global employment

Builds International Markets & Political Ties:

  • This takes the form of trade agreements such as NAFTA, ASEAN, & APTA
  • Not only does this provide the structure for trade, but it also ensures a political consensus on the need for trade, and ensuring that it is kept fair.

Disadvantages

Interdependency:

  • Countries become dependent on each other for the supply of certain products or services; this can lead to serious economic stability issues if there are supply shocks.
  • Furthermore, overdependence can also be established meaning that an economy survives purely on exports of one product or good. An example of this is Cuba when the United States placed export sanctions and restrictions in the 1960s. The U.S. had been the biggest importer of Cuban sugar cane, and without their main importer the economy was left in a fragile state. The Soviet Union rescued the economy, by purchasing all excess Cuban sugar cane.

Over-Specialisation:

  • This can lead to certain areas of the economy being underdeveloped. An example common to most developing countries is that they are specialised in agricultural production and then are reliant on Western imports for technology.
  • Dutch Disease: this is where natural resources are exploited in favour of maintaining an agricultural and manufacturing industry. Through foreign countries buying the natural resource the currency strengthens and then other exports are no longer competitive. Thus, restricting the economy to be dependent on the natural resource export. In the case of the Netherlands, the discovery of the Groningen gas field in 1959 had led to other Dutch exports to lose any competitive edge.

Exhaust Resources:

  • Increasing global demand may lead to the exploitation of resources to the point where the law of diminishing returns is fully enacted, which may eventually cripple the domestic economy. Often the case with agricultural countries with the over-cultivation of land.

Trade Monopoly:

  • One country may specialise to the point where others cannot compete, creating a degree of monopoly power in international trade. This may force countries to import goods at an un-competitive price, giving the original producer the entire benefit of trade.

Mobile Phone Providers

phones

It has come to that time again; I must renew the contract for my mobile phone. I have recently suffered at the hands of some frustrating customer service by O2, but there is not substantial enough incentive to change provider.

I had a browse around the different providers and packages available, whether it was to keep my current phone or to switch to a new phone and contract. What I soon came to realise that even though no provider would admit it there was to a degree extreme inter-dependence with the pricing and packages available. The only factors that could persuade me were additional benefits (such as O2 with priority tickets), advertising, or offering a marginally lower one off payment for the actual phone.

I was looking to change my phone to the current iPhone 5 and for a contract with at least 1 gigabyte of data, alongside unlimited calls and texts. For example (24 month contracts):

o2-customers-vent-frustration-after-network-down-hours

O2

The Cost (Per Month): £37
Phone Price: £49
Package: Unlimited Minutes & Texts, and 1GB Data
Total Cost: £937

Vodafone-logo3

Vodafone

The Cost (Per Month): £42
Phone Price: Free
Package: Unlimited Minutes & Texts, and 1GB Data
Total Cost: £1,008

ee

EE

The Cost (Per Month): £41
Phone Price: £30
Package: Unlimited Minutes & Texts, and 1GB Data
Total Cost: £1,014

three_mobile_logo_520x300x24_fill

Three

The Cost (Per Month): £34
Phone Price: £49
Package: 500 Minutes, 5000 Texts, and Unlimited Data
Total Cost: £865

Now it is evident that each package is different in its own way, and but it really comes down to the preference of the consumer, whether they want to pay a large monthly bill, or have little or no one payment for the device. Currently, it can be noted that this market is a great example of oligopoly.

It is clearly difficult for the consumer to decide which package offers the best all-around service, and the advantage EE have with 4G service is only temporary as the other providers are going to catch up. These are currently the four biggest firms, with other small firms still operating offering alternatives such as Tesco mobile, and the inter-dependency defines the oligopolistic nature.

The firms don’t heavily compete on price, but tend to increase advertising campaigns, or offer a range of benefits. O2 offers customer’s priority tickets to music and sport events alongside general offers from brands and food stores. Vodafone also creates offers from high street brands, and food stores, but also has the best roaming packages. EE has their current 4G network coverage, and most diverse coverage as a result of connection with T-Mobile and Orange. Three is the only to offer unlimited data in their packages, but then restricts minutes and texts and questionable coverage abroad.

Although I do not feel customer loyalty towards O2, I feel like it is more convenient to stay with O2 so keeping my number won’t be a difficulty, and I have already become accustomed to their online services. One factor which I have not yet covered though is the surcharges as a result of exceeding the data limit, currently it can be noted that the mobile providers are making the most profit out of data services as a result of the popularity of smart phones.

There is also the age long issue of small print. Currently providers seem to subsidise the cost of smartphones to an extent that it makes it attractive to switch to a new one every year. What consumers most often don’t realise is that there are various service charges, and unbelievable surcharge rates. It can be increasingly frustrating as you are told rather clearly the monthly bill and the upfront cost but they fail to directly mention the actual long term operating cost.

The industry in itself can be seen as a huge bundle of inter-dependence which in no way is really benefitting the consumers, the firms don’t want to compete on price, so they try to persuade with consumer benefits and advertising. O2 (under Telefonica) and Vodafone are an example of two aggressive advertisers and they currently fight for market share in the UK, this can be seen as a classic example of game theory where they have reached the Nash equilibrium where they both advertise.

This market is particularly frustrating as it seems that with your choices that you are in a scenario where you pick the lesser of two evils, rather than one standing out as the clear best choice. I can complain but the situation in the United States seems to be far worse, there is the situation where a consumer looking for the best coverage for a smartphone is forced into a duopoly between Verizon and AT&T. They not only have high initial payments for the devices, but then continue to have confusing plans which are separate for data and calls. The packages fail to offer a middle ground for consumers, meaning that if there are certain requirements such as more data the consumer jumps to a higher price level.

For now it looks like I will stick with O2 and an iPhone as after searching through different phones and different plans, nothing seems to incentivise me to move away. I already know how to deal and put up with customer services, although I wish that paper billing was not a part of the past, as it was great to see a breakdown of calls, texts, and data usage.

Greggs Bakery Sink or Swim?

greggGreggs reported that sales for the first quarter of the year and up until this point that sale have dropped 4.4%. They are blaming “bad weather, and under pressure consumers” as the cause for the fall in sales.

The bakery is a major feature of high streets in the United Kingdom with an estimated 1,700 stores, and still creating new outlets in order to increase sales. There are two factors which may point that Greggs is only heading down. Firstly, it may be that pasties have become increasingly less popular in a society that is concerned with body image and health. Secondly, the high rent costs of high street property which may no longer balance out with profits made from sales.

The high street has already been struggling this year, but this may the first occasion that a business of this nature may fail to survive. HMV, Jessops, Blockbuster, and Comet to name a few were all involved in sales of a technological nature, whereas Greggs is part of the food market. It is possible that competition from high street competitors such as Subway, and McDonalds are simply taking a greater percentage of customers.

Greggs have reported that they believe the issue is part of the decreased footfall in UK high streets, alongside the issue of competitors.

It is understandable that over the past few years Greggs variable costs have increased as the result of increasing basic food commodity prices. This is forcing them to raise their costs, putting further pressure on consumers. The business has been heavily pursuing deals and promotions in order to revitalise their customer base, but this is so far only proving to be a strain on their already limited profits.

The question is whether or not Greggs will survive the high street squeeze? And what will this mean for competitors in this industry?

I get the feeling that Greggs might die out, not only as a result of the competitive nature of the market, but also as a result of demand for certain foods moving elsewhere. But we will have to wait and see.