The “Inevitability” of Planning

Hayek

There was an argument for the inevitability of planning for example technological change bringing about the existence of natural monopolies, consequently requiring government planning as to some extent the lesser evil than production by private monopolies.

Hayek breaks down this argument once more by considering social infrastructure and existing policies. He asks the question whether the development of natural monopolies is a consequence of new technology, or more simply the economic conditions in which they operate. Hayek argues that the latter is true. He uses the breakdown of the following example:

A large firm having superiority over a small firm, due to technological change may result in greater economies of scale, and an as such lower cost per unit produced and thus begins a process of underbidding and driving out small firms in order to increase market share.

Now at first glance the argument stated above is reasonable, but Hayek notes how this is not the case from a congressional report by the temporary national economic committee in that it states:

“The superior efficiency of large establishments has not been demonstrated; the advantages that are supposed to destroy competition have failed to manifest themselves in many fields. Nor do the economies of size, where they exist, invariably necessitate monopoly.”

This leads Hayek on to argue that it was the policies within countries which facilitated the growth of monopolies, which would then drive out smaller firms. He takes the creation of cartels, and syndications as a consequence of governments seeking regulation in prices and sales as the factor that led to the growth of large monopolies. This goes back to his overarching argument of travelling down one road completely or not at all, as there is greater flaw in attempting a mixture. Then going on to state that “monopoly capitalism” became acceptable even more so as countries such as the United States erected protectionist policies and pursued semi-isolation. He uses the example of Great Britain in stating that planning is not inevitable, in that yet again policy had promoted the growth of natural monopolies. He notes that the British system had been extremely competitive up until 1931 where similar to America protectionist policies arose, and economic planning was introduced and thus monopolies came about. Not of technological change, but the actual structure of the economic system.

He then delves into another segment where planning is not inevitable. Arguing against those who make the assertion that the complexity of modern industrial civilisation creates the need for central planning otherwise we cannot combat its problems effectively. They additionally state that it is increasingly difficult to obtain a coherent picture of economic process, thus things should be coordinated or else dissolve into chaos.

Hayek breaks this down by simply stating that if conditions were simple enough for one person or board to have perfect information then planning works, but as they note in their own argument there is this existing complexity where it is increasingly difficult to attain this information. Thus Hayek argues that decentralisation becomes imperative, as then there is the coordination between separate agencies to bring about “mutual adjustment”. Furthermore, he states that “nobody can consciously balance all the considerations bearing on the decisions of so many individuals.” Thus he arrives at the price system and how it operates without the need for recording every single change in information by a central body. It also allows for the greater complexity in our system which helps the growth of the industrial system and that planning ultimately stifles it.

It is here that he comes to point which is of particular interest to me, he writes about how technological change can be stifled in order to maintain the status quo. For example the industrial revolution promised to enhance the productivity of labour; however it came at the cost of employment for many people. So here arises the argument for the need of central planning to efficiently create the change over such that the short term loss does not override the short term gain. To this Hayek states that planning is not needed as either the short term loss can be accepted, or the change can be delayed up until the necessary infrastructure or policy is erected to minimise any loss.

Specialisation & the Allure of Planning

Hayek states there are many good things, which all agree are highly desirable, and possible, that are difficult to achieve within our own lifetime. This develops the allure of planning in that it seems possible to circumvent the barrier that is time, collective action leading to the achievement of these goals.

He then brings this into regards of specialists (technocrats) in that a planned society seems to offer a route to achieving their objectives. He states that this is an illusion and a misdirection of resources, in that the specialist will obviously place greater importance on his aims then others. Hayek uses a nice example to illustrate this:

“The lover of the country-side who wants above all that its traditional appearance should be preserved and that the blots already made by industry on its fair face should be removed, no less than the health enthusiast who wants all the picturesque but insanitary old cottages clear away, or the motorist who wishes the country cut up by big motor roads, the efficiency fanatic who desires the maximum of specialisation and mechanisation no less than the idealist who for the development of personality wants to preserve as many independent craftsmen as possible.”

However, they all have a wish to go about this planning and therefore they will ultimately come into conflict with each other. As such this brings about the central issue, that not everyone can be pleased. It’s attractive to those who have devoted their lives to a single task and want to see it done universally. But practically this cannot occur, also defining to some extent the authoritarian nature of central planning, only one direction can be pursued and thus not everyone will be pleased.

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Exchange Rates: Float or Fixed?

money bags

Throughout history countries have adopted both fixed and floating exchange rate systems, usually depending upon the condition of the domestic economy. The value of a currency was traditionally based on a fixed system of gold, which was known as the gold standard. However, due to the limitations incurred by the gold standard such as a restriction on growth through the lack of monetary expansion, free floating systems were adopted. Currently, most developed countries maintain a managed float system which combines aspects of a fixed rate with those of the floating rate.

Free floating exchange rate is where the market forces of supply and demand determine a currency’s value relative to another currency. There are many advantages to the use of this system, as it supports trade and achieves accurate pricing of the currency as the market forces provide price signalling. Nevertheless, the free floating system ensures no government involvement, and this reduces the possibility of market failure. With the absence of government control it is unlikely that the currency will be held at an artificially achieved price which is either over or under valued. Through letting market forces clear the exchange market events such as Black Wednesday can be avoided. Black Wednesday was when the Sterling was pegged to the Deutschmark; there was market speculation that at this exchange rate that the Sterling was being over-valued. This led onto currency traders such as George Soros to undercut the currency by short selling. This had forced the Bank of England to unpeg the currency to allow market forces to clear the market and restore the sterling to a stable value. This exemplifies the danger of fixing the currency, and how this can be easily be avoided by simply letting supply and demand determine the value. This is limited in the fact that speculation can still occur, and developing countries may want to avoid free floating as foreign investors may “bet” either way on the currency and this has national repercussions.

A fixed exchange rate system is where the value of one currency is pegged onto the value of another currency or as mentioned gold; this is done in order to maintain the value of the currency within a given band. Two mechanisms may be used to keep the currency’s value within the band, and these take the form of interest rates and foreign reserves. In a free floating system the interest rate can be varied to any degree in the interest of pursuing monetary policy, whereas in a fixed system the interest rate is only manipulate to ensure the currency’s value stays within its respective band. If the interest rate were to be kept too high, the currency would attract foreign investment leading the currency to strengthen, while the opposite can occur if the interest rate were to be lowered. This means that the government has finite ability in manipulating in the currency for domestic reasons, restricting the pursuit of monetary policies. Furthermore, in order to control the value of a currency a central bank most hold sizeable foreign reserves. The central bank must be able to freely buy and sell the currency in question, and this requires access to foreign reserves. This introduces the possibility of government failure as it is difficult to know how much a foreign currency must be held, and the possible market repercussions of having a preferred reserve currency. In the free floating system these controls are not needed, reducing the possibility of government induced failure, and the free floating system also allows greater monetary flexibility.

The free floating exchange rate system provides an automatic readjustment for an economy’s balance of payments. When a country is running a trade deficit imports are exceeding exports, prompting leakages out of the economy without introducing some kind of injection. Furthermore, as the country maintains a high demand for imports this means that there is a considerable demand for foreign currency, prompting the domestic currency to be supplied. This eventually reaches the point where the domestic currency is supplied to the extent that there is downward pressure on the currency causing it to depreciate in value. This depreciation in value means that the relative price of exports abroad decreases, making them competitive in the foreign markets. It also leads to the relative price increase of imports, as now the domestic currency is less able to purchase foreign currency. This counteracts the trade deficit as now exports will exceed imports closing the trade deficit gap. This is all achieved through the market clearing forces, rather than government intervention which may misallocate resources in an attempt to control the balance of payments. However, this does lead to a cyclical effect where the currency will have stronger and weaker periods. The main limitation in the dependency of the automatic readjustment is that it depends on the type of imports, some developing countries may have staple goods (e.g. gasoline, water, etc.) as their imports, and regardless of currency change their exports may still not be attractive, thus the adjustment does not occur or does not occur to the same extent as it would for a developed country.

Fixed exchange rate systems do promote long run stability, which can be undermined if the market is left to determine the value of the currency. It is beneficial for developing countries to maintain a peg as it helps them plan for the long run, and they need dependable trade flows. As previously mentioned the imports undertaken by developing countries may be basic necessities, so a free floating system may destabilise their ability to import the essentials. With a fixed exchange rate the developing countries can make trade agreements that will be sustainable for a length of time, and ensure some kind of economic stability. Furthermore, there is the removal of administrative costs that are persistent with the free floating system, such as futures contracts, and other types of hedging. Through running a fixed system the currency can be protected from the fluctuations of free floating currencies, which also contributes to the long term planning of developing countries, and a degree of economic stability. One key advantage of the fixed system is that it encourages firms to maintain productive and allocative efficiency so that they can compete in international trade. When a currency is pegged it is difficult to depreciate its value to make exports more competitive, thus producers are driven to allocate their resources wisely and ensure efficiency in order to cut down operational and productive costs.

When comparing the two systems it is clear that a mix of the two is suitable for many developed countries, whereas a fixed rate system has more direct benefits to developing countries who aim for stable growth. In a managed float the two fixing mechanisms can be employed in order to manipulate the value of the currency, but as the currency remains unpegged the overriding market force is that of supply and demand so it is unlikely that the currency will be over or under valued even with the use of fixed system controls. The free floating system has quite considerable benefits, as it not only reduces government intervention but also provides the automatic adjustment of the balance of payments, and monetary flexibility which has become integral in a post financial crisis economic climate.

South Africa: Sink or Swim

South Africa is currently suffering from a high rate of unemployment making it difficult for the economy to grow. Forecasted growth rates have already been downscaled as the largest economy in Africa is struggling to meet targets. The countries main contributor to GDP can be identified as consumer spending and this is why the persistent unemployment is having a considerable effect on growth forecasts.

Key Terms:

Unemployment – “Those out of work, actively seeking work at the current wage rate”

GDP/Growth – Measured by the output of an economy (gross domestic product)

Consumer Spending – Spending on retail goods, energy consumption, transportation, housing costs, and other areas where disposable income is spent.

Due to the high levels of unemployment it can be noted that there is a decline in aggregate demand within the economy. Colen Garrow states that the retail sector is weakening and there is going to be pressure overall as there is a lack of demand. It can be noted that to an extent the South African economy is contracting as there has been increased inflation as a result of a cost-push and fall in aggregate demand (shown below).

Picture1

The shift for aggregate demand from AD to AD1 is a result of the rise in unemployment, the people have less spending power and therefore there is an overall decrease in consumer demand. The shift of aggregate supply is a result of the tightening credit environment as firms struggle to meet their costs. The red rectangle represents the inflationary response in the economy as a result of the shift in aggregate supply. So as a whole the South African economy has retracted as output has significantly decreased (resulting in forecasts for future growth to decline) and there has been an inflationary response, as the price level has increased.

There is also the factor of unemployment which is 24.9% falling from the peak during Q4 of 2012 at 25.5%.This is shown simply below with a demand and supply relationship of labour in South Africa.

Picture2

Currently in the market labour is only being demanded at the point of LD but the supply is at LS. This surplus of labour is the current unemployment. With so many out of work and seeking work it is clear that economy is not working to full capacity. If a production possibility frontier for the economy was shown it would be operating within the curve. This further explains the economies inability to have substantial growth.

Consumer spending has radically decreased, making it difficult for the economy to grow and therefore attempt to combat the unemployment. This is realised by the fact that private sector demand for credit dropped from 10.09% to 8.64%. This is why the retail sector is struggling, as the unemployment and inflation has led to the decline of demand.

The unemployment in South Africa can be seen as a combination of structural and cyclical unemployment. Mining has been one of the major consumers of labour in the region, and recent closing of mines and movement by companies to other African regions for mining has meant a structural change in labour demand. The cyclical unemployment is a result of the struggling economy, as different firms reduce the amount of people they employ to meet the higher costs of production.

In the short run the economy is not likely to recover, growth is a must if the government aims to combat the high rate of unemployment. It is essential to restore consumer confidence in the economy, and also enable people to obtain credit more easily as to restore the aggregate demand of the economy.

In the long run for the economy to attempt to maintain growth, eliminating unemployment is essential to attempt to get the economy working back at a point of the PPF. However this could lead to an inflationary response in the form of a demand pull, and the government will need to begin considering how to reduce already increasing inflation as a result of increasing production costs.

Currently in the South African economy the rate of unemployment is pulling it down, in this situation there are no winners within the country. Exports may become more favourable as the inflation will weaken the South African Rand, but make investing in South Africa unlikely. To solve the unemployment in South Africa is difficult as a result of its cyclical and structural qualities; the first step would be to create more job opportunities. However, it is also essential that a greater majority of people achieve education and training whether it is academic or vocational to help improve employability prospects.

Expected growth by 2014 is forecasted at around 3.4% which is still considerable in comparison to some countries in the EU. There is still risk though investing within the country and the government must do more to encourage foreign investment and begin a round of serious structural investment such as roads to create jobs and spur on growth.

There is the potential for South Africa to climb out of the current situation, and unemployment stands at the centre of it. The country is still Africa’s biggest economy and will continue to be so if it can achieve consistency with its currency and sustained growth.

Overfishing (Market Failure)

What are the main causes and consequences of the market failure in fishing?

The main cause of the market failure in fishing is the over-consumption and demand for all varieties of fish and seafood.  This is driven by government subsidies aimed to help the fishing industry as they are a considerable part of the economy, as some towns and cities are dependent on fisherman traffic. Governments are also contributing subsidies in the interest of keep food prices down, in foods such as fish which have become common in global diets.

The consequence of this over-consumption is the clear over-fishing and exploitation of the varieties of fish that can be consumed. There is now a growing dependence on fish farms to supply for the demand of fish.

The central external costs of the supply in fish contributing to market failure are:

  • The eventual extinction of specific species of fish
  • Accidental catch of other unwanted fish, reducing general population
  • Algal blooms, caused by dead fish left in sea and ocean
  • Weakening ecosystems, to near collapse
  • Loss of large fish i.e. Tuna
  • Forced government subsidisation
  • Less beautiful underwater cultures for tourism
  • Depleting natural resources
  • Driving small businesses out

The cause of the over-fishing is difficult to pin on a single source as it is both the demand of consumers, as well as the argument “well there will be no difference if the fish are taken now or in a months’ time”.

There is the developing issue of illegal fishing, even though laws and regulations have been set in place to only allow fishing within certain areas it is costly and difficult to actually enforce these laws and regulations. This issue develops on the point that companies now go to other countries to fish as there are less restrictions on quotas, such as the Senegal example where local fishing business is beginning to be taken by corporations.

A cause of over-fishing can be attributed to the methods used to obtain fish, even though they are the most effective and efficient there is a lot of unwanted catch in fine mesh nets and trawling methods. This is why there is a major breakup in the food chain of the species, and has a residing effect on the ecosystem of the fish whether big or small.

Facts:

Globally, some 75 per cent of wild marine fish are now said to be either fully-exploited or overfished, according to the United Nations’ Food and Agriculture Organisation (UN FAO)

Fish farming, now provides almost half of all the fish consumed by humans.

Development of crime in areas such as Somalia, and Senegal

Have the government solutions to over-fishing made the situation worse?

Overall, it can be argued that the government has not really made a clear attempt for a solution and if anything has made the situation worse. Governments throughout Europe, Asia, and American have made it a prerogative to subsidise the fishing industries.  This is an attempt to keep the industries alive even though they are catching less wanted fish then in the late 19th century and throughout the 20th century.  Governments have made it more worthwhile for fisherman to try and scavenge for what is out there rather than protect fish stocks for the future, and this is what the subsidies have achieved.

In regards to further failure by the government is the inability to abide or follow advice on quotas on the amount of fish that can be fished per day to ensure that there is no complete collapse of a species or ecosystem. Most quotas that governments set range between 20%-40% higher than what scientists advise. There is also the issue of policing this which the government is not completely committed too.  This is because the market failure is heavier on the government and producer side than the consumer. As consumers have not been offered viable alternatives to fish, there is the continued over-consumption.

In a sense government solutions have not done enough as over-fishing is only one cause for the general decline in fish stocks as there is also global warming, and illegal fishing. Global warming has had serious implications on the quality of sea life, and has encouraged the dependency on fish farms to provide common fish. The issue here is that the fish farms still fish to provide smaller fish to larger fish such as tuna.  This has started a vicious cycle which the government has not successfully intervened, and if anything encouraged fisherman to not follow quotas.

There is also the ban of catching certain fish; again this government intervention further contributes to the market failure as it simply makes those fish more desirable. There is also a lower price on farmed fish as they are considered a lesser good than natural fish. There has been no attempt to tax depending on unwanted fish taken, or hand out certain areas of water where companies have to personally decide how to take care of the land.

Facts:

Unfair Fisheries Partnership Agreements that allow foreign fleets to overfish in the waters of developing countries.

The cost of mismanagement, in lost economic output, is huge: some $50 billion a year, according to the World Bank.

 

What action would you suggest to reduce the damage done by overfishing while supporting those who depend on the fishing industry?

There needs to be a clear change in government policy as well as the manner in which fishing is done. There should be a greater stress on achievable regulation, and possibly an increase in prices.

Governments may choose to continue subsidising the fish industry, but should begin to subsidise fish farms that grow all the fish needed to feed bigger carnivorous fish. This will produce self-sustaining fish farms that are no longer reliant on the fishing of small fish to provide feed.

Governments should agree that only local fish is not taxed within a country, so in the case of salmon being supplied in Scotland has no tax, whereas if it was exported to another country there would be an export tax in the country of origin, and an import tax in the receiving country. This would accurately price the cost of the fish, and especially rarer fish.

Industry standards have to change; this can be done by introducing time frames that fishing is allowed within the season. Beyond this if a boat goes out to fish for a week then it may only actively fish on 4 of those 7 days, ensuring that quotas are met not over reached. Also in the equipment used for fishing to ban the use of trawling, and fine mesh nets. The method of trawling has adverse effects to the ecosystems, and fine mesh nets produce a lot of unwanted catch of small juvenile fish therefore further reducing the chances of endangered species.

No fish zones need to be created in areas where the ecosystem has suffered or there is the chance of a fish becoming extinct, this is done today but I would call for an international body to police these zones to ensure there is no illegal fishing whether industrial or local.

For a time temporary bans on certain fish would have to be placed, this would reduce the number of jobs and profitability of the industry, however this ensures job safety in the future by allowing the fish populations to naturally increase without intervention.

Facts:

Restoring these stocks could deliver up to £14.62 billion per year in gross revenues. This is 2.7 times the current (2010) value of their landings

The size of investment required to achieve this is £10.4 billion over the entire transition period (9.4 years) – £9.16 billion in present value terms

Minimum Wage (Harkness)

 

Discuss arguments for and against a national minimum wage

For:

  • Sets the living standards for the country, and also establishes what should be expected from the state. It gives a representation of the type of income one needs to live within the country
  • Ensures that employees are not being exploited by private companies
  • Generally improve the income of workers
  • Does not rely on the demand  and supply of labour

Against:

  • National minimum wage may cost jobs, as employers may not be able to afford hiring as many employees as needed
  • Does not solve the issue of those unemployed whom are still a burden on welfare states
  • Difficult to decide what a national minimum wage should be in proportion to, as 50% of average income is not always a reliable indicator
  • If the minimum wage is too low it may undermine the employees ability to sustain a living

Should National Minimum wage be raised or lowered?

Raised:

  • If the minimum wage was to increase this would lessen the burden on the state to give welfare.
  • The poor tend to spend a higher portion of their income, with the increase of minimum wage there can be increased savings, and greater monetary flexibility.
  • Since the state provides welfare for those unemployed and those with low-level salaries, it in a manner subsidises the businesses. If minimum wage were to be raised the employers owe more to the worker rather than the government.
  • People rather take benefits than an unsecure job at minimum wage, so if the minimum wage were increased there would be a greater incentive to get a job.
  • If it is lower than people will begin to struggle as almost all of their income is used up in basic necessities and families will have to have two working parents which may lead to the need for more welfare.

There is speculation that tighter control of wages simply means the economy is no longer as free and that labour within certain countries is less competitive, however it can be noted that countries such as China who have an export based market are increasing the minimum wage of employees considerably.

Discuss the possibility of an International Minimum Wage?

There are several problems with the concept of an international minimum wage. Firstly, the minimum wage would be subject to value of currencies and foreign exchange market. The second issue would be the fact that the cost of living is different in every country. Finally, not all countries offer welfare and the minimum wage set may not be enough to sustain a family or basic lifestyle.

If an international were to be set it would be as problematic as setting a single currency for multiple countries, there are both pros and cons. In the case of minimum wage it would become problematic if a certain currency was worth more than another currency which is the case globally when comparing all the varieties of currency.

The cost of living changes drastically from country to country, and even from state to state in the U.S. If a person were to move from San Francisco (CA) to Manhattan (NY) 28% increase in cost of groceries and a 57% increase in cost of utilities.[1] This is why in the United States there is a federal minimum wage, but states can increase the minimum wage e.g. Illinois, Connecticut, & Nevada. This current example clearly represents why it would be difficult to introduce an international minimum wage without effective policies to support it, which is difficult to do internationally.

Countries such as the United Kingdom offer a variety of welfare services, whether it is tax exemption or healthcare. The majority of countries outside of Europe don’t have such comprehensive welfare systems, therefore if an international minimum wage is set those in Europe on minimum wage are in a far better position than others. The concept of an international minimum wage is to increase equality, and stop exploitation in LEDs.  However it would be difficult to enforce, and on what factor would the wage be decided on.

While in class we brought up the issue of competition. If there was an international minimum wage then every country would be equally competitive for the price of labour. It is important to note that country’s do not want to move over to a high minimum wage as it may deter producers, as they rather produce for a cheaper price improving their profit margin on products. But if there was to be an international wage it would ensure that people were not being exploited in any specific region. It would be difficult to speculate what affects an international minimum wage would have on the global economy, as it could cause the creation of a black market for labour.

Discuss whether regional variations to the National Minimum Wage are a good idea

Politically it is difficult to explain variation of minimum wage within a country, as the argument would be that there is a greater cost of living within a certain area, therefore establishing that there is serious inequality within the country. Economically, variation to minimum wage with respect to region is logical. As noted in the example of the United States, were each state is allowed to set its own minimum wage as long as it is greater than the federal minimum wage. In England the cost of living is greater in remote areas due to the reliance on personal transportation (driving) and the lower supply of basic goods. Therefore, it would only make sense if the minimum wage for that area was increased.