The illusion of competition

Hello world. My posts on this blog have been sporadic, I’m generally moved to write by economic activity and the global economy (Africa excluded) has been, by and large plodding along in its sluggish manner. There has been no breakthrough policy shift; no ideological shift away from the current set of policies, rather, a continuation of what we’ve seen, which is public sector cuts and the detrimental consequences of such actions.

What this prolonged period of economic activity has shown us is the fact that profits will always by certain sections of our society. Despite policies that have had a nefarious effect on large sections of our community, profits have been made and if we look at the market structure of the firms making profits then it is clear that they mainly resemble oligopolies and monopolies.

Before I explain the ramifications of this apparent anomaly, I should stress that I am not here to lambast profit making. Profits are a sign of an efficient business, whereby costs are controlled and a business can expand. Without profit business would not exist, not only would there be no incentive to innovate and take ideas to market, but a firm would have no means in which to continue producing their good or service. In an ideal world however, profits would be generated in a naturally competitive market. And a competitive market has no room for oligopolies and/or monopolies to form.

My previous pieces here and here show how oligopolies are bad for consumers because they allow firms to charge whatever prices they feel suitable, leaving consumers with no choice. What is so distasteful is the fact that goods and services that are essential to our wellbeing are the ones where competition is non-existent and legal barriers are erected in order to prevent newer entrants from challenging established firms.

It may be coincidence but as the weather gets cooler the utilities market seems to increase prices and this year is no different. If we look at British Gas, one of the largest firms in this market, they are increasing gas by 8.4% and electricity by 10.4%. Ian Peters of British Gas admits it is “unwelcome news” but in an industry where there is no effective competition comments such as his could act as a condescending reminder of the contrasting fortunes of our increasingly divided society. Whilst I do not doubt the sincerity of his comment, it comes during an extremely difficult period of stagnant economic activity, where households have been forced to cut spending therefore demanding less. Comments such as his can only add insult to injury. The Energy Secretary Ed Davy was not pleased, adding that the price increases in general were “extremely disappointing news.” He and the Prime Minister advocated that consumers “shop around” for the best deals. Therein lies the fundamental problem. Even if consumers switch from one energy company to another the market structure itself dictates similar prices, thus the savings are marginal at best. For savvy consumers looking to save every penny (and in this climate, who could blame them?) this is a restrictive option. It should be noted however that collusion in any oligopoly is either deliberate (which is illegal) or tacit. So firms will mimic their rivals.

Source: BBC

The formation of the energy cartel in the UK is an explicit example of market failure. Market failure is where the free market fails to effectively distribute resources efficiently. In order for governments to erode this failure there are a number of political and economic tools it could utilise in order to help correct this failure. Governments often spout the notion that markets are regulated. Regulation is a surrogate form of competition that probably disrupts the flow of business activity as oppose to aiding it. What governments should do and what they claimed they were doing when they privatised several important industries was ensure that market power cannot become concentrated into the hands of a few large firms. This has not happened. Rather, the inefficient government owned industries have been replaced by the inefficient privately owned firms. In fact, when government owned them they had to answer to the taxpayer, now these firms answer to shareholders, the stakeholders i.e. consumers have no say. Their acquiesce is a formality.

The same situation is prevalent in transport where prices will rise again in January by 4.1%. Again the traits are synonymous with other oligopolies, consumers have no choice.

Powerful firms often use branding as a way to create the illusion of competition. Branding allows consumers to associate that good or service on its own merits, but as the diagram below highlights, rather poignantly, so few firms actually have substantial control over goods and services we have to demand.

The 10 major food companies

I began this piece by stating that profits are still being made by sections of our society. I am not advocating for some quasi profit distribution to the lower echelons of society. I am however suggesting that the public demand much more from national government. Where oligopolies are formed, governments should be pressured by the public to erode the legal barriers preventing a number of newer entrants challenging the dominant firms. Until actual competition is established and markets resemble a monopolist market structure, where there a lot of firms and new entrants can enter the market easily, prices in essential industries are only going to go in one direction.

Paul Krugman on BBC HARDtalk

Although this interview was conducted some twelve months ago Professor Krugman’s arguments about how to end the Great Recession are more potent than ever. Professor Krugman is a well known Keynesian and he has been advocating for more government expenditure. Although the government in the UK are extremely unlikely to change from its programme of fiscal consolidation, empirical evidence does suggest that substantial government spending is the most effective method to restoring economic growth during a recession. Krugman used the example of America post 1930 and Roosevelt’s “New Deal,” an economic plan designed to boost the American economy through government spending.

 

Read of the Week

This is an excellent piece relating prostitution and the public sector cuts. This blog is intended to highlight how significant economics and economic decision making is and how it affects every aspect of society. Thus, no part of society is exempt.

http://blogs.independent.co.uk/2013/05/01/prostitutes-and-the-recession-how-david-cameron%E2%80%99s-cuts-are-affecting-british-women/

Is Justice Reinvestment a viable solution to the UK Prison Crisis? Part 1

Getty

The following is part one of a special look at the prison system in the UK. The prison population is near full capacity and incarcerating criminals is an arduous and expensive process. Justice Reinvestment seeks to allocate resources away from building and funding of prisons and looks to invest resources into greater societal schemes that could prevent crimes in the long term.

Justice Reinvestment (JR) is a simple concept, reallocating resources away from prisons and investing funds into societal schemes. The resources invested are aimed at eradicating the problems that lead onto criminal activity before they manifest. That should result in the long-term reduction of the number of incarcerations. The prison system in general is wasting resources and failing to tackle the long-term problem of reoffending.

There are currently 84,000 prisoners in the UK, full capacity, despite household and violent crime falling by 46% since 1995. Sentencing has not followed in the same direction. The inverse relationship between the drop in crime and rise in incarcerations highlight the odd relationship between high sentencing and fall in crime. Crime has fallen yet more people have been sent to jail.

Clearly the current prison situation is both inefficient and ineffective as greater emphasis should be devoted to criminal prevention rather than punishment, tackling the act once it has occurred may “solve” the crime, but the greater problem of why an individual or group have committed the crime itself highlights the need for a substantially greater understanding of crime prevention. The current prison system does not tackle crime prevention very well.

Philanthropist George Soros and his firm Open Society first expressed concerns with regard to similar problems within the US penal system, Allen and Stern suggest,

“George Soros has been questioning the cost of maintaining the current unprecedented level of imprisonment in the US and asking whether a redirection of resources away from criminal justice and into social, health and educational programmes might not make a more effective long term contribution towards creating safer and stronger communities.” (Justice Reinvestment – A New Approach to Crime and Justice 2007)

The concerns raised here share similarities to those being expressed in the UK, hence why JR could provide a realistic solution to the current penal crisis.

The prison crisis in the UK is the manifestation of both the latter stages of the John Major government (1990-1997) and more significantly Tony Blair and Gordon Brown. (1997-2010.) The manifesto promise of not only being tough on crime and more significantly the causes of crime, the current prison crisis has not benefitted from their efforts.

“On crime, we believe in personal responsibility and in punishing crime, but also tackling its underlying causes – so, tough on crime, tough on the causes of crime, different from the Labour approach of the past and the Tory policy of today.” (Labour 1995)

The idea of JR would appear to adhere to the Labour manifesto of 1995 that promised to act on the causes on criminal activity. The proactive approach is likely to provide remarkable knowledge on reoffending. The data could prove pivotal for identifying patterns and relationships between the criminal and their background. Identifying certain traits in societal behaviour would provide insightful knowledge on reoffending and resources would be in place to tackle it directly.

The crisis could be viewed as a simple problem of demand being greater than supply. Half of all prisoners reoffend. This has increased pressure on the prison system to reduce overcrowding so that prisons not only punish, but educate, rehabilitate and reform prisoners so that they can reintegrate themselves back in society reformed and not reoffend. Currently, resources are at full capacity and the prisons are struggling to provide those services due to the sheer numbers of incarcerated. The revolving door culture with criminals is putting further strain on the troubled economy. JR provides insight in reducing the long-term problem of high reoffending. This is by no means a short-term solution; it requires a more long-term approach and immediate reoffending rates are not likely to fall dramatically. However, what JR would provide is an in depth understanding of the why reoffending is so high.

No room left.

For several years tough on crime or zero tolerance translated into imprisoning record numbers of criminals. Also, building more prisons appeared to offer the solution to the growing demand for prison space. All of this occurred whilst criminal activity was falling. In hindsight, it would appear that the government at the time appeased the general public’s call for the justice system to be tough on crime. JR would provide a viable alternative to the current problem, which would appear to be a problem with central legislation and the general short-sightedness of politics in the UK, local government require much greater micro control over released prisoners. With greater control, local authorities could look to improve certain areas that are disproportionally represented in prisons and look for those funds to help improve the affected regions. It may seem unlikely at this point, due to the scope of the project. Nonetheless, stiffer discussions in Parliament should take place. The most recent reshuffle saw David Cameron remove Kenneth Clarke and replace him with Chris Grayling. Many view this move a political move to the right. Clarke was rather too ‘liberal’ for many Tories who favour a hardline approach. Robert Winnet of The Telegraph suggests

“His [Ken Clarke] pro-European stance and relatively liberal views towards criminal justice have brought him into conflict with Mr. Cameron and other senior Tories” 

In addition, for true justice, emotion (which public opinion is mainly driven by) must be removed in order to maintain the authenticity and the impartiality of Justice. However, the nature of the political system in the UK requires politicians to be rather myopic with long-term decisions.  This emphasizes why JR could offer a viable solution for the capacity problems in the UK.

Albertson and Fox highlight the fact that public opinion appears to at least be shifting towards policies that would appear to support many of the ideas and suggestions that are presented in the Justice Reinvestment proposal.

“The public do not rank prison highly as a way of dealing with crime. Most think that offenders come out of prison worse than they go in.”

What this shows is that the public is aware of some of the immediate concerns regarding the penal system, reinforcing the need for desperate reform. By the same token however, there does appear to be a ‘stubbornness’ or lack of understanding from large sections of the public with regard to criminal justice and members still believe that sentences are too soft. The former Justice secretary Kenneth Clarke nonetheless was advocating for substantial change to the current penal system. In an interview with The Times in 2011 he not only expressed concerns over the cost of the current penal system, but also the conditions of prisons in general.

“Prisons are financially unsustainable. It is just very, very bad value for taxpayers’ money to keep banging them up and warehousing them in overcrowded prisons where most of them get toughened up.”

Whilst Clarke’s concerns regarding the aggregate cost of the prison system in the UK is justified due to the current state of the UK economy, implementation of Justice Reinvestment would require centralized power from national government being transferred to local government. This would involve “substantial transfer of funds.” (Allen and Stern 2007) The criminal system and local governments are not exempt from the public sector cuts. This outlines why JR moves funds around, rather than demand more. So it is a question of where those funds go.

Clarke’s main concerns appear to be surrounding the aggregate cost of the current penal system, it does display why the current system is simply not sustainable. JR explicitly states that local authorities will have greater micro control over how funds are utilised. In theory at least, this would present a viable alternative to the current, unsustainable system.

In part 2 I shall look into the prison population further, look at JR in more detail and arguments against JR. 

Do right wing parties become more popular during economic downturns?

Golden Dawn: Their sharp rise has occurred during the worst economic crisis since The Great Depression

Clearly the global economy is disarray. Several large economies around the world have still not resumed their pre crisis levels of output and that does not appear to be changing anytime soon. This has several consequences, unemployment across the world, especially in Europe is high, people have less disposable income so spending levels are lower and there seems to be rising support for right wing politics. This has led me to ask a question: do right wing political parties become more popular during periods of economic upheaval? My answer is yes.

Economic stagnation or downturns are periods in which more people lose their homes, credit is harder to obtain, several businesses close down, unemployment & underemployment rise and disposable income is reduced. They occur during an economic upturn, however, the positivity during an upturn far outweighs the negativity, so the effects are minimalized. So if we take the UK for example and we look back during Tony Blair’s premiership, the economy was booming during most of his time, with exception to the downturn of the early 2000s, (dot com bubble) post 2002 the economy is performing well. At the time Britain was pro E.U. and pro immigration and a lot people were contempt to allow migrant workers to come to Britain. Nobody can escape the UKIP hysteria; they were often ridiculed as just another political party whose views on immigration and E.U. membership were extreme. Now Nigel Farage has David Cameron looking over his shoulder. The progress UKIP have made since the credit crunch has been nothing short of remarkable. In this age where the main political parties have lost connection with several disillusioned members of the public, UKIP represent boldness and consistency. But their views are more acceptable during a time of economic disarray. They are saying nothing different from ten years ago, they were anti-E.U. then and they are now. They were anti-immigration then and they are now. And migrant workers coming into Britain is not a recent phenomenon, yet there surge in popularity has transformed them from just another political party comprising of disgruntled former Tories into a real pain to the three main political parties. Moreover, their MEP seat looks secure and a recent YouGov opinion poll shows that public opinion is on their side and politically, immigration is such a contentious issue, politicians know they must tread carefully around it, often lacking the boldness UKIP has, hence there surge in popularity.

UKIP leading the way according to poll                                                     YouGov

 This surge has stemmed from the fact that the large public sector cuts have affected millions of people. This is on the back of the huge bank bailouts ordered under Gordon Brown for several failing banks and the fact that the large public sector deficit does not appear to be reducing. Economically the UK has a long way to go. It certainly has a huge effect on people’s lives, their mood, thoughts and actions. People think differently during recessions and downturns and this is reflected on the political landscape. Politics provides the avenue in which any citizen can protest against political actions and clearly people are speaking out against the way society is today. And this is because the economy is in such a dire situation.

 Last year in France, François Hollande won the general election. By defeating Nicolas Sarkozy he was elected President. One could suggest that many French voted out of protest in order to remove Sarkozy due to the problems in the economy. The French had similar concerns to the British, mainly regarding its economic woes and social problems based around immigration. Moreover the real story of this election was Marine Le Pen, leader of the far-right group Front National (National Front.) Of the 35,883,209 who voted, the Front National received 6,421,426 of the votes. So 18% of the votes went to a far-right political party. Thus the Front National came third overall. Again, their clear policies struck a cord with over six million people and this was their best election result to date.

The Euro Zone has come close to collapse and nowhere has that been more apparent than in Greece. Greece has always had high levels of public expenditure and around 10% unemployed for the last ten years, so this has added to the high national debt. Who should be blamed is not the issue at hand? If anyone should take responsibility it is the Greek politicians, for overseeing the mess and allowing public finances to spiral out of control. in the midst of this the far-right party Golden Dawn has had a huge impact on Greek politics, their surge in popularity certainly provide and sometimes channels the energy the recession has created. Their anti-immigration policies, much like Front National and UKIP have resonated with people and have provided them with the platform in which they hope to gain considerable election success.

If we look at the UK again, much of what the BNP said about immigration is not that different from what UKIP opine. Where they are on the political spectrum is different fair enough, but in terms of both being anti-immigration they are virtually the same. Yet the BNP was close to bankruptcy and UKIP appear to be going from strength to strength. Times have certainly changed. In an economic downturn people may have less patience for issues such as immigration, social housing and the provision of social services such as education and health care. This is usually because tax receipts have shrunk as a result of higher levels of unemployment, public sector cuts and less activity in the economy as a whole. So people may feel that domestic policy ought to prioritise its national citizens before seeing to the needs of others. What does not garner the same emotion from public attention are the benefits immigrants usually bring to communities. Ethnic minorities make up 6.24% of the Greek population. This figure has been growing steadily, but up until 2005, Golden Dawn were not the force they are now. The Greek economy has rotted since and the popularity of not just Golden Dawn, but right wing politics, especially in smaller parties, has gathered loyal cult followings, what they hope is that it manifests into tangible political success. They are at the very least making their bigger counterparts take notice, especially at local elections.

Personally, I think UKIP and the surge in popularity in far-right political parties highlight the sad state of politics in the UK and the rest of Europe today. However, I genuinely believe in freedom of political expression. For me UKIP provide more problems than solutions because they are virtually a one-policy party and I am yet to be convinced what they would do if the UK were to leave the E.U. In the case of the Front National in France, Le Pen was recently voted the most popular French female politician so she does not look to be losing any momentum.

I am confident that if the global economy was in a better state, more people had jobs and more money in their pocket then I can’t see where the far-right could get their impetus. Blaming immigrants for instance is a weak and flawed argument for the UK at least. There is no doubt that immigrants reduce the cost of labour, but the problems in the UK are more complex than blaming one group. Maybe the UK has got too many immigrants, but what I am certain of is this issue is not a simple case of close the borders and the problems will disappear. I would personally like to see the same energy exerted towards tax avoidance from large multinationals because that could potentially recoup billions in tax revenue.

How UKIP and other right wing parties perform in the next series of elections should be interesting, if the economy is still as sluggish as it is now, I predict well, and if the recovery is looking strong then I don’t think they’ll do that well. My only hope is that the economy starts to show real signs of growth and it will be interesting to see how the right reacts to that.

Budget 2013

Continuity rather than change as the UK economy continues to stroll along sluggishly

It has been a week since Chancellor of the Exchequer George Osborne announced his 2013 Budget and the reaction has been quite blunt in all honesty. The reaction probably reflects the state of the economy, flat and underwhelming. Osborne has decided to bring in more cuts, looser monetary policy and he is even trying to create another housing bubble.

Before I analyse some of the key facets of the Budget it should be noted that youth unemployment is close to 1m, underemployment (the number highly skilled workers in low paid work) currently stands at 3.05m and the Bank Of England is warning the country of a triple-dip recession. Things look bleak to say the least. With the economy performing so poorly I was hoping (not expecting) the Chancellor to announce at least one policy that could galvanise consumers; a cut in the rate of VAT would have been ideal. Retailers were complaining about a lack of spending on high streets at Christmas, making things cheaper would incentivise spending simply by making things cheaper. This could provide some remedy to the economy that clearly needs a boost.

But it was not to be and Osborne made it clear he was sticking to Plan A, deficit reduction. Unfortunately spending as a percentage of GDP has actually increased since the Coalition took power and this is due to the increase in unemployment and therefore welfare payments. This accounts for the nominal rise in welfare payments such as Job Seekers Allowance, but the decline in real terms. Home Secretary Iain Duncan Smith announcing a 1% increase.

Plan A is not working to the dismay of Osborne and the Office Of Budgetary Responsibility (OBR). The fiscal watchdog, a body founded by Osborne in 2010 had to revise its growth figures again, predicting growth in 2013 to just 0.6%, down from its previous figure of 1.2%. This is not the first time the OBR has had to revise its growth figures, leaving me to wonder how they can be repeatedly making either optimistic or unrealistic forecasts for growth. In their defence there are obviously only predictions and forecasts should never be taken as a given, still, it does not bode well. A figure of 1.2% is hardly triumphant; let alone slashing that figure by half.

As I mentioned the deficit is actually rising, so the austerity medicine is not actually working…yet. It was always a long-term goal, the goal to reduce the bloated public sector and have the private sector replace the jobs lost, but that clearly is not happening. The current deficit stands at £120billion, so the debt-to-GDP is at 88% (IMF). In other words, the public finances are going to have to reduce significantly until we say any major fiscal policies exerted by the government, as the debt-to-GDP is very high.

Clearly Osborne’s policies highlight his and the government’s stance on fiscal policies. But with the economy is such disarray there will be some avenue to try and stimulate the monetary side of the economy and this is the reason why Osborne has refreshed the Bank Of England’s mandate. In an attempt to provide more room to maneuver the Bank of England will now be a little more flexible in it approach. Perhaps the biggest change in the Bank Of England’s mandate is something known as “explicit forward guidance” whereby the MPC makes a pledge to keep rates very low over a designated period. This should give markets more confidence due to the stability announcements should provide. It should also grant consumers with sufficient information about interest rates on loans, if rates remain low it should encourage more spending. These outcomes remain hypothetical and over time, the Chancellor may refresh the remit. In my opinion, the policies may be ineffective. If you look at the current interest rate, it has been at a record low level of 0.5 % since March 2009 and that still has not added much to market confidence. This situation resembles Japan in the early 1990s. Not only can predictions be made about the interest rate, but the evidence given highlights that it does not always translate to increase in spending, despite the low level of interest attached. We could even be in a liquidity trap, a state in an economy where monetary policies have no effect on growth. The interest rate has been 0.5% since March 2009, since then the Bank Of England have tried to boost the economy by buying government debt, quantitative easing, which is monetary policy. Growth has remained very low and the policies do not appear to be working.

The Chancellor also announced a new policy known as the “Help to Buy” policy, which is designed to protect banks against losses on high value mortgages. Politically, it may look good, but economically there are questions. It sounds like a government funded credit bubble. Whilst I do not think it will resemble anything like what we saw during the Blair days of the economy being pumped full of toxic mortgages. As time elapses, the scheme will undoubtedly become clearer. It may even provide the boost this economy so desperately needs.

In all honesty this Budget has confirmed that the UK has a long road ahead in terms of a tangible growth. The economy continues to “grow” at a disappointing rate and there are more cuts to come. Despite the cut in beer relief, the cut in cooperation tax that benefits large multinationals more than small or medium sized ones, this Budget has reflected the mood of the economy. It has been flat.

Is Economic Growth the aim for the UK?

High Streets up and down the UK have not had the easiest times lately

Since 2007, the global financial crisis engulfed several leading economies and placed them in a precarious position. Output in many G20 nations declined and it was the worst downturn since the Great depression. When an economy is growing we notice that more people find work, credit is easier to obtain and living standards for the majority of society tends to rise in harmony with the economy. In a downturn and recession (defined to two consecutive quarters of negative output) the opposite tends to occur, less jobs created, rise in unemployment and usually a rise in income tax to compensate for the lost output.

Since the coalition in the UK came into power in May 2009, Chancellor of the Exchequer George Osborne has led the way with polices aimed at reducing the UK’s deficit. A deficit is the sum of government debt, deficits being a flow variable and debt being a stock variable. As we have all heard, this is his primary aim, so we have seen large reductions in government expenditure, in an attempt to curb government spending because the current government deem it too high. Fair enough, Labour may have binged a little on spending and some savings needed to be made. But, the best way to reduce government debt and therefore the deficit, is to stimulate economic growth. It is economic growth that will reduce the deficit, not only will growth translate into more jobs being created, more goods & services made available and more disposable income for households, but it will also help the government achieve their aim of deficit reduction.

It is this failure of George Osborne and Business Secretary Vince Cable to recognise this that has made me ask the question, is economic growth even their aim?

The OECD has backed Osborne’s economic policies, suggesting that fiscal consolidation is an urgent requirement. Whilst I can accept that, there are policies that the government could bring in in order to increase public spending. They have not. When the government came into power one of their first economic decisions was to increase VAT from 17.5% to 20%. This increase of 2.5% makes everyday goods that have VAT attached 2.5% more expensive. If you want people spending, make things cheaper, it’s that simple. Retailers had a rather subdued Christmas, had VAT being 15% or even 12.5% then I’m sure it would have had a significant difference.

The UK is also not a member of the Eurozone. This should provide a bit of protection from the farcical situation currently engulfing several imbalanced economies. Whilst the UK is very close to the other nations, the fact that it can manipulate its currency should provide some breathing room in which it could devalue the Pound and attract new business. With the Chancellor cutting cooperation tax, the UK should be seen as an ideal location for business. However, whatever effect the domestic currency is having alongside the competitive cooperation tax rates is clearly not penetrating the economy strong enough and the recovery is taking much longer than it should be. Moreover, incomes generated by large firms do not appear to be trickling down to the rest of society. Unemployment in the private sector confirms this, as it is increasing at a sluggish rate.

All of these factors combined makes me wonder if all this austerity is actually worth it, because the opportunity cost of allowing the economy to stroll along in this mundane manner represents time lost. It just appears that the government is holding back for future consumption. It is a dangerous move in my opinion because it could lead to large structural damages that could take several years to repair.

The Chancellor will be providing a new Budget soon and I’m sure it will contain more of what we have already heard.

I’ll conclude with the fact that David Cameron does not think you tackle a debt crisis by issuing more debt (governments increase debt when they spend). However, as so long as jobs are created, taxes are paid and the economy is growing the level of debt does not matter because the positive effects of economic growth cancel the negativity associated with the debt. It is when an economy is not growing that the level of debt and deficit becomes an issue. Furthermore, there is not a single large economy that has cut its way to growth, so if it does happen in the UK all of this austerity will be worth it. The benefits do appear to be a long way away right now.

George Osborne’s record in statistics

George Osborne’s record in statistics

After announcing the Winter Statement, here is a look at George Osborne’s record.

Source: The Guardian

Privatisation is Justified… Only if it results in competition.

There is very limited choice in many of the privatised industries including rail.

Privatisation in the UK during Margret Thatcher’s premiership was intended to shift the economic burden away from taxpayers into private hands. It was intended to erode the natural state monopoly and establish market-based competition. Economic theory suggests that privatisation eradicates the state owned monopoly and creates competition in the market, which should lead to better services and a lower cost. Government led businesses are said to be inefficient at providing services that a private led firm can do, so the appeal is certainly there.

Nationalised industries tend to provide goods and services with high social value, goods such utilities, agriculture and transport tend to be provided by the state because these derived demanded goods are viewed as essential. Unlike firms, the state’s intention is not to maximise profits, so there are no shareholders to appease, nor answer to. This has its advantages and disadvantages because constantly operating at a loss will impose a burden on the taxpayer, who may feel their taxes would be best utilised elsewhere, where there taxes are not being wasted.

This was central when Thatcher and her government suggested that a wave of privatisations across various sectors such as transport, telecommunications and utilities were the best way to reduce the burden on taxation and the optimal way for consumers to be provided with essential goods and services. The state was viewed as a natural monopoly and the highest consumer satisfaction and utility is gained through competition, it is competition that yields the greatest efficiency and the lowest possible prices. Therefore, establishing competition through several competing firms was central to this proposal. Economists Todaro and Smith suggest,

“Proponents [of privatisation] suggest that it curbs government expenditure, raises cash to reduce internal and external debt and promotes individual initiative while rewarding entrepreneurship”  

Clearly the benefits of privatisation are clear, the eradication of the natural monopoly is perhaps the strongest because it opens the market and allow more firms to compete. However, in the UK this unfortunately has not been the case. The wave of sell offs during the 1980s continues to have a significant effect on life in the UK today. Services such as gas were privatised, so was telecommunications and parts of the rail industry. Some twenty years later after firms such as British Telecom (BT), British Gas and regulatory bodies such as Network Rail not only stifle competition, but they appear to have replaced the very monopoly it was created to replace.

John Moore was the Minister in charge of initiating the wave of privatisations. He said in 1983

“The long term success of the privatisation programme will stand or fall by the extent to which it maximises competition. If competition cannot be achieved, an historic opportunity will have been lost.”

He said at the 1983 Conservative Party conference:

“Our aim is that BT should become a private sector company…[but] merely to replace state monopolies by private ones would be to waste a historic opportunity. We shall continue our programme to expose state owned industries to competition.”

Moore explicitly states if privatisation cannot lead to a competitive market “an historic opportunity will be lost.” I could not agree more because had the privatisation initiatives been applied appropriately, with legislation implemented to prohibit cartels forming in the case of the rail industry or outright monopoly, like BT in the telecommunications market then these formerly stated owned industries would have created far more jobs on the sheer fact that the market would be significantly larger, they also would have lower prices. And they would have lower prices because there would be ten or more firms each competing to try and get customers, so lowering prices in order to attract custom. If however there are two or three firms, then they are more likely to collude, whether it is explicit or tacit, the outcome is the same and it is near impossible to detect.

Commentator John Gamble stating in 1994

“When BT, BG and the water industry were divested, the Conservatives failed to liberlise their markets meaningfully and as a result, were forced to create regulatory mechanisms and institutions to prevent the utilities from abusing their positions.” 

I mentioned in my piece about regulation and the above inflation gas price increases and how regulators in many instances interfere with business activity and can actually do little to prevent firms from these price changes. It should be noted that the way a customer will have low prices is through competition. That was the reason why Mrs. Thatcher sold off many state controlled firms, but we are seeing today that the state monopolies have been replaced by cartels and monopolies in some cases. Moreover, this is conflicting to what was proposed. One could even suggest that a return to state operated firms were better, because at least they are accountable to the public. Private cooperations are accountable to shareholders are not obliged to disclose information to stakeholders.

Privatisation in the UK does appear to have shifted from natural monopolies to private monopolies in the case of BT and oligopolies in the case of Network Rail, British Gas and so on. Clearly, this is the oligopolistic market structure is not competitive and fails to provide sufficient customer choice. Customers are therefore left to demand essential goods from limited suppliers, resulting in high prices. Unless privatisation leads to a highly competitive market, with several competing firms, it is merely replacing the very entity is supposed to be replacing.

All Being Watched Over By Machines Of Loving Grace

 

I first saw this documentary about two years ago on BBC2 and it remains one of the finest, if not the finest documentary I’ve seen. Adam Curtis manages to draw upon what appears to be obscure links and pull them together to identify a big and fascinating picture. If you are looking for some answers to the current financial situation then watching this video is a must.