Great Read

Hello world. Today’s read touches on a poignant issue and that is the property market in the UK. I’ve previously touched on this issue here where I spoke about the dramatic effect gentrification is having on London. This piece has similarities. The report is from Transparency International UK and they make suggestions that could deter potential criminals laundering their dirty money into the UK property market.

Property in London is a secure investment as the price rarely drops due to excess demand and limited supply. Moreover, if precaution is not applied then inflationary pressures will force most Londoners to look elsewhere for properties which is the reality that most people in London now face, the capital is too expensive for most to afford and it does not help when London is such an attractive place for wealthy foreigners who view properties as secure investments. Market forces do not have to consider morality as they are not actually doing anything wrong from a business perspective; but caution should be applied as the social ramifications could lead to disillusionment from many Londoners, especially those on lower incomes.

http://www.bloomberg.com/news/articles/2015-03-04/british-real-estate-is-safe-haven-for-dirty-money-report-says

The rise of the machines

More on their way
More on their way

As I venture into my local supermarket what is clear to see is the increase in self-service checkouts. More and more supermarkets are replacing human labour with computers. Clearly this is related to cost and labour costs are a concern for some firms, so they are potentially saving millions if they replace till assistants with computers. In a competitive market, other firms will match their competitors, so my local supermarket is TESCO; if I go to the closest Sainsburys the increase in self-service checkouts is there too, same with the closest Asda and Waitrose respectively. This speaks volumes in a time where unemployment is relatively high and several household incomes contract as the burden of deficit reduction takes a toll on many low income earners, whose propensity to consume is reduced, even though a larger proportion of their income goes on living. Moreover, it must shatter morale in an organisation if you are told that computers are replacing colleagues.

It should be noted however that firms could suggest that they are prolonging the majority of jobs if they make crucial savings in this area. Undoubtedly some jobs will be lost if supermarkets continue to install self-service tills, but the savings could translate to more jobs being saved in the long run. Also, productivity could rise due to more personnel being available to assist customers, replenish stock levels and assist customers who are using trollies.

What the rise in self-service tills highlights is the rapid technological advancements in today’s society. A society where computers are critical to today’s workforce and this leads onto greater dependency as a result. In car factories, machines can complete tasks it could have taken several hours, even days for a group of humans to complete. So as time elapses, so must innovations in improving productivity and efficiency. This will come at a cost; human labour in some organisations, in the not too distant future will become virtually obsolete.

One could argue this is nothing new, of course. The Luddites of the 19th century staged several virulent protests against lower skilled, lower paid workers and they actively destroyed machines that replaced (what they deemed) their high skilled labour. There is no modern day equivalent to the Luddites, the point is more poignant than ever, labour is being firstly by lower paid workers and then eventually by machines.

Private firms besides obeying the law have no moral obligation to serve society. If they chose to do so, it is of their shareholders request or of their own freewill. Therefore, the gloomy economic climate and the high unemployment levels have little impact on the firm unless they are directly impacted by it. So it is in their own interest to do what they feel is right by their own business and reducing costs and therefore increasing profitability is their goal. How does one achieve this? By seeking efficient methods to solve costly problems. The rise in computers replacing human input is a global issue and it is directly related to unemployment levels. Paul Krugman writing in the New York Times on December 9 suggests

“There’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds, many of the jobs being displaced are high-skill and high-wage.”

This helps to understand why private firms have no moral obligation to help solve the current global unemployment problem because they are looking to help themselves and do what they need to do to ensure they make it through these challenging times. The cost is more unemployment.

Getting more people back into work is the government’s aim. The onus lies with the individual to ensure he or she is deemed valuable to their respective organisation. We are however living in difficult times and proving your value is proving tougher than usual, what is clear is the fact that firms are only going to look forward, so the computers are here to stay. What individuals must ensure is that they are working with and not being replaced by them.

Betting Shops take away more than money.

Directly across this road is Jennings Bet. 20 yards down this road is Coral. 200 yards down this road is William Hill

The gambling industry in the UK has exploded in the last fifteen years. The rapid technological advancements have helped to facilitate the boom in gambling and this has helped generate billions in revenue. There are however several social and economic implications with gambling shops. Gambling shops tend to take away more from society than they contribute.

Businesses have an obligation to return profits. That is their goal and everything else is secondary. They have no moral obligation to ensure that society is “better off” unless it is at the request of their shareholders. There is however a bigger, more poignant point that has to be made. That is betting shops, particularly in poorer areas take away more than money.

I have lived in South East London for my entire life and I pass through Deptford on a daily basis and at the beginning of a road named Evelyn Street there is a William Hill. If you travel further, some two hundred yards or so there is a Paddy Power. Across the road from the Paddy Power is a Jennings Bet and across the road is a Coral. On one road there are four competing betting shops, all providing the same service. All situated in an area of relatively low income and more importantly, all taking more away from the local community than putting back in. The main reason why I am opposed to so many betting shops in poorer areas is because the very nature of gambling ensures that money is taken away from the participant. Bookmakers may glamorise unfavorable odds by emphasing the potential winnings and bombarding customers with the rewards, but there would be no gambling industry if it were designed to reward customers. Its very purpose is to take money away. Moreover, there is more to lose if you naturally earn lower income. Individuals on lower incomes are spending a higher proportion of their earnings in betting shops; therefore they bear a greater burden if they lose.

According to BBC News bookmakers argue they create jobs and support the local community. Vague and hollow statements may wash with some, but that is an empty statement. Labour costs are the price every business must pay regardless, so to opine that is stating the obvious. “Support the local community.” How? By extracting money from low earners? Betting shops omit what we call in economics negative externalities. Externalities are the cost or benefit of ones actions that affect a third party. Betting shops create jobs (positive externality) but the increase in reckless gambling results in higher policing, higher health costs and a reduction in the quality of local lives for the rest of the community. All negative externalities. Thus, the high social costs far outweigh the social benefits.

Earlier this year more than 1,100 local Southwark residents signed a petition to curtail the number of betting shops in their local area. The campaign is aimed at changing planning laws so that betting shops cannot move into closed banks or post offices. Currently they can because they are classified as financial and professional services. But a change in the law will see them have to go through different, more difficult channels to obtain retail space. Something that would be welcomed by many.

Rowena Davis, a Councillor from Peckham South London started the petition, here is what she said:

“When I walk through my area within 10 minutes I pass eight bookmakers and that means they are more common than post offices or corner shops. We know they are clustering in poorer areas.”

Clearly this is an issue that several parties feel strongly about. As I mentioned earlier, betting shops have no moral obligation to uphold, their aim is to maximise profits. But they should still be aware of the high social costs that are imposed on society because of their predatory actions and local councils should also be aware that when betting shops are saturated on a high street, they will bear higher social costs as a result.

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.