The Economist | Deep trouble

The Economist | Deep trouble

The deep sea is a frequently used example of common access resources that is over-exploited  – a case of ‘The Tragedy of the Commons’ originally coined by ecologist, Garrett Hardin. It stems from a simple idea that the benefits of over-fishing (increased revenues) are private while the costs are shared. Unfortunately, such an approach is unsustainable as a result of over-consumption and subsequent market failure. Technology is both a cause of the problem and a solution too. Larger trawlers increase catch size reducing the number left to breed. However, new technology can help to monitor, collect information and enforce regulation. One extreme proposal is to ban fishing in set zones, this has been effective in some trials allowing fish to ‘restock’ and improve sustainability. Clearly, an international agreement is required, but this is hard, especially given the current rise in nationalism and self-interest. The WTO are working on something, but have been doing so for several years.

Port Talbot & A’level economics

A’level economics students frequently moan  that what they have been taught is not relevant to what is going on around them while economics teachers complain that students do not relate what they have been taught to the real world!

The recent events at Port Talbot provide an ideal example to use economics concepts.

The multiplier can be used in assessing the costs to the area should Port Talbot close since not only will steel jobs be lost if the plant closes, additional jobs will also be at risk as steel workers suffer lower disposable income and cut back on expenditure,  particularly in non-essential areas.

In considering the type of unemployment created, one can use the idea of structural unemployment since many of the steel workers affected will not have the skills needed in newer, growing industries.

The possible closure of the plant is relevant to the arguments about the benefits of free trade and the theory of comparative advantage whereby UK steel purchasers benefit from cheaper steel imports from China which need to be set against the  job losses among UK steel producers. This aspect can be expanded to consider whether the Chinese are dumping steel on the world market and, if so, what action should be taken, especially in the light of the tariffs on Chinese steel imposed by the USA and those imposed by China on imports of steel from the EU and elsewhere.

A final example is in the  field of market failure where Tata have complained that the UK Government’s environmental policies have raised energy prices and helped make UK produced steel (and heavy industry generally) uncompetitive. UK electricity prices are almost double those in the rest of the EU and more than double those in China and while these high prices help to subsidise renewable forms of energy, they make life difficult for UK firms.

The market for legal advice in the UK – competitive market or cozy cartel?

A report in today’s Independent newspaper suggests that the cost of legal advice from one of small number of well known firms in the UK, collectively known as the “Magic Circle”, has risen by around 100% in real terms since 2003.  The market structure for this industry seems to display all the hallmarks of an oligopoly, and one which might tend towards some form of collusion; demand is inelastic, there are a small number of interdependent firms and customers have difficulty collecting good information about substitutes.

In addition, beyond these largest firms a form of price leadership structure may be in operation.  As these large firms ratchet up their charges smaller firms outside the Magic Circle take the opportunity to increase their fees in a clear example of what is commonly referred to as Stackelberg equilibrium.  The economic rents enjoyed by these firms in the form of supernormal profits may be quite considerable.

The question is, as economists should we care, and if so, what can be done?  The availability of good legal advice at a reasonable price may well have positive externalities as it protects the functioning of a market economy and also allows smaller firms to compete in all markets with larger ones as they do not face the barrier to entry in any market of very high legal costs associated with operating in the market.  In short, high legal costs may make a host of markets much less contestable.

This suggests some government action is necessary.  Everyone with a knowledge of economics should be able to recommend lots of policies to make any given market more competitive, and the market for legal advice is no exception.  A reduction of barriers to entry, a requirement for transparency in pricing, an investigation into possible anti-competitive practices and the use of large fines for those found guilty might all be relevant.  However, as we have seen in the energy market action by consumers may also be needed.  A willingness by customers to shift their business to cheaper firms and an attempt to make firms move to a fixed price model by supporting those firms which do will certainly give the Magic Circle something to think about.

Ultimately, a combination of government action and consumer action will be needed but nobody should be under any illusion; the legal profession generally and the “Magic Circle” will fight against it tooth and nail.  Economic history suggests that those enjoying economic rent seldon give it up easily.

Long Term Growth Prospects

As oil prices continue to fall, stock markets collapse and the world economic recovery falters, it is worth thinking occasionally about what is in store over the next thirty years rather than the next thirty months.

Some economists suggest that continuous, rapid world economic growth is a thing of the past since we will never again experience the waves of technological change which boosted growth over the last 150 years. In the late 19th and early 20th centuries life changed out of all recognition. The basic tasks of living, for example collecting water and washing clothes took much effort; speed and travel were totally different – journeys considered normal today, such as travelling from London to Birmingham or from London to New York were major expeditions. Communication  relied largely on the delivery of mail. It is difficult for us to understand how the gradual spread throughout the population of things today considered commonplace, such as the telephone, railways,  washing machines and the motor car transformed everyday living in developed countries.

Recently there has been concern that the world is not going to get the same positive external shocks from technology to boost economic growth that it has previously experienced. Some believe that information technology will provide the stimulus while others suggest that such things as driverless cars will provide less of a stimulus than the original invention of the car itself. To quote Peter Thiel, a major venture capitalist “We wanted flying cars but instead we got 140 characters”.

Possibly we should not be worrying about the long and focus on ensuring that the world does not head into another major recession. As Keynes said “In the long run, we are all dead.”

Macroeconomic musings 8th October

The UK economy continues to progress well. This year, for the 3rd year in succession, it is likely to achieve the fastest growth in GDP of the G7 countries and, also this year, real disposable income grew at its fastest rate for five years. In terms of happiness, as measured by the ONS, people are  more content than ever with a happiness rating of 7.5/10, the highest since the survey was first carried out in 2012.

However not all is going according to plan. The current account deficit continues at a record level and is being financed by overseas borrowing, inward FDI (not a bad thing) and sales of assets such as London property. As a result, although GDP is doing well, GNP (or GNI) which measure the amount of income going to UK firms and households, as opposed to GDP, which looks at activity in the UK, is doing less well and has grown by approximately 1% per year less than GDP. The difference between them is the net amount of money flowing out of the UK, for example the foreign industries in the UK sending their profits home. Furthermore we are receiving less in the form of interest, profit and dividends from our overseas assets because of lower interest rates and reduced profits as other countries struggle to escape the recession.

Natural monopoly and competitive markets

Any economics student who has studied long run cost curves should be familiar with the idea of natural monopoly.  Many utilities, such as telephones, water and electricity supply are natural monopolies.  This creates a problem when it come to privatizing a state monopoly, because a private monopoly can result.

In some cases the British government solved the problem by separating the natural monopoly, the network part of the business, from the supply section.  So we have UK Power Networks and a number of competing gas and electricity firms.  In the case of BT that was not the case and the privatized firm was allowed to keep its network.  However, this may be about to change, as this article shows:

http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/11903239/Taking-Openreach-out-of-BT-could-backfire-warns-Ed-Vaizey.html

There will certainly be advantages and disadvantages to separating the network from the operator, but economic theory suggests it could be a good move.