Category Archives: Economic Systems

Nationalisation v Privatisation – Britain's railways

public privateIn the Cambridge AS Economics syllabus a new topic was introduced in 2016 which looks at the areas of privatisation and nationalisation in an economy. Below are some notes on the topic and a good video on the renationalisation of British railways.

Rising fares, overcrowded trains and delayed services have led to increasing anger over how Britain’s railways are run. According to a YouGov survey last year, 60% of the British public support renationalising the railways. The main reason cited – that they want the railways to be accountable to taxpayers, rather than shareholders. This begs the question, could we see a renationalisation of Britain’s railways in the future?

Nationalisation is when a government chooses to take an industry into state ownership in order to safeguard the supply of a good or service.

Privatisation is the transfer of ownership of property or businesses from a government to a privately owned entity.

Potential Benefits of Privatisation

  1. Improved Efficiency – private companies have a profit incentive to cut costs and be more efficient.
  2. Lack of Political Interference – Governments are motivated by political pressures rather than sound economic and business sense.
  3. Short Term view – A government many think only in terms of next election
  4. Shareholders – a private firm has pressure from shareholders to perform efficiently
  5. Increased Competition – more firms mean greater competition and efficiency
  6. Government will raise revenue from the sale – only a one off benefit and future dividends are lost.

Potential Benefits of Nationalisation

  1. Natural Monopoly – Many key industries nationalised were natural monopolies. This means the most efficient number of firms is one.
  1. Externalities – Some of the nationalised industries had significant positive externalities. A government can run public transport system could invest in public transport to help improve the economic infrastructure.
  1. Welfare Issues – Some industries play a key role in the welfare of consumers and citizens. Government provision means that needy groups can be looked after and provided with basic necessities.
  1. Industrial Relations – Labour unions often favour nationalisation because they feel they may be better treated by the government – rather than a profit maximising monopoly.
  1. Government Investment – Some industries require long-term investment to improve services over time. This long-term investment may not be profitable in the short-term, so without government intervention they may suffer from lack of long term investment.

Russia – economic concerns.

Part of the excellent Al Jazeera documentary series about Russia, which addresses the problems facing many Russians today. The global economic crisis, conflicts with neighbouring countries and the drop in oil prices all played their part in the demise of the Russian people. There is a very good interview with the former Central Bank Chairman Viktor Gerashchenk who held the position during Yelstin’s reign. He explains very simply how you grow your economy and that there must be money in the banks so that companies can borrow and invest. Buying US Treasury Bills was loaning money to the US and paying for their deficit. Meanwhile the infrastructure and public services declined rapidly causing a lot of anguish amongst the people. You can’t suddenly jump from a socialist system into the free market. Worth a look.

AS Level – Economic systems: North Korea

Following on the theme of economic systems and North Korea, below is a documentary from the BBC Panorama programme. John Sweeney goes undercover in North Korea and finds out what life is really like. The documentary shows: State ownership, State control, price controls and extreme government failure in poor quality goods and services, massive shortages, and crippling unemployment. He does venture over the border to South Korea  where the experience is in stark contrast. Good video to finish off the market systems topic.

 

Satellite photo for teaching economic systems

Teaching economic systems with my AS Level class and I use this great satellite photo to introduce the topic. I usually get students to write down what they understand by the photo. You should get a range of answers from – “they have no nightlife in North Korea” to “North Korea has a controlled economic system and it is blacked out from failure of the electrical grid except for Kim Jong Il’s palace”.

I got the image from the book Nothing to Envy: Ordinary Lives in North Korea. The book looks at the lives of six defectors from the repressive totalitarian regime of the Republic of North Korea and how it collapsed catastrophically into poverty, darkness, and starvation under the dictator’s son, Kim Jong Il.

Should we have a Universal Basic Income?

Post Cap MasonI posted on this issue last year when Kim Hill (Radio NZ) interviewed Paul Mason  – author of Post Capitalism (now out in paperback). Mason makes the point that we are going to live through a long transition from capitalism – the state and the market to post capitalism which is the state, the market and the shared collaborative economy. With technology taking a lot of the jobs in traditional industries in the UK he states that further development in this sector is not the way of creating new jobs. He talks about delinking work from wages by just paying people to actually exist – rather than tax to exist.
Liam Dann (NZ Herald) wrote a piece about Amin Toufani’s presentation at SingualrityU summit in Christchurch where he talked about people in the labour force having to learn, unlearn, and learn again – unlearning should be core competency. However as there maybe many people who will struggle with this concept Toufani believes that a universal basic income (UBI) may need to be adopted – see RSA video below.

Recent events – UBI

  • Switzerland held a referendum on a basic income in June this year but it was comprehensively turned down.
  • Finland is going to run a U.B.I. experiment in 2018
  • Y-Combinator, a Silicon Valley incubator firm, is sponsoring a similar test in Oakland USA.

Why has the UBI become such a popular talking point?

  • The automation of a lot of jobs has left people very concerned about redundancy.
  • The modern economy can’t be expected to provide jobs for everyone
  • The UBI is easy to administer and it avoids paternalism of social-welfare programmes that tell people what they can and can’t do with the money they receive from the government.

Concerns

  • Potentially drives up wages and employees will compare their wages with the UBI.
  • Easier for people to take risks with their job knowing there is the UBI to fall back on.
  • It takes away the incentive to work and lowers GDP
  • UBI – not cheap to administer and would likely cost 13% of GDP in the US

Positives

  • In the Canadian province of Manitoba where the UBI was trialled, working hours for men dropped by just 1%.
  • The UBI would make it easier for people to think twice about taking unrewarding jobs which is a good consequence.
  • In the developing world direct-cash grant programs are used very effectively – Columbian economist Chris Blattman.
  • In New Jersey young people with UBI were more likely to stay in education

If the U.B.I. comes to be seen as a kind of insurance against a radically changing job market, rather than simply as a handout, the politics around it will change. When this happens, it’s easy to imagine a basic income going overnight from completely improbable to totally necessary. 

James Surowiecki – New Yorker – 20th June 2016

 

Why everyone should know some basic economics.

Below is a great animation from RSA in which Ha-Joon Chang  (South Korean institutional economist specialising in development economics) explains why every single person should know some basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel. He mentions the nine schools of economic thought which are Austrian, Behaviourist, Classical, Developmentalist, Institutionalist, Keynesian, Marxist, Neoclassical and Schumpeterian. Furthermore, he makes the point that given the complexity of the world and the partial nature of all economic theories, you should be humble about the validity of our own favorite theory. Therefore keeping an open mind about its usefulness in society.

A lot of what he talks about is in his excellent book entitled “Economics: A User’s Guide”. 

Nationalisation v Privatisation

public privateIn the 2016 Cambridge AS Economics syllabus there is a new topic which looks at the areas of privatisation and nationalisation in an economy. Below are some notes on the topic.

Nationalisation is when a government chooses to take an industry into state ownership in order to safeguard the supply of a good or service.

Privatisation is the transfer of ownership of property or businesses from a government to a privately owned entity.

Potential Benefits of Privatisation

  1. Improved Efficiency – private companies have a profit incentive to cut costs and be more efficient.
  2. Lack of Political Interference – Governments are motivated by political pressures rather than sound economic and business sense.
  3. Short Term view – A government many think only in terms of next election
  4. Shareholders – a private firm has pressure from shareholders to perform efficiently
  5. Increased Competition – more firms mean greater competition and efficiency
  6. Government will raise revenue from the sale – only a one off benefit and future dividends are lost.

Potential Benefits of Nationalisation

  1. Natural Monopoly – Many key industries nationalised were natural monopolies. This means the most efficient number of firms is one.
  1. Externalities – Some of the nationalised industries had significant positive externalities. A government can run public transport system could invest in public transport to help improve the economic infrastructure.
  1. Welfare Issues – Some industries play a key role in the welfare of consumers and citizens. Government provision means that needy groups can be looked after and provided with basic necessities.
  1. Industrial Relations – Labour unions often favour nationalisation because they feel they may be better treated by the government – rather than a profit maximising monopoly.
  1. Government Investment – Some industries require long-term investment to improve services over time. This long-term investment may not be profitable in the short-term, so without government intervention they may suffer from lack of long term investment.

Petrol prices in North Korea on the way up

A HT to Kanchan Bandyopadhyay for this piece from the Associated Press. Petrol prices in North Korea since February have risen by approximately 14% as it contends with the tougher international sanctions over its nuclear programme which is potentially putting a brake on the emerging market economy. However it is difficult to say what is exactly happening as officials in North Korea don’t discuss issues like this openly

What about supply and demand?

It might be a simple matter of the market. With more vehicles on the road there is more derived demand for petrol putting the price up. It is also possible that more fuel is being used for military purposes or for government construction or development projects. Most of the supply of petrol comes from China and the impact of sanctions is limiting the supplyThe fear that prices will rise further has coNK Fuel Couponnsumers stock piling petrol coupons. In North Korea customers usually buy coupons for the equivalent amount of fuel that they wish to purchase. To purchase 15 kilograms (petrol is sold by the kilogram in North Korea) it about $12 in Pyongyang which equates to a 20% increase in price. As with most planned economies the supply of petrol is controlled by the state and it decides on who gets what – military and public transportation such as street c
ars and buses are still kings of the road.

Black market currency 

Strangely enough North Koreans usually pay for their fuel in US dollars or euros. One kilogram of gas is currently about 80 North Korean won but no one actually pays that.

80 won =  80 U.S. cents under the official exchange rate, but only about eight-tenths of a cent under the unofficial exchange rate most North Koreans use when buying and selling things among themselves – the “real economy,” in other words.

The number of passenger cars has grown rapidly and rather than the typical black limousines or blue Mercedes sedans driven by communist party officials, they are middle of the range cars imported from China.

The growth in traffic in the capital is a visible indicator of economic activity the North generally prefers to keep under wraps. Many vehicles these days are clearly being used in an entrepreneurial style, moving people and goods around for a fee.

Higher gas prices could put a damper on such activities, or at least cut into their profits. The rise of automobiles is focused on the capital, which remains a very special place. Most North Koreans don’t have cars, or even access to cars. In the countryside, major highways are still not very well traveled and often not even paved. And gas, when it’s available, is usually more expensive.