Political Economy Review 2015
PER 2015
Introduction / Andrew Threadgould
2015 has been an exciting year in economics and politics alike. The UK General Election produced a surprising result in comparison with the story the opinions polls were telling throughout the campaign. Incumbent governments rarely increase their majority, let alone win enough seats to allow them to discard a coalition party. David Cameron has previously stated that he will not lead his party into the next election campaign, and the best gift he can leave for his party could be a successful negotiation through the tricky issues of union. For the next parliament at least, it is the state of both the United Kingdom and European Union which will dominate the political economy landscape. Of the four nationalist strains in UK politics, it was the Scottish movement which can claim the greatest success, if only at the expense of the SNP’s natural bedfellows, the Labour Party, in the process denying both parties any chance of power. At the time of writing, Grexit looks more possible than ever, and a far more likely occurrence than Brexit; it is hard to imagine an EU referendum in the UK triggering a British exit from the Union: the pro-Union lobby in this case will be heavily financed to say the least. Economically, the UK continues its journey from recession. It is arguably the distribution rather than level of income which is of greatest concern, with much in labour market statistics to fascinate economic thinkers. Strong trends towards self-employment can be viewed in both a positive and negative light, but it is perhaps the stories beyond Britain which will determine the fate of the UK economy in the years ahead. It is with great pleasure to report news on an OA who left 10 years ago. Alex Teytelboym was a top economist of his generation, and he recently returned to the College twice: firstly, to debate the philosophy of Wittgenstein, and later that month to present to a conference of Heads of Economics on the CORE course he has been developing to transform undergraduate Economics. This new perspective on Economics places the subject within the context of other social sciences and seeks to explore the subject ‘as if the last three decades had happened.’ This is a worthy cause, and further details are available here: http://www.core-econ.org/ The 2015 PER offers the usual variety of articles from the best of this year’s Remove economists. Some of these pieces will be submitted to national competitions; I hope you find all are worthy of your time.
Happy reading,
threadgouldaj@dulwich.org.uk
2
PER 2015
Saving our skin / Hamish Lloyd Barnes
4
Should we harness the possibility of direct democracy? / Howard Hung
9
Is carbon trading dead? / Oliver Morland 12 ‘It is immoral for drug companies to charge large sums for drugs that are cheap to manufacture.’ Discuss. Maurice Khoo 16 Aman Nath 22 Owen Chu 24 “Reason is and ought only to be the slave of the passions.” Can a desire ever be wrong? How would you attempt to prove this? / Oz Aibangbee 29 What is the most underrated event of the past, and why is it so much more significant than people understand? / Harry Warren 35 Do You Agree That Unrestricted Individual Freedom Serves The Interests Of All? Charlie Dee 37 Oliver Laurie 40 Jan Rybojad 43 Why are oil prices falling in 2015? / Minsuk Kim 47 Is the falling oil price reshaping the world economy? / Sunny Chen 49 Does Formula 1 need a change of oil? / Leo O’Mahony 54 Econcomics: the economics of the comic industry / Oscar Smith 59 Should “fracking” be allowed? If so, who should benefit? Charlie Clarke 62 Paddy Wilson 66 How has resistance of oppression shaped historical cultures and societies? / Thomas Parfitt 70 “Countries like Greece caused the Eurozone crisis by running up too much debt, so it is only fair that they should bear most of the burden of fixing it.” Discuss. / Josh Oakley 74 Should raising GDP be the primary objective of economic policy? / Adam Burton 78 How far has Spain dealt with the economic problems it faced after the 2008 recession? Cameron Gleave 82
Should the government support British manufacturing? / Ed Tillson
85
Front cover: Thomas Boutelle
3
PER 2015
Saving our skin Hamish Lloyd Barnes "High saving promotes faster growth. So having more savers in the global economy should be good for our long run prosperity." Encouraging individuals, firms and governments alike to pocket their cash for a rainy day has become a regular mantra amongst economists of late, but is there any truth behind this obsession over thrift? Fundamentally, the debate that ‘having more savers in the global economy should be good for long run prosperity’ is a twofold, hinging on two conflicting arguments; the Keynesian ‘paradox of thrift’ which argues that a high savings ratio will lead to a lack of demand, potentially resulting in less investment and thus poor economic growth via the accelerator theory and the opposing Classical ideology that savings are borrowed and used to fund investment, causing the productive capacity to grow. John Maynard Keynes argued in his ‘General Theory’ in 1936 that a large rise in savings would in turn trigger a slump in aggregate demand as consumption begins to fall; a concept which he coined a ‘paradox of thrift’. The paradox describes the decision a consumer or firm faces when they receive their income (or revenue); to save or spend? Of course, the opportunity cost of saving or spending respectively can vary in a given economic climate and in different time periods, presenting consumers, firms and governments with a vexed conundrum. The allure of spending is the prospect of immediate satisfaction in the form of good and services, whereas savings promise a buffer for future years and economic security for the individual. Weak demand can then lead to a decline in investment, as firms near their capacity do not feel the need to expand via capital investment due to low levels of demand; this phenomenon is known as the accelerator theory. Such an issue tends to be more prominent in times of economic slowdown, or recessions, when falling GDP growth and rising unemployment forces the government and individuals alike to save their incomes, making demand weaker and triggering a prolonged period of negative growth. A popular analogy links the dilemma which Keynes’ paradox presents to consumers to the iconic words of St Augustine; “lord give me chaste, but not yet” 1 , but are high savings ever wholly necessary? It is important to note that there are different forms of saving; private savings, which is the sum of savings by companies and by individuals, and government savings, defined as government revenue less current expenditure. A rise in ‘global savers’ implies that both government and private sector saving increases, which is unlikely due to a concept known as ‘Ricardian Equivalence’ which suggests that cuts in public sector spending are offset as the private sector begins to flourish as households reap the rewards of lower taxation. A rise in saving will only lead to a fall in aggregate demand if national saving; the sum of private and public saving, increases. Moreover, a fall in aggregate demand could lead to demand pull deflation in the long run, depending on the amount of spare capacity in the macroeconomy assuming you adopt a Keynesian LRAS curve, that is. If the price level falls relative to global economies, this could lead to a fall in imports as foreign goods and services become comparatively more expensive than that of domestic products and a rise in exports as they become more competitive. If this surge in exports and fall in imports outweighs the initial rise in national savings, then demand side growth could be stimulated in the long run. In the long term, it is argued that large levels of savings can be used to finance investment, defined as the addition of fixed capital by firms, which in theory should lead to a rise in the productive
1 Augustine of Hippo, Confessions (c.397) VIII, 7
4
PER 2015
potential of the economy as productivity rises. However, this argument is based on two major assumptions; the first being that readily available funds will automatically cause businesses to expand when, in actual fact, business confidence levels will play a large part in the likelihood of this mechanism. Secular stagnation, which describes a situation in which savings are vast but there are little investment opportunities to boot; a scenario which arises as a result of low demand, would mean that high savings do not translate to investment and thus long term growth. This problem, which faces some of the major economies today, seems to have broken the Keynesian ‘Business Cycle’ which suggests that economies recover after and period of recession, with the global economic titans stuck in a period of stagnation following the global economic crisis. However; it’s not all bad. In theory, secular stagnation is only problematic if the entire of the world experiences it; as money can be borrowed from poorer countries with a glut of savings but little investment aspirations such as some nations in Africa. Not only will this stimulate export led growth as capital outflow s depreciate the domestic currency, but it will also provide funds for foreign economies’ investment projects, beckoning the question that; in a world where global economies are integrated and money flows so freely between them, is high saving necessary in the domestic economy for long term prosperity if some economies continue to save? Secondly, this assumes that if firms pump millions of pounds worth of capital investment into the economy, the productive capacity is sure to grow, which is a far more complex matter. This concerns the allocation of capital or to put it bluntly; what firms (or governments, should they choose to spend savings) actually spend their money on. For example, improvements in productivity drivers such as healthcare and education, areas which the recent Labour government sought to improve in the UK, will increase the potential of the economy, however, spending on renovating parks and other such areas will have a lesser effect on economic growth. An example can be made out of the Japanese economy in the 1990s, whose high savings were used by the government to concrete river beds and various other ill-informed uses which had little success in stimulating growth in the long term. A strong case can be made against the argument that saving is an integral aspect of strong economic growth, exemplified by Germany whose thriving economy stems from high domestic demand, despite plummeting savings levels, illustrated in the graph below as gross national savings fell by approximately 4% of GDP before 2010. This economic vigour has not been stimulated by the state, which has undergone a fiscal tightening in recent years, but stems from two major sources; falling interest rates and an increasingly weak euro. Falling base rates which, when passed onto consumers by commercial banks and matched by high levels of consumer confidence, have led to a spike in consumption; fuelling demand side growth as there is less incentive to save and it becomes cheaper to borrow with rates moving into negative territory. In addition, ultra-low interest rates force down the cost of government debt which, along with Germany’s fiscal prudence in recent years has improved their government budget position which crept into surplus in 2012.
5
PER 2015
Germany Gross National Savings, % of GDP 2
As the euro’s value begins to decline relative to global currencies, German exports have become increasingly competitive in global markets which has triggered export led growth as confidence and economic stability in Germany’s major foreign trading partners such as the UK begin to grow. However, this is not a wholly reliable source of growth, as external factors such as fluctuations in the stability of trading partners and the strength of trade unions can hinder the performance of the macroeconomy greatly. For example, the recovery of the UK economy in recent years has been slowed by weak growth in the Euro area, hitting UK exports hard. Meanwhile, low inflation, which actually turned negative to -0.4% earlier this year, borne from falling oil prices leading to cheaper costs of production and as a result increasing aggregate supply, has amplified the spike in consumption as German households take advantage of low food and energy prices and, in the words of the Bank of England Governor Mark Carney “enjoy it while it lasts” 3 , in light of an impending rising price level as demand side growth thrives. On the contrary, the Chinese economy begs to differ, with national savings surging to just under 50% of GDP in 2015 and showing little signs of stopping. This comes as no surprise given the absence of a large welfare system, forcing Chinese households into vast precautionary saving in the face of low job security in the manufacturing sector and little presence of cheap healthcare, not to mention state housing and pension reforms. The demographic of modern China has also contributed to the boom in savings. This has been largely effected by the one child policy, meaning a significant proportion of the population are lower to middle age, an age which supposedly save more, according to Franco Modigliani’s ‘Life Cycle Hypothesis’. That being said, the ‘Consumption Smoothing’ theory, formalized by Robert Hall in 1978 conflicts this opinion, stating that consumers generally aspire to consume (and thus save) a constant amount throughout their lifetime. If this is true, there is one gaping hole in this theory; individuals cannot anticipate the future economic climate and know not whether there will be a recession in the coming years in which they could potentially lose their job, for example. Despite compromising the peace of mind of their people, a less prominent welfare system allows the Chinese government funds for fiscal loosening, bereft of a 2 http://www.tradingeconomics.com/germany/gross-national-savings-in-percent-of-gdp-imf-data.html 3 “Mark Carney: Enjoy low prices while you can” – The Telegraph (2015) http://www.telegraph.co.uk/finance/bank-of-england/11409986/Mark-Carney-enjoy-low-prices-while-you- can.html
6
PER 2015
budget deficit and the intrinsic national debt which has proved problematic for other major economies in recent years, meaning they have been able to survive external shocks to the economy such as the global financial crisis which put a dent in exports and thus hindered domestic demand. In such times, the Chinese government adopted an extensive fiscal expansion, increasing spending on healthcare and public infrastructure, as well as tax cuts in order to jump start the economy. China Gross National Savings, % of GDP 4
This depth in saving then allows investment projects to be readily funded, generating demand side growth in the short term and supply side growth in the long term. As a result of Keynes’ ‘paradox of thrift’, China’s high savings ratios leave much to be desired in terms of household consumption, leading to an investment heavy demand structure which could struggle in times of high business pessimism. Thus, although they might have the answer to economic prosperity, the Chinese now face the challenge of rebalancing their economy and moving towards more domestic demand to fuel growth which can be sustained in the long run. This might be done through lowering the base rate and stimulating domestic demand, assuming confidence levels are high and credit is readily available in the banking sector. This is a viable option for Chinese policy makers as China, with interest rates of 5.10%, are one of the few big names of global economics that have not found themselves in a monetary straight jacket after forcing themselves into a liquidity trap through incessant lowering of the base rate. Although it is not integral, high savings can undoubtedly lead to economic growth in the long term given that the investment environment is apt, capital is allocated in a manner which will maximise productivity and demand side growth is fuelled by a stimulus which can offset the paradoxical fall in consumption that inexorably follows a high savings ratio. This then poses the question; can ‘long run prosperity’ be merely refined to economic growth? Arguably, an economy can never truly prosper in the long run with an immense weight of national debt hanging over them. As a result, nations must thus, questionably, undergo a prolonged period of fiscal tight-fistedness, known as austerity, as they repent their sins. This neoliberal ideology points out that not only must national debt be serviced eventually, limiting public savings for future investment into the domestic economy but also that a high level of debt jades a country’s credit rating. The implications of the latter issue are experienced in the short run, tainting short term
4 https://www.quandl.com/data/ODA/CHN_NGSD_NGDP-China-Gross-National-Savings-of-GDP
7
PER 2015
growth as the rate of interest rises and borrowing becomes more expensive or, in severe conditions, the availability of credit dissipates entirely. However, this is not always the case. In the UK, the Monetary Policy of the Bank of England released a forward guidance statement in August 2013, commencing “The Committee intends at a minimum to maintain the current highly stimulative stance of monetary policy until economic slack has been substantially reduce” 5 . In essence, the MPC have refused to change interest rates until the LFS measure for unemployment is below a threshold of 7%, in short; until the recovery is secure. These monetary restrictions have protected the demand side growth of the macroeconomy from being tarnished in the short run by boosting interest rates. The full wrath of the former issue will be felt in the long run as debt-spawning spending in the short run leaves less money for future generations. That being said, this is only problematic if these projects are not productive in the long run such as spending on war, however, long lived resources like roads and railways will not injure the economy in the long term. Not only this; debt-burdened countries such as the US and Japan are reprimanded for overspending through the loss of discretion in their budget priorities. As national debt mounts, a country’s fiscal capacity shrinks leaving less flexibility for state driven stimulus in order to neutralise economic volatility and cope with external price shocks in times of desperation. A principle feature of the pro-austerity argument is one which I have explored earlier on and has been a key component of the recent UK Coalition government’s economic strategy; the notion of ‘Ricardian Equivalence’. This suggests that, due to fiscal drag cut backs in public expenditure will trigger a fall in taxes, allowing the private sector to blossom as a result. If this were true, surely austerity offers countries the chance to cleanse themselves of debt whilst simultaneously maintaining a healthy economy fuelled by the private sector? Unfortunately, the relationship between private and public sector is not black and white. In a time of austerity, it is unlikely that these ‘automatic stabilisers’ will come into play as a constant revenue is needed to close the deficit. Not only will this, but consumption and investment levels only soar if supported by sufficient levels of confidence. That being said, global consumer confidence levels are on the rise since the financial crisis; improving by one index point to 97 in the first quarter of 2015 since the last of 2014. Whilst global economic giant Germany proves that savings are not necessary for a flourishing economy, such growth cannot be sustained in the future if set against a backdrop of national debt; although the topic polarises the views of economists. Overspending restricts policy makers’ fiscal ability, making them more vulnerable to economic turmoil, as well as putting a dent in their credit rating which can have an adverse effect on short term growth. Although the Chinese certainly have a formula for economic success; it’s not perfect, and I suspect some sort of ‘balancing act’ might be necessary in the coming years to ensure their growth is wholly sustainable. Should the Western world not see the error of their ways and adopt a savings intensive (and thus debt-free) economic model akin to that of our far-Eastern cousins, they might live to regret it in their bumbling search for long run prosperity.
5 MPC Forward Guidance Statement (August 2013) - http://www.bankofengland.co.uk/monetarypolicy/Pages/forwardguidance.aspx
8
PER 2015
References and further reading: The Economist. 2005 (Print Edition) “Anatomy of Thrift” - http://www.economist.com/node/4418414 The Economist. 2015 (Free Exchange) “The Global Secular Savings Stagnation Glut.”
-http://www.economist.com/blogs/freeexchange/2015/04/puzzles BloombergView. 2015. “Why German Growth Beat Expectations”
-http://www.bloombergview.com/articles/2015-02-13/why-german-growth-beat-expectations Choukhmane, Coeurdacier and Jin. 2014. “The One-Child Policy and Household Savings”: pp 4-5 - http://personal.lse.ac.uk/jink/onechildpolicy_ccj.pdf Threadgould, A. 2013. “Are Austerity Measures Self-Defeating?” Economics Today volume 21.
Should we harness the possibility of direct democracy?
Howard Hung
“Democracy is the worst form of government, except for all the others.’’ This famous quote by Winston Churchill raised doubts about the contribution of democracy during a crisis, especially during cold war when the juxtaposition of the tight confines of the decision making process between the superpowers, USA and USSR and the unfathomably disastrous consequence became apparant. Indeed, one of the biggest criticisms of democracy is that the hardships of the minority could not be justified by the welfare of the majority. However, the injustice in certain cases could be justified if it prevents a greater injustice, namely, if the hardships of the minority are to prevent the hardships of a greater magnitude. In fact, the relationship between human nature and the society as a cooperative venture for mutual advantages have to be realized before we could provide an adequate answer for whether or not should we inaugurate direct democracy. Augustine, the famous medieval philosopher, has once said, ‘’justice is the rightful dominance or dominion of the superior over the inferior.’’ Preceding this, two questions immediately arise: Firstly, to what extent is a dominance, or power, rightful? Also, who should be dominant over others, and why? The foundation for direct democracy is that the government has to comply with the will of the public within a system of legislative, judicial and executive branches that are controlled by people. Direct democracy could also mean the distribution of state power through assemblage of the people with mainly three kinds of power that people hold: citizens’ initiative enacts new legislation, recall forces the officials to step down before the end of their term, and referendum abolishes an existing law. Before we go onto the evaluation of abolishing the House of Commons, we should appreciate the indispensability of the principle of checks and balances to a society. All through history, political systems have needed an essential automatic stabiliser built into them to ensure that power is not abused --- checks and balances, and democracy is no exception to that golden rule. So why exactly is the separation of power so important? Under a complex political hierarchy, the principle of checks and balances is adopted to balance each of the branches. More importantly, it holds other bodies back from the abuse of power: the legislative body passes law, the executive body executes these laws, and the judiciary body could exercise judicial review to review the constitutionality of these laws. Under such system, any flawed motion that advocates excessive individualism would be rejected, and specialisation of different departments would lead to a more efficient decision making
9
PER 2015
process. Without the House of Commons, all that is left is people making laws to rule themselves. As a result, the equilibrium of checks and balances would be distorted and the city would soon be on the verge of ruin. Advocates of direct democracy also tend to be indifferent over the incompatibility of such a regime with a human society. No human city could avoid the corruption of domination. Human nature has an insatiable appetite for power, for control over other people, no matter to what extent this desire is. This is inevitably true. The very existence of law is to prevent excessive individualism from taking over. According to Halsbury¹, our constitution is based upon the idea that ‘no body or political party has a monopoly of wisdom, that State bodies should be democratically and legally accountable, and that they should promote good government in the general interest, rather than in their personal interests.’ In the United Kingdom, power is divided to ensure that it never becomes dangerously concentrated in the hands of one stakeholder. The removal of a legislative assembly would lead to people making laws to rule themselves, in which the city could easily fail because of the uncertainty of whether or not people would be biased towards themselves. In fact, when power is concentrated on the public’s hands, the inevitable deformity of human nature will take its toll when it comes to decision-making: the egoistical side of the coin would dominate that of the rational and benevolent when making a decision. Once rationality succumbs to the selfishness of human nature, human actions would be susceptible to ignorance, stupidity and irrationality, thus instead of what Abraham Lincoln said, it would become ‘’Government of self-interest, by self-interest and for self- interest’’. In Plato’s Republic , Socrates presented a paradox in a human city¹: human beings have multifarious needs, but they are not self-sufficient. Therefore, Plato believed that in an ideal city, people are clairvoyant enough to specialize in what they are at best in order to maximize their self-interest, which they later exchange their products with others. A fisherman fishes, a farmer farms, and so on. Of course, there are conflicts of interests under the system of collaborative effort when distributing production and benefits: everyone wants to maximize their share, and it is here that the selfishness of human nature takes its toll and human beings’ strong inclination to self-interest dominates their rationality. I shall present an analogy to make my argument more fathomable and conceivable. In fact, similar to a filter, the rationale of a complex political hierarchy is to fend off such ignorance: we could see the impurities as ignorance, stupidity and some other innate traits of human nature which impede and hinder people’s attempts to make the right decision; The very existence of a legislative assembly is to get the most out of the inevitable trait of human nature while ensuring there is some constraint on the worse excesses of human nature. This is similar to a filter where most but not all of the impurities could be got rid of. Without such filter, the abundance of ignorance and stupidity would take over and hamper the development of the society. Advocates of direct democracy believe that without centralised decision-making, the politicians, the media, the religions, the unelected lords and shadow government of any nature cannot manipulate the power any longer, as the power will be with every individual. However, we must understand the substantial differences in the role of the general public under a system of representative democracy and direct democracy. Under representative democracy, political parties advertise their political ideologies and practical policies through monitored, legitimate means. Here is why a political hierarchy is indispensable: To reduce the number of donkey votes, people would need impartial and amplified guidance from official political institutions, as well as regulations on political parties’ way of advertising their policies. Conventional ways of providing these guidance are advertising the rights and roles of being part of a civil society through TV advertisements, flyers or leaflets. Under direct democracy, the role of citizens would be more proactive. Without this felicitous, legitimate guidance, the ignorance, stupidity and irrationality of human nature would instantly become vulnerable to manipulation by the alleged ruler through a
10
PER 2015
variety of means, one of which would be bribing through giving out benefits. Since the monied interests have more resources to hire signature-gatherers and to run advertising campaigns based on extensive marketing surveys and expert PR advice, there's a real question about how democratic existing initiative processes are. As I have mentioned previously, human beings are selfish, and political parties can take advantage of this inevitability of human nature. Thus whichever political campaign one finds more beneficial would gather more votes. Furthermore, such processes offer no more deliberation than the media debates that characterize most political campaigns. Under direct democracy where the view of the public is the sole parameter of decision making, the lack of division of labour would lead to inefficiency of the society. In order to achieve efficiency, there should be some sort of leadership to execute will of the people. In the UK, making a new law requires 3 readings with consultation of expert under the rationale of governing according to the wills of the people. However if we devolve the power to the public and hold a referendum on each and every issue, some problems that desperately needed to be solved would persist instead of being solved immediately. Therefore, a certain degree of sovereignty and power should be confined to the government only for the sake of the society. If people think the law is not fair, they could vote people who think the same into the parliament. We should also think carefully about the ambiguity: what people want might not be what is benign to the society. The ignorance and stupidity of human nature is further exacerbated by such confusion which people treat what they want as commensurate with what is beneficial to the society. For instance, if people motion for a cut in income tax or even an abandonment of such tax, the government would soon run into budget deficit. The point I would like to stress on is: the public’s view should not be the dominant parameter, a balanced view between individual welfare and welfare of the society as a whole should be. Voltaire once wrote, ‘’In the long run the people can be trusted to judge what is best for them’’ When people pursue instant gratification instead of long term prosperity of the society until it comes to a point where people start to regret and realize the importance of thinking ahead of time, it is too late. More importantly, some political issues are so complex that they require a specific field of expertise. For example, whether the government should cut defence spending, what policies the government could adopt to tackle recession. For these enigmatic, mind boggling political issues which require a holistic approach, even Parliament has to consult experts of different fields and the brightest minds across the UK before voting on a particular motion. Under direct democracy, electorates would be very susceptible to making the wrong decisions emanating from greed and self-indulgence. For example, when the country is dealing with diplomatic issues or fiscal or monetary policies, people would be led astray by their lack of knowledge, and would make decisions based on superficial evaluation. This illustrates that evaluating policies with competing and conflicting outcomes of votes should only be dealt with by experts. There is another impracticality stemming from direct democracy, that is, some of the issues are considered national security and should not be disclosed. For example, if the people vote publicly on whether or not should UK send troops to battle ISIS, there will be a time lag between a referendum and the processing of votes, thus the entire plan would be futile as the military tactics are voted on publicly and would be known by ISIS. Some may argue that the government could have certain degree of sovereignty when it comes to processing secretive information. However, another impracticality arises: where should we draw the line? Using a referendum would be useless as there is a stern possibility that people claim that they have the rights to know everything about their countries. Thus the practicality of direct democracy in making national decisions is low. Some people might think that the qualification of the representatives could not be justified because they are elected by unqualified people. However, this argument commits the fallacy of equivocation: advocates of this argument have been confused by the differences between “knowing someone who
11
PER 2015
is good” and “being good”. For example, a football coach need not be better than the players in order to coach. Electorates could still elect qualified representatives even though they themselves are not qualified. Another argument for direct democracy is legitimacy. Some see direct democracy as a resurgence of constitutionalism as it complies with the definition of Human Right by United Nations where citizens have the right to participate directly in decision making. However, I do not see that as a valid point, because dissolving the political hierarchy would not only let citizens take control, but it would cultivate the possibility of people abusing that power. An even bigger problem now that is worse than authoritarian rule arises: tyranny by majority. Therefore, such a system catalyses the production of short-sighted people who rate their self- interest over universal benevolence. The cataclysmic effect of the abundance of short-sighted, selfish people would not take its toll until the long run. This is because these people would rather prefer instant gratification than long term welfare of the society. For example, if they were to choose among two policies, selfish people would vote for a 5% income tax cut rather than spending an equivalent amount on education and infrastructure and other projects which do not have immediate, direct effect upon them. As time proceeds, the ruler would no longer dare to propose policies that benefit the long term but might sacrifice people’s interest otherwise he or she would live under the fear of a recall by the public to be replaced by another ruler who is more obedient, which goes back to my previous point of tyranny by majority.
Is carbon trading dead?
Oliver Morland
So you think carbon trading is dead? Think again!
The beautiful market based emissions trading system is evolving and reforming year by year and is now spreading right across the globe. After Europe dived into the water first with its imaginatively named Emissions Trading Scheme(ETS) in 2005, there were many haters and critics. But 10 years on, the ETS is bigger and better and similar concepts now cover 12% of global carbon emissions and counting.
But wait? What are these carbon trading or cap and trade schemes? How about a re-cap.(haha, re-cap) The cap and Trade or Carbon Trading schemes are launched by governments who create pollution permits for every tonne of greenhouse gases they will allow to be emitted. These permits are dished out to energy intensive companies who use them to have the right to pollute our planet and make their products. A more energy efficient company will have permits to spare, so it trades them to other companies for some cash. As firms realise they can get rich quick by selling off spare permits, they invest in more energy efficient technology. Watch the video to see it in animation:
12
PER 2015
However, that’s not to say it’s been as successful as many of its advocates believed. And there have been several hiccups along the way.
The Hiccups
The main problem is that the ETS simply dished out way too many bloody permits. According to the scheme’s watchdog SANDBAG, each company had 7% more pollution permits than they actually needed. With so many permits flooding the market, the price per tonne of carbon
dropped to near €2, making the permits worthless and the incentive to invest in efficient technology negligible because not much money could be made by selling your spare permits. Therefore the first phase of Europe’s flagship environmental policy didn’t go that well.
The reason why too many permits were given out was partially the fault of the 2008 recession. As demand collapsed firms cut down on production. The plus side was that world CO2 emissions temporarily fell. The down side was that the market was overwhelmed with permits. The other issue is that more and more intensive manufacturing is being sent to China. Therefore demand for carbon permits in Europe has been dropping. However whether greenhouse gases are emitted in China or Europe they are still causing climate change. The answer came from the American State of California’s mega economy. All by itself it is the world’s eighth largest and produces 1% of global carbon emissions. In 2008 California set up AB32 environmental legislation which included a cap and trade scheme, however part of the permits were sold by auction. This means companies would only buy as many permits as they really needed and the government can make some money by the sale. The risks were huge, Americans are especially sceptical of
13
PER 2015
government intervention and if speculators hoard permits and the auctions aren’t correctly controlled the whole concept could collapse. Despite these risks the concept has endured. Concerns have been raised that cap and trade is a hidden tax where the price firms pay for permits is passed on to customers. But the experiment was successful enough for Europe to follow suit. During the second phase of the ETS(2008-2012) 4% of permits were auctioned. A cautious move, but in 2013 the ETS decided to bump that up to 30%, buoyed by the revenue the auctions made. Now with a profit incentive for governments, there was less resistance to imposing the scheme on key industries which had previously held the scheme back in certain countries.
Concerns were raised in California that the scheme wasn’t doing much to combat climate change and was merely being used by the government as a way to pay off its debts. However in 2011 Bloomberg predicted European emissions are set for a sharp fall in 2015 up until the 2020 deadline year. It’s difficult to predict exactly how much the cap and trade scheme is causing that. And governments have tried to reassure sceptics, for example in Europe all countries are required to directly reinvest 50% of auction revenues for climate change
purposes.
Carbon Leakage
Carbon Leakage is a fancy term for when companies pack their bags and make a run for it to escape increased production costs brought about by cap and trade. In order to stop this the European Commission has passed a second list which will be in effect from 2015-2019. The list ensures that companies who have lots of international trade and who are vulnerable to increased production costs are put on the “At risk of ditching the EU list”, at which point they are given special treatment such as free pollution permits instead of sold by auction. Because of the enormous surplus of permits their price hasn’t hurt many industries’ costs, therefore the ETS hasn’t had much “leakage”. However some claim the United Nations has been behaving badly with its Clean Development Mechanism(CDM). Basically this scheme allows businesses in developed countries to get permits to produce extra greenhouse gas emissions, in exchange the business must invest in a clean energy system in an underdeveloped country. If regulated properly this would have a carbon neutral effect, but it isn’t regulated properly and western businesses have reaped the rewards. The Western Sahara people aren’t best pleased either because their occupiers the Moroccans have become rich from development projects.
14
PER 2015
Integration
We’re trying to save the world, not just some national 20% emission reduction targets. Therefore it is encouraging to see that the world’s biggest economies like China and the USA are trialling the scheme in separate regions, but the whole world needs to start linking schemes together. This is why California has paired its cap and trade program with its twin in Quebec, Canada. Alberta is also expected to join as North America works towards one giant cap and trade.
This is part of the reason why the European Commission has been harassing the International Civil Aviation Organisation(ICAO) for so long , and in 2013 the organisation finally yielded by agreeing to apply a market based mechanism by 2020. The year before, in 2012, the ETS had forced all flights to and from the EU to be part of the cap and trade scheme. That same year the EU decided they had taken too big a bite and suspended the legislation to allow aviation breathing space. It has now been agreed that only flights within Europe should fall under EU ETS. It seems strange that the EU ETS has been assaulting the airliners for so long when they only produce 3% of its total emissions. However the reason lies in globalisation. Getting the airlines to engage in a global cap and trade system could set the world on the path to a globally linked carbon trading system. Further more the ICAO predicts that by 2050 global aviation emissions will grow by 300-700%. Action is needed to stop the airliners flying out of control.
There’s a bigger picture
The cap and trade schemes are a great piece of economic engineering. However they are not the solution, merely a solution. The heart of the matter is that when the system functions perfectly and firms look for cleaner technology it needs to be available.
Therefore investment needs to be there for those entrepreneurs and scientists who are developing the green technology. Most important of all, there must be a global desire to do as much as possible to fight climate change. We are living in a peaceful(well, mostly) world where poor countries are developing very quickly. If everyone can get on board the climate train then we have the opportunity to grow a more prosperous future and live happier lives. After all is that not the objective of economics?
Bibliography:
http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20150613-column.html#page=1 http://ec.europa.eu/clima/policies/ets/index_en.htm http://www.theguardian.com/environment/2011/apr/28/overhaul-europe-carbon-trading-scheme
15
PER 2015
‘It is immoral for drug companies to charge large sums for drugs that are cheap to manufacture.’ Discuss. Maurice Khoo
In the drug manufacturing market, there are basically two types of producers, generic drugs producers and brand drugs producers. The major difference between these producers is that the generic one will produce the drugs based on the composition of the drugs researched by the pharmaceutical brand drugs without any cost on the Research and Development (R&D). Therefore, generally generic drug producers can produce drugs with a lower cost.
(Source: http://www.cbc.ca/news/canada/new-brunswick/generic-drug-plan-cuts-costs-dub%C3%A9-says-1.1163078)
The diagram gives an example of the price difference in the brand and generic drug in New Brunswick and it suggests the price of generic drugs can be even lower in other provinces.
(Source: http://franciscanphysicians.blogspot.co.uk/2011/08/generi-cor-brand-name-choice-is-yours.html)
This diagram shows the evidence that the generic drugs can be sold at a lower price due to their lower production cost. This also suggests that the generic drugs in fact has the capability to be sold at a lower price with a lower production cost. However it is impossible for the big pharmaceutical companies who invest a lot in the R&D part for inventing new drugs to provide drug cheaper. As for
16
PER 2015
the objectives of these big pharmaceutical companies, they need to have incentives for them to produce drugs which are profitable and maximise their profits. Therefore, it is important for them to have income revenue which can cover a large sum of cost and at the same time they need to take up the risk to do trials of the invented drugs for the experimental groups of patients. In view of this, these big pharmaceutical companies will be normally granted a 10 years patent for a new brand drug to secure their earnings. At the same time, these companies will also need to invest a lot in the marketing for their new drugs so they have a greater cost of production compared to the generic drug producers. For these reasons, the big pharmaceutical brand drugs have no way to sell their drugs cheap and a large sum of revenue provides attractiveness for them to invent in new drugs are important for the pharmaceutical market to function properly and it can bring some other positive externalities to the economy such as employees will be healthier and the country productivity can be improved showing by the increase in the country GDP. Also the sufficient supply of a large variety of drugs can also minimize the chance of the spread of disease which is crucial to the global economy to function properly without any interference from the outbreak of disease. For example, the outbreak of SARS in 2003 had brought an economic downturn to the economy of most countries in the world due to the weak business and consumer confidence. This suggests a well-established pharmaceutical market can have a great value in the global economy.
(Source: http://www.randalolson.com/2015/03/01/design-critique-putting-big-pharma-spending-in-perspective/) The diagram above suggests that the leading pharmaceutical companies in the world are generally spending more on marketing than the R&D side. Also, this tells us how much the big pharmaceutical companies will spend excluding other factor cost of production. Therefore, those brand drugs are impossible to be sold at lower selling prices comparing to those generic drugs which have not much cost on marketing and R&D.
17
PER 2015
While the generic drugs producers have a lower cost of production but they still charge a higher selling price, people will think that it is immoral for them to charge a price as they are just copying the drug content from those big pharmaceutical researching firms. At the same time, these generic drug producers claim that they are facing a certain difficulties such as most of the countries have import tax charged on the drugs imported to these countries, they need to maximize their profit while their main income is relying on those expired patent drugs from the big pharmaceutical company. Under these reasons, the generic drug producers will tend to charge a high price even they have a lower production cost. According to the latest figures, India is the leading country of the generic drug manufacturing industry while the countries with the most demand for drugs will be more likely the developed countries resulting most of the generic drugs will be exported from India and hence the supply for those less developed countries will be limited with less consumers as they will have a lower standard of living so they will be less aware to the health problem and a less proportional amount of income will be spend on drugs. At the same time, the general price level is increasing, showing an inflationary effect which will likely causing an increasing cost of raw materials for drugs production. As for the another reason, the generic drug producers will want to maximise their profits while at the same time they know that their income flow is unstable as the India government may have law enforcement on the drug patent once the India is going to join the World Trade Organization, this will become a great anxiety for these generic drugs producers and they will have lower business confidence and being reluctant to lower the selling price. Also they know that India have the potential to show a great improvement in the future and become a leading big country in the world which requires more specialisation with more trading partners, so it is inevitable for them to join the World Trade Organization. Apart from these factors, the low future business prospect is also due to the slow progress of the researching in the big pharmaceutical company. A recent article in The Economist states, ‘over the past decade, more and more medicines have been going on to the market with lower and lower levels of benefit.’ 6 These brand drugs are going to just make some minor changes to the composition of the drug and apply for a new patent so as to minimize the effect of the emergence the generic drug manufacturing industry. The generic drug producers can still produce the generic drugs in India is mainly due to the India didn’t accept these type of re-new patent of the brand drugs. An extract has been quoted ‘Patents are designed to reward a person’s or a company’s invention by preventing others from copying and selling a product. That gives the patent holder a monopoly on supply. And pharmaceutical companies work hard to gain and extend such protections. India’s law sets a higher bar for protection than in some other countries, limiting the ability of companies to get patents for new versions of drugs whose active ingredients were previously known unless they can show significant therapeutic benefit. U.S. and European patent laws more readily grant patents to updated versions regardless of whether they offer major improvements in efficacy over the original compounds.’ This quoted extract has explained the origin of generic drug war in India.
Despite the low business prospect, the current situation of the generic drug industry is still having a great support from the India government. For example there is a typical case of the drug patent war
6 http://www.economist.com/news/leaders/21592619-patents-drugs-are-interests-sick-well-industry- protection-should-not
18
Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52 Page 53 Page 54 Page 55 Page 56 Page 57 Page 58 Page 59 Page 60 Page 61 Page 62 Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Page 73 Page 74 Page 75 Page 76 Page 77 Page 78 Page 79 Page 80 Page 81 Page 82 Page 83 Page 84 Page 85 Page 86 Page 87 Page 88 Page 89Made with FlippingBook flipbook maker