For all households, energy is considered an essential item. As electricity and gas prices rise and fall, many of us don’t think twice about turning on the lights, cooking a meal or turning on the heating. We may complain about the cost and want prices brought down, but we still pay the bills. But, is there anything that can be done about high energy prices? And if there is, should anything be done?
The worlds of politics and economics are closely linked and Ed Miliband’s announcement of his party’s plans to impose a 20-month freeze on energy prices if elected in 2015 showed this relationship to be as strong as ever. The price freeze would certainly help average households reduce their cost of living by around £120 and estimates suggest businesses would save £1800 over this 20 month period. The energy companies have come in for a lot of criticism, in particular relating to their control of the industry. The sector is dominated by six big companies – your typical oligopoly, and this makes it very difficult for new firms to enter. Thus competition is restricted. But is a price freeze a good policy?
Part of the prices we pay go towards investment in cleaner and more environmentally friendly sources of energy. Critics suggest that any price freeze would deprive the energy sector of much needed investment, meaning our energy bills will be higher in the future. Furthermore, some argue this price freeze suggests that Labour is abandoning its environmental policy. Energy shortages have been a concern, especially with the cold weather the UK experienced a few years ago. This issue may reappear with price freezes. As Angela Knight, from Energy UK, suggests:
Freezing the bill may be superficially attractive, but it will also freeze the money to build and renew power stations, freeze the jobs and livelihoods of the 600,000-plus people dependent on the energy industry and make the prospect of energy shortages a reality, pushing up the prices for everyone.
There is a further concern and that is that large energy companies will be driven from the UK. This thought was echoed by many companies, in particular the British Gas owner Centrica, commenting that:
If prices were to be controlled against a background of rising costs it would simply not be economically viable for Centrica to continue to operate and far less to meet the sizeable investment challenge that the industry is facing…The impact of such a policy would be damaging for the country’s long-term prosperity and for our customers.
Share prices naturally fluctuate with global events and a political announcement such as this was inevitably going to cause an effect. But, perhaps the effect was not expected to be as big as the one we saw. 
Share prices for Centrica and SSE fell following the announcement – perhaps no great shock – but then they continued to fall. The market value tumbled by 5% and share prices kept falling. This has led to Ed Miliband being accused of ‘economic vandalism’ by a major shareholder of Centrica, which is hardly surprising, given the estimated cost of such a price freeze would be £4.5 billion.
The economic implications of such a move are significant. The announcement itself has caused massive changes in the FTSE and if such a move were to go ahead if Labour were elected in 2015, there would be serious consequences. While families would benefit, at least in the short term, there would inevitably be serious implications for businesses, the environmental policy of the government, especially relating to investment and the overall state of the economy. The following articles consider the aftermath of Ed Miliband’s announcement.
Miliband stands firm in battle over fuel bills plan The Guardian, Patrick Wintour and Terry Macalister (25/9/13)
Michael Fallon calls Miliband’s energy prices pledge ‘dangerous’ Financial Times, Elizabeth Rigby and Jim Pickard (26/9/13)
Britain’s labour treads narrow path between populism and prudence Reuters (26/9/12)
Ed Miliband’s radical reforms will make the energy market work for the many Independent (26/9/13)
Has Labour fallen out of love with Business? BBC News (26/9/13)
Top Centrica shareholder Neil Woodford accuses Labour leader Ed Miliband of economic vandalism The Telegraph, Kamal Ahmed (25/9/13)
Centrica and SSE slide after Labour price freeze pledge The Guardian (26/9/13)
Ed Miliband’s energy price freeze pledge is a timely but risky move The Guardian, Rowena Mason (24/9/13)
Questions
- Why are energy prices such a controversial topic?
- How are energy prices currently determined? Use a diagram to illustrate your answer. By adapting this diagram, illustrate the effect of a price control being imposed. How could it create an energy shortage? What impact would this have after the 20-month price freeze
- Why would there be adverse effects on energy companies if prices were frozen and costs increased? Use a diagram to illustrate the problem and use your answer to explain why energy companies might leave the UK.
- How would frozen energy prices help households and businesses?
- Why were share prices in Centrica and SSE adversely affected?
- Is there an argument for regulating other markets with price controls?
- Why is there such little competition in the energy sector?
The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?
Chinese business has grown and expanded into all areas, especially technology, but countries such as the USA have been reluctant to allow mergers and takeovers of some of their businesses. Notably, the takeovers that have been resisted have been in key sectors, particularly oil, energy and technology. However, it seems as though pork is an industry that is less important or, at least, a lower risk to national security.
Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said:
This transaction will create a leading global animal protein enterprise. Shuanghui International and Smithfield have a long and consistent track record of providing customers around the world with high-quality food, and we look forward to moving ahead together as one company.
The date of September 24th looks to be the decider, when a shareholder meeting is scheduled to take place. There is still resistance to the deal, but if it goes ahead it will certainly help other Chinese companies looking for the ‘OK’ from US regulators for their own business deals. The following articles consider the controversy and impact of this takeover.
US clears Smithfield’s acquisition by China’s Shuanghui Penn Energy, Reuters, Lisa Baertlein and Aditi Shrivastava (10/9/13)
Chinese takeover of US Smithfield Foods gets US security approval Telegraph (7/9/13)
US clears Smithfield acquisition by China’s Shuanghui Reuters (7/9/13)
Go-ahead for Shuanghui’s $4.7bn Smithfield deal Financial Times, Gina Chon (6/9/13)
US security panel approves Smithfield takeover Wall Street Journal, William Mauldin (6/9/13)
Questions
- What type of takeover would you classify this as? Explain your answer.
- Why have other takeovers in oil, energy and technology not met with approval?
- Some people have raised concerns about the impact of the takeover on US pork prices. Using a demand and supply diagram, illustrate the possible effects of this takeover.
- What do you think will happen to the price of pork in the US based on you answer to question 3?
- Why do Smithfield’s shareholders have to meet before the deal can go ahead?
- Is there likely to be an impact on share prices if the deal does go ahead?
Despite the prolonged stagnation in the UK, unemployment has not soared. In fact, over the past two years the ILO unemployment rate (see here for a definition) has fallen slightly – from 8.6% in October 2011 to around 8.0% today. What is more, the claimant count rate is considerably lower than the ILO rate – at around 4.4%.
Part of the reason for the relatively good unemployment figures is the rise in ‘zero-hours contracts’. These allow employers to cut the hours that people work without laying them off. The Office for National Statistics estimates that last year (2012) 250,000 people, or 0.84% of the workforce, were on such contracts.
But just what is meant by ‘zero-hours contracts’? According to the ONS:
People on zero-hours contracts are classified as being in employment regardless of the number of hours they actually worked during the survey reference week. This includes anyone who was not required to work any hours during the reference week whilst remaining on their current contract of employment. The continued existence of the contract of employment is the key determinant of their employment status in these situations.
If people are working less than they would like to, this is classified as underemployment, but such people do not appear in the unemployment statistics. Such contracts thus mask the true extent of surplus labour in the economy.
The Chartered Institute of Personnel and Development (CIPD) puts the figure much higher than the ONS. In the Summer 2013 issue of its Labour Market Outlook, it estimates that one million workers are on zero-hours contracts.
Many employers use such contracts, including many voluntary-sector and public-sector organisations, including the NHS, local councils and Buckingham Palace. They are also used by many small and medium-sized enterprises and many well-known large companies, such as Sports Direct, Amazon, JD Wetherspoon and Cineworld. It gives them the flexibility to adjust the hours they employ people. It allows them to keep people in employment when demand is low. It also makes them more willing to take on staff when demand rises, as it removes the fear of being over-staffed if demand then falls back.
But many workers dislike such contracts, which give them fewer employment rights and fewer hours than they would like to work. It also makes it difficult to budget when future income is uncertain. It also make credit and mortgages harder to obtain, as people have no guaranteed income. Another complaint is that companies may use the threat of lower hours as a tool to bully staff and get away with poorer working conditions.
In May of this year, the Business Secretary, Vince Cable, announced that he was setting up a review of zero hours contracts.
Note that zero hours are not the only form of flexible working. Other examples include: ‘self-employed’ workers, contracted separately for each job they do for a company; people paid largely or wholly on commission; on-call working; part-time working, where the hours are specified in advance, but where these are periodically re-negotiated; overtime; people producing a product or service for a company (perhaps at home), where the company varies the amount paid per unit according to market conditions.
The following videos and articles look at the issue in some detail: at the extent of the practice and at its benefits to employers and its costs (and some benefits) to workers. Both The Guardian and the BBC have an extensive range of articles on the topic.
Webcasts
Do zero hours contracts create real jobs? BBC Newsnight, Allegra Stratton (14/8/12)
Record number of ‘Zero Hours Contracts’ ITV News on YouTube, Laura Kuenssberg (2/5/13)
Britons rally against ‘Zero Hour’ contracts Al Jazeera on YouTube (4/8/13)
Anger at Amazon working conditions Channel 4 News (1/8/13)
Government to include Amazon in its zero hours probe Channel 4 News (2/8/13)
Councils using zero hours contracts BBC London, Warren Nettleford (31/7/13)
Podcasts
The real economy: Labour market BBC Today Programme, Evan Davis (24/8/11)
Zero hour contracts ‘just the norm’ BBC Today Programme, Rochelle Monte and Peter Cheese (5/8/13)
Articles
Zero-hours contracts: One million British workers could be affected Independent, Nigel Morris (5/8/13)
Zero hours contracts “spreading like wildfire”, official stats show Union News, Pete Murray (1/8/13)
Zero-hours contracts: what are they? The Guardian, Phillip Inman (30/7/13)
Buckingham Palace uses zero-hours contracts for summer staff The Guardian, Simon Neville, Matthew Taylor and Phillip Inman (30/7/13)
Nick Clegg: business department will investigate zero-hours contracts The Guardian,
Patrick Wintour, Simon Neville, Matthew Taylor and Phillip Inman (31/7/13)
Zero-hours contracts are not unavoidable The Guardian, Phillip Inman (1/8/13)
ONS admits it underestimated number of zero-hours contracts The Guardian, Simon Neville (1/8/13)
Zero-hours contract workers – the new reserve army of labour? The Guardian, Philip Inman (4/8/13)
Zero-hours contracts cover more than 1m UK workers The Guardian, Simon Goodley and Phillip Inman (5/8/13)
Zero-hours contracts use by councils needs to be moderated The Guardian, Vidhya Alakeson (5/8/13)
If zero-hours contracts are driving this ‘recovery’, it’s a lousy kind of recover The Guardian, Deborah Orr (9/8/13)
ONS increases its estimate of workers on zero hours contracts Financial Times, John Aglionby (1/8/13)
Zero Hours Herald Scotland, Ian Bell and Scott Dickson (4/8/13)
Sports Direct protests planned over zero hours contracts Channel 4 News (3/8/13)
Cable warns of exploitation of zero-hours contracts BBC News (5/8/13)
Q&A: What are zero-hours contracts? BBC News (5/8/13)
Record number of 16-24s on zero hours contracts at work BBC Newsbeat, Jim Reed (15/5/13)
Figures show 18-24s most likely on zero-hours contract BBC Newsbeat, Jim Reed and Amelia Butterly (5/8/13)
Andy Burnham calls for ban on zero hours contracts BBC News (28/4/13)
Zero-hours contracts: What is it like living on one? BBC News, Sean Clare (5/8/13)
Small Talk: Zero-hours contracts? Key for growth Independent, David Prosser (5/8/13)
Zero Hour Contracts Manchester based law firm, Emma Cross (30/7/13)
Data
People and proportion in employment on a zero-hour contract ONS (31/7/13)
Estimating Zero-Hour Contracts from the Labour Force Survey ONS (26/7/13)
One million workers on zero hours contracts, finds CIPD study CIPD, Michelle Stevens (5/8/13)
Labour Market Outlook CIPD
Questions
- Distinguish between open unemployment, disguised unemployment and underemployment?
- Distinguish between functional, numerical and financial flexibility? Which type or types of flexibility do zero-hours contracts give the firm?
- Identify the various benefits to employers of zero-hours contracts?
- What are the costs and benefits to workers of such contracts?
- Identify what forms of flexible contracts are used for staff in your university or educational establishment. Do they benefit (a) staff; (b) students?
- Are zero-hours contracts fair?
- In what ways do zero-hours contracts transfer risks from employers to employees?
- If a company introduces a system of zero-hours contracts, is this in accordance with the marginal productivity theory of profit maximisation from employment?
- From the perspective of the employer, how do the benefits of zero-hours contracts compare with other forms of flexible working?
- Consider the arguments for and against (a) banning and (b) regulating zero-hours contracts.
Each day many investors anxiously watch the stock market to see if their shares have gone up or down. They may also speculate: buying if they think share prices are likely to go up; selling if they think their shares will fall. But what drives these expectations?
To some extent, people will look at real factors, such as company sales and profits or macroeconomic indicators, such as the rate of economic growth or changes in public-sector borrowing. But to a large extent people are trying to predict what other people will do: how other people will react to changes in various indicators.
John Maynard Keynes observed this phenomenon in Chapter 12 of his General Theory of Employment, Interest and Money of 1936. He likened this process of anticipating what other people will do to a newspaper beauty contest, popular at the time. In fact, behaviour of this kind has become known as a Keynesian beauty contest (see also).
Keynes wrote that:
professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
When investors focus on people’s likely reactions, it can make markets very unstable. A relatively minor piece of news can cause people to buy or sell in anticipation that others will do the same and that others will realise this and do the same themselves. Markets can overshoot, until, when prices have got out of line with fundamentals, buying can turn into selling, or vice versa. Prices can then move rapidly in the other direction, again driven by what people think other people will do. Sometimes, markets can react to very trivial news indeed. As the New York Times article below states:
On days without much news, the market is simply reacting to itself. And because anxiety is running high, investors make quick, sometimes impulsive, responses to relatively minor events.
The rise of the machine
In recent years there is a new factor to account for growing stock market volatility. The Keynesian beauty contest is increasingly being played by computers. They are programmed to buy and sell when certain conditions are met. The hundreds of human traders of the past who packed trading floors of stock markets, have been largely replaced by just a few programmers, trained to adjust the algorithms of the computers their finance companies use as trading conditions change.
And these computers react in milliseconds to what other computers are doing, which in turn react to what others are doing. Markets can, as a result, suddenly soar or plummet, until the algorithms kick the market into reverse as computers sell over-priced stock or buy under-priced stock, which triggers other computers to do the same.
Robot trading is here to stay. The articles and podcast consider the implications of the ‘games’ they are playing – for savers, companies and the economy.
Articles
Questions
- Give some other examples of human behaviour which is in the form of a Keynesian beauty contest.
- Why may playing a Keynesian beauty contest lead to an undesirable Nash equilibrium?
- Does robot trading do anything other than simply increase the speed at which markets adjust?
- Can destabilising speculation continue indefinitely? Explain.
- Explain what is meant by ‘overshooting’? Why is overshooting likely to occur in stock markets and foreign exchange markets?
- In what ways does robot trading (a) benefit and (b) damage the interests of savers?
Every summer a number of air shows take place in the UK, such as those at Farnborough, Cosford and the Royal International Air Tattoo. Some of these events prove to be extremely popular and successful. For example, over 50,000 people attended the event at Cosford on Sunday 9th June to watch a five-and-a-half-hour flying display, including the Red Arrows, a Vulcan bomber and a RAF Battle of Britain Memorial Flight, which featured Spitfire, Hurricane and Lancaster aircrafts.
The event was so popular that some people who had paid £25 for a ticket failed to make it to the show ground because they were stuck in a 9 mile traffic jam! The popularity of these events does raise an interesting economic question. Why do so many people pay to attend when it is possible to watch much of the air show from outside the showground? If people can enjoy the benefits of watching an event whether or not they have paid then we might expect the majority of them not to pay.
Air shows seem to have some of the characteristics of a public good: i.e. to some extent the consumption benefits are both non-rival and non-excludable. By non-rival it is meant that one person’s use or consumption of the good does not decrease the quantity available for somebody else to use or consume. If one person watches the Red Arrows fly by, it does not decrease the ability of others to watch them. Contrast this with a product that has the characteristic of being ‘rival’ such as a hamburger. If someone eats a hamburger, it reduces the amount that is available for others to enjoy. The good is ‘used up’ during consumption. Other people cannot eat the same hamburger!!! Many sporting and music events share this characteristic of non-rivalry. For example if somebody is watching a band playing live at Glastonbury it does not stop somebody else from enjoying the benefits of watching the band. The performance of the band is not ‘used up’ like the hamburger when a person watches the show.
The major difference between Glastonbury and an air show is that the event organisers at Glastonbury can prevent people who have not paid for a ticket from enjoying the show. The event is excludable, as fans have to enter the show arena in order to see the bands. However, as one contributor to an internet discussion site commented:
Air show organisers are at a particular disadvantage compared to other show organisers because the key elements of their show can be seen for miles.
Another contributor added that:
Unfortunately being an air show by its very nature it’s very public – the planes are in the air for everyone to see for free for miles around.
In other words, air shows have the characteristic of being non-excludable, as people can benefit regardless of whether they have paid or not.
These public good properties seem to be causing problems for an air show in Welshpool that appears to have an issue with a number of non-payers watching the event. The organisers recently stated that:
We can’t stop people watching from the hillsides, but perhaps we can make them understand that they need to come to the show and pay.
The previous year the organisers had sent people out with buckets to collect voluntary donations from those sitting on the hillside. However they found that:
People were not for giving much at all and it was noticeable how much copper was in the buckets we’d used and there were hardly any notes.
One solution being proposed in order to generate more revenue is to increase the entry fee, which is currently £5, in order to compensate for those who are not paying.
Articles
Bob Jones Memorial Air Show urges people to buy tick BBC News (9/6/13)
How to make an airshow pay PistonHeads, (9/6/13)
Free or should you pay Talk Photography, (9/6/13)
An organisers view Airshow, (9/6/13)
Cosford Air Show pledge over traffic chaos Shropshire Star, (10/6/13)
RAF Cosford Air Show – Home RAF Cosford Air Show, (12/6/13).
Questions
- What practical problems does a show such as Glastonbury face in trying to make the event excludable?
- In the blog it explains how one person watching a band live does not have a negative impact on the pleasure other people will derive from watching the same band: i.e. it is non-rival. Is this always true? Can you think of any circumstances when watching a live band might become a rival good?
- What term do economists use for goods that are non-rival but are excludable? Think of at least three examples.
- What ideas might the organisers of an air show adopt to encourage people to pay and enter the show ground area?
- Can you think of any strategies that might be used to increase the number and size of the voluntary donations made by those who watch the airshow for free from a hill-side?
- What are the organisers assuming about the price elasticity of demand for the air show at its current price if they claim that increasing prices will lead to an increase in revenue?
Part of the prices we pay go towards investment in cleaner and more environmentally friendly sources of energy. Critics suggest that any price freeze would deprive the energy sector of much needed investment, meaning our energy bills will be higher in the future. Furthermore, some argue this price freeze suggests that Labour is abandoning its environmental policy. Energy shortages have been a concern, especially with the cold weather the UK experienced a few years ago. This issue may reappear with price freezes. As Angela Knight, from Energy UK, suggests:
