With the fall of communism in eastern Europe between 1989 and 1991, many hailed this as the victory of capitalism.
Even China, which is still governed by the Chinese Communist Party, has embraced the market and accepted growing levels of private ownership of capital. It is only one or two countries, such as North Korea and Cuba, that could be described as communist in the way the term was used to describe the centrally planned economies of eastern Europe before 1990.
But whilst market capitalism seemed to have emerged as the superior system in the 1990s, may are now questioning whether the market capitalism we have today is fit for the 21st century. Today much of the world’s capital in the hands of big business, with financial institutions holding a large proportion of shares in such companies. And the gap between rich and poor is ever widening
The market system of today, is very different from that of 100 years ago. In fact, as John Kay agues in his article “Let’s talk about the market economy” below, it would be wrong to describe it as ‘capitalism’ in the sense the term was used in the debates of the 19th and early 20th centuries. Nonetheless, the term is still used and generally refers to the market system we now have. And it is a market system that many see as failing and unfit for purpose. It is a system that coincided with the bubble of the 1990s and early 2000s, the credit crunch of 2007–9 and the recession of 2008/9, now seeming to return as a double-dip recession
With the political and business leaders of the world meeting at the World Economic Forum at Davos in Switzerland on 25–29 January 2012, a central theme of the forum has been the future of capitalism and whether it’s fit for the 21st century.
Is there a fairer and more compassionate capitalism that can be fostered? This has been a stated objective of all three political parties in the UK recently. Can we avoid another crisis of capitalism as seen in the late 2000s and which still continues today? What is the role of government in regulating the market system? Does the whole capitalist system need restructuring?
It’s becoming increasingly clear that we need to talk about capitalism. The following webcasts and articles do just that.
Webcasts and podcasts
Davos 2012 – TIME Davos Debate on Capitalism< World Economic Forum (25/01/12)
Can capitalism be ‘responsible’? BBC Newsnight, Paul Mason (19/01/12)
Capitalism ‘nothing to do with responsibility’ BBC Newsnight, Eric Hobsbawm (19/01/12)
Are there alternatives to capitalism? BBC Newsnight, Danny Finkelstein, Tristram Hunt and Julie Meyer (19/01/12)
America Beyond Capitalism The Real News on YouTube, Gar Alperovitz (27/12/11)
The future of capitalism CNBC, Warren Buffett and Bill Gates (12/11/09)
Capitalism Hits the Fan (excerpt) YouTube, Richard Wolff (2/1/12)
Panel Discussion “20 years after – Future of capitalism in CEE” Erste Group on YouTube, Andreas Treichl, Janusz Kulik, Jacques Chauvet, and media Adrian Sarbu (24/2/11)
The Future of Capitalism: Constructive Competition or Chaos? YouTube, Nathan Goetting, Tony Nelson, Craig Meurlin and Judd Bruce Bettinghaus (24/1/11)
Capitalism in Crisis Financial Times, Various videos (24/1/11)
Bill Gates: Capitalism a ‘phenomenal system’ BBC Today Programme, Bill Gates talks to Evan Davis (25/1/12)
Capitalism (See also) BBC The Bottom Line, Evan Davis and guests (28/1/12)
Articles
Meddle with the market at your peril Financial Times, Alan Greenspan (25/1/12)
The world’s hunger for public goods Financial Times, Martin Wolf (24/1/12)
When capitalism and corporate self-interest collide JohnKay.com, John Kay (25/1/12)
Let’s talk about the market economy JohnKay.com, John Kay (11/1/12)
A real market economy ensures that greed is good JohnKay.com, John Kay (18/1/12)
Seven ways to fix the system’s flaws Financial Times, Martin Wolf (22/1/12)
To the barricades, British defenders of open markets! The Economist, Bagehot’s Notebook (26/1/12)
Community reaction to doubts about capitalism in Davos CBC News (26/1/12)
Capitalism saw off USSR, now it needs to change or die The National (UAE), Frank Kane (26/1/12)
Words won’t change capitalism. So be daring and do something Observer, Will Hutton (22/1/12)
A political economy fit for purpose: what the UK could learn from Germany Our Kingdom, Alex Keynes (20/1/12)
Debate on State Capitalism The Economist (24/1/12)
Questions
- How has the nature of capitalism changed over recent decades?
- Can capitalism be made more ‘caring’ and, if so, how?
- What do you understand by the term a ‘fair allocation of resources’? Is capitalism fair? Can it be made fairer and, if so, what are the costs of making it so?
- Can greed ever be good?
- How does the ‘Anglo-Saxon’ model of capitalism differ from the European model?
- What do you understand by the term ‘crony capitalism’? Is crony capitalism on the increase?
- John Kay states that “Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital.” Explain what this means and what its implications are for making capitalism meet social goals.
- In what ways can governments control markets? Have these instruments and their effectiveness changed in effectiveness over time?
- What are the costs and benefits to society of the increasing globalisation of capital?
- To what extent was the financial crisis and credit crunch the result of a flawed capitalist system and to what extent was it a failure of government intervention?
- Why is it important for the success of capitalism that companies should be allowed to fail? Consider whether this should also apply to banks. How is the concept of moral hazard relevant to your answer?
In an earlier blog Energy profits margins up by over 700% we analysed the increasing pressure on many households as they saw their energy bills increase in price year on year. This helped the big six energy companies achieve a 700% rise in their profits.
However, it also sparked interest by the regulator Ofgem, which was looking to ensure that consumers found it easier to make price comparisons and create a more competitive market. One issue that Ofgem were looking into was how to make the energy sector more open to competition, given that the big six companies own the power stations and hence this acts as a barrier to the entry of new firms.
The latest announcements from some of the big energy companies will therefore come as a pleasant turn of events for Ofgem. On Wednesday January 11th 2012, EDF announced that it would be cutting its energy prices by 5% from 7th February in response to a fall in wholesale costs. Only a day later, Npower announced its plans to cut its tariffs by 5% from 1st February. British Gas cut its prices by 5% with immediate effect and SSE will reduce its gas prices by 4.5% from March 26th.
Is this a sign that the market is becoming more competitive thanks to Ofgem or is there another explanation? For the past 2 winters, temperatures have been consistently below freezing and hence demand for gas/electricity was at an all time high, speaking concerns of gas shortages. However, with the mild winter we are currently experiencing (I hope I haven’t jinxed it!) demand for heating etc has been significantly lower, which has reduced wholesale costs and the big six companies have begun to pass these savings on to their customers. Yet, despite this seemingly good news, are they being as ‘kind’ as we think? Most of the companies are cutting their prices by about 5%, yet wholesale prices fell by significantly more than that. Furthermore, over the past few years, customers have seen their tariffs increase significantly – by a lot more than 5%. To some extent, this confirms the criticism levelled at the energy sector – when costs rise, they are quick to pass on the full costs to their customers. But, when costs fall, they are slow to pass on only a fraction of their cost savings. The following articles consider this issue.
Npower will cut gas prices by 5% BBC News (13/1/12)
EDF cuts gas price by 5% Reuters, Karolin Schaps and Henning Gloystein (11/1/12)
British Gas readies push to promote price cut MarketingWeek, Lara O’Reilly (13/1/12)
British Gas cuts prices by 5% Independent (13/1/12)
Energy suppliers do battle in the war of modest price cuts The Telegraph, Emily Godsen (13/1/12)
British Gas and SSE follow EDF Energy price cut Financial Times, Guy Chazan and Sylvia Pfeifer (11/1/12)
British Gas cuts electricity prices, but keeps gas on hold Guardian, Hillary Osborne (12/1/12)
British gas and SSE announce price cuts (including video) BBC News (12/1/12)
More power firms cut energy tariffs The Press Association (12/1/12)
Questions
- In which market structure would you place the energy sector? Explain your answer.
- What is the role of Ofgem? What powers does it (and the other regulators have)?
- Using a demand and supply diagram to help you, explain why wholesale costs have fallen.
- Why have the energy companies only passed on about 5% of cost savings to their customers, despite falls in wholesale costs of significantly more than that?
- Do you think price wars are likely to break out in this sector? Are they in the interests of consumers?
- Why did energy prices increase so quickly last year and the year before? Use a diagram to help you.
In many parts of the UK, bus services are run by a single operator. In other parts, it is little different, with the main operator facing competition on only a very limited number of routes. Over the whole of England, Scotland and Wales there are 1245 bus operators, but the ‘big five’ (Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach) carry some 70% of passengers. Generally these five companies do not compete with each other, but, instead, operate as monopolies, or near monopolies, in their own specific areas. On average, the largest operator in an urban area runs 69% of local bus services.
Given this lack of competition and potential abuse of monopoly power, the Office of Fair Trading referred local bus services in Great Briatin (excluding London) to the Competition Commission (CC) in January 2010. The CC has just published its final report. Paragraph 5 of the summary to the report states:
We concluded that there were four features of local bus markets which mean that effective head-to-head competition is uncommon and which limit the effectiveness of potential competition and new entry. These features are the existence of: high levels of concentration; barriers to entry and expansion; customer conduct in deciding which bus to catch; and operator conduct by which operators avoid competing with other operators in ‘Core Territories’ (certain parts of an operator’s network which it regards as its ‘own’ territory) leading to geographic market segregation.
And paragraph 8 states:
We decided on a package of remedies with three main elements to address the AECs [adverse effects on competition] that we found. First, the remedies include market-opening measures to reduce barriers to entry and expansion, thereby reducing market concentration and providing an environment in which competition is likely to be sustained. By reducing barriers to entry and expansion, we also expect it to become harder for operators to sustain a coordinated outcome. Second, the remedies include measures to promote competition in relation to the tendering of contracts for supported services. Third, we made recommendations about the wider policy and regulatory environment, including emphasizing compliance with and effective enforcement of competition law.
The following articles look at the findings of the report and at the potential for improving the service to passengers, in terms of quality, frequency and price.
Articles
Competition regulator outlines bus market shake-up The Telegraph (20/12/11)
Bus market not competitive, Competition Commission says BBC News (20/12/11)
Passengers ‘need more bus rivalry’ Press Association (20/12/11)
Competition Commission publications
CC sets out Future Destination for Bus Market Competition Commission News Release (20/12/11)
Bus Market Inquiry: Final Report, Case Studies and Appendices Competition Commission (20/12/11)
Local Bus Services: Accompanying Documents Competition Commission (20/12/11)
Questions
- What are the barriers to entry in the market for local bus services?
- In what circumstances are local bus services a natural monopoly? Is this generally the case?
- In a non-regulated bus market, how could established operators use predatory pricing to drive out new entrants?
- How may offering reductions for return tickets reduce competition on routes where there is a large operator and one or more smaller ones?
- What practices can established large operators use to drive out smaller competitors?
- Go through the four reasons given by the CC why head-to-head competition in local bus markets is uncommon and in each case consider what remedies could be adopted by the regulator or by local authorities.
- Which of the remedies proposed by the CC involve encouraging more competition and which involve tighter regulation?
Ministers from around the world met in Durban in the first two weeks of December 2011 to hammer out a deal on tackling climate change. The aim was that this would replace the Kyoto Treaty, due to expire at the end of 2012.
International climate change agreements are particularly difficult to achieve, as there are several market failures involved. Also, there is considerable ‘gaming’, as each country seeks to negotiate a deal that benefits the world as a whole but which minimises the disadvantages to their own particular country.
The conference ended on the 11 December with a last-minute deal. Both developed and developing countries would for the first time work on a legally binding agreement to limit emissions. This would be drawn up by 2015 and to come into force after 2020. The following articles assess the significance of the agreement and whether it represents real progress or little more than a deal to work on a deal.
Articles
‘Modest’ gains as UN climate deal struck Independent (11/12/11)
Landmark deal saves climate talks Irish Examiner (11/12/11)
Durban climate change: the agreement explained The Telegraph, Louise Gray (11/12/11)
Durban climate conference agrees deal to do a deal – now comes the hard part Guardian, Fiona Harvey and Damian Carrington (13/12/11)
Climate deal: A guarantee our children will be worse off than us Guardian, Damian Carrington (11/12/11)
Durban climate deal: the verdict Guardian, Damian Carrington (12/12/11)
Australia hails Cop 17 agreement News 24 Australia (11/12/11)
Climate talks reach new global accord Financial Times, Andrew England and Pilita Clark (11/12/11)
Durban Climate Talks Produce Imperfect Deals Voice of America, Gabe Joselow (11/12/11)
Critics slam climate agreement t Sydney Morning Herald, Arthur Max (11/12/11)
Deal at last at UN climate change talks Euronews on YouTube (11/12/11)
World still in arrears on climate change pledges Reuters Africa, Barbara Lewis (11/12/11)
New UN climate deal struck, critics say gains modest Hindustan Times (11/12/11)
Climate change: ambition gap Guardian (12/12/11)
Canada leaves Kyoto to avoid heavy penalties Financial Times, Bernard Simon (13/12/11)
Durban Platform Leaves World Sleepwalking Towards Four Degrees Warming Middle East North Africa Financial Network, Ben Grossman-Cohen and Georgette Thomas (Oxfam) (13/12/11)
A deal in Durban The Economist (11/12/11)
Assessing the Climate Talks — Did Durban Succeed? Harvard University – Belfer Center for Science and International Affairs – An Economic View of the Environment, Robert Stavins (12/12/11)
Questions
- What was agreed at the Durban Climate Change Conference?
- Why is it difficult to get agreement on measures to tackle climate change? How is game theory relevant to explaining the difficulties in reaching an agreement?
- How would you set about establishing the ‘optimal’ amount of emissions reductions?
- Why will the market fail to provide the optimal amount of emissions reductions?
- Why was it felt not possible for a legally binding international agreement to come into force before 2020?
When people shop in supermarkets they often look for what’s on special offer. After all, everyone likes a bargain. About 35–37% of supermarket items are on special offer at any one time and around 50% of the money spent by customers is on such items.
But things aren’t always as they seem. Supermarkets use clever marketing to persuade people that they’re getting a good deal, while sometimes it’s nothing of the sort. Examples include putting up prices for a while and then reducing them again saying “huge reduction”; or promoting an offer of, say, “three for £2”, when you could buy an individual item for 60p; or using the word “now” £2.50 to imply that the previous price was higher, when in fact it wasn’t; or selling a double-sized “value pack” for more than double the price of the regular size. These tricks are commonplace in supermarkets.
Sometimes the wary consumer will be able to find out which offers are genuine, but it’s not always that easy. And even if you do buy something at a genuine discount, is it something you really want? Or have you been persuaded to buy it simply because it’s on offer? Supermarkets study consumers’ psychology. They find clever ways of promoting products to make us feel that we have done well in getting a bargain.
The following programme in the BBC’s Panorama series looks at the big four supermarkets in the UK – Tesco, Asda, Sainsbury’s and Morrisons – which between then have 68% of supermarket sales. It gives examples of some of the not so special offers and how consumers are being hoodwinked.
Webcast
Revealed: The truth about supermarket ‘bargains’ BBC Panorama (clip), Sophie Raworth (5/12/11)
The Truth About Supermarket Price Wars BBC Panorama (full programme), Sophie Raworth (5/12/11)
Articles
What you need to know about the supermarket price wars Totally Money (7/12/11)
Supermarkets accused of misleading consumers The Telegraph, Nick Collins (5/12/11)
Supermarket price war: Can they all be cheapest? BBC News, Anthony Reuben (9/12/11)
Are Our Retailers Criminals? International Supermarket News, Laura Elliott (6/12/11)
Supermarket deals “not what they seem” warns expert Retail Gazette, Gemma Taylor (6/12/11)
Questions
- What types of misleading offers are identified in the Panorama report?
- For what reasons are consumers “taken in” by such offers? Does this imply that consumers are irrational?
- Does intense oligopolistic competition between the big four supermarkets lead to lower prices?
- How is it possible for two supermarkets to claim that they are cheaper than the other? How would you decide which supermarket was generally cheaper?
- Why might it be difficult for an independent agency to do a comparison of prices of different supermarket chains?
