The east coast mainline from London to Edinburgh is a ‘premium route’. This means that it is one of the lines in the UK that is profitable. When the franchises come up for renewal on such lines, potential operators bid to pay the government for the franchise. National Express won the eight-year franchise in 2007 for a total of £1.4 billion, paid in annual rising instalments.
Although the east coast mainline is still profitable, the recession has meant that passenger numbers have been insufficient for National Express to make its annual payments to the Department for Transport and still be left with a profit. As a result, the government will take the franchise into public ownership later this year. This specially created nationalised company will then operate trains on the route until a new franchise is awarded to a private company at the end of 2010.
So why has this proved necessary? Is it all down do the depth of the recession? Or was the £1.4 billion cost of the franchise unrealistically expensive? Would the answer be for National Express to merge with another operator, such as the First Group? Or should the government be prepared to waive, or at least reduce, the franchise payments until passenger numbers are growing fast enough? Or is it time to rethink the whole UK model of rail privatisation and perhaps return to a nationalised rail system? The articles below consider the issues.
National Express loses East Coast line Independent (2/7/09)
National Express goes off the rails on east coast line Times Online (4/7/09)
Q&A: the future of National Express and the east coast mainline rail service Guardian (1/7/09)
East Coast main line: Q&A Telegraph (2/7/09)
Runaway train: The crisis in the rail sector Scotsman (5/7/09)
First Group sets sights on East Coast Business7 (3/7/09)
National Express’s decision to quit East Coast franchise is a lose-lose for nearly everyone Telegraph (4/7/09)
Focus turns to rail franchise system Financial Times (2/7/09)
Rail network: red signals ahead Guardian (2/7/09)
Have we reached the end of the line for privatisation? Observer (5/7/09)
Privatisation has been a train wreck: Ken Livingstone Guardian (2/7/09)
New Capitalism: Old Capitalism except taxpayer money is at risk: Iain Macwhirter Sunday Herald (5/7/09)
Questions
- Consider the relative merits of temporary nationalisation of the east coast mainline services with providing temporary support for National Express.
- Should profitable rail franchises be awarded to the highest bidder? Similarly, should loss-making franchises be awarded to companies bidding for the lowest subsidy?
- Discuss the arguments for and against a complete re-nationalisation of the railways.
- With reference to the final article above, explain what is meant by a Special Purpose Vehicle and whether it was an appropriate means for National Express to fund its £1.4 billion franchise. What dangers are associated with this and other new forms of ‘no-risk capitalism’? Is there a ‘moral hazard’ in this form of capitalism?
The current financial crisis has led many to wonder whether this may mark the ‘death of capitalism’. While this may almost certainly be an over-statement, it may mark a fundamental sea change in the way in which we oversee and manage a capitalist system. The articles below look at some of the implication of this possible change in approach.
Positive thinking Guardian (18/10/08)
A category error Guardian (10/10/08)
History can guide, yet there are new limits of the possible Guardian (10/10/08)
I’ve watched the economy for 30 years. Now I’m truly scared Guardian (28/10/08)
The new New Dealers Guardian (26/9/08)
Europe and America in the shadows as a new era dawns Telegraph (26/10/08)
Questions
| 1. |
Explain what is meant by a capitalist system of economic organisation. |
| 2. |
Assess the extent to which a ‘soft-touch’ regulatory approach can be blamed for the current financial crisis. |
| 3. |
Discuss the extent to which greater levels of government intervention and economic regulation are likely to result from the current financial crisis. |
| 4. |
Are we witnessing the death of capitalism? |
In a remarkable turn around, the current financial crisis has seen mentions of Karl Marx and Marxism creeping their way back into the economic media. Whilst no-one expects a resurgence of Marxist economics, the current financial crisis has led people to wonder whether his work may have some relevance in trying to analyse the current instability in the capitalist and financial system. Even the Archbishop of Canterbury has argued that Karl Marx was right in his assessment of capitalism. So is Marx turning in his grave, or is he due for a revival of fortunes?
Banking crisis gives added capital to Karl Marx’s writings Times Online (20/10/08)
The red Archbishop? Guardian (25/9/08)
Marx is dead: don’t resuscitate him Guardian (27/9/08)
Questions
| 1. |
Summarise the key tenets of Marxist economics. |
| 2. |
Step 5 of Karl Marx’s ten essential steps to Communism was “Centralisation of credit in the hands of the state…..“. Assess the relevance of this as a possible solution to the current financial crisis. |
| 3. |
“An over-expansion of credit can enable the capitalist system to sell temporarily more goods than the sum of real incomes created in current production, plus past savings, could buy, but in the long run, debts must be paid”. Discuss the extent to which this quote from Marx is relevant in the analysis of the current financial crisis. |
A key introductory economic concept, brought to us from Adam Smith, is the invisible hand that manages the workings of the market economy. However, is the current financial crisis an indication that the invisible hand has failed us? Should we be looking more at the invisible heart of community when we try to build an economic system? The first article linked below look at whether we may be more successful at delivering economic happiness and welfare if we follow the invisible heart rather than the invisible hand.
This way happiness lies Guardian (19/10/08)
Why do we need economic growth? BBC Magazine (16/10/08)
Questions
| 1. |
Explain how the ‘invisible hand’ allocates economic resources in a market economy. |
| 2. |
Assess whether the current financial crisis may indicate that the invisible hand has failed to allocate resources appropriately. |
| 3. |
Discuss whether the pursuit of economic happiness may be more appropriate than the pursuit of economic growth. |
During his lifetime Galbraith warned extensively of the problems likely to be associated with financial excesses, and if alive today would almost certainly allow himself a ‘told you so’ moment. He was a lifelong liberal who argued that capitalism was inherently a fragile and unstable system. So what relevance does his work have to the current financial crash?
Galbraith saw this coming Guardian (15/10/08)
In praise of …The Great Crash 1929 Guardian (15/10/08)
Questions
| 1. |
Write a short paragraph summarising Galbraith’s life and work. |
| 2. |
Assess the extent to which his arguments in relation to the fragility of the financial system are still relevant today. |
| 3. |
Galbraith commented that all stockmarket bubbles exhibit “seemingly imaginative, currently lucrative, and eventually disastrous innovation in financial structures“. Discuss the extent to which this kind of innovation (e.g. derivatives and sub-prime mortgages) may have been responsible for the current financial crisis. |