Fairtrade: A Future Fair for All?

On average, the quantity of 'Fairtrade' goods being traded in the UK has been doubling every 2 years. At least 20% of Bananas, Coffee and Chocolate sold in the UK are sourced from Fairtrade suppliers.  And 7 million farmers in 58 countries globally benefit directly from the Fairtrade movement. However in economics it is rare for any form of market intervention, or on the other hand any abstinence from it, to be without its doubters.

The underlying problem that generates a case for Fairtrade setting a market price-floor, is that many firms have near-monopsony power over farmers, let’s use cocoa farmers as an example. This means that they possess a lot of bargaining power when negotiating prices for the cocoa they need to create their own chocolate with, as they are the only, or a very valued and significant customer for, the cocoa-farmer. Therefore, they are able to drive the price of the cocoa down beneath a free-market equilibrium, as the farmer essentially is a price-taker and has no power to ignore and rebuff unfair prices under the equilibrium price which they need to be fully satisfied, and would ideally only supply at (i.e. normal profits).

However Fairtrade artificially tries to eradicate this power imbalance, through setting a price floor on the market, as shown above using a supply and demand diagram.

This has the effect of creating excess supply in the Fairtrade markets, as the market is no longer in its free-market equilibrium. This excess supply may subsequently harm those markets that are not Fairtrade, reducing their demand and revenue; assuming that not all firms in the intervened market are under the shield of Fairtrade. Hence, those who are with Fairtrade benefit, but at the price of hurting those not aligned with Fairtrade, which may cause a less even distribution of income in such emerging economies on aggregate, which could be seen as unfair and inequitable.

However, price distortion is by no means definite. One counterargument against price distortion could be because this argument does not take into account the principles of product differentiation.  Coffee, for example, cannot be compared to other commodities such as oil: there is not one single type of coffee but instead many different coffees that are differentiated from one another in terms of production techniques, seasonal or regional differences in quality, blending, packaging, handling, and now also "social responsibility". Therefore it could be that the market equilibrium for Fairtrade goods, which are perceived to be equal to the price of non-Fairtrade good + a social responsibility value by consumers, lie at a higher price-level, as consumers will pay more based on environmental and social responsibility claims. Hence although the price of Fairtrade goods may be higher, it is so because that is the markets natural equilibrium, and therefore excess supply does not necessarily exist.

Whatever the case, Fairtrade is a movement which is growing, evolving and encompassing food markets in particular. According to research by the Fairtrade foundation, 65% of consumers recognise and understand what Fairtrade is about, and are supportive of it. If they support it and understand it, it is likely that they will differentiate Fairtrade goods from others. However, will they buy both Fairtrade and non-Fairtrade products? That is unlikely. Therefore, as Fairtrade gains popularity, there must be a proportionate increase in the number of Fairtrade suppliers involved with it, otherwise the danger could be of crippling non-Fairtrade markets, not necessarily through ‘unfair’ prices, but through a simple lack of demand.

Fancy Working Until You're 66?

By the year 2020, UK residents will have to wait until their 66th Birthdays to claim their State Pensions. Meanwhile, in the land of our closest neighbours, France, general strikes are enveloping the nation, civil unrest is at large, and resources are being stretched to the limit - because of proposals to lift their retirement age to a seemingly measly 62! Well, they are French.

Undoubtedly, a rise in the state retirement age is not, and certainly will not prove to be, one of the most popular moves of the Spending cuts in the UK. However, can it be justified?

Almost certainly.

Demograhic trends are set to experience seismic shifts as baby-boomers (people born between 1946 and 1964) retire over the next two decades. The consequent rise in older Adults will add huge amounts of stress not only to the already sizeable pension burden, but also to the NHS and infrastructure costs, as more long-term care (ie. Nursing Homes) facilities will need to be created to cope with surging demand as people live longer lives.

It really is a serious concern for current Governments. In fact, six European economies - Germany, France, Ukraine, Belgium, Luxembourg and Greece estimate that by 2050, at least 30% of their spending will be dedicated to age-related expenditure. And for the rest of the advanced global economies, their median spend will be around 27% of their state income. Such huge proportions of spending are clearly unsustainable, so the case for reform is clear. But what reform exactly?

Well, a crude method could be to try and stop people from living longer, lingering, burdensome lives, but that's not ethical. One may try and generate a second 'baby-boom' to pay for the original boom, but that's not practical, marketable or easy to do. Tax raises could pay for it; but there's no chance in today's climate. An increase in Government Fiscal Deficits could be permitted, surely one could pay it off in the future; well, that would certainly contradict other current Government policies. Or, even easier, one could allow immigration to bump up the number of taxpayers in the country; again not easily marketable politically, particularly during a time of unemployment.

Hence, the only sensible option left it would seem, in this climate at least, is to raise the retirement age. As life expectancies increase steadily, it is generally viewed as reasonable to increase retirement ages at a similar rate. If this happens, the potential size of the workforce will grow, and so will it's potential to produce, pay taxes and enhance the long-run growth of the economy. There will of course be winners, those who just about qualify to retire early, and losers, especially the young, who would have filled the gaps of those who retired but now stay in employment for longer. However, in the long-run such unfairness caused by an increase is likely to be ironed out, i.e. when those who would have retired at 65 retire at 66 instead, the young will then be able to take the vacancies a year later than previously, restoring the young-old cycle as before, and then the positives really will outweigh the negatives.

In conclusion, raising the retirement age certainly will not be celebrated. It is simply a policy that will be hated less than its alternatives.

Don't Shoot the Messenger.

The Chancellor as he announces the results of the long-awaited spending review.

In his Play Henry IV, Shakespeare penned the phrase 'Don't shoot the messenger'. Without doubt George Osbourne and the Coalition will be forced to vociferously convince the Nation of this sentiment for years to come after the series of cuts announced on Wednesday.

In fact, in his speech Mr Osbourne did try to emphasise this message, and many of his other colleagues are now plugging the same party line: that they must 'confront the ghastly truth of Labour's legacy', as Liam Fox, Defence secretary, recently stated.

The simple graph below evidences the motives behind their campaign. The UK's deficit has ballooned recently, and at 10.1% of GDP in 2010, Britain has the largest budget deficit of any major economy globally. Only the United States comes close at 9.0%. However, why is this worrying, haven't we had budget deficits for years? We were fine then, right?

UK Fiscal Deficit as a percentage of GDP, including forecasted change in blue

Well, the IMF recently stated that: 'As economies gradually recover, it is now urgent to start putting in place measures to ensure that the increase in deficits and debts resulting from the crisis...does not lead to fiscal sustainability problems'. In other words, the IMF believes, and generally speaking so do other global institutions and economic powerhouses such as the IFS, OECD and others, that it is critical to the long-term prospects of the UK economy that it takes decisive action to substantially decrease the budget deficit. Fundamentally, this will increase confidence in the UK'e economy internationally, decrease interest payments and morally will not allow our over-exuberance become a hindrance on the lives of future generations.

However on the other hand there are many who feel that cutting back too soon is sure to, or is is far too likely to, cause a double-dip recession, or in the 'best-worst case scenario' to introduce stagflation to the economy. Stagflation is a period when inflation and unemployment are rising simultaneously, but both growth and demand are stagnating. This happened in Japan in the 1990's, and thus far Japan does not seem to have recovered from the long-term drain that it has had on the technological power's productive potential. Included in this camp of opposers are of course the Labour party, who, living up to their newly-found title of 'The Opposition' are digging into some good opposing by arguing for a much slower and gentler rate of deficit-reduction.

However, could the real idealogical battle to arise from these spending cuts be one of Keynes Vs. Hayek? Government intervention and demand Vs. the free-market system and conservative beliefs? Some more cynical commentators see these spending cuts as a landmark change of direction for the UK, similar to that experienced during the period of Margaret Thatcher and Ronald Reagan, only this time with a more Keynesian slanted US President. The notion of shrinking the public sector, cutting around 490,000 jobs from it in a few years, and expecting, or even hoping that the Private sector will pick up the slack could be viewed as an attempt to increase the poignancy of the free-market in the UK, by increasing the size and role that the Private sector has in the economy. A marked reverse from the ever-expansionary approach of New Labour? Maybe.

We cannot yet tell if ulterior motives are paying a part in these spending cuts, it will become evident with time, and surely with hindsight.

All we can be sure of however is what the Government would like us to think concerning it's actions. Whilst delivering his announcement George Osbourne stated: 'A fair Government deals with the deficit decisevely'. Is that really true? Can the cuts really be considered to be fair?

MONEY: Is it really worth, what it's worth?

You take a crumpled piece of paper out of your pocket. On it there is a collection of numerical digits, a picture of a deceased national icon, and not much else worth taking any notice of. You hand it over the counter to the Shop Assistant, and in return, you are handed your product of choice.

But how and why does this seemingly irrelevant note, or even a coin, hold a value?

Well, I'm afraid to inform you that all of your money has no inherent, permanent, or even vested value. It is all essentially worthless. Yes, I did say that your money is worthless.

But surely it does you may say. You may believe that the Government has stocks of precious metals which are used to backup the value of their currency. Therefore, your money's worth is backed-up by a tangible asset, and it has a relatively secure value. But if you believe so, take a look at the chart below.

These countries represent 65% of the Global Population, and, more importantly, 89.6% of Global GDP. And really, the only nations which can truly claim to have their currencies propped up by Gold reserves are Venezuela, Switzerland and Kuwait. For the majority of the other nations, commodity reserves were destroyed in around 1971, as President Nixon declared the US would no longer exchange dollars for Gold.

So where does the apparent value of money that we appreciate and use all the time disseminate from?

Well, there is a limited supply of money, and there is a large demand for it, as people want, and currently feel that they need it in order to purchase goods and services. Furthermore, they want it because they believe that the money will hold a value into the future, and they have confidence that it will be accepted wherever they desire to spend it now and then. Hence, money is based upon a mutual set of beliefs, rooted by a confidence in future expectations, especially for inflation, and a faith in the acceptability and trade-worthiness of the currency.

Faith may not seem like the most sturdy basis upon which to build a global economy. However, the theory of the 'Double Coincidence of Wants' goes part of the way to explaining why it is unlikely such a confidence-based monetary system will disappear.

Realistically, the only way that the whole monetary system will crash, is if inflation runs riot and people lose all faith in it's purchasing power.

However, please notice the use of the term money rather than currency. Individual or linked currencies are much more liable to influence from a poor, corrupt or misinformed Governement(s), and single currencies are hence more likely to crash, although likely just to be replaced by another currency in the same monetary system.

The Double Coincidence of Wants

Bartering was at one stage in Mankind's history the only the method by which producers and consumers could exchange goods and services.

However, it was terribly inefficient. Goods are often extremely difficult to swap logistically for starters. I mean, can you imagine carrying a bag of potatoes to your local shop, just to exchange for a book, simply because their perceived values are equal?

Moreover more challenging is to find two items that are judged by two different people to have equal, or less justly, similar, values.

This is where the title, 'The Double Coincidence of Wants' comes in. With a barter system, there may be many people offering goods and services, and many people wanting them, but the problem lies in the issue of them possessing things wanted by the people they desire to trade with. Hence, the double coincidence. You must not only find someone with something you want, but you must find somebody with something you want, who wants something you have and possess. Unlikely, right?

That's why bartering is extremely inefficient and unproductive. And that's why today we have money. Be it US Dollars, UK Sterling, Euros or Yen, money allows local, national and global trade, via electronic payments and physical payments. With a system of bartering, we would still be stuck were we were as a species thousands of years ago.

Where's my wall charger?

Buying an iPod recently, it struck me that unlike with almost any other electrical appliance, you do not receive a wall-charger. Annoyingly, this sometimes causes me the inconvenience of needing to connect up my otherwise adorable iPod to my computer to charge it, even if I have no intention or desire to use the computer. So, why do Apple not provide a wall charger with an iPod?

Many people will cynically presume no doubt that Apple just want to take more of their hard-earned money, through a slightly underhand way. Assuming that a reasonable proportion of their customers (roughly 120 million of them!) will view a wall-charger as necessary, there is bound to be a sizeable amount of demand for their official chargers. And, at £25.00, or $29.00, a pop, with minimal transportation and production costs, one can be confident that there are financial incentives at play in terms of the choice to disregard the iPod charger.

Furthermore, an iPod charger will incur costs for production, especially through additional costs for transportation, as the neat and minimalistic case within which new iPods are sold would need to be expanded, thereby reducing the number of units that could be crammed into shipments, hence in the long-run, perhaps leading to significant increases in transportation costs. No doubt these extra costs created by the inclusion of a charger would need to be passed onto the consumer. Which would in turn, following the law of demand, cause a decrease in sales, which would be more pronounced if demand were elastic, and obviously less so if it was inelastic, i.e. less responsive to a change in prices. Therefore, increasing the price of the iPod so that it includes the charger will probably put more people off buying than it will encourage them to do so.

Perhaps price-targeting is at play here to. For some people, price will be a much bigger determinant as to whether or not they purchase the iPod or not than for some others, so these people are more known to be 'price-sensitive'. Through keeping prices at a minimum, those who are price-sensitive should still buy the iPod, hence meaning that Apple minimises the number of lost customers it acquires. However, surely Apple want to charge people who are willing to pay more, more money than those price-sensitive ones, right? Well, it is for these people that the price of a wall-charger is so inflated. As they are willing to pay for it, let them. And that is a further tactic that Apple employ to pull that extra disposable cash from those more affluent pockets.

If the above reasons aren't adequate, there will almost certainly be a strong positive correlation between iPod-computer connections, and App Store purchases, for when people connect their iPod to their computer, it will increase their likelihood of browsing the App Store, and grabbing that latest 'must have' app.

Surely, for Apple it's obvious - make iPod's cheap, chargers expensive, and ... it's happy days.

Interest Rates Kept At Rock Bottom - Why?

Since 1694, the Bank of England has regularly set Interest Rates as a method of controlling the British Economy onto further and sustained growth. Today, however, the Bank decided to hold the base rate at 0.5%, which prior to March 2009 had never been set as the official base rate, for it was considered too low!

However, we must remember that these are precarious times, which call for strong stimulus. Or, is it true that 2009 was a precarious time, and now  we are witnessing a strengthening of the economic recovery, and have a need for less potent monetary policy?

Well, there is no doubt that many concerns about the UK's short-medium term future do exist. The US economy is stuttering, a factor in the UK's trade gap widening - to 8.7 billion pounds from the 7.5 billion pounds in the previous month, with a 0.9% decrease in exports, unexpected against a depreciating pound - raising fears over the Government's idealistic export-led recovery. The Government is set to embark on a rampage of spending cuts, causing job losses in the short-term, and less investment in the long-term. Many European countries are still only staggering away from the brink of collapse. Add to this a growing business pessimism, particularly in the manufacturing industry, as Inventory purchasing slides, showing low future business confidence, and the picture isn't rosy. Which makes the Bank's decision seem extremely obvious.

Which it may well be. However, there are still some strong arguments as to why Interest Rates should now be increased. Inflation - which the Bank of England is obliged to try and restrain towards 2% has been above 2% every month in 2010 so far, when measured by both CPI and RPI according to the Office for National Statistics. Inflation will decrease the value of assets, may cause a price-wage spiral to begin (although this is not appearing to happen at the moment due to the high amount of supply available in the Labour Market), and cause a decrease in the UK's competitiveness.

However, the majority of the issues caused by inflation are minor in comparison with the catastrophe a slump in growth could signal in the long term future of the UK.

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Does BP's size, power and clout make it into, well, a Monster?

Some would say that the oil industry is an Oligopoly. On the other hand, many more believe that the global oil industry is generally operated as an industrial cartel.

However, would having such power and force make BP into a more clumsy, more error-prone business?

I'm sure that many Louisianans would agree at the moment. And, from an economic viewpoint, too much power, either in a Cartel, Oligopolistic or Monopolistic system, can lead to problems.

Complacency ruins efficiency, causing a business to react more sluggishly to changes of market forces, and to becoming less caring about the social aspects of their exploits, due to reduced importance of a social standing in relation to demand.

A lack of competition reduces further positive incentives, such as for companies to cut waste, reduce risk and to invest in greener technologies.

And a sense of security as a business, increases the chance of less Research and Development, less long-term investment, and more complacency yet again.

So, perhaps, and only perhaps, the natural disaster in the Gulf was at least partially due to failed Government regulation of the Oil industry. But is the global industry too big for a single Government even to attempt to regulate?

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Turbocharged German Growth

The German Car-manufacturing industry has seen a 14% increase in export orders

Q2 2010. The UK grows by 1.1%. The US by 0.6%. But Germany surges ahead with a staggering 2.2% growth! How and why has did this happen?

First, we must remember that last year, Germany was embroiled in the World economic slowdown like the majority of major economies. It's GDP shrank by 4.9% in that year, less than the UK's decline of 6.4%, but still significant enough to mean that there would be significant decreases in production, expenditure and income, which would in turn cause an increase in 'slack', or spare capacity, in the German economy.

With such slack in an economy, such startling growth figures become more feasible, simply because there is more room for businesses to employ more staff, without significant wage increases, to increase production without incurring large capital investment costs (e.g. the need to build a new factory or warehouse) or to become more entrepreneurial, as there may be less barriers to entry for newer firms whilst the established firms are weak, and have lost valuable expertise/staff and equipment etc. Still, due to the deeper recession in the UK, and hence the greater level of spare capacity in the economy, UK growth should be higher compared to Germany, shouldn't it?

Well, as aforementioned, it's not. And, for good reason. The economies are significantly different.

Rank	Country	Exports	Date of information
—	World	$12,461,000,000,000	2009 est.
—	European Union (minus internal trade)	$1,525,000,000,000	2009 est.
1	People's Republic of China	$1,204,000,000,000	2009 est.
2	Germany	$1,159,000,000,000	2009 est.
3	United States	$1,046,000,000,000	2009 est.
4	Japan	$542,300,000,000	2009 est.
5	France	$472,700,000,000	2009 est.
6	Netherlands	$417,600,000,000	2009 est.
7	Italy	$412,900,000,000	2009 est.
8	South Korea	$373,600,000,000	2009 est.
9	United Kingdom	$357,300,000,000	2009 est.
10	Canada	$323,400,000,000	2

As can be seen from the table above, Germany is the World's second largest exporter, exporting over three times more goods than the UK. Although totally reliant upon the state of foreign economies, which have generally been risky and volatile, with the exception of China, exports are a critical source of income for a recovering economy: they fill the void left by a decrease in domestic demand, i.e. demand within a single nation, and  allow wealth to be injected into an economy from abroad, which is likely to have numerouspositive effects domestically, such as the Multiplier or Accelerator effects, which will be explained in depth at a later date.

In effect, by exporting such large quantities of goods, in particular technological or engineered, high-value goods, the German economy is literally able to 'turbo-charge' it's recovery. Exports release an economy from the stranglehold of domestic constraints, and allow products to be sold to a much larger market, more households and more firms, hence generating more revenue.

So, why don't other countries simply export more goods? Aahh, well, that's a question of competitiveness and barriers to entry....

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The beginning.

Hello and welcome! Welcome to the new, shiny and suave destination for all of your economics-based needs!

This blog will show you, and the World, about why economics is so important to all of us; how and why it affects our choices, happiness and future well-being so much.

Apart from commenting on current affairs from an economic perspective, I will endeavour to help you to further your understanding of the intricacies of the subject, with articles about specific economic subjects and theories; hopefully, so that you can acquire useful  knowledge to help you in the real World.

This blog will be of particular use to A-level Economics students, who need help to revise or understand subjects for their syllabuses.

Above all, my mission is to try and make sure that everybody who visits this blog will enjoy economics, learn about economics, and understand the World in more depth as a result.

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Remember: Economics is not only about money! It covers a huge range of every day topics: Unemployment, Fiscal Policy, Strategical decision-making and Price Systems to name but a few!