Point Counterpoint
Monopoly
... is a market structure characterised by a single dominant firm, where the market has high barriers to entry and the firm is a price maker (it can dictate the price it charges as the good or service lacks substitutes). A firm is said to have an economic monopoly when its market share exceeds 25%. Modern day examples include Google as its market share of search engines account for 90%. Having such power can result in multiple consequences and benefits, which you can find out more from Stella and Archie!
... increases opportunities for specialisation
Firms with monopoly power can produce at a high output, allowing them to exploit significant economies of scale, which occurs when long-run average costs fall as output increases. In an industry with high fixed costs, such as the rail industry, a natural monopoly which can exploit economies of scale could be significantly beneficial as the high output by one firm greatly decreases average fixed costs. Thus higher economic efficiency can be achieved when the industry dominated by one firm benefits from significant economies of scale. Therefore, monopolies with lower long-run average costs could achieve productive efficiency and lower offer prices for consumers. Supernormal profit can also be used to subsidise loss-making markets, particularly those with positive externalities. Government regulation and the threat of new entrants (high contestability) can both limit excessive supernormal profit in monopolies and further incentivise lower prices.
... encourages innovation
Monopolies can make high supernormal profits in the long run due to a lack of competition, particularly in industries protected by statutory barriers to entry such as patents. Such profits can then be invested into research and development (R&D), which improves dynamic efficiency. Monopolies are incentivised to innovate as they are interested in further increasing the barriers to entry to maintain their supernormal profits in the long run. For example, pharmaceutical companies which often have an economic monopoly, continuously obtain patents and invest heavily in research. Therefore, many life-saving medical developments would not be possible without the monopolistic structure of pharmaceutical companies. This is one of innovation’s many positive externalities of production, which also include increased efficiency and higher quality products. Innovation and R&D would not be possible without supernormal profits and the incentive to maintain barriers to entry — monopolies are highly beneficial.
... causes market failure
A monopoly which profit maximises will set a higher price than the market equilibrium price in competitive markets. This is possible as the firm has a large market share and there are high barriers to entry. Such leads to a reduction in effective demand and underconsumption. The deadweight loss due to inefficient allocation of resources results in a market failure. These effects can significantly affect industries of necessity goods such as water or electricity if monopoly firms engage in such behaviour. For example, the Organisation for Petroleum Exporting Countries produces 30 percent of the world's oil and thus, are monopolies. The higher prices they charge result in allocative and productive inefficiency, and deadweight welfare loss — a market failure is often inevitable. Therefore, monopolies sacrifice economic welfare to increase abnormal profits, reducing economic prosperity.
... causes unemployment
Monopoly firms are productively inefficient as they produce at an output higher than their average costs. They have no incentives to reduce their costs due to the high barriers to entry. From the lack of competition in the market, firms gaining monopoly power may experience diseconomies of scale. This occurs when the firm's marginal costs increase due to the factors of production reaching their maximum efficiency, which eventually increase the average costs. The increase in costs causes firms to seek profit elsewhere; employees. Hence, firms reduce employees' wages to the point of exploitation, causing workers to leave their jobs out of injustice. According to Karl Marx, these individuals are called 'the reserve army of the unemployed.’ Firms inherit the monopolistic power of manipulating unemployment levels and the wage rates leading to consequential modifications in the economy.
By Stella Wilson &
Archie Baheerathan
Answering your Burning Questions
What is a free market economy and the function of the 'invisible' hand?
By Archie Baheerathan
A free market is an economic system in which prices of goods and services are determined by the market forces such as supply and demand, independent of government intervention. In this system, private individual economic agents have the liberty to decide for whom, what, when, or how the goods and services are supplied at what price. This is known as decentralised decision making. The market participants have greater economic freedom as no external forces manipulate consumers' and producers’ behaviours. Adam Smith, the founder of modern free-market economics, introduced this system in his book, “The Wealth of Nations.”
He proposed the existence of an 'invisible hand' in a free market which is a metaphor for the unseen forces that allow a free market to operate efficiently. Smith discusses that all exchanges between economic agents within a free market are strictly voluntary, and all participants act for their self-interest. The 'invisible hand' is a so-called 'force' that creates an equilibrium level in the market resulting in beneficial social and economic outcomes. These forces are unintentional from an individual’s perspective, but arse from self-interest driven actions. Smith further wrote that due to these self-interested individuals, the invisible hand would automatically result in the optimum distribution of scarce resources, resulting in an efficient economy.
Supply= quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given period.
Demand= quantity of a good or service that consumers are willing and able to buy at a given price in a given period.
Economic agent= an individual that plays an active role in contributing to the economy, such as a consumer or supplier.
Equilibrium level= state of balance between market demand and supply.
Point Counterpoint
International trade
... refers to economic transactions between countries, involving both goods and services. The first school of thought devoted to international trade is called “mercantilism” from 17th and 18th-century Europe. Mercantilists advocated that a highly interventionist government policy be directed to arranging the flow of commerce to conform to these beliefs. The big breakthrough of this theory came with Adam Smith’s Wealth of Nations, is remembered for his incisive analysis of trade policy, where he details not just the benefits of free trade but the costs of government intervention. Then, the theory of international trade was reinforced by classical economists in the early 19th century with the theory of comparative advantage.
For centuries, trade policy has been the subject of intense and spirited debates. Let’s take a dive into what Archie and Stella have to offer!
... increases opportunities for specialisation
International trade increases countries’ accessibility to goods and services which are not available domestically; aiding, countries to trade with others to efficiently produce a good. The benefits of international trade can be further explained using the comparative advantage theory proposed by David Ricardo. Comparative advantage occurs when a country can produce a good with a lower cost of production by the process of specialisation. Countries maximise the beneficial impacts of trading by specialising in producing a specific good and then trading these for other goods and services; this is known as specialisation. Ricardo argued that obtaining a comparative advantage, allows economies to supply goods at a relatively low marginal and opportunity cost. The occurrence of specialisation can increase labour efficiency as workers focus on producing one type of good and thus less capital and time invested on other goods with higher opportunity costs. This can stimulate growth in competitive markets and overall greater economic efficiency.
... Leads to economic growth and reduces poverty
Countries that engage in international trade obtain various economic improvements such as productivity, innovation and employment. Firstly, specialisation and trade increases output, improves productivity. Economic growth and lower world prices have benefitted lower-income households who purchase greater quantities of goods and services. The World Bank reports that developing countries compose 48 percent of world trade in 2021, up from 33 percent in 2000 and those living in extreme poverty halved since 1990. As labour is derived demand, increased output from trade would mean increased demand for labour — increased employment and wages will reduce poverty and inequality. For example, the US-Vietnam FTA in 2001 had reduced poverty in Vietnam as it increased real wage rates in export and manufacturing sectors. International trade which promotes a competitive market environment brings greater innovation rates. Such would bring higher labour productivity levels, further stimulating economic growth.
By Archie Baheerathan & Stella Wilson
... makes the economy vulnerable to international politics
International trade allows countries to specialise and exploit their comparative advantage. While doing so, they rely greatly on positive international relations and trade links to maintain a range of imports that other countries specialise in. Historically, many Western countries are reliant on international trade for access to oil, which has proved to be dangerous during the current Ukrainian crisis and the 1973 Oil Crisis. For both events, geopolitical issues have caused significant energy shortages and price increases.
Further, foreign governments may introduce discriminatory changes in laws, regulations or contracts governing investments. Particularly in emerging markets, countries have realised the value that can be extracted from foreign firms through regulatory control. It is very difficult for firms engaged in international trade to protect against these risks, making them vulnerable to the decisions of foreign governments.
... increases structural and mass unemployment
While international trade can encourage wider growth in an economy, increased competition and structural unemployment can be incredibly harmful in certain sectors, such as heavy manufacturing. The cultural loss of local producers is a similar, yet unquantifiable, risk of international trade.
Countries with traditional economies are at risk of losing their farming base, as developed economies subsidise their agricultural industry. Both the EU and the US heavily subsidise agribusinesses, which undercuts the prices of local farmers in other countries. This makes farming a less viable industry in developing, traditionally agricultural economies. It is prevalent even within the EU, where significant subsidies to Western Europe have damaged farming industries in Eastern Europe. Therefore, due to international trade, artificially cheaper subsidised products can destroy agricultural industries in countries that are incredibly reliant on agribusiness, dangerously increasing structural and mass unemployment.
FOCUS:
Cryptocurrency
Cryptocurrencies for Dummies
by Rohan Naval
Cryptocurrency seems to be the craze of the 2020s, and the one thing everyone wants to jump onto is to “get rich quick.” However, amongst this craze actually comes a revolutionary economic idea that has the potential to change not only financial markets but basic and everyday interactions.
Currencies are a medium through which goods and services are exchanged. Fiat currency, or our current system of currency, involves the use of paper notes, coins, and credit cards based on that system. This system of currency is different in every country, and every country has a central bank that controls the printing and valuation of each currency. However, there are some problems with this system. For starters, the valuation of this currency can fluctuate depending on the stability of the government, and there are expenses to be paid to access this money (fees paid to banks and more.). Furthermore, transactions such as international bank transfers can take long periods of time. Some of these factors were seen during the 2007-2008 Financial Crisis, which led to the creation of the cryptocurrency system when a man who calls himself Satoshi Nakatomo created the first type of cryptocurrency: bitcoin.
Cryptocurrency works in a much more different way than normal fiat currency. To begin with, these currencies are put into circulation by a given creator of a currency. Then, the “blockchain” process is put into play. Blocks refer to the list of records of the locations and recipients of a certain cryptocurrency — these are used to increase transparency and identify with whom a certain currency has been exchanged.
The blockchain is a 4 step process: purchase, mining, sale and registration. First, a buyer will purchase a given cryptocurrency, and enter the transaction into a computer network called a node. Then, the process of bitcoin mining starts — this happens when other cryptocurrency users attempt to confirm the transaction via computer algorithms. This process of mining often requires a lot of energy and is a large scale and often shared venture. When someone successfully confirms a transaction, they earn cryptocurrency themselves. Once this confirmation takes place, the sale has been confirmed. Finally, this detail is added to the blockchain and registered.
The price of a cryptocurrency, as with normal money, is determined by the forces of supply and demand. As for demand, elementary factors such as the number of nodes (systems with active users), and the people who accept this currency will influence the price. The supply of cryptocurrency depends largely on the operating terms of the cryptocurrency. For example, the most popular cryptocurrency, bitcoin, has a fixed supply of 21 million tokens that only increases proportionally to demand. This is why this currency is seen as more favourable, as the price fluctuations, in the long run, are much smaller as supply is more inelastic. Ethereum, on the other hand, which has an unlimited supply, has much higher fluctuations.
Another topic that affects cryptocurrency as a whole is impending government regulations. Across the globe, numerous governments are either embracing cryptocurrency as something to bolster their economies or seeing it as a threat for different reasons. Other governments are rather neutral on the matter but have put in place standard regulations. Some politicians in the US such as Senator Elizabeth Warren have decried the energy costs incurred by bitcoin mining, and other countries such as Algeria have banned it over suspected allegations of terrorist financing. However, few countries and companies such as El Salvador and Tesla have embraced the currency, with Tesla now accepting it for payment of goods.
The discussion on cryptocurrency is rather complex, but with a basic knowledge of its inception and functioning, it is not too challenging to keep up with recent updates in the crypto-universe.
When you pick up the £5 note, it says
“I promise to pay the bearer on demand the sum of £5,” signed by the Bank of England.
The reason why we believe this note is worth £5 is that we trust the Bank of England and the UK government. Currencies have value because people think and accept they do. Imagine a world where this establishment does not exist
— the world of cryptocurrencies.
Price volatility and regulations ... What does the future hold?
by Sarah Baek
The inherent nature of crypto — decentralisation, limited supply, and speculation — explain its price volatility. Of many falls in the price of bitcoin, the most recent one since November 2021 had wiped out $1.3 trillion in the aggregate crypto market.
Firstly, the value of crypto is derived from its decentralised network. The task of managing and maintaining the value of crypto is distributed by users — there is only one public ledger recording millions of transactions. This lack of a central authority with the power to intervene in the market to either step in to support markets or artificially subdue volatility, contribute to its price volatility. Ria Bhutoria, former director of research for Fidelity Digital Assets said that its price volatility is a “trade-off for a distortion-free market.”
Secondly, Nakamoto put a limited supply of 21 million tokens into circulation. The closer the total supply reaches this limit, the higher the prices will be. Nobody can predict the changes to prices when the limit is reached, and investors will also no longer make profits from mining crypto. In the case of bitcoin, prices have fluctuated in response to any actions taken by the big financial players who compete for the ownership of digital assets with a diminishing supply.
Thirdly, the speculative nature and the fact that nobody really knows how much crypto is worth, unlike gold or silver, result in price volatility. A crypto trader, Jim Greco of Radkl, said “it’s gone so mainstream that we know it has value, but what the value is, is still very much up for debate.” As a result, investors and traders can only speculate the price movements in determining its value. Similarly, media outlets and influencers create investor concerns, leading to price fluctuations. For example, crypto lost 47 percent of its value in a week in May 2021 due to a restriction on crypto-trading by China and a tweet by Elon Musk saying Tesla will no longer accept payments in bitcoin. This speculative nature is surely accelerated as crypto is traded 24/7, all year round on a number of different exchanges.
The larger the crypto market becomes, the more attraction it gains from regulators. Since 2018, governors of G20’s central banks had put crypto high on their agenda.
The new US crypto regulators have already begun their actions on stopping tax evasion. In November 2021, the House of Representatives passed the Build Back Better Act to close the tax loophole manipulated by crypto investors, mainly via the “wash sale” rule on commodities, currencies, and digital assets. A wash sale occurs when one sells an investment then repurchases the asset or one greatly identical, and leaves no record on one’s portfolio. Unlike the stock investors who are penalised, crypto investors have claimed a tax benefit for the loss. Then, they would quickly buy back the crypto they sold to catch any rebound in price — which was possible considering crypto’s volatility.
On legality, crypto has become a breeding space for money laundering, financing terrorism, and other atrocious practices. For example, according to Chainalydis, a crypto research group, "criminals held $11 billion of crypto from known illicit sources in 2021.” In October 2021, the Financial Action Task Force, an international organisation that coordinates intergovernmental policy on illicit finance had introduced new guidelines on combating money laundering and broadened regulatory oversight of crypto firms. Although the guidelines do not have a force of law and would need to be implemented by national regulators, it was influential in setting the standard for government policies and new crypto regulations.
Amidst the growing calls for regulations, Nobel-laureate Paul Krugman also commented that although the world of crypto is not big enough (as it only accounts for six percent of the US GDP) to threaten the financial system, it still needs to be regulated, if it can be. He had described the crypto-craziness as “uncomfortable parallels” with the subprime crisis of the 2000s. According to National Opinion Research Center, 44 percent of crypto investors are non-white, and 55 percent do not have a college degree, suggesting that crypto has become popular among minority groups and the working class. However, even if more diverse investors now have investment opportunities with crypto, Krugman warns of “growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and poorly positioned to handle the downside.” These enhance the calls for not only national, but international regulations to minimise the human costs in times of crisis if one ever comes.
As a twist, people have also come up with stable coins as the volatile crypto that has often made transactions for payments and loans less practical. They are crypto issued by private entities but pegged to stable assets such as the dollar, providing the steady value that government-issued money would have in digital form for blockchain transactions. Just like the central bankers manage supply and demand and ensure there are enough reserves to maintain the value of money, stable coin issuers also do a similar job. However, as they do not guarantee a one-to-one dollar backing they claim, some authorities are worried that a sudden rush in withdrawals would lead to a “collapse in one of those assets, putting consumers, financial companies, and even the economy at risk,” according to the New York Times. In response to such concern, others have suggested a central bank digital currency (CBDC).
CBDC is essentially an official take on bitcoin. As a novel monetary innovation, it is simply a digital version of currency that is issued by the central bank. The dominance of Apple Pay and Alipay mean today’s transactions depend on private companies rather than central banks, and competitors from crypto to Facebook-backed Diem mean weaker state authority. However, many economists suggest that CBDCs will give central banks a greater presence in cashless societies, along with opportunities such as monitoring the usage of digital money, impediment of negative interest rates, and faster and more reliable online payments.
Once these concerns are addressed and adequate regulations are implemented, the government can open more of the good sides to the public and let the crypto market grow on a consistent level. For example, those who are deterred by high retail bank fees, minimum balance requirements, inflexible terms of use, and banking deserts, can turn to crypto that has become as legitimate as fiat currencies.
Point Counterpoint
Globalisation
... is the increasing integration of the world's local, regional, and national economies into a single international market. Its main characteristics include free movement of capital and labour across international boundaries, free movement of labour and capital across international boundaries, and free trade in goods and services between different countries.
... reduces absolute poverty
Globalisation allows countries to specialise in the production of goods and services they have a comparative advantage in. The theory of comparative advantage by David Ricardo suggested that trade between two countries with different opportunity cost ratios will mutually benefit through increased overall output. Thus the trade liberalisation enabled higher world output as developing countries now account for 32% of world trade, translating into higher average income and economic growth for both developed and developing worlds. Consequently, research has suggested a negative correlation between globalisation and poverty — approximately 140 million people were lifted out of poverty due to welfare gains from globalisation and trade liberalisation, according to the UN. Furthermore, globalisation has allowed for the FDI Greenfield Effect. For example, creating international employment can have a positive multiplier effect where the training and skills could transfer to the local economy and increase human capital. The inflow of technology and physical capital will increase productive capacity, allowing for higher labour and capital productivity and thus increased GDP for the recipient countries.
... lowers prices and provides greater economic efficiency
Globalisation has created a large international market for producers to target, which allows a firm to exploit both internal and external economies of scale. Lower raw materials costs from global sourcing will contribute to the minimisation of long-run average costs. Firms now operate in a more competitive environment — competing on a global scale extended from a local or national level, incentivises firms to become more efficient and innovative in order to survive and maximise their profits. The increase in productive and allocative efficiencies will maximise the allocation of resources, contributing to greater standards of living for consumers. The switch in production of agricultural and manufactured goods from high-cost locations for example the US or UK to low-cost locations such as China and India allowed further reductions in price. All of these contribute to lower prices for consumers, resulting in higher consumer surplus and welfare gains. Lower incomes can particularly benefit from lower prices from globalisation as they spend a higher proportion of income on tradeable goods than those on high incomes.
By Sarah Baek & Stella Wilson
... exploits workers
Joseph Stiglitz, a Nobel Prize-winning economist, criticised globalisation as a force for decreasing wages in developed countries such as the US, exacerbating inequality for low-skilled workers, whose jobs were moved to countries such as China and India, which have lower relative unit labour costs (lower wages in relation to productivity). The Economic Policy Institute has estimated that 3.2 million jobs in the US have been lost to China alone. This job displacement as a result of globalisation exploits cheaper labour markets, which can restrict economic growth in these lower-cost countries, especially as the majority of the profits from large multinational corporations benefit managers and shareholders in richer countries, rather than workers in poorer countries. Multinational companies are often accused of social injustice, such as using slave or child labour and providing cruel working conditions. Globalisation has contributed to this, as these companies have access to countries with weaker labour laws, making systematic exploitation of workers possible.
... destroys culture and the environment
Globalisation promotes cultural homogeneity and contributes to neocolonialism, which uses economic imperialism and globalisation to influence developing countries. This destroys traditional production techniques, livelihoods, and cultural customs. For example, multinational companies such as McDonald's have exploited significant economies of scale, allowing them to destroy small, local restaurants, contributing to the homogenisation of many culturally significant cuisines. Similarly, many multinational companies including Adidas, Nike, IKEA and Walmart have contributed to deforestation in the Amazon forest through activities such as logging, mining, and cattle grazing. This economic over-specialisation in the Amazon forest is incredibly unsustainable, and destroys natural resources, therefore destroying traditional livelihoods such as rubber tapping and subsistence farming, which are much more sustainable and do not contribute to negative externalities such as pollution or climate change. As well as significant environmental damage, the destruction of natural resources as a result of globalisation decreases incomes for current and future workers, exacerbating inequality and slowing development in developing countries.