The Headington Economist Issue 5

OCTOBER 2018 2018/19 VOUME 5 CAPITALISM THE HEADINGTON ECONOMIST

HELLO! AND WELCOME TO THE FIFTH ISSUE OF THE HEADINGTON ECONOMIST MEET THE TEAM Zara Salaria and Allison Chia Head of the Economics Team EDITORS WRITERS DESIGNERS ZARA SLARIA LISA WANG VIVIEN SIN ALLISON CHIA ASHLEY TOK ASHLEY TOK SAMANTHA LIM ZAINAH MAHMOOD NATALIE YAU ELLA ROBINSON ALICIA KONG NATALIE TIONG PHOEBE VEENTLETURF SABRINA NAJIB NATALIE  KO COCO SHI  ALIDA LI CHARLOTTE YUAN   WITH SPECIAL THANKS TO MR. VLACHONIKOLIS AND MR. THOMAS

a letter from the editors. It’s been a great term for Economics at Headington so far. We started off the year with brand new classrooms - writeable tables (how cool). The D’Overbrooks/Headington Foreign Aid Debate was a great success- thank you Allison, Jenny and Jennifer for representing us and we’re looking forward to the upcoming ones with OHS and Magdalen. We both attended the John Locke Institute Awards Ceremony (see inset), Allison for her highly commended essay on education policy and Zara for being an alumni member. Last year, we got up to some pretty cool stuff as well. Allison got her book review published in the IEA Magazine, and Zara entered in to the Dorian Fisher Memorial Prize- her submission was highly commended. She also won the 2018 Financial Times School Quiz, meeting (her now good friend) Andy Haldane at the Bank of England and undertaking her work experience at the FT this summer. It’s really exciting and encouraging to see record numbers of people taking Economics in the Sixth Form this year. Our launching of the “Doughnut Club”, a branch of EconSoc inspired by Kate Raworth’s “Doughnut Economics” proved to be very popular. All are welcome Tuesday Lunchtimes for doughnuts and discussions ! We also can’t wait for her upcoming visit to Headington very soon. Stay tuned ! This issue is on possibly one of the most controversial topics in Economics today, and we’ve decided to present you with a range of discussions to expose you to all sides of the arguments, letting you make up your own mind. From poignant, first hand accounts exploring the issue of Child Labour to how Capitalism can actually help poorer countries we hope you can sit back and really engage with this issue. It’s been a pleasure to make. And of course, we couldn’t have done this without our wonderful team of editors, writers and designers. Thank you for putting in the time and effort to make this edition such a success- you know who you are ! And thank you to Mr. Thomas but most of all to Mr. V for all the help and support. Big love, ZARA ALLISON

CTAOBNLTEENOTFS 01 Quote Page 02 04 04 02 The Law - Help or hinderance on economic growth? 04 How can Capitalism Aid developing countries? 06 Labour Markets under Capitalism 08 The best solution to child labour? FEATURE ARTICLE 10 How capitalism has lead to the housing crisis 12 The importance of property rights under capitalism 08 14 50 Ideas you really 10 need to know about capitalism - Book Review 15 Crossword puzzle

CCCAAAPPPIIITTTAAALLLIIISSSMMM is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all . - John Maynard Keynes 1

THE LAW aaHHeellppoorrHHiinnddrraannccee ffoorrccaappiittaalliissmm?? Law is living and evolving, but that means whatever reigning political party will have influence on the laws it creates during their time in power. Let’s look at two key sucessful countries which have achieved massive economic growth under Capitalism. BY ASHLEY TOK U6 The Trump administration in the US have not been free of controversy to say the least. The law supports Capitalism in the US by it’s low corporation tax rates. But the most strikingly capitalist part of America is the shocking amount of privatisation. Healthcare, water, broadband, transport and banking are all privatised industries. Especially with 52 different states in the US with different firms offering their services, it must be a managerial nightmare. An analysis of the water and sewer utilities in 2009 have decreed that private companies private companies charge 80% more for water and often water companies abuse or fail the individual consumer. It is therefore not surprising that the USA’s FCC (Federal Communications Commission) last year, have proposed to remove the Obama Administration’s label that the internet was a utility. Essentially, Obama wanted a free and open internet that was equal for all. The FCC repealed this status of a free internet in - 2

December 2017. In short, Net Neutrality works Fig. 1 Source: Google something in figure 1. To incentivise foreign investors, like HP, Mr. Lee Legislation introduced would mean that has reduced labour costs and provide industrial different internet providers buildings for use by companies - a Capitalist (eg. Comcast, Verizon, AT&T) can speed up heaven. internet if you use certain websites (Like AT&T’s streaming service), and greatly slow WESTERN POLITICAL down other websites like Netflix. This greatly disrupts the free market and turns the internet LIBERALISM AND from a utility to a market place. It will become easier to monopolize, and will greatly affect the ECONOMIC DISCIPLINE consumer which cannot afford to pay to bypass the ‘slow lane’ toll, and it will also disincentivize ARE HARD TO HAVE AT entrepreneurs from making technological advances. It is a major hindrance to capitalism, THE SAME TIME. which is being talked about in the EU. - Toh Chin Chye. Perhaps more subtly, have you noticed if you Perhaps Mr. Toh, but because Mr. Lee has been go on certain websites, messages like “We so driven in running Singapore like a value your privacy” pops up? Many countries corporation, the country has lost out on have introduced various Data Protection Acts producing traditional art, music and literature. which controls how your personal information Challenging the government leads to legal can be used, quite obviously stemming from penalties. the huge Facebook/Cambridge Analytica hack in March of this year. Though it is great that our As seen here, there is no ‘perfect’ country and privacy is now protected, it is a loss for the there is no perfect legal system. We are lucky to invisible hand of the free market, because it has have a democratic society that allows us to less information to serve your wants and needs. change the leadership of the countries we live in. It is a win for the person behind the screen as it I hope that I have illuminated here the power of protects our right to privacy, but a loss for the law that alters the economies, and hence the capitalism. societies we call home. Singapore seems to have found an admirable balance between the law and capitalism. Being half the size of London, Singapore as a country doesn’t have natural resources to rely on, and can’t really privatise. Free market forces here appear to be the most efficient allocation for resources because they are so scarce. 3

 How can Capitalism aid Developing Countries?  BY LISA WANG L6 In the last thirty years, globalisation and flourishing capitalism have taken about 1 billion people out of poverty. Nothing has done more than the free market economy where the productive efficiency is high and the prices of goods and services (as a result of the price mechanism) has lowered. What’s more, extreme poverty has almost vanished from industrialized countries which have employed capitalist structures. Theoretically, capitalism reduces poverty by encouraging people to produce more. Better technology makes production much more efficient because the use of resources is always being reconsidered and redistributed in order to get the maximum efficiency. Since there are thousands of firms, competition forces companies to lower the price in order to attract consumers, so that goods are cheaper and more accessible - allowing everyone to have a higher standard of living. This enables the poor to afford basic goods for daily life. It also aid in controlling inflation! 4

\"Capitalism reduces poverty through encouraging people to produce more.\" Since the 1980s, China and India have been As a result, the number of crimes can expanding and liberalizing trade in global decrease and the infant mortality may well markets, which have significantly improved decrease as well. Over time, national health their economic conditions. Special mention will be at a higher level as well. This goes to China, which has pulled strengthens a country’s economy because approximately 680 million people out of their labour market expands and the nations’ poverty from 1981 to 2010 due to veering resources are being used more efficiently. away from a planned economy. Over the last decades, international aid has Capitalism can also help third world increased in building hospitals and schools, countries’ governments because they do not and also improving access to water. Whilst have to have as many public sectors to the effectiveness of aid has been hotly provide minor goods and services to citizens. debated, in theory it helps to promote growth Instead, the government will be able to focus and development through liberalization in on health care services and spend the money developing countries. Many private charity on benefits to support the less well off. This organizations have raised money for poorer adds to increasing the efficiency of a nation’s nations over the world to help people labour. struggling in third world countries. There are To conclude, capitalism has helped the poor also private firms building manufacturers in many different ways including bringing abroad in poor countries to employ the employment up, increasing productivity and citizens so that they have a job to make a the standards of living. Human incentives are living which not only gets them out of the a powerful tool of promoting goals. Poorer cycle of poverty but also increases the countries can really benefit from capitalism in efficiency of production. Competitive a free market as competition increase markets make education more available to efficiency. The biggest gain for a country that more people. which gives the less fortunate opens up the free market is, controversially, an opportunity to be educated, and by doing getting rid of poverty. 5 so their intrinsic utility increases.

gum Labour markets under capitalism BY ALIDA LI AND NATALIE KO U6 In a labour market, employers compete to hire the However, current economists now believe that best, and workers compete for the best jobs. firms do not earn profits by exploiting workers. Capitalism is an economic or political system in Instead, they believe firms earn their money by which a country’s trade or industry is controlled taking risks. In a capitalist labour market, by private firms. Karl Marx and Adam Smith employers are confident that their workers will created 2 theories about the labour market. alway be available. Therefore, they can hire workers for short periods of time and dismiss Karl Marx was a German economist famous for his them if seen to be beneficial. Adam Smith’s theories on capitalism and communism. Marx theory on the labour market proposed that the believed that labour would be exploited in a wages of labour are determined by their capitalist system, where the product of labour is performance. Under capitalism, profits can be not owned by them but by the owner of the firm. increased when the cost of labour is This was influenced by observing that an increase separated. Workers are rewarded by their in productivity didn’t increase living standards. efficiency and ability to generate revenue Marx answers the question “How can capitalists rather than the gains achieved as a result of enjoy profits if goods in a capitalist society tend to hard work. The performance of an individual is be sold at prices that reflect their true value?” with compared to other workers. Pay differentials the idea that the owner is able to enjoy a are often resulted from factors such as privileged position in the means of production. distinction in skill level and bargaining power Since Marx believed that the exploitation of of trade union workers. Chief executives and labour follows from private ownership, he air traffic controllers, are examples of high concluded that justice for workers in a capitalist paying occupations in the UK labour market, market is impossible. He also believed in the value whilst bartenders and waiters are two of the of all of its commodities, which is known as lowest. “labour power”, which is the worker’s capacity to produce goods/services. Using principles from However, it would be too simplistic to say that classical economics, Marx explained that the there are no limitations in the labour market value of labour power depends on the number of model under capitalism. One of the causes of hours it takes society to care for a worker so that labour market failure is the immobility of he/she has the capacity to work. labour. Factors such as the level of transferable skills and the educational requirements for jobs will affect mobility, which contribute to occupational wage differentials and structural unemployment. 6

Another key reason is the discrimination of employers, in which some people may be prepared to experience higher costs rather than to come into contact with members from a particular group. A firm may have lower profits due to not employing female workers, and higher costs due to not buying from firms that do employ female workers. Statistical discrimination states that firms make generalisations about specific groups. For example, a firm may not employ a person over the age of 50, as they are less productive than younger workers. In spite of this, the influence of government policies addressing the issue cannot be denied. For instance, carrying out reforms to transportation systems and the housing market increases workers’ affordability and thus their movement between various areas. Furthermore, tightening laws on equality and penalties for businesses violating the law could reduce dismissals and prejudice against labour. The labour market has brought profound changes to our economy and the works of it have influenced the wages of workers. As Adam Smith suggested, an increase in productivity equals an increase in real wage. Therefore the living standards of a worker will eventually increase. 7

FEATURE ARTICLE The Best Solution To Child Labour ? BY ZAINAH MEHMOOD L5 Zainah Mehmood interacted with working children in households, shops and streets of Dhaka City over the summer. She explores the unlikely truth of child labour in her native Bangladesh, and uses lesser known evidence to complement her own interactions with child workers. In a tussle of economic systems, endure long hours of physical labour, and her resigned retort to questions capitalism usually emerges as the often in inhumane work about why she doesn’t go to school victor. There is the general idea that environments. The minimum legal is simply, “If I go to school, how will a capitalist economy liberates age for employment being 14 in my parents afford our food and room citizens; the incentive of Bangladesh, but 93% of child without my contribution?” opportunity equates to better labourers work in informal sectors, As she went back to dusting the wealth distribution between the such as small factories and books she had been handling so rich and the poor. However, workshops, on the street, in home- longingly, I realized that in capitalism might not be the utopian based businesses and domestic developing countries children think revelation it seems to be- deep employment, where such laws are less of becoming successful years flaws can be found within the difficult to enforce (UNICEF). down the line and are more focused system. In developing countries, However, as unpopular as it sounds, I on surviving- day in and out. If child most notably, this is evident with don’t think eradicating child labour labour is abolished, these children the proliferation of child labour that would necessarily benefit “exploited” would receive free public education prop up a robust industrial sector. children. It is often thought but time spent in school might leave “everyone has a right to education”. them destitute because often, they Child labour brings to mind However, a conversation with 13-year are vital contributors to the children who are mentally, old Fateema proves that even free household income (an average family physically and morally deprived education comes with a in Bangladesh consists around 5 from their childhood and forced to cost. Fateema works as a house help people-The World FactBook). 93%  of child labourers work in 8 informal sectors, such as small factories and workshops.

One might ask, “how much can a young child earn anyway?” The answer would be – enough. We often convert the currencies when comparing the purchasing powers of two individuals living in two different countries. However, it is unfair and inaccurate to compare the fledgling economy of Bangladesh with that of a more developed one. For instance, BDT 500 equals approximately GBP 4.54, meaning it barely is enough for two bags of Crisps from Tesco. However, in Bangladesh, the same amount can buy at least 20 full meals with a large portion of rice, lentils and vegetables. The Bangladeshi minimum wage is BDT 5300 (GBP 48.10), almost 1/18th the minimum wage in UK, an average child worker receives around BDT 1000 - 2000 per month (GBP 220). It is a significant financial contribution; perhaps meaning the difference between having one meal per day and having one every two days for some families in Bangladesh. Capitalism is built around cost and profit maximization. In developing countries, where enforcing any regulation is fraught with challenges, labour laws are ignored deftly and most companies take advantage. They employ children to do the menial, physical labour in factories and workshops because this is cheaper than appointing an adult worker. Due to cheap labour costs in developing countries, multinationals based in developed countries outsource some of their work. This increases demand for cheap labour; an endless cycle that perpetuates a broken system of exploitation. So, does that make foreign companies the evil that encourages child labour by prioritising profit maximization above all and turning a blind eye to the plight of these children? is it the theory of capitalism, so lauded as the champion of the poor, that is at fault? Or should we simply blame the government due to its inability to look after its people, and enforce its laws and deliver justice? If the government was able to take smaller steps such as making a law that allows them to work but has ground rules to make the job easier for the children, it would be the first ‘big’ small step to changing perspectives of families and would make the transition into ‘no child labour’ a lot easier; in other words creating more opportunities and finding alternative methods to put the child's energy into something beneficial rather than causing his/her future harm. Some may say simply developing a child benefit system would abolish the issue of earning enough money for the family to survive, so the last question to ask: Is the act of just giving money enough to eradicate child labour, or one of the most prolific demons of the twenty-first century? 9

How Capitalism has led to a Housing Crisis  BY PHOEBE VEELENTURF U6 The housing crisis, happening in the UK, is due to supply restrictions, as there are too reflects a paradox of contemporary many restrictions on land-density and height capitalism. As cities are increasingly getting restrictions. 50 years ago the UK land values more powerful and wealthy there is an were 50% of GDP, now they are 200% of GDP. increase demand for land, increasing As a result of the massive increase in housing competition and housing prices, as living in a prices the charity Shelter estimated that there city becomes more desirable. However this are now 307,000 people in Britain who are can't explain the increased cost of land and homeless-accommodation in temporary accommodation as well.The lack of housing, bed and breakfast and homeless development in cities like London create a hostels, and sleeping rough. This is predicted politically engineered wealth inequality. to increase. In London 56% of all homes fail to Londoners have poorer lives as a result of meet Shelter Living Home Standards (criteria consuming less residential space in less of affordability). This crisis is not a crisis of desirable location than they would otherwise supply but a crisis of of the surrounding consume. The cause of increase in prices - areas. 10

UK land More than 100,000 UK land titles are values are registered to anonymous companies in 200% of GDP British overseas territories. 30% of housing properties sold in London were bought by overseas investors, therefore the solution of building more properties for capital investment and buy-to-let will increase housing prices and this therefore is not the solution. The housing market needs to be set free, housing restrictions on height and density should be loosened in order to open up the housing market, and the market should be able to control where and what type of housing is built. The planning system should be replaced with self regulation, space standards should be scrapped and replaced with more economic solutions. affordability, the prices are too high for people (mainly the working class) to buy them and there is too much excess of luxury housing on the market. Housing has been financialised and turned into making money, as a result of too much luxury housing available on the market when there is a lack of affordable housing - 59% of housing demand in london is for lower- mainstream houses.Homelessness is rising and owner-occupation levels for the young have decreased because housing prices have risen. Capitalism creates the housing sector as a business for increasing short-term profits. The housing sector is dominated by big businesses, using up housing prices for projects by multi-national developers, driving up the cost of land as well as the rent 11

THE IMPORTANCE OF PROPERTY RIGHTS UNDER CAPITALISM Scholars have argued that private property is BY ALICIA KONG U6 necessary for nations to prosper. To evaluate the extent to which this is true, it is important Property rights, like capitalism, to first understand the meaning behind the encourages efficient use and allocation of two terms. Capitalism is a system where the resources, and is seen as playing a vital factors of production (labour, land, capital role in solving the basic economic and entrepreneurship) are privately owned problem - scarcity. Without property rights, and is dependent on the free-market resources are called common goods as economy to distribute such resources, so they are rivalrous yet non-excludable. This owners can derive income from it. Property means that the resource is finite yet rights are the owner’s entitlements over the everyone has access to it. Take farming as resource, meaning they are entitled to have an example, if all farmers share a piece of authority over it, to exclude the resource over farm land, everyone would want to take up others and hold the right to exchange it with as much area as possible to increase the another person. Just by defining the key volume of crops grown to be sold in order terms, we can already see that the two factors to maximise income. The number of are dependent on each other. If property is farmers who use the land will keep owned by the state, no individual has the increasing since the resource is free, and right to decide on its usage, hence cannot as a byproduct, the quality of the land will extract income out of it by means of decrease because of overexploitation, exchange and so capitalism has failed. This affecting the quality of everyone’s crops. reinforces the importance of multiple roles of private property to ensure the operation of 12 the capitalist system.

This effect is called the ‘tragedy of the Without property rights, being involved in commons’ in economic terminology and is the market means pure scarification of used to describe a situation in a shared- goods, hence no one would be willing to resource system where individual users give up possession and so the capitalist acting independently according to their market would fail. own self-interest behave contrary to the common good of all users by depleting With property rights, individuals will be that resource through their collective confident in engaging with the market as action. This is seen as a market failure. One they believe in the legitimacy of the mechanism to turn the tragedy around is return and knows that no one else can to exert ownership of the resource done interfere with their return. This suggests through buying the land, reinforcing the the need to enforce property rights for role of property rights in the world of individuals to voluntarily engage in the capitalism. market where the exchanging of property occurs. Another vital role of property rights is to facilitate trade. Adam Smith, the father of free-market economics, proposed the theory of division of labour in The Wealth of Nations (1776) as to making the economy more efficient. If everybody specialises in producing one item, multiple groups have to work together to complete a product. This shows that exchange is necessary to realise the gains from specialisation. 13

BOOK REVIEW 50 Ideas you really need to know about  CAPITALISM JOHNATHAN PORTES BY ZARA SALARIA U6 A thorough, perceptive introductory guide to Take the chapter on nationalization and the social and economic system we call privatization for example, he concludes that ‘capitalism’, specifically written with the “Governments aren’t good at running context of its place in the 21st century. The businesses’ and bases this statement purely book itself is divided and broken up into short, on economic action, explaining how although digestible chapters which gives the reader a nationalization is almost always politically good sense and feel of the vast range of ideas motivated, its political nature and lack of drive capitalism comprises of- and how complex has proved to be economically disappointing. they are. However, it could be argued Protes relies too heavily upon historical economic assumptions Portes covers a range of different topics, that haven’t been completely tried and tested zooming in to the microeconomics of in the turbulency of 2018. Something Portes capitalism in the opening chapters, does beautifully throughout this structured introducing the crucial foundation which essay on capitalism- is his prominent capitalism is built upon- property rights, and acknowledgement of capitalism being both an building upon his key introductions in later economic and political idea, and the conflict it chapters, such as his analysis of the failure of can cause is a theme that runs right through in Marxism. Portes maintains a consistent voice every single section. The book’s emphasis on throughout his book, an opinionated one, but capitalism as a modern idea, is where things before delving into his opinion and ‘the get the most interesting, as the concept of condensed idea’ (which he prints in bold and uncertainty of economics in a forever changing signs off with after every chapter) he provides world prompted by Portes leaves lots of room a balanced overview of each idea, with real life for lasting thought and debate, especially as examples of economics in action to reason his you reach the final chapters. arguments. 14

crossword puzzle ACROSS DOWN 4 New methods, products and ideas 1 Medium of Exchange 5 Manner of negotiating prices 2 Lack of Equality 6 \"Father of Socialism\" 3 Promoting interests of Consumers 8 Unfair Treatment 5 A requirment of Capitalism 10 Capitalist Market System 7 Striving to gain something 11 Factor of production, risk taker 9 Economic Objective 12 All property owned by the community 13 British Prime Minister 15

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