What is wrong with our economy?

Many people will have different answers to this question and in a way, there are many answers, but for me there is one answer in particular that screams out the loudest, maximising short-term  profits. 

Since looking at this in our current A2 syllabus I have come to believe that those who are not prudent and forethought may be better off themselves but as Pareto's theory suggests, it is impossible to make any one individual better off without making at least one individual worse off. 

This is what is happening; Multinational corporations (MNC's) are obsessed with maximising their profits that long-term growth is something of the past. It is the employees of these companies that are suffering the most. Employees are people who devote their lives to creating money for customers, shareholders, and colleagues. Therefore, in return, at least in theory, they share in the rewards of the value created by their team. 

However in reality, it is far from this. Employees aren't regarded as people of a team anymore. Businesses nowadays see their employees as "costs" due to the ever increasing obsession towards maximising short term profits.  For the greatest profits costs are to be kept at a minimum. In order to do this, reducing costs as much as possible is something that has to take place (expect the "costs" of salaries to senior management and shareholders). 

The problems with this increasing short-term profit maximising is what it leaves us for the future? If these MNC's -of which some could be referred to as monopolies- are more focused on creating abnormal profits which pays for the luxury lives of those that run them then how are the firms to develop? Abnormal profit is supposed to create money towards R&D (Research and Development), so without this firms cannot progress. In the long-run this is likely to cause competition that would diminish these abnormal profits being earned but this will take time to happen. 

More so, cutting "costs" to create this short-term profit is having a huge affect on the working class population. For those lucky enough to be kept in labour, their wages are still reduced to keep costs at a minimum. This is effectively removing their purchasing power, coincidentally stunting the growth of these same corporations making the choices. 

If consumer expenditure is being reduced then businesses can't grow. Right now, firms aren't concerned about the growth of their companies but more so maximising their short-term profits. In the overall aspect of an economy, aggregate supply is likely to decrease due to the fall in labour force, thus resulting in an overall decrease in economic growth and the development of these companies in the future. 

Rising Energy Prices in the UK

Rising energy bills have been a major political focus in the last few months, as the Labour and Conservative parties look to offer differentiating policies to reduce the increase in energy bills for households as each of the "big six" energy firms (British Gas, SSE, Scottish Power, E.On and EDF) announce significant price increases. 

The domination of the big six firms in this market means that energy can be considered to be an oligopoly market structure. This is a market dominated by a few large firms where the firms are interdependent (the actions by one firm will produce counter-action by others). 

The price rises within the energy market in the UK could potentially be considered a form of collusion. The first announced price rise was by SSE, who on October 10th announced an 8.2% increase in domestic bills from 15th November. The other 5 firms were soon to follow, with E.On being the last of the big 6, announcing on 6th December that a 3.7% price rise was set to take place. This could be considered a tacit collusion, where although there is no formal agreement between the firms, the firms are observing each other's behaviour and refraining competing on price by following price increases. 

It may be arguable as to whether the major energy suppliers' profits are excessive or whether the price rises are justified. Energy companies claim that prices are rising as a result of a rise in the international price of energy. They also claim that their profits are around 5%, which is much lower than that of major supermarkets.

Regardless as to whether price rises can be justified, the proposed response by the government and opposing political parties is likely to be  a major influence on the 2015 election if energy prices continue to rise as households' discretionary incomes fall and consumers demand a solution for falling standards of living. 

The Proposed Solutions

1.Domestic Fuel Cap

Ed Miliband has promised to freeze the price of gas and electricity bills for 20 months if Labour win the 2015 election. He also promised the restructuring of firms by forcing the big companies to split power generation from their retail businesses (which he believes would encourage greater competition) and to replace Ofgem, the existing regulator, with a more powerful body that would force firms to pass savings in the market on to customers.

However, major energy companies, as well as the Conservatives and Liberal Democrats argue that this is unrealistic because of the varying and unpredictable international costs of gas and other fuels. In addition, reduced profits for the big 6 firms would be likely to lead to a lack of investment in technological improvements. Any reduction in profits could also lead to a reduction in investment in firms as a result of shareholders receiving less dividends. This could increase the cost of fuel production in the future. 

2.Reduction of Green Levies

David Cameron has proposed the reform of the Energy Companies Obligation (ECO), which provides subsidised insulation to households in areas of low income. The ECO scheme costs firms £1.3bn a year and adds about £50 to every household bill. A reform in the ECO would involve reducing its key energy efficiency targets by 30% and extending the ECO by an additional 2 years to March 2017. 

Diluting the target, however, means that the government will be doing much less to reduce carbon emissions, a backward step in progression towards a more environmentally sustainable energy supply. Furthermore, building groups argue that this would severely damage the green energy industry and means there will be much less free insulation for fuel poor households.