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. 

The Lipstick Effect

When studying A level Economics, you learn the difference between a luxury good and an inferior good. A luxury (normal) good is a good for which an increase in income leads to an increase in demand. The good is not necessary for living, but is deemed as highly desired within a society. An inferior good is a good for which an increase in income levels leads to fall in demand.

The lipstick effect is the theory that during periods of recession or economic downturn, consumers will be more willing to buy less costly luxury goods over more expensive luxury goods. For example, rather than splashing out on a new fur coat, women are more likely to seek material solace in small indulgences such as lipstick. L'Oréal saw its UK sales grow 5.3% in 2008, the heart of the most recent recession. People still buy luxury goods during economic hardships, but they are more likely to choose goods that will have less of an impact on their discretionary incomes. 

It explains why it is often the case that restaurants and entertainment industries do well during a recession. Consumers that want to treat themselves during a time of financial difficulty settle for a relatively cheap night out, for example through a cinema trip or meal out, over a more expensive experience such as a holiday.

In May of this year, "China Daily" reported that the lipstick effect had hit China as the Chinese economy began to slow. China's GDP rose 7.8% in 2012, the first time that the country's growth rate was below 8% since 1999.As the industrial and manufacturing sectors declined last year, fashion brands soared. The retail value of the beauty and personal care sector grew from 184.1 billion yuan in 2011 to 202.1 billion yuan in 2012. Again, L'Oréal saw its market share grow from 10.8% in 2011 to 11.2% in 2012.