Free Market Of The United Kingdom.

Free Market Of The United Kingdom Economics Essay

The UK economic system is based on the free market system and is one of the most globalised economies in the world. It is a successful country which accepts this system. Although many countries have success in this system, sometimes it is not suitable for developing countries such as China or Thailand. Most countries try to practice the free market trading in order to enhance their economic system and undeniably, this system is an ideology which each country may have to adapt appropriately. Even though capitalism and free trade are currently allowed to operate in UK, the role of government also plays a large role in many economic activities to ensure fairness of exchange transactions.

Free market can be defined as a system which buyers and sellers are responsible for making their choices without regulation by the government. The price mechanism plays an important role in a free market to determine allocation and distribution goods and services. This system has several benefits which both of the producers and consumers satisfy with the price. It seems to be that free market system has a great many advantages but there are a number of arguments which indicate the possible disadvantages. The fundamental characteristic of a free market is that people who can control resources and wealth have privilege to purchase goods and services at high price so the poor are thrown out of the market implicitly. Because of this situation, several ethical problems such as unemployment, crime, and environmental problems increase.

This essay will focus on an analysis of ethics and benefit of the UK free market since 1990. The first section examines the benefits and drawbacks of free market trading. The feature of free market is based on individualism and utilitarianism which form two sides of the argument. Next, the ethical problems caused from free market system will be highlighted. Due to the aspect of freedom, people may do what they want to regardless of reconsideration of society. The last point will analyze the possibility of the UK free market trading in the future and evaluate advantages and disadvantages for developing countries.

1. An analysis of benefits and drawbacks of the free market trading

1.1 Background the UK free market

The free market system was accepted since the eighteenth century in the UK. This system was continuously developed until now so as to obtain maximum benefit. Even though the freedom, which is the basic concept, plays a key role in the UK economic system, practically the government may enter to the market in some sections especially public goods and services. In other words, most decisions in UK are made by the price mechanism in the market and some decisions need to manage by the state such as education, hospital, and public utility. For example, road users have to pay for the road network through the petrol tax system controlled by the UK government (Bearshaw et al., 2001). They also confirmed that the state is responsible for almost 40% of all expenditure in the UK.

1.2 The concept of free market

Individualism is the basic feature of the free market system. It can be defined as the nature, evolution, and function of such institutions in terms of the unplanned and unintended action of free individual agents (Schotter, 1990, p. 6). Buyers can easily purchase any commodities and sellers also produce and distribute whichever products they want to. There are no obstacles put in place by the state to limit the flow of goods and services between trading nations (ibid., p.7).

1.3 The benefits of free market

Based on the concept of individualism, there are three benefits of the free market system. First of all, Schotter (1990) stated that the entrepreneurs can make their own decisions about quantities and what goods should be produced. He also explained that if they produce a product which nobody want to or they produce too much, their profit will be decreased, reducing their income and forcing the production of new different products which the market demands. Secondly, the consumers may have various choices and can choose to buy quality goods. Every entrepreneur wants to produce the products which are sold to many people so there are also many competitors that can produce the same goods or better through the market. Therefore the producer should create distinctive products or produce high quality goods and services in order to increase sales. Lastly, there has been an increase in higher levels of education for graduate employment. Philo and Miller (2001, p.3) stated that The essential individual freedoms were for employers to employ, for workers to be able to sell labor without the restrictions of the trade union and for consumers to be able to buy. The demand for the right to work is therefore converted to workers who have the individuals right to go to work. It is suggested that the workers attempt to enhance their skills so as to satisfy the wage rate because everyone can sell their abilities into the market and the employers are free to hire employees at the lowest possible price. If people have different skills which are required in the market, they will have several opportunities to choose their jobs and request higher salaries.

1.4 The drawbacks of free market

On the other hand, Schotter (1990, p.47) insisted that the very individual rationality that makes the market work so sell often destroys the optimality of its results. The disadvantages can be divided into two parts. Firstly, he argued that people, who have good performance under the existing set of institutions, may have encouragement to work hard in contrast with people who do badly may not be supported. This is due to unequal distribution of income is in the society. Even though in the free market system workers free to supply their abilities, sometimes many skills which each one can do well might not be demanded in the market or many people have the same capability. Secondly, the public goods such as street lighting and public transportation, lack the encouragement from people to pay for them since there is no profit to provide these goods despite the fact that they are important for everybody. Schotter (1990) illustrated that the problem might happen if people think of public goods based on the free trade concept (ibid., p. 58). For example, the street lights should be installed to protect people but there is no one who wants to contribute to them because all people believe that everybody may use them which cannot be specified each person.

2. Identifying the ethical problem caused from the free market system

2.1 The ethical problems

It seems that the free market has several advantages. However, the benefits of this system also lead to ethical problems such as unemployment and environmental problems. Obviously, competition is a characteristic of the free market hence people who cannot compete with others will be easily ignored by the market system. Eventually they may lead to one part of the ethical problems. Two areas of moral problems can be identified.

Firstly, there was an increase in unemployment and poverty in the society. Most entrepreneurs try to reduce costs of their product in order to gain the high profit in the market. Consequently, they attempt to create new innovations such as machine and robot which can help them to manufacture many products in a short time and replace many workers. For example, the self checkout machines, which can be found at many ratailers such as Sainsburys in UK, can replace a lot of staffs. The buyers can make a payment by scanning the barcodes on their own goods to machines. Furthermore, an increase in jobless may be one effect of crime in the society.

Secondly, the environmental problems such as greenhouse effect, air pollution, etc may result from the free market system. Due to the concept of trade without any tariffs or subsidies imposed by the state, every firm produces their products in a way that they expect to obtain the highest profit. Therefore, they do not consider the full costs of pollution (Mankiw, 2001) . Exhaust from automobile creates smog that is breathed by the public, and hence the pollution created by drivers should be included the costs attributed to a company. Bearshaw et al., (2001) also stated that the main industries responsible for a release of carbon dioxide to the air are electricity, gas and transportation. These industries are important for production and distribution in a developed country, and yet have a significant effect on global warming. It is suggested that while the company receives full benefit from the free market trading, the problem of environment will continue to be a problem.

2.2 A case study of carbon footprint emission of two retailers in UK

The Sainsburys and Tesco are currently the leading supermarkets in the UK and they create a vast amount of pollutions that lead to several environmental problems. They produce carbon footprint in many ways such as transportation, their buildings. For instance, refrigeration, which accounts for direct carbon emissions, is necessary for this business because they sell a lot of fresh food. However, they attempt to reduce their carbon footprint by several ways. Sainsburys convinces customers to bring their own bags so as to reduce the numbers of bags which bring about an increase in carbon emissions. This company also use 50% recycled material for producing their bags given to customers (J-Sainsbury's, 2010). In addition, Tesco promoted the campaign Greener living Brand since September 2009 which encouraged the customers to buy products such as energy-saving light bulb which can reduce the global warming. It also launched the website which contains methods of carbon footprint reduction. For example, this website shows ten ways to decrease carbon emissions such as washing clothes at 30 Celsius or lower. It will save around 45 kilograms of carbon dioxide per year. (Tesco, 2010)

3. Way forward for the free market in UK

3.1 An analysis of current UK economic trends

It is difficult to decide whether the UK free market will be maintained over the next hundred years or will be immediately accepted by a new system. However, the UK is a country which successfully practices the free market system, as can be evaluated by the gross domestic product (GDP) . The figure 1 shows that the annual changes in GDP index from 1979 to the first quarter of 2010. Overall, the GDP growth trend remained positive and increased gradually from 2005 to the second quarter of 2008. This implies that after the free market had accepted, the UK economic system developed in the right way. However, the UK GDP growth fell and became negative during the fourth quarter of 2008 until 2009 and turned into positive in early 2010 due to global financial crisis. In this case, the state attempt to cut unnecessary public expenditure so as to reduce fiscal deficit which is the result of the recession in 2009.

GDP growth rate in UK 2005-2009

Figure 1: GDP growth in UK 2005-2009

Source: Office for National Statistics (Statistics, 2010)

Unemployment rate, Q1 1979 to Q1 2010 Quarterly changes in Public Sector Employment, UK

Figure 2 Unemployment rate in UK 1979-2009 Figure 3 Public Sector Employment, UK

Source: Office for National Statistics Labour survey Source: Office for National Statistics Labour survey

Notes: 1. Unemployment rate is for those aged 16 and over

Additionally, the unemployment rate increased sharply from 1979 to 1986 and then decreased until 1990 as can be seen in the figure 2. It was because of the initial free market system that people became jobless. In 1990, there was a rapid increase in unemployment rate due to the contraction in monetary policy aimed at bringing down high inflation until 1993 (Jenkins, 2010). After that, the unemployment rate declined continuously until 2008 and then dramatically rose to 6.9% in the first quarter of 2009. This was due to the global recession which caused demand across the world fell sharply (Jenkins, 2010). However, figure 3 shows that the public sectors increasingly employed the staffs during 2008 to 2009 while the private sectors needed to reduce workforce and froze salaries. The UK government involved in this case in order that the labour market might recover quickly. (ONS, 2010)

3.2 Benefits and drawbacks for developing countries

Undeniably, the UK has a powerful role in the global economy and success of the free market system. However, it may have advantages and disadvantages of this system. If developing countries try to practice this system, they should learn from the UK and adapt the system in conformity with the nature of each country. Thailand is one of developing countries which support the free enterprise system. It learns from several situations in developed countries such as UK and USA. It started to open up the country since the late twentieth century. Thai entrepreneurs have freedom to invest in Thailand or foreign countries and international investors can also open and expand their businesses in Thailand. Thus, there are several benefits which improve Thai economic in a good way. However, it had to face with the Asian financial crisis in 1997 which bring about a dramatic increase in unemployment. It might also have several environmental problems such as air pollution that is caused by many industries. Due to these situations, Thai government may integrate to solve the problems effectively by legislation. For example, in Thailand every factory must control harmful gases which release to the atmosphere by setting up the filterable equipments.

Conclusion

In conclusion, this essay has discussed about the benefits and drawbacks from the market system. It is also identified the ethical problems which come from accepting free market system. Some countries have received a considerable number of benefits from this system. Meanwhile, they might be confronted with several moral problems such as poverty, crime, and environmental problems. Nowadays, most successful countries increasingly become aware of the social problems. For example, many countries should think of global warming that impact on the creatures in the world because of an increase in temperature near the surface of the earth. Moreover, the state of each country should play a key role to control the problems by issuing the policy. The free trading concept is accepted in the UK economic system and it is a successful country. Even though the price mechanism plays an important role in the UK market, some sections may be regulated by the government in order to support social justice.

However, develop countries can apply the free market system from UK. In practice, every country may have to suitably adapt the concept in order to increase economic welfare. This is due to the fact that each country has different characteristic such as population, geography, and history of economic system. Perhaps the free trade might be advantageous for developed countries. This may not mean that every developing country should practice according to them since the free market system has also positive and negative effects. Furthermore, the GDP can measure the growth of each country but it cannot evaluate human happiness. Although some countries have their high GDP index, it cannot imply that everybody who lives there have a sense of well-being and those countries do not have the social problems. Consequently, the economics should grow in parallel with concerns for human welfare.

Reasons for and problems of Black Money

Black money is generated due to the following reasons:

• The people do not pay their taxes. Even if they pay taxes, they are not in correct proportions to their incomes. The tax evasions by corporate and industrial houses are to the tune of billions of rupees. These firms are able to make clever usage of the income tax rules and hence, they save taxes. This tax evasion leads to the generation of black money.

• The black money is earned by gifts, hawala transactions and illegal foreign exchange deals. These deals are not scrutinized by the government simply because these are without any documentary evidences.

• The procedures of over billing or under billing and exaggeration of expenses lead to the generation of black money. The sale and purchase of assets also lead to the generation of black money. The value of the property is shown to be very low in the documents whereas it has a very high value in the actual transaction. The businesses are conducted in other sectors of economy in the same manner and non-billed amounts are retained by the individuals and the firms as black money.

Black money is harming our national economy and we have achieved an economic growth rate of five percent per annum whereas the economy should have grown at the rate of eight percent in order to make up for the rising population pressures and infrastructural development requirements. Black money is the chief inhibiting factor in the process of national economic development.

The menace of black money has also increased the rich poor divide. The poor families are unable to afford even the square meals whereas the rich and the neo-rich are enjoying the luxuries of life. The Indian society has become poorer. Only the few sections of the society, which account for fifteen percent of the total population, have been able to enjoy the highest standards of living in this subcontinent. Therefore, the real poverty has increased and not decreased over a period of fifty years. The black money menace started during the seventies and it is now at its peak and the masses have suffered due to rising prices, inflation in business, poor exports and industrial recession. The rich few, however, have not felt the heat and continue to lead luxurious lives at the cost of their poor countrymen. It has connotation for which you have to exercise care and caution by utilizing your brain for converting a portion of black money or the entire money by converting into white money on a piece meal basis. In this form, you will be able to avoid the rigors of economic measures including taxation.

Black money could be curbed only through the strict efforts of the state and this is for the benefit of the masses as well. We should disclose our real incomes and must pay taxes regularly. We should avoid unhealthy means of making money. The nation must get out of the evil net of black money. Only the honest Indians could save the nation.

Problems of Black Money

Even after 40 years of independence, our country is faced with poverty and numerous economic ills. Even though socialistic pattern of society has been accepted in the constitution, our country is far away from socialism and her economy is in the grip of private enterprises. In fact, India has unlicensed economy which has given birth to corruption, inflation and black money. The concept of mixed economy has been harmful to both private and public enterprises. It has jeopardized our economy and hit the common man below the belt. The poor man has been becoming poorer and rich richer just because of the economic ills like inflation and black money. Black money which runs a parallel currency in wealth which is made overnight in violation of the rules and provisions stipulated by the state and a collusion with the state officials does not go unchecked. This kind of money is earned setting aside all human and moral values.

There are many sources of black money. Chief among these areas follows:

• Import licenses.

• Selling of cement licenses, steel and iron.

• Transactions in heavy industries.

• Transaction in public sector.

• Release of industrial licenses.

• Government and commercial transactions.

• Forged and face currency.

Today the making of black money has become factor in our society because palatial houses, and cars, and in arranging cocktail parties and recreations in big hotels. Moreover, it helps a person getting everything done in time and to his best satisfaction.

There are many causes of converting genuine profit into black money. The chief among them are:

• Inflation.

• General and mid-term election.

• Tax evasion.

The government itself is responsible for the creation of black money. The exorbitant rates of taxation on income, sales, wealth production and revenue inevitably lead to tax-evasion. The taxes on income and wealth are so high that an honest person will be left with little after he pays his due taxes. Many taxes on income and wealth are so high that an honest person will be left are encouraged by the government's taxation policy to look for loopholes in order to refrain from reporting their income. Thus, the money earned as profit remains unaccounted for an unreported and is converted into white money by investing it in big houses, luxury items, gold ornaments, and showy marriages. The government has full knowledge about the quantum of black money which is pumped into our economy every year, but the government measures to check the growth and increase of unaccounted wealth has been ineffective. The missing element has been the will to strike at the root of the evil. That has been the sad story all these years. The customary ritual of declaring war on tax evasion at conferences of income-tax commissioners is faithfully performed every year. The public is told as usual that black money will be unearthed and evaders duly punished. Some operations of the income-tax department get wide popularity. The income-tax officials put themselves on news when the flat of a film star is auctioned or legal action taken against an industrial tycoon. But the problem of black money cannot be solved in this manner.

The political system itself breeds black money. The democratic system which means unlicensed freedom is largely responsible for the growth of corruption and black money. When political parties accept unaccounted money for election campaigns they not only heap generate black money but also protect the hoarders of ill-gotten wealth. It will be a major blow against the parallel economy, if it is made mandatory to audit the books of political parties. Such financing of elections could be also considered. The drive against the parallel economy will never be effective unless the nexus between politics and black money is broken.

The inflationary pressure also threatens our economy and gives birth to black money, which plays a decisive role in inflation and price responsible for inflation and black money. The inflation rate at present is above fifty percent of what has already taken place since twenty years back. In other words, we have become high cost economy with prices averaging fifty percent above what they had been in the country and the lowering of the common man. Unless some strict measures are taken to counter inflation and check high cost economy, the problem of black money cannot be solved. Black money, however, should be dealt with strict application of penal provisions and devaluation of our currency.

Thus, black money is growing unabated and it has become almost a parallel economy. People hoarding black money are trying to convert it into white money and thus causing inflationary pressure and high cost economy. One school of thought is of the view that the parallel economy has come to stay and it need not be disturbed because it plays a useful role. Condemnation of what is illegal goes against the grain of good administration and no government will be justified in pampering black marketers and tax evaders.

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