Introducing Economics. Resources and the UK economy

I

For many of us, this is probably the first time we`ve studied Economics. So my first blog tries to explain why a knowledge  and understanding of Economics is so important and one of  the current  controversies that has preoccupied Economics and Politics in the last couple of years. Economics primarily studies how we manage the resources available to us to provide for the needs and wants of the population.Our resources are land, labour, capital and enterprise. One of the simple ideas is there are good ways and bad ways to use our resources.

Britain is the 5th richest economy in the world. One thing you may notice is that every piece of land in Britain is used for a purpose. In London, some land is used to build houses.flats and offices, Other land sites shops , shopping areas and small factories. The remainder is set aside for parks,nature reserves and wildlife all of which improve the environment. In cities such as London, Beijing and Paris land is highly expensive. Developers build high rise blocks to maximise the use of the land. It`s not just in London. Most land in the countryside is used for farmland, forestry or leisure. There`s very little land which is left idle.

Compare this with a developing country. Much of the land is unused and would be highly costly to develop, especially if it`s arid and deserted. . We are fortunate in Britain that our climate and geography is congenial to all sorts of agricultural production and manufacturing

 

It`s not just land. Probably the most important resource an economy has is it`s labour. China has the largest labour force and as a result has the highest  level of production measured by Gross Domestic product. However it`s not just about numbers, quality is if anything more important. In Britain Education is the third  largest area of government spending, second to health and Social Welfare. Good education improves the skill level of the workforce, promotes innovation and enterprise in business and helps economies grow.

However there are no guarantees of a good job, especially during a period of recession when peoples` incomes fall and along with it the demand for labour! Ten years ago, Britain was entering a major recession along with the rest of the world.The result was a rise in business bankruptcies and in  unemployment which left a lot of people in ,manufacturing and services with poorer job prospects. A couple of years earlier the European Union had gained  2 new member countries, Romania and Bulgaria.

What about Brexit? What is the background?

The European Union is basically a group of 27 countries which trade freely with each other without any taxes or restrictions. One of the other conditions is that there is free movement of labour. This allowed unemployed members of the labour force from poorer countries like Romania and Bulgaria to travel to Britain and seek employment in an economy where not only were there there  plenty of jobs but wages were much higher . In 2008, the world economy suffered a major financial crisis, brought on by years of irresponsible bank lending and mounting debt. Unemployment in Britain rocketed to nearly 3 million and some people who lost their job became resentful of the high numbers of migrant workers from the EU and outside. In many ways the 2016 referendum on EU membership was a vote on immigration.

Aside from the humane aspects of providing a home for asylum seekers and refugees, Immigration is one way in which an economy can increase its labour resources. We show this by a rightward shift in a country`s production possibility frontier.  It should make an economy better off provided migrants work, spend  and pay taxes like anyone else. Most of the data however suggests that overall migrants from the European Union contribute £2,300 more per anum to the government  in tax revenue than the average British citizen and  significantly more than non EU migrants*.  The vast majority of migrants from EU came to work.

*Migration Advisory committee report 2019

Over 3 years on from the referendum, UK unemployment is at a record level at 1.3 million or 3.8% of the labour force. If anything we have a lot of shortages of labour in particular skills such as engineering, Information technology and also  doctors and nurses.

For more on this the National Institute of Economics and Social Research have put together a very good video on immigration from the EU:

Capital:

Another important resource is capital. This is made up of all all the physical goods used in the production process, such as machinery, factory buildings, offices, computer systems and  mainframes, robots and any other gadget or tool used in production. It also includes the country`s infrastructure, which is made up of  roads, railways, electricity pylons and generators and broadband. You may have analysed already a production possibility curve which shows the choice between producing  consumer goods and capital goods.  Countries which over specialise in capital goods will sacrifice the immediate living standards of their population in favour of future growth. Britain however over specialises in consumer goods and as a result we try to maintain living standards by high consumer spending but at the same time we neglect the infrastructure necessary to sustain our economy long term. We have been called a nation of shopkeepers by some!

There have been at least 3 main infrastructure projects we have been slow to deliver. Firstly our public transport, the percentage of  electrified railways in Britain is only 42% compared to an EU average of 54%,  so journeys from A to B take a lot longer than similar journeys in countries like France or Germany. Secondly our broadband speeds and reach are well below many of our European and international competitors. We are 34th in the world league, behind countries like Poland and Lithuania. (By the way don`t expect to have internet on the underground and time soon!). But the most worrying perhaps is the speed of transition from fossil fuel usage in energy generation to  clean alternatives such as wind, solar and hydroelectric. Only 28% of our energy is from renewables. Although this is above the EU average, we are all aware of the ticking time bomb of rapid climate change. We are seeing this now with extreme flooding in parts of North England, made worse by the lack of investment in adequate flood defences.

Enterprise   

Finally we have enterprise, the resource that is the glue to make all the other 3 factors of production work together in producing goods and services we need and value. Perhaps Britain is doing a little better on this one. It`s relatively cheap and quick to start a new business in Britain and we have a record number of new business start ups each year. For larger businesses however, we rely a lot of foreign capital. Some of the most famous names in Britain are owned by entrepreneurs outside the country. Harrods is owned by the Al Fayed family based in Qatar, Rolls Royce and the Mini are both owned by BMW and even Boots is owned by US retailer Walmart, to name but a few. This means a lot of the profit made from these business goes abroad! The Economist magazine have published  a very good summary of this here

Overall it`s a country`s ability to acquire more resources and then make the best use of its resources that determines how prosperous it is.  Having said that, geopolitics, the rules of international trade  and colonialism have greatly distorted resource allocation.

In my next blog, I`ll reflect on how market forces sometimes  work well and at other times need to be reigned in by the government