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THE FAIR DINKUM ECONOMY
Changing Direction for a Brighter Future
By ROBERT GIBSON
Trafford PublishingCopyright © 2013 Robert Gibson
All rights reserved.
THE FREE ENTERPRISE SYSTEM (FES) EXPOSED
The Free Enterprise System (FES) started about the time of the Industrial Revolution, a couple of hundred years ago. Prior to this people lived a subsistence lifestyle based around agriculture, small-scale manufacturing and trade. The Industrial Revolution gave them a means of mass-producing consistent-quality products that vastly increased their profit potential. Capitalism quickly grew as individual wealth increased. Countries that were early adopters of mechanisation soon came to dominate world trade.
The world needed a way of deciding the relative price of goods, and the FES was the answer. Market forces set the price of goods based on supply and demand for a product or service. In theory it is a good system provided there is a healthy level of competition and consumers, at the time of buying, have a good knowledge of all the competing prices, at the time they are buying, but this is rarely the case in reality. This system was based on a few basic assumptions—consumers can distinguish between the various quality of goods; competition leads to cheaper prices; competition will result in an improvement in the quality of goods and services; the best companies will survive. Originally, in small communities, where everyone bought locally, and knew the farmers, shopkeepers, and factory owners, and there were only a few stable brands of each product, this system probably worked well.
In today's world, the FES falls far short of its original ideals. It is not perfect because people are not perfect, there will always be greedy people who are keen to exploit a system to their advantage, and innocent victims who will suffer as a consequence. For all its good the FES has a dark side, it is based on competition and winning at the expense of others. It makes people very self-centred and selfish. The last 50 years have seen the rapid growth of global companies; these companies have become tremendously powerful, and that power is too often abused to build their own empires and returns to shareholders, at the expense of the greater community. We have seen many of these large multinational conglomerates buying up their competition to eventually dominate the market. They often become the only significant buyer for many of their components and raw materials, and this is an extremely dangerous situation as it exposes the market to exploitation where buyers can force raw material prices below what is sustainable. This can lead to the downfall of their suppliers. We have seen this happening in all markets; in agriculture (e.g. sugar, wheat, wool, dairying, meat, vegetables, and fruit), mining (e.g. coal, nickel, and iron ore); textiles; printing and manufacturing. What we have also seen is companies downsizing local operations, and relocating overseas even though they are making record profits. In underdeveloped countries, we see struggling families working for large multinational corporations for a few dollars per week, and countries selling their precious resources or produce for a few percent profit while their people live in poverty.
On 20th February 2013, the ANZ bank in Australia (one of the largest) announced it was cutting 70 jobs from its wealth management operations and outsourcing the work to India; this came the week after announcing a quarterly profit of $ 1.36 billion, and being on track for a record annual profit. The next day Telstra (Australia's largest telecommunications company) announced it would sack 648 jobs from its Yellow Pages Division; 257 of these were due to a drop in advertising in its print business, but 391 were jobs which were outsourced to The Philippines and India. This came shortly after announcing a record half-year profit of $1.6 billion.... and more jobs cuts are expected!
The growth in international trade in the middle of the 20th Century started to hurt local industries in Developed Countries. They cried out for their governments to act to protect their markets. This resulted in the introduction of a high level of trade-restrictions such as tariffs, quotas, and embargoes as well as a number of government subsidies to local producers. Starting in the 1980s, governments of Developed Countries yielded to external pressure, and started to open up their markets to free trade; this became known as "Globalisation". Over the last 30 years, this policy has caused a lot of damage to the manufacturing and agricultural sectors in these countries. They are now faced with a critical problem—how do they stop the damage to their economy and the decline in their standard of living. All countries have now become so dependent on world trade that Developed Countries are not game to return to the days of protectionism, for fear it will have a fatal effect on the World's economies.
During the second half of the 20th Century, we saw a number of companies eliminating competition to the extent that they came to dominate their market. Some of these companies exploited their position by driving down the price they pay their suppliers, and inflating the price they charge their customers. It was soon obvious that private industry could not be trusted to self-regulate, and that the forces of demand and supply could not control the price in such circumstances, so governments had to intervene. This resulted in the introduction of anti-monopoly legislation designed to stop one, or a few large companies, from dominating a market segment. Today the term "Free Enterprise" has become a misnomer; companies have had to accept many restrictions over various aspects of their business. Various restrictive trade practice laws have been passed to stop monopolies from forming, to prevent companies colluding to fix prices, to outlaw misleading advertising, and to protect other companies and the public against insolvent trading (i.e. businesses continuing to operate when they knew that they could not pay their debts). In addition to this many other pieces of legislation were passed governing safety standards, environmental controls and employment regulations. Unfortunately, there was always some businessman quick to exploit any shortcomings in the legislation. Each time governments moved to block an abused loophole, someone would find a way to get around it or find another loophole. This would lead to more legislation, and so on. Over the years this has resulted in a system which is highly complex and difficult to enforce, governments have struggled to achieve their objectives, and much time and money is spent trying to police these laws.
We have seen the downfall of the Communist System in Europe where industry was entirely under government control, so we know full regulation does not work, but there is certainly a need for some government intervention.
Due to the uncertainty of what the future holds companies in Developed Countries have become extremely reluctant to invest in new facilities and equipment or even to update their out-dated equipment. Near my home town, a company called Volgren won a government contract to build buses, they did the right thing, bought suitable land, and built a purpose-built factory. They invested heavily in equipment and training of employees, anticipating a long-term return on their investment. Three years later, when the contract was up for renewal, it was awarded to a competitor in another city—the factory now stands idle.
Our insatiable demand for material possessions is also causing an alarming decrease in savings and rising personal debt. In Australia, the Bureau of Statistics records shows that savings decreased from 15.9% of GDP in 1960 to 7.9% in 2010. Personal debt has risen to 100.04% of the annual Gross National Product, the first time it has ever exceeded GNP. Household debt (including mortgages) raised sixfold from 1990 to 2008, well exceeding the consumer price index which only increased by 56% in that period. The trend is the same in the United States and the United Kingdom.
When a business tries to increase its profit it is usually at the expense of their suppliers or customers, why cannot they be happy with just a "reasonable" return on their investment? Consumers are becoming just as hurtful, they are no longer loyalty to the one store, if they can buy an item for 10% less at the new shopping centre down the road then they will. They soon desert their local shop which may have been serving them well for many years. The public is being conditioned (and even encouraged by some firms) to haggle and push the price down as low as possible. This might appear to be good for the customer in the short term, but for businesses, already facing tight margins, it can send them broke, and this is to nobody's benefit in the long run.
Is Competition Really a Good Thing?
In 1981, my wife and I opened a retail shop in a brand new, small shopping centre in Newcastle. Prior to doing this we attended a seminar which was offered by the local university. I was astounded to see the statistics on small business failure in Australia. Their survey showed that 90% of small businesses closed within five years, most of them because the owners go broke. This should have scared us off, but we foolhardily thought (probably as many do) we would be one of the fortunate 10%, and went ahead regardless. We signed a lease for 3 years along with all the other tenants then watched as one by one, 60% of the shops closed before their 3 years was up; some had not even lasted 12 months—it was soul-destroying to witness. After 3 years we moved to cheaper premises in another suburb, but closed the shop 1 year later as the returns did not justify the time and effort were spending. The problems we encountered were:
Our lack of marketing expertise, which is not uncommon with many small businesses.
We continually lost sales to cheaper inferior goods because many customers were not willing to pay for quality.
We refused to meet unreasonabled is counts offered by some of our competitors as we realised the futility of this.
On some products, we were not able to match the prices offered by the larger stores who, because of their "buying power", were able to sell items at prices cheaper than our buying price.
As this was a small centre, we were part of a close community. We became acutely aware of the problems in retailing, and the heartbreak and despair that many owners suffer; if their business fails they often lose their life-savings and sometimes their house, which they had used to secure a loan to finance the venture.
If you carefully observe any shopping centre, you will be surprised at the rapid and high turnover of shops. It is exciting to see a new shop open, but the story behind the scene is often one of despair; a business that has just failed; previous owners who have gone broke; heartache for many years to come for all concerned. The FES has been disastrous for small business. When it started, its main attraction was that anyone, no matter what their status in life, had the opportunity to start their own business and possibly build an empire. Many outstanding businesses started as a local news sheet, a corner store, one-man building company or trucking company or a family farm, but over the years this has become progressively harder to do. Small business is declining rapidly. Owners have become discouraged at having to work long hours for small returns to line the pockets of large companies. There is no security in small business. A small retailer may have to spend $200,000 in setting up a clothing shop. If they work hard, and manage it well, they should be able to expect to have a good long-term investment, but this is rarely the case today. Is this fair?
The 1960s in Australia saw the start of the discount stores. A friend of mine worked in the white goods industry at the time. She worked for the Gas Company who supplied gas for cooking and heating, and also sold gas stoves and heaters to support their business. She said many consumers would come in to compare products and get all the good advice from her specialist, well trained staff. They then would go to one of discount stores and buy the item for 10% less. Needless to say, her department's sales declined and eventually closed to the detriment of consumers who then had to rely on sub-standard advice from the general retail staff of the discounters. The poor retailer that does all the hard work to assist the customer is abandoned. This does not encourage companies to train their staff nor provide good service or quality.
By discounting, sellers aim to increase profit by increasing the quantities that they sell. In Australia, there are 2 large retail corporations who control the grocery industry. In 2012, they started a new price war using low-priced milk to lure customers. The farmers were being paid 13cents per litre for their milk, which was being sold for $1.00—this was cheaper than 3 years previously. The farmers, the consumers, and the government asked the retailers to stop the discounting as everyone could see it was sending the farmers broke, but they continued for many months, doing a lot of damage to their suppliers' and their smaller competitors' businesses.
The other downside of discounting is the paradox that consumers save money. Many retailers use the old ploy of marking up the "normal retail price" to make the "sale price" look more attractive, and many people seem to believe it. I do not think that customers are that gullible, I think they choose to fool themselves as justification for spending what they really cannot afford. Consumers feel pressured to buy before the sale ends even though they may not actually need (as opposed to want) the item; they simply cannot pass up such a bargain which is at a "never to be repeated" price. This impulsive buying results in the consumer buying more than they really need—come on now, how many shirts, jeans, shoes, handbags do you truly need! Often the consumer uses credit to buy an item. They end up spending more than they would have without the sale, so their bank account is actually worse off than it otherwise would have been.
Prior to World War II, there were hardly any women in the workforce. During WWII women were employed in factories to replace the young men who had joined the armed forces; the female participation rate rose to 32%. When I was young, wives worked at home and looked after the family and their house. When a young woman became pregnant, it was expected, and even required, that she would leave her job and raise her family. Since WWII, the female participation rate has increased to 70%. Mothers take maternity leave for 6 months or a year then it is back to their careers, trying to balance their job and home life as best as they can. This has certainly increased the standard of living of families. We have a lot more possessions, more cars, larger houses, eat out more often, and go on fancier holidays, but there is a trade-off; we have more hectic lives, more stress, and parents have less time with their children. Household incomes in Australia have doubled in the last 30 years which gives the impression that our economic system is producing a higher standard of living, but is it really or is it more to do with the fact that most families now have both parents working? What the long-term effects on society will be is yet to be seen, but personally, I think there is a lot to be said for the simple life.
Garages used to be for cars, but these days, people have so many possessions, the garage is too full of stuff which is rarely used, and the car is on the street. You may think that with the amount of stuff you buy, stores should be doing well. It is ironic, but this growing consumerism is actually leading to their destruction. Consumers have a limited amount of money to spend. The fact that they can afford to accumulate so many possessions can be attributed to the lowering of prices.... and quality. It follows that, if prices drop, profit margins follow, so stores have to keep selling more to stay afloat—many eventually go under.
The rapid growth of large multinational conglomerates over the last 50 years has seen a much greater degree of price control over the price of their goods and also the price they are willing to pay for goods and materials they buy. The setting of prices by forces of supply and demand may work well where the two parties are equally matched, but this is rarely the case. In many markets, the buyer is such a significant customer for the much smaller supplier that the supplier has little bargaining power, and is forced to accept the price offered. All too often this price barely covers the supplier's cost. On a larger scale, we see the same domination in international markets where the prices of things like coal, sugar, and minerals from smaller or developing countries are determined by large business or governments of the leading Developed Countries. For 20 years, the large supermarkets have been selling their own "home-brands" at prices substantially below the regular suppliers. These started out to be of poor quality, in plain packaging, so the established producers were not too worried, but they have been improving each year, and it has now reached the stage where there is a home-brand alternative for most lines of groceries. I do not have data on what market share the home-brands now hold, but I know traditional suppliers are scared. We are told the stores can do this because they spend less money on "fancy packaging"—are consumers really that gullible? The truth is the lower cost is achieved by either cutting quality or coercing suppliers to reduce their prices. Some suppliers started producing home-brands on behalf of the supermarkets—I am sure they are regretting it now!
Excerpted from THE FAIR DINKUM ECONOMY by ROBERT GIBSON. Copyright © 2013 Robert Gibson. Excerpted by permission of Trafford Publishing.
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