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What is a Degree for?

This is a subject that is of interest to everybody but is especially significant for people thinking about starting a university or college course. For every choice you make there is what economists call an ‘opportunity cost’. Opportunity cost is the next best alternative. Maybe for you there was a chance to get a job in an accounting firm instead of starting a degree course. Would that have been a better option?

Do not think of a degree simply as a means of getting a job. It’s far more than that. It’s a chance for personal development. You may be planning on a university course with a specific career path in mind but many before you have found that their interests have led them in an unexpected direction. For example, a student might start a business degree dreaming of working in share trading, only to find that the demands of the industry clash with their introverted nature. Instead, they  discover a passion for, say, research. The degree didn’t lead to one end point. It gave opportunities to learn what they were really suited to, and the skills to pursue this.

Neither should you think of a degree simply as the means of becoming an expert in one thing. University education is about mastering a subject, but it is much more than that. It’s about acquiring transferable skills, such as problem solving, communication and the ability to work in diverse situations with diverse people.

It is also about developing critical thinking and the ability to assess evidence. These skills can then be applied to many ideas and issues. In today’s unpredictable world, new jobs emerge quickly, while others fade away. A university degree should equip you with the adaptability to navigate these changes, rather than simply slotting into existing job categories.

Does your Choice of Degree make Financial Sense?

Will you earn sufficient in the years to come to cover the loss of earnings in the next few years and to cover the debt you will probably acquire?

The evidence suggests that it depends upon two things. One is the subject you choose. Many degree subjects will not do so. Despite what we have said above, the salaries offered to graduates depends upon the subject studied. The most financially rewarding degrees are in veterinary science and economics. These have the biggest payoffs. Next comes maths and statistics. Then comes accounting, business, management and suchlike. So choosing one of these degrees is financially worthwhile, although to a varying extent. Most people who choose arts and media studies may well find personal value through their studies but it is unlikely that it will prove to be a good financial investment.

The other thing is the degree classification. A lower degree category is not much more than a certificate of attendance. You really must aim for at least an upper second if you are to benefit financially from this kind of study.

Should I be Considering a Higher Degree?

Financially, the answer is yes, if you choose the subject carefully. It’s a further investment with a very good return. It is not necessary to do it at the same university as the one where you study for your undergraduate degree.

What if you have already started on a Degree Course?

If you manage your time properly and give yourself sufficient time to study you can have a really enjoyable experience, finish up with a good degree and find that it is financially rewarding. But you will probably only get one chance. Make the most of it.

Introduction

Energy companies sometimes report large profits while millions of households struggle with the cost of living generally and energy costs in particular. These companies are able to charge high prices, due partly to the fact that demand has increased but partly because of supply constraints, for example, those resulting from sanctions imposed on Russia after its invasion of Ukraine.

These profits have prompted calls for governments to introduce a ‘windfall tax.’ A windfall tax is a one-off tax imposed by a government on a company or group of companies. In this case the suggestion is to raise taxes on oil and gas producers’ profits and to use the funds to subsidise those households who are struggling with high energy bills. Some governments have introduced a windfall tax, others have not. Here we assess the arguments for and against such a tax although we make little reference to the various alternative ways that consumers might be helped by the money raised by such a tax.

Here are five of the key issues to consider.

Key Issue One: Excess Profits

Russia’s invasion of Ukraine caused oil and natural-gas prices to rise rapidly and then to gyrate wildly, so that firms are making record profits as a result of something for which they were not responsible. They have not earned them by taking risks or improving efficiency. Indeed they are profiting from bloodshed. In the meantime governments, having run up enormous debts during the pandemic, must now find more money to protect poor consumers from soaring energy bills and to boost defence spending. Under these circumstances a windfall tax sounds reasonable.

However, there are those who have pointed out that energy markets go through periods of boom and bust. In some years they even make a loss. For example, the big UK company, BP lost £4.2bn in 2020 when there was a collapse in global demand for oil, a result similar to most fossil fuel producers. They only regained part of this loss in 2021-22 when economic activity restarted. If they cannot enjoy boom profits in the good years to offset the bad years, it threatens their long term viability.

Key Issue Two: The Effect on Investment

Will lower net profits as a result of a windfall tax lead to less investment? One can argue that oil companies look for new oil and gas fields but will invest in infrastructure to develop such opportunities only if they are profitable when markets settle down rather than at existing prices.

During 1922, when asked if any of BP’s planned investments would not go ahead if a windfall tax were introduced, chief executive Bernard Looney said: “There are none that we wouldn’t do.”

In other words, taxing some of that windfall profit will not change future investment plans.

But the kind of investments made by oil companies are often considerably risky. Is it believable that they would continue to make these investments if they felt that their profits would be seized when their investments pay off?

Key Issue Three: A Redistribution of Income to towards those in Greatest Need

Remember that you cannot tax companies, only people. A windfall tax, like all company taxes, is a transfer of income between people. However, it can be argued that income in the form of dividends to shareholders is paid, largely to higher income groups so that a windfall tax is a means of redistributing income to those in greatest need and is therefore appropriate.

Critics of a windfall tax have said that older people could suffer disproportionately, as many pension funds benefit from the profits of big oil companies. How big an issue is this in the case of the energy firms? As an illustration, about 8% of BP and Shell’s shares are owned by UK pension funds.

Key Issue Four: Climate Change

It can be argued that the risk of windfall taxes deterring investment in fossil energy is less powerful now that most of the world is trying to phase out the burning of fossil fuels because of the concern about climate change.

Against this two things should be considered. One is that investment in fossil fuels will continue to be needed in the short term. Alternative sources of energy such as wind power, solar energy and nuclear power are only realistic alternatives in the longer term.

Second, these companies are themselves investing funds in other forms of energy such as off shore wind power so that a windfall tax might discourage a movement away from fossil fuels. In 2021 the Spanish government announced an ‘excess profit’ levy on Spanish electricity companies, but then watered down the proposal for fear that it would harm investment in wind farms.

Key Issue Five

The purpose of the windfall tax is to help households who will then spend virtually all of the additional income they receive. However, had the income been left with the energy companies , some of it would have been saved. It would have gone into pension funds and other financial instruments where it would boost people’s savings. Thus the overall effect of the tax is to boost total demand. Since the source of current inflation levels can be argued to be created by excessive demand, the effect of a windfall tax would be to add to inflationary pressures.

Introduction
It may seem an odd question but it is an important one. Why do firms exist? Consider an example. Why do travel agents exist? It would be perfectly possible for ·an individual to arrange their own holiday. They can book a flight with the air¬ line and they can also arrange hotel accommodation when going abroad. Many do just that and yet many others choose to use a travel agent, that is, a firm, a business, rather than use indi-vidual markets to achieve what they want. So why does the travel agent exist?
Travel agents exist because they can minimise transactions costs.

Firms, Hierarchies and Transactions Costs

When a firm exists, the way it alloc¬ates its resources within the firm is not that of a market. When people arrive for work in the morning, there is not a labour market to find who will do a particular task for the least reward. Within the firm resources are not allocated on a market basis, but on the basis of a management decision. Once a firm is established, markets are not generally operating within the firm.
We could put it like this. If we look outwards from the firm at the way in which that firm relates to other organisations, we find relationships usually on the basis of markets. If we look inwards, markets are not being used.

Rather, within the firm, it is hierarchies, that are the basis of resource allocation, not markets. The term hierarchy concerns the arrangement and organization of individuals within a firm according to power, status, and job function, rather than on the basis of markets and prices.

So how do we explain the existence of firms such as travel agents? Is such an arrangement the best use of society’s scarce resources? One of the first people to address this problem was Ronald Coase, who introduced the idea of transactions costs. His work has subsequently been developed and enriched by others, notably Oliver Williamson.
Ronald Coase taught for most of his career at the University of Chicago.

Trans actions costs are the costs associated with the organising and arranging of exchanges. Going back to the example of the travel agent, I could organise a flight and a hotel, but I now have to have an exchange with one or more hotels. I need another exchange with the airline and there may be others depending upon the exact form of the holiday. If I go to the travel agent, she can organise the whole thing for me in just one go. She can do this for thousands of other people too. So she makes one exchange with each of a few hotel operators, which will replace a whole series of individual exchanges. So the number of exchanges that takes place is considerably reduced by having the travel agent. Each exchange involves transactions costs, The existence of the firm with its hierarchy minimises the transactions costs and therefore can be more efficient use of resources than using a market.
So it may be more efficient, then, to have a firm, even though resources within the firm may not be allocated on a market basis. If an organisational arrangement is less costly than the use of a market, firms will come into existence. So the presence of transactions costs is a key explanation of why firms exist at all.

The Size of the Firm

Now let’s look at a related question. What stops firms becoming ever bigger over time? Why isn’t all world production carried on by firms, or even a single, big firm? Coase gives the following as his answer.
As a firm gets larger, the cost per unit that we call average cost may well fall. There are economies to being larger. They are the economies of scale we mentioned earlier. However, at some level of output organising additional transactions within the firm may rise. Beyond a certain size, the gains from economies of scale are defeated by the costs of firm bureaucracy. In other words, an increase in firm size may be efficient when firms are small but inefficient when firms are already large. This places a constraint on firms’ potential size.
Businesses exist because of the existence of transactions costs. However, they are limited in size by the costs of firm bureaucracy.