The Wane Of a Monopoly

"The CEO of Alko makes over 36 000 € in a month. But it is quite clear when you take a look at the challenging job description: Selling vodka to Finns in a monopoly-market." -Iikka Kivi, comedian

During the past week, the Finnish government announced changes in the country's alcohol legislation. The reform includes for example more liberal marketing of alcohol and dispensing, allowing bars and pubs to sell "take-away"-alcohol, the allowance of small breweries to sell beverages directly to consumers, and most of all, the allowance of selling 5,5% alcohol by volume beverages in grocery stores when the previous limit was 4,7% alcohol by volume. Although the current Juha Sipilä's government has been highly unpopular, the reform should make many Finns satisfied. But the organization that most definitely isn't happy, is Alko Oy.

Established in 1932, Alko Oy is the national alcoholic beverage retailing monopoly in Finland and it is a government-owned enterprise. When established, the purpose of Alko was to sell exclusively alcohol beverages in Finland under the supervision of the state after the years of prohibition in 1919-1932. Still in the 21st Century and 85 years later, the status of Alko is still pretty similar; It holds the exclusion to sell alcohol beverages over 4,7% alcohol by volume. Until this very day.

One of the main arguments for the monopoly is the fact, that by supervising and regulating the sales of alcohol, the negative externalities of consumption (social effects of consuming) are minimized. Thereby Alko is also obligated to report to the Finnish Ministry of Health and Social Affairs. Thereby Alko is also obligated to report to the Finnish Ministry of Health and Social Affairs Also the marketing of alcohol is strictly regulated by the Finnish state, which manifested in 2014 in the prohibition of the usage of the word Viski (=whiskey) in the name of an event. 

As stated in Feeling Lucky Everyday, the European Union, free-market capitalism and globalization threat constantly these kinds of monopolies. In a internet-society where the existence of asymmetric information is becoming less and less common, people can try to get around these monopolies in many different ways. High ABV alcohol beverages can be easily ordered online for example from Germany, Estonia, the Netherlands and the United Kingdom. This alone is a major loophole for the Alko's justified monopoly.

Already in 2005, the Finnish Food Marketing Association asked the European Union to challenge the legality of Alko's monopoly, which it disputes. The small breweries want to make business as any other firm, the pubs and bars want to decide themselves from their business without any government intervention and the people want to satisfy their needs in the easiest way. The reform of the alcohol legislation might even give the domestic industry of Finland the boost it needs by creating more consumption, investments and maybe even employment in industries producing, selling and serving alcohol.

But the reform is also a major setback to Alko. Now when grocery stores are allowed to sell 5,5% alcohol by volume beverages, the level of monopoly and the revenue of Alko will most certainly decrease. So the question is, how long will Alko survive before competition in the alcohol-market becomes more fierce? When is the time when you can buy yourself a nice bottle of fresh Koskenkorva from the local R-Kioski? I would say that the time of this might be sooner than everyone thinks. Wine is going to be the next product released from regulation and showing up to the shelves of grocery stores, right next to beef and fish. But WHISKEY, vodka, liqueurs and other over 22% alcohol by volume beverages might stay in the hands of regulation a bit longer, because of the major health risks of over-consumption compared to milder alcoholic beverages.

We still must keep in mind that alcohol is a demerit good that is considered as harmful for the users and for the people close to the users. The regulation of selling these kinds of demerit goods is justified, but not for eternity. In some point, the society changes in a way when the liberalization might have more positive effects than negative. The only way to find out the effects is by trial and then examining the results. Hopefully we don't fumble this up.

The only thing we know, is that the situation of Alko is going to very challenging in the future. In a state which suffers from a huge lack of competitiveness in a free-market world, liberal economic reforms will unfortunately become more and more common.

The wane of the monopoly might just have just begun.

Text: SW
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Wagner's Law and the Dilemma of the Welfare State

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Here in my home country Finland, the economy and thus the welfare are experiencing significant challenges. The amount of government debt is still rising and is currently over 100bn€. An enormous growth from the figures of 2008, when the government debt in Finland was "just" 53bn€. Actually you can follow the development of Finland's government debt here.

The productivity of the economy, the lack of investments in industries, rising level of unemployment and the lack of international competitiveness are other issues threatening Finland's economy and the state of the welfare state.  In addition to this, the government is carrying out major cuts from social security,  from student and unemployment benefits for instance to cut the government expenditure in a desperate hope to stop the growth of the indebtedness.

Interesting though, Finland isn't the only country suffering from growing indebtedness. The United States and other super nations as well are experiencing the same phenomena. The amount of debt in the world is rising significantly and it is rising fast. We currently live in a world where the amount of debt rises more than the economic output. As you might guess, this can make matters very difficult in the world in a few years or so. Higher government debt implies more state interference in the economy and higher taxes in the future and this is exactly what is happening in Finland at the moment.

But why is the amount of debt rising constantly? One possible explanation comes from one of my favorite economic theories, the Wagner's law. It states that the development of an industrial economy will be accompanied by an increased share of public expenditure in gross national product. In non-economist gibberish, it means that when the economy grows and develops, the government's expenditure will grow in order to maintain the current common state of welfare in an economy. For example, if there exists more and more advanced public services which could help the people, the people will demand those advanced services and will no more be satisfied to the former standards of their services.

In order to provide these advanced and developed public services for the economy, it is clear that the government needs to grow its expenditure to invest in the supply of these services and public goods. This is the case especially in the welfare states such as the Nordic countries, where the state plays a crucial role in protecting the social well-being of its citizens. When the amount of economic output is low, the government must take more debt to satisfy the needs of its citizens.

To what extent does Wagner's law exist in a modern world? Numerous of studies have illustrated the existence of the correlation of the rising public expenditure and economic development. As we can see below, the Wagner's law indeed applies in the long run for the nations illustrated in the graph. The government expenditure as a percentage of GDP has grown in the time-period of 1870-1960. During the 1960's however, the expansion of the welfare states has decreased this growth a bit.

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So one explanation to the basic dilemma of the growing indebtedness is that the citizens of a state demand more advanced services. We can argue that are these more advanced services the kind of that the economy would actually need. The citizens have done pretty alright in the past also, so would there actually exist the need for these more advanced services? I'm not saying that we should turn back the clock and return our society to the Medieval, but I'd like to question the need of modern developed and costly services. Health care and education are of course vital for the welfare and the development of the human capital and thus the economy, but there might exist other services that demand more public expenditure from the state than before. For example, market-based economists argue on the effect of high unemployment benefits to the economical output and the government expenditure and the effect of the tax-rate (discussed more in Troubles of the Taxman). These are yet again the issues the government of Finland is going through at the moment.


To find out what these particular public goods and services are, we should all ask ourselves; what services and goods will we actually need and what services and goods we would be willing to give up. By answering these questions, we are a step closer in approaching the dilemmas of scarcity and the development of the welfare state. The cuts should be allocated on these goods and services instead of education and health care. With a bit of personal reflection, we all might possess possible solutions in order to make the welfare state great again.


Text SW
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Sexual Recovery?

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Let’s talk about sex. In our modern society sex is almost as inevitable as winter in Finland. It can be seen very frequently in persuasive advertising in almost any media, can be found directly on the internet in the form of pornography and also can be heard from my upstairs neighbor. Sex is something that humans as mammals have been of course interested throughout the history.

As you might guess, sex is used very efficiently in the field of business. Sexual persuasion is used very frequently in marketing; especially young women and men can be represented in the media almost as sexual objects. Also the annual revenue of the porn industry is estimated to be annually $2.6 billion to $3.9 billion. There always exists a demand for some form of sex, which makes sex a much demanded product.

Pornography and sexually persuasive advertising aren’t illegal but widely condemned. But prostitution is still illegal in different parts of the World. For example in Finland buying sex is legal, but unregulated. In countries like Germany, Switzerland and the Netherlands buying and selling sex is legal and regulated. In USA, for instance, buying sex is illegal and prostitution is criminalized. The chart showing the worldwide legislation of prostitution can been seen below.

Although its criminalization, according to TNS’ study in 2004, 15 % of American men have at least once paid for sex during their lifetime. Human trafficking is one of the World’s biggest current issues and it still exists and keeps the illegal prostitution in going. More than 500,000 women are trafficked into Western Europe every year, says the International Organization for Migration. These points doubt the effectiveness of criminalization of prostitution. Prostitution has been said to be the world’s oldest profession, since the signs can be found as far as from the 18th century B.C. Prostitution has always been there, and always will be.

The purpose of this text is not to give support or objections against prostitution. The purpose of this text is to analyze the potential effects of legalizing and regulating prostitution in a way it is done currently in Germany and the Netherlands. Could there be any actual positive effects or will the common welfare become worse?

If prostitution is a regulated industry with many agents, then the organizations must pay corporate tax like any other firm. Cities can earn tax revenue from other sources also: For example the city of Bonn collected on average 250,000€ from a “sex tax,” which collected revenue from saunas, brothels, and street pay meters in 2011. Also we must not neglect the effect of so called “sex tourism”, where foreigners travel to countries where prostitution is legal and thereby stimulate the economy through consumption.

Also the sex workers themselves have to obviously pay income tax from their income. The sex-workers also don’t necessarily have to work in brothel for a pimp; they also can be given the opportunity of entrepreneurship. In Germany they also already have access to health insurance and social security benefits.

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One of the major concerns of prostitution is human trafficking. Some evidence is shown that the legalization of prostitution attracts women who are legally seeking for job opportunities, but unfortunately also human traffickers who force women into sex. Although sex workers in Germany have the right to demand proper work conditions and work safety guidelines for themselves, the monitoring of the victims of human trafficking needs to be addressed more. With proper regulation, it might also be easier to monitor and help the victims of human trafficking who are forced to sell their body. Also without proper regulation, the spreading of AIDS and other STD’s can cause major costs for the economy in the form of increased health-care expenditure.

Also the existence of labor unions for prostitutes can help the reduction of human trafficking, Not only the brothels and the state would monitor human trafficking, but also the unions. The unions could assess a strict control on who is fulfilling the requirements to work as a prostitute.

So far we have assessed the effects of prostitution into fiscal policy and unemployment, but what about the social effects? One concern is that the representation of young women in the society could become much worse. When legalizing something so objectifying, women could be seen as nothing more than sexual objects. When prostitution becomes more common and can be seen on everywhere every day, there exists a danger of objectifying young women even more. In extreme cases this can lead to increased numbers in sexual offending.

The Netherlands, Germany, Austria, Switzerland and Greece have already accepted regulated prostitution and brothels. By regulating prostitution, it could be possible to increase the government’s tax-revenue, reduce the unemployment and most importantly, put the lights upon the problems of human trafficking and sex slavery. However, once must consider the social consequences of such a radical legalization for the society. 

As a conclusion we still could state that sex indeed sells.

Text: SW

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