Ordoliberalism is an branch of classical liberalism that developed during the time of the Nazi party. They didn’t agree with the planned economies of Nazi Germany and the Soviet Union. Furthermore, the free market and Keynesian beliefs were also rejected. They did follow the work of Austrian economist Friedrich Hayek and both agreed that deficit spending for to stimulate demand (demand management) was ill-advised. Where they differed was ordoliberalism believed in strong government control to create a framework of rules that provide order to assist the free market. There were three main features of ordoliberalism:
– An antitrust policy to cope with cartels
– Strict monetary policy focusing on price stability
– Tough insolvency laws
With the onset of the global financial crisis Keynesian fiscal stimulus economics was back in vogue. Although Germany endorsed this policy the euro crisis led them to argue for the anti-Keynesian idea of spending cuts at a time of declining demand. The German constitution requires states to balance their budgets by 2020 and limit borrowing from the Federal government. Germany has also forced similar rules on other EU countries through the 2012 fiscal-compact treaty, partly to limit its own liability to them. The German culture of adhering to rules is very prevalent in Ordoliberalism and they stress the euro zone’s no bailout rule. Mario Monti, a former Italian prime minister, likes to claim that in Germany economics is seen as a branch of moral philosophy.
Source: The Economist
Back in February I blogged on a Behavioral Economics course that I have been teaching for the last three years at King’s College. I have now put all the resources onto an iTunesU course so that you can access the multi-media material that accompanies the course booklet. The iTunesU course includes the following:
– Richard Thaler – co-author of ‘Nudge’
– Geoffrey Miller – author of ‘Spent: Sex, Evolution, and Consumer Behaviour’
– Dan Ariely – author of ‘Predictably Irrational’
– Daniel Kahneman – author of ‘Thinking Fast and Slow’
– Black Gold
– The Corporation
– Inside Job
– Kevin Slavin – TED Talk “How algorithms shape our world”
The course booklet has been edited so that answers to questions can be typed – this can be downloaded also from the iTunesU course. Click on the link below to enroll on the course.
The cracking China
MARTIN LUK – MARSDEN HOUSE
Bridging the gap
AMAY AGGARWAL – PEART HOUSE
Game theory and the cold war
AMANDA NGO – TAYLOR HOUSE
Inflation compensation degradation (say it)
JAKE McCONNELL – GREENBANK HOUSE
Global oil prices
SHAAN KESHA – PEART HOUSE
Syriza’s rescue programme for Greece “ pure Keynesian policies”
MARK JOHNSTON – ECONOMICS DEPARTMENT
The King’s College ‘Phillips Society’
AMANDA NGO – PRESIDENT
BOOKSHELF- recently published economics books
Click below to download:
Recent research has looked at the ‘political business cycle’ (PBC) – which refers to the government of the day manipulating economic policy to boost their re-election chances. Examples have been as follows:
- increasing unemployment benefits
- reducing taxes
- increase in child benefits
- promising greater spending in certain sectors
PBC as you would expect is prevalent when elections are closely fought and is more pronounced in developing economies. However in election year spending rarely stimulates economic growth and firms tends to put investment on hold – 4.8% reduction than in non-election years. This suggests that there is a reverse political business cycle. It is only when the election is a foregone conclusion that investment remains constant.
Source: The Economist
The Reserve Bank of Australia lowered its cash rate by 25 basis points to two percent in early May. The Bank had already dropped the cash rate by 25 basis points in February this year. In announcing its decision, the Bank commented on the decline in international commodity prices over the past year, which had resulted in a decline in Australia’s terms of trade. As a result, business capital expenditure (especially in mining) is expected to be weak. The Bank is expecting stronger growth in employment and an improvement in household demand. Low mortgage rates are resulting in strong house price inflation, especially in Sydney, and the Bank is “…working with other regulators to assess and contain risks that may arise from the housing market”.
China’s third interest rate cut in six months has spurred concerns the mainland’s economic slowdown is hitting where it hurts: the labour market. The People’s Bank of China (POBC) reduced reserve requirement ratios in April (the proportion of funds that banks have to hold with the central bank) in an effort to promote lending growth in the country. It has been reported that the cut in the reserve requirements ratio will allow banks to increase lending by about 1.2 trillion yuan. The POBC also reduced both the benchmark lending and deposit rate by 25 basis points to 5.1 percent and 2.25 percent, respectively, in response to weaker-than-expected economic activity data, which has raised concerns that the government’s annual gross domestic growth (GDP) target of “around 7 percent” might not be accomplished. Maintaining stable employment has been a top priority for the Chinese government as it steers the world’s second largest economy away from an export-driven model to one based on consumption.
Drug-taking in professional sport has long been a major concern and there is no better example than seven times Tour de France winner Lance Armstrong who admitted to doping. Furthermore in the period from 1997 until 2002 among 64 world class 100 metre sprinters 25% have been convicted of doping and this doesn’t include two American sprinters who tested positive this year. So why do athletes continue to dope eventhough you could get banned for life if caught?
Prisoners Dilemma to Inspection Game to Metagame
Game theory deals with differences of opinion between groups who know each other’s inclination but not their genuine objective or choice. It then concludes the optimum course of action for any rational player. In this scenario the parties involved are the competing athletes and although both are better off if neither takes drugs, they cannot trust each other so both engage in doping – Prisoners Dilemma. If you introduce an authoritative figure – the organisers – to test the athletes the fear of getting caught should ensure that athletes remain clean, referred to as the Inspection Game. However this cannot be said to happen at leading sports events as athletes, on the whole, don’t think they will get caught. Researchers from the University of Hamburg have introduced yet another party which they refer to as the customer (sponsor and spectators). Their critical role is the potential withdrawal of support which could see the sport’s demise. A withdrawal of one of these three parties can trigger the withdrawal of the other two. Sports events cannot survive without sponsors, withdrawal of the media restricts the access to the customers, and finally sport is only attractive for sponsors as long as there are customers. Therefore the strategies of the three parties looks like this:
Athletes – Dope or Clean (D C)
Organisers – Test or No Test (T N)
Customer – Stay or Leave (S L)
In the figure below organisers decide on the testing the athletes whether there was doping or not. But more importantly customers are to be informed about doping tests that turn out to be negative as well as positive. The customers then decide whether to stay or leave.
The assumptions are as follows:
D-N-S > C-N-S = athletes prefer to dope if not tested.
C-T-S > D-T-L = athletes prefer to be clean and tested = customers stay, over being doped and tested = customers leave (assuming that customers don’t like doping *scandals)
D-N-S > D-T-L = a scandal combined with a loss of customers is worse for organisers than undetected doping where customers stay.
C-T-S > C-N-L = testing clean athletes with customer support is better for the organisers than not testing clean athletes when customers leave.
D-T-L > D-T-S = customers prefer to withdraw support after a scandal
D-N-S > D-N-L = customers prefer to stay if there is no scandal.
C-T-S > C-T-L = customers prefer to stay if there is no scandal.
C-N-S > C-N-L = customers prefer to stay if there is no scandal.
*Dope & Test = Scandal
Dope & No Test, Clean & Test, Clean & No Test = No scandal
In reality customers who are ready to leave after doping scandals undermine the incentives to test athletes and find them guilty of doping. Consequently this encourages athletes to use performance- enhancing drugs and organisers to reduce their anti-doping methods in order to preserve the economic worth of the event – eg the Olympic Games.
Most athletes that have been found guilty of doping are not delinquent exceptions, but just unlucky scapegoats because the probability of being caught is low. The solution suggested would be to establish transparency so that the customer would know the results for all tests whether they were positive or negative. This allows the customer to condition their support on the presence of serious anti-doping tests. In practical terms this transparency could create a rating for each event based on how rigorous their anti-doping policy is.
The vast majority of authorities in today’s sports events would state that their testing regimes were very stringent. However the likelihood of human deceitfulness is very realistic and in some cases it is not those that take the performance enhancing drugs who are the real cheats, but those who have generated an environment where athletes would be foolish not to.
Nobody’s Innocent – The Role of Customers in the Doping Dilemma. Berno Buechel et al. University of Hamburg. January 30th 2013
Athlete’s dilemma – The Economist Print Edition July 20th 2013
German Current Account Causes
- Germany’s labour costs have been approximately 20-30% lower that its Eurozone competitors and the German real exchange rate is strongly undervalued relative to the rest of the eurozone. This makes its goods artificially cheap, crowding out those of other eurozone countries from both eurozone and world markets. If Germany still had the D-Mark, it is almost certain that the increased competitiveness of German exports would have caused an appreciation in the German currency. This appreciation would have rebalanced demand – increasing the price of exports and reducing the price of imports. A flexible exchange rate would have moderated the rise in the German current account surplus.
- German manufacturing has been very competitive in recent years with improvements in productivity, and high-tech German exports have weathered the global downturn, better than many other countries. Germany had less exposure to financial services and has a very competitive manufacturing sector.
- Germany’s jobless rate is at a very low 4.7%. This should be stimulating demand but the German regulatory and tax structure is geared in favor of output and exports, and against consumption and investment. Furthermore, the German government are running budget surpluses which takes money out of the circular flow. This is when its infrastructure is looking very tired – canals, the rail network and autobahns need upgrading. Investment has fallen from 23% to 17% of GDP since the early 1990’s. Net public investment has been negative for 12 years.
German Current Account Consequences
- The large current account surplus and undervaluation of currency was good for Germany, but it was holding back exports in other countries. Greater German domestic consumption and targeting higher inflation would provide a boost to global demand and help to stimulate growth in terms of export demand especially in southern Europe. Surpluses steal demand from elsewhere and they export unemployment to other countries. This matters in an era of “secular stagnation” and excess global savings.
- Given the imbalances in the Eurozone, southern European economies face a long period of deflation as they slowly seek to restore competitiveness against their northern competitors. However, given European wide austerity, this period of deflation is proving very costly in terms of lost GDP and high unemployment.