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Archive for the ‘Economic History’ Category

Brexit and ‘Yes Minister’?

May 2, 2017 Leave a comment

In light of what has been happening in Europe recently here is a very amusing clip from the BBC series “Yes Minister” in which Sir Humphrey and Jim Hacker discuss Brussels and the notion of the UK trying to pretend that they are European. Also discusses why other European nations joined the common market in the first place.

The Ancient Art of Economic Forecasting

April 27, 2017 Leave a comment

I came across this piece from a colleague on economic forecasting. The article below appeared in the Sydney Metropolitan Press in the late 1920’s. Although economic cycles don’t run to an exact time period the graph below would indicate that this model is not too far out of kilter.

The top line = years in which panics have occurred and will happen again

The middle line = years of good times, high prices and the time to sell stocks

The bottom line = years of hard times, low prices and good times to buy stocks

The past panic century of dates are 1911, 1927, 1945, 1965, 1981, 1999, 2019. Except for 1981, these were all pretty good years to sell stocks – The Big Picture blog. 2016 suggests the top of the present cycle with 2019 being a year of panic.

“The Ancient Art of Economic Forecasting” – Sydney Metropolitan Press 1920’s

The attached graph professes to forecast the future trend of Australian business conditions, was first brought under the notice of the public in 1872. It was prepared by a Mr Tritch, whose origin and activities are shrouded in mystery.

The top line shows years in which panics have occured, and will occur again. Their cycles are 16, 18 and 20 years. The centre line shows the years of good times and high prices; the cycles are 8, 9 and 10 years. The bottom line shows the years of depressions and low prices; the cycles are 9, 7 and 11 years.

The panic which occurred in 1893 is shown in 1891. Nevertheless, that year witnessed the beginning of the depression. 1915, just after the war started was a year of depreciation, and 1919, the year following the cessation of hostilities, was a period charcterised by good times.

As this chart was published in 1872, it is interesting to note the forecast of the depression now existing. It will be seen that there has been a general upward trend since 1926 with the panic occuring in 1927 after the high is reached. The bottom of the depression is reached at the end of 1930 and the upward trend begins in 1931.”

Art of forecasting2.png

Russia – economic concerns.

March 31, 2017 Leave a comment

Part of the excellent Al Jazeera documentary series about Russia, which addresses the problems facing many Russians today. The global economic crisis, conflicts with neighbouring countries and the drop in oil prices all played their part in the demise of the Russian people. There is a very good interview with the former Central Bank Chairman Viktor Gerashchenk who held the position during Yelstin’s reign. He explains very simply how you grow your economy and that there must be money in the banks so that companies can borrow and invest. Buying US Treasury Bills was loaning money to the US and paying for their deficit. Meanwhile the infrastructure and public services declined rapidly causing a lot of anguish amongst the people. You can’t suddenly jump from a socialist system into the free market. Worth a look.

Brexit and trade – UK can learn from New Zealand’s experience

March 17, 2017 Leave a comment

With the departure of the UK from the EU there have been many questions asked about the future of UK trade. No longer having the free access to EU markets both with imports and exports does mean increasing costs for consumer and producer.

New Zealand’s Experience

A similar situation arose in 1973 when the UK joined the then called European Economic Community (EEC). As part of the Commonwealth New Zealand had relied on the UK market for many years but after 1973 50% of New Zealand exports had to find a new destination. However with the impending loss of export revenue New Zealand had to make significant changes to its trade policy. In 1973 the EEC took 25% of New Zealand exports and today takes only 3%. Add to this the oil crisis years of 1973 (400% increase) and 1979 (200% increase) and protectionist policies in other countries and the New Zealand economy was really up against it.

What did New Zealand do?

1. It negotiated a transitional deal in 1971 with agreed quotas for New Zealand butter, cheese and lamb over a five-year period, which helped to ease the shift away from Britain.

2. New Zealand was very active in signing trade deals of which Closer Economic Relations with Australia was the most important in 1983. The other significant free trade deal was with China in 2008. Below is a list of New Zealand’s current free trade deals and a graph showing the changing pattern of New Zealand trade:

NZ Free trade Deals

NZ exports goods 1960-2015.png

With brexit around the corner it will be imperative that the UK starts to develop trade links with non-EU countries of which New Zealand might be one. The UK is the second largest foreign investor in New Zealand and its fifth largest bilateral trading partner.

Macroeconomic models – a new approach needed.

March 3, 2017 Leave a comment

In 1776 Scottish economist Adam Smith talked of the economy as the invisible hand. Here he emphasized the self-regulating nature of the economy as individuals, firms and companies independently seek to maximize their gain which may produce the best outcome for society as a whole. The capitalist systems seems to rely more on the relentless growth of consumer spending and, although it can lead to dramatic improvements in standard of living, it does require people to become resolutely addicted to products/services and be prepared to get into significant debt.

Today, an economy is a much more intricate machine which aims to allocate scarce resources to satisfy the utility of economic agents such as individuals, firms and government. The dominant model for many years has been “Dynamic Stochastic General Equilibrium” (DSGE) and it takes all the characteristics of an individual (this person is typically called the representative agent) which is then cloned and taken to represent the typical person in an economy.

DSGE.png

Therefore it assumes that all individuals and firms have identical needs and wants which they pursue with total self-interest and complete knowledge of what they desire. DSGE also takes into account the impact of shocks like oil prices, technological change, interest rates, taxation etc. However a couple of areas that it doesn’t represent accurately is the financial sector and the instability of markets – booms and slumps. A new task will be to include the banking sector into the models as macroeconomists assumed it to be a screen between savers and borrowers rather than profit orientated organisations prepared to take big risks with increased leverage and sub-prime lending. For example as house prices increase banks are willing to lend more money to speculators who bid up the price above what is the fundamental value. The opposite applies if banks become more risk adverse and marginal buyers are forced out of the market causing prices to drop. By representing the financial sector in an economic model you go some way to help solve the major problem with DSGE and other models in that they are useful only if they are not unsettled by external factors like a banking crisis.

Keynes said “If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!”. To achieve this there needs to be structural reform in the discipline.

Agent-based modeling

An emerging field called agent-based modelling has grabbed the attention of some economists. This is where large amounts of data is collected from individuals who are unique to each other in they have different motives and actions in the market place. The behaviour of these individuals overlap and interact which generate predictions through a messy process but similar to what happens in real life, unlike DSGE and the clean old-fashioned macroeconomic models. Agent-based modeling has also shown promise in other disciplines like Physics and involve real-world problems. The example used by John Lanchester (New York Times magazine) is how Brazil nuts seem to end up towards the top of the mixed-nut package and nut research has since found real-life applications in industries such as pharmaceuticals and manufacturing.

With a better sense of what is influencing behaviour in the economy, economists might become less blinkered by their own theory, and better able to foresee the next crisis. Meanwhile, they would be wise to repeat (daily) the words: “My model is a model, not the model.”

Final thought

Macroeconomic models need to be adapted to take account of the events of the last 20 years. For so long typical macro model has been DSGE but as yet no model includes the impact of recessions and the eighty-year depressions. Economics failed to predict or prevent the GFC and this was based on conceptual faults which included a refusal to engage with the role of the banking and finance system in the economy.

Dani Rodrik of Harvard University splits economists into two camps: hedgehogs and foxes.

Hedgehogs take a single idea and apply it to every problem they come across.

Foxes have no grand vision but lots of seemingly contradictory views, as they tailor their conclusions to the situation.

Maybe more fox like behaviour is needed.

References

New York Times Magazine – The Major Blind Spots in Macroeconomics

The Economist – A less dismal science

 

The economic legacy of Obama

January 16, 2017 Leave a comment

Here is a good overview of President Obama’s economic legacy from PBS’s Paul Solman. Did his efforts to turn the country around after the 2008 financial crisis constitute a robust recovery, or too little, too late? Economics correspondent Paul Solman assembled a panel of economic experts to discuss employment across racial groups, the types of jobs created and the obstacles the president faced in enacting his economic agenda. Some of the comments are as follows:

  • He saved us from a great depression.
  • Over 15 million jobs have been added; 22 million more people have health insurance coverage than they did before.
  • If we characterise an economy as being in a catastrophe at unemployment rates greater than 8 percent, the black unemployment rate is still above 8 percent. So, frankly, black Americans are still in a great depression, or great recession at the very least.
  • The failure by the Obama administration to focus on economic growth.
  • A long-term infrastructure program would have made a great deal of sense, and frankly still does today. But that’s not what the Obama administration proposed. I think we need to have a more holistic structural agenda for lower-income Americans, rather than just treating it as a problem of recession and recovery.
  • We needed bolder, stronger, more fundamental, not tinkering, ideas to really structurally change the U.S. economy.

Keynes v Hayek with Chinese characteristics.

December 3, 2016 Leave a comment

You will no doubt have heard about the battle of ideas – Keynes v Hayek. In the 1930’s this was probably the most famous debate in the history of economics – the battle of ideas -government v markets.

Now there is Chinese version of the debate:

Justin Lin (Keynes) versus Zhang Weiying (Hayek) – both are Professors at Peking University. Lin is on the right of the image below.

lin-v-zhangTheir latest debate is about industrial policy and the concept that the government can set the example of how to run successful industries – in the 1980’s textiles and today renewable energy. Although China’s growth record would seem to justify this some have seen these state run industries produce little innovation. Lin believes that countries that have a comparative advantage should receive help from the government whether it be in the form of tax cuts or improved infrastructure. Furthermore, because resources are limited the government should help in identifying industries which have earning  potential. This assistance includes subsidies, tax breaks and financial incentives — aimed at supporting specific industries considered crucial for the nation’s economic growth.

Zhang sees this industrial policy as a failure in that he believes government officials don’t know enough about new technologies.  He uses the example in the 1990s, when the Chinese government spent significant money on the television industry only for the cathode ray tubes to become outdated. He is also concerned about industrial inertia with local officials following the central government’s direction which tends to lead to an overcapacity. Zhang, however, credited the free market — not politically motivated government subsidies — with game-changing innovations that benefit society eg. James Watt and the steam engine, George Stephenson’s intercity railway, and Jack Ma’s innovative online marketplaces under Alibaba.

China’s ongoing transition to a market-based economy has relied on labour, capital and resource-intensive industries. But the transition’s negative side effects have included structural imbalances and excess capacity in certain sectors. Moreover, some state-owned enterprises such as telecoms have been challenged by disruptive innovators, such as social networks.

Zhang said industrial policy can foster greed. For example, companies may collude with government officials to win special favours. And policymakers can make mistakes, given that even the most well-informed intellectual cannot always predict market trends. Other economists have contributed to the debate stating that a lot of the most successful companies have not had any government assistance in their early years.

However the debate is sure to continue – what works best ‘Markets or Governments’?

Sources:

The Economist – 5th November 2016

CaixinOnline 

Should we have a Universal Basic Income?

November 28, 2016 Leave a comment

Post Cap MasonI posted on this issue last year when Kim Hill (Radio NZ) interviewed Paul Mason  – author of Post Capitalism (now out in paperback). Mason makes the point that we are going to live through a long transition from capitalism – the state and the market to post capitalism which is the state, the market and the shared collaborative economy. With technology taking a lot of the jobs in traditional industries in the UK he states that further development in this sector is not the way of creating new jobs. He talks about delinking work from wages by just paying people to actually exist – rather than tax to exist.
Liam Dann (NZ Herald) wrote a piece about Amin Toufani’s presentation at SingualrityU summit in Christchurch where he talked about people in the labour force having to learn, unlearn, and learn again – unlearning should be core competency. However as there maybe many people who will struggle with this concept Toufani believes that a universal basic income (UBI) may need to be adopted – see RSA video below.

Recent events – UBI

  • Switzerland held a referendum on a basic income in June this year but it was comprehensively turned down.
  • Finland is going to run a U.B.I. experiment in 2018
  • Y-Combinator, a Silicon Valley incubator firm, is sponsoring a similar test in Oakland USA.

Why has the UBI become such a popular talking point?

  • The automation of a lot of jobs has left people very concerned about redundancy.
  • The modern economy can’t be expected to provide jobs for everyone
  • The UBI is easy to administer and it avoids paternalism of social-welfare programmes that tell people what they can and can’t do with the money they receive from the government.

Concerns

  • Potentially drives up wages and employees will compare their wages with the UBI.
  • Easier for people to take risks with their job knowing there is the UBI to fall back on.
  • It takes away the incentive to work and lowers GDP
  • UBI – not cheap to administer and would likely cost 13% of GDP in the US

Positives

  • In the Canadian province of Manitoba where the UBI was trialled, working hours for men dropped by just 1%.
  • The UBI would make it easier for people to think twice about taking unrewarding jobs which is a good consequence.
  • In the developing world direct-cash grant programs are used very effectively – Columbian economist Chris Blattman.
  • In New Jersey young people with UBI were more likely to stay in education

If the U.B.I. comes to be seen as a kind of insurance against a radically changing job market, rather than simply as a handout, the politics around it will change. When this happens, it’s easy to imagine a basic income going overnight from completely improbable to totally necessary. 

James Surowiecki – New Yorker – 20th June 2016

 

Trump’s economic policies a vision of the past.

November 20, 2016 Leave a comment

tooze-wages-of-dI came across this interview on PBS News (Making Sense of Financial News) in which Paul Solman interviews economic historian Adam Tooze about the historical context of Trump’s economic policies. Tooze wrote an excellent book about the economics of World War II Germany entitled “The Wages of Destruction” – well worth a read.

He refers to Trump’s policies as nationalism, with a commitment to the redevelopment of American manufacturing and industrial jobs. He cites the following historical events which Trump has seized ownership of.

  • 1933 and 1938 – the New Deal under President Franklin D. Roosevelt and the origins of the modern public sector – government-driven infrastructure spending.
  • 1950s, in which the Eisenhower administration brings about the modern interstate highway system.

He does have concerns about Trump’s aggressive trade policy of protecting United States manufacturing industries and sees a depreciating US dollar, higher US interest rates and a collapse in the market for US debt. However Trump’s rhetoric only applies to approximately 15% of the US labour force. Tooze believes that the appeal of Trump to the voters was that he offered hope for ordinary Americans to be able to earn a living based on the historical context of nationalism.

Categories: Economic History Tags:

US needs a new direction

October 14, 2016 Leave a comment

Jeffrey Sachs wrote a very good piece in the Boston Globe regarding the way forward for the US economy. Some interesting data:

  • 1.4% GDP between 2009-2015 when it was projected at 2.7%
  • 81% of Americans experienced flat or falling incomes between 2005-2014
  • 1980 – top 1% earn 10% of income
  • 2015 – top 1% earn 22% of income
  • 10% unemployment in October 2009 – dropped to 4.9% today. Mainly caused by those of working age leaving the labour force entirely.
  • Employment relative to working age (25-54) in 2000 was 81.5%. In 2015 it was 77.2%
  • US Treasury debt owed:
  • – 2007 = 35% of GDP
  • – 2015 = 75% of GDP
  • – 2026 = 86% of GDP – forecast
  • – 2036 = 110% of GDP – forecast

Issues with the US Economy

US manufacturing jobs have shifted overseas – remember NAFTA. Northern Mexico saw a huge influx of US companies as they took advantage of cheaper labour costs.

Automation – the advent of smart machines seems to be shifting income from workers to capital, driving down wages and leading to frustration of low wage workers.

As well as debt sustainability the US economy needs to shift its reliance on carbon-based energy to non carbon energy sources – hydro, wind, solar etc. Some have argued that the US has simply run out of big new inventions to sustain growth levels but ultimately the world has got to change its model as resources will eventually run out. We can’t keep relying on people buying more and more stuff to maintain growth or the Chinese building more cities and blowing up and rebuilding bridges.

Sustainable Development 

Jeffrey Sachs argues that sustainable development works best when it focuses simultaneously on 3 big issues:

  1. Promoting economic growth and decent jobs
  2. Promoting fairness to women, the poor, and minority groups
  3. Promoting environmental sustainability.

US growth has tended to focus on economic growth and neglect inequality and environmental issues. Future growth needs to focus less on current consumption but investment in future knowledge, education, skills, health, infrastructure and environmental protection. Furthermore if the investment is carried out efficiently the economy can growth in an environmentally safe as well as being fair. Good investment requires two things:

  1. Planning – need to overcome complex challenges for our future – e.g. energy
  2. Public investment  – replacement of a crumbling infrastructure – roads, bridges, water systems, seaports etc

Jeffrey Sachs recent research measured how 150 countries performed with regard to sustainable development and the progress that countries will need to make to achieve the recently adopted SDGs – see image below. The Scandinavian countries came in top – Sweden, Denmark, Norway – the US was 22nd out of the 34 high-income countries whilst Canada was 11th.

Click the link below for an article on income inequality from the Boston Globe by Jeffrey Sachs

Facing up to income inequality

Sustainable Development Goals_E_Final sizes

Ludicrous regulations of the US Airline Industry and Contestable Markets

August 12, 2016 1 comment

We discussed Contestable Markets in my A2 class today and I used this clip from Commanding Heights to show how regulated the US airline industry was during the 1970’s. Regulations meant that major carriers like Pan Am never had to compete with newcomers. However an Englishman named Freddie Laker was determined to break this tradition and set-up Laker airways to compete on trans-atlantic flights. He offered flights at less than half the price of what Pan Am charged. Alfred Kahn was given the task by the then President Jimmy Carter to breakup the Civil Aeronautics Board (the regulatory body) and he wanted a leaner regulatory environment in which the market was free to dictate price. There is a piece in the clip that shows how ludicrous some of the regulations were:

When I got to the Civil Aeronauts Board, the biggest division under me was the division of enforcement – in effect, FBI agents who would go around and seek out secret discounts and then impose fines. We would discipline them. It was illegal to compete in price. That means it was illegal to compete in the discounts you offer travel agents. So we regulated travel agents’ discounts. Internationally, since they couldn’t cut rates, they competed by having more and more sumptuous meals. We actually regulated the size of sandwiches. Alfred Kahn

When the CAB was closed down competition was the rule and the industry had vastly underestimated the demand for air travel at lower prices – a very elastic demand curve – see graph below.

 

 

 

 

 

 

 

 

In the A2 course contestable markets is a popular essay question and is usually combined with another market structure.

What is a contestable market?

• One in which there is one firm (or a small number of firms)
• Because of freedom of entry and exit, the firm faces competition and might operate in a way similar to a perfectly competitive firm
• The threat of “hit and run entry” from new firms may be sufficient to keep the industry operating at a competitive price and output
• The key requirement for a contestable market is the absence of sunk costs – i.e. costs that cannot be recovered if a business decides to leave a market
• When sunk costs are high, a market is more likely to produce an price and output similar to monopoly (with the risk of allocative inefficiency and loss of economic welfare)
• A perfectly contestable market occurs only when entry and exit into and out of a market is perfectly costless
• Contestable markets are different from perfect competitive markets
• It is possible for one incumbent firm to dominate the industry
• Each existing firm in the market produces a differentiated product (i.e. goods and services are not perfect substitutes for each other)

There are 3 conditions for market contestability:

• Perfect information and the ability and or legal right to use the best available technology
• Freedom to market / advertise and enter a market
• The absence of sunk costs

Example
• Liberalisation of the US Airline Industry in the 1970’s and the European Airline Market in late 1990s
• Traditional “flag-flying” airlines faced new competition
• Barriers to entry in the industry were lowered (including greater use of leased aircraft)
• New Entrants – easyJet- Ryanair

Why everyone should know some basic economics.

August 9, 2016 Leave a comment

Below is a great animation from RSA in which Ha-Joon Chang  (South Korean institutional economist specialising in development economics) explains why every single person should know some basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel. He mentions the nine schools of economic thought which are Austrian, Behaviourist, Classical, Developmentalist, Institutionalist, Keynesian, Marxist, Neoclassical and Schumpeterian. Furthermore, he makes the point that given the complexity of the world and the partial nature of all economic theories, you should be humble about the validity of our own favorite theory. Therefore keeping an open mind about its usefulness in society.

A lot of what he talks about is in his excellent book entitled “Economics: A User’s Guide”. 

Relevance of Economics Teaching at University

February 20, 2016 Leave a comment

What is the use of EcoHere is a link to Peter Day’s Global Business programme from the BBC World Service – Economic Rebellion. In this episode he looks at the history of economics teaching and asks why some universities are changing their courses whilst others are staying put. Since the crash of 2008 students have been rebelling against the economics teaching. In an interview with John Kay, he quite rightly stresses the importance of teaching ‘Economic History’.

Arthur Marshall gave his advice to the economics profession.

* Are you covering different schools of economic thought in your teaching? Is your approach intellectually pluralistic enough?

* Are you teaching enough economic history, so that we can learn the lessons from the past?

* Do your students have enough time to absorb and reflect on the material they are learning? In fact, as the discipline expands, are your students taking enough economics?

* Are you encouraging your students to embrace and respect the perspectives that other disciplines bring to thinking about and solving economic problems? What, for example, have we learned about neuro, evolutionary and behavioural economics? And how can that learning be better incorporated into public policy-making?

* How can we better understand the trade-offs between policies that improve incomes and those that improve social inclusion or environmental sustainability or our resilience to economic shocks?

* And, perhaps most importantly, are you challenging yourselves, and your students, to think beyond the comfortable?

Having read ‘This Time is Different’ by Carmen Reinhart and Kenneth Rogoff you often wonder why economists and public officials didn’t pick the common patterns amongst so many previous financial crises

I can also recommend the book “What’s the use of Economics”, edited by Diane Coyle, which examines what economists need to bring to their jobs, and the way in which education in universities could be improved to fit graduates better for the real world.

History of the Renminbi

February 11, 2016 Leave a comment

Below is a very good video from the FT which outlines the growth of the Chinese currency – the Renminbi (RMB). It includes some excellent graphics including the value of the currency against the US$ from 2005 – 2015 (see graphic below)

  • 1948 – RMB was put into circulation by the Communist party
  • 1997 – RMB was pegged to the US$
  • 2005 – Peg was removed
  • 2009 – China allowed approved companies to settle trade payments with non-Chinese customers using the RMB
  • 2015 – 20% of China foreign trade is settled in RMB compared to 3% in 2010
  • 2015 – RMB the 5th most traded currency although it is a long way behind US$ and €

The Chinese authorities want to have the RMB included in the basket of currencies that make up the IMF’s special drawing rights. This would mean an official endorsement of the RMB as a reserve currency. However one of the conditions of the IMF of being a reserve currency is that it must be freely tradable. Although the Chinese government is reducing its interventionist approach it is not yet ready to give market forces complete free rein over its exchange rate.

Renmimbi

Wealth Accumulation vs Imagination and Creativity

October 28, 2015 Leave a comment

InnovationA recent piece by Edmund Phelps in the New York Review of Books argues that Western economies have generally failed at giving the labour force access to jobs that provide self-respect.

The classsical idea of political economy is to let wages rates fall to what the market determines and then provide everyone with a safety net of unemployment benefit, healthcare etc. Although this policy does assist those in need, it negates the desire for people to do something with their lives besides consuming goods and leisure time. A lot of people have a desire to participate in a community in which they can interact and develop new skills and self-esteem.

People need to ‘flourish’

He goes into the notion of “flourishing”( defined as “using one’s imagination, exercising one’s creativity, taking fascinating journeys into the unknown, and acting on the world”), and how current Western economies act to deter such human activity. Phelps refers to this as the good life which typically involves acquiring mastery in one’s work and using imagination, creativity and taking the journeys into the unknown. These benefits are in experience and not in material reward – he quotes Kabir Sehgal “Money is like blood. You need it to live but it isn’t the point of life.”

He argues that individuals prospered in the 19th Century when in Europe and America, economies emerged with the dynamism to generate their own innovation. Participants were constantly trying to think of new ways to produce things. What made innovating so powerful in these economies was that it was not limited to elites. It permeated society from the less advantaged parts of the population on up. People of ordinary background might be involved in innovations, large and small. George Stephenson was illiterate, John Deere a blacksmith, Isaac Singer a machinist, Thomas Edison of humble origins. People of ordinary ability could also have innovative ideas.

The Mechanical Model of Economics

Today most companies are highly efficient and labour that are reasonably well off, have gone on saving pushing up their wealth to very high levels. As a consequence the supply of labour contracts as does the labour force participation rate.  However many people although comparatively rich are poor in the conditions for the good life of flourishing and prospering. With the absence of innovation comes decreased investment and an underutilised labour force. This is especially prevalent in Europe where figures for levels of happiness are indicative of unemployment levels and job satisfaction – Spain (54), France (51), Italy (48), and Greece (37).

This is in contrast to nations which are labeled as ‘emerging’—Mexico (79), Venezuela (74), Brazil (73), Argentina (66), Vietnam (64), Colombia (64), China (59), Indonesia (58), Chile (58), and Malaysia (56).

The US has a similar syndrome with a productivity slowdown and the decline of job satisfaction but more significant is the loss of indigenous innovation in the established industries like traditional manufacturing and services that was not nearly offset by the innovation that flowered in a few new industries—digital, media, and financial. You may think that companies on Silicon Valley offer jobs that are very creative and forward thinking but companies like Google and Facebook account for only 3% of national income.

Causes of the narrowing of innovation?

Phelps looks at two possible causes of this narrowing of innovation.

  1. There has been a suppression of innovation by vested interests. Professions have had instituted regulation and licensing to curb experimentation and thus reducing innovation. He uses the example of the US car industry which was able to regain their positions in the market by government bailouts. This meant that companies like BMW and Toyota lose money in their attempts to be more innovative in order to acquire market share. Consequently companies would be skeptical of being innovative in the US car market. Furthermore stakeholders use lobbyists to regulate and implement patents which increases the barriers to entry for new entrants.
  2. Schools are doing less to expose the young to the great books of adventure and personal development. Parents teach their children from infancy to be careful and stay close to the family. There is discussion now of the overprotected child: the need for a return to “free range” children who are allowed to explore, to try things and take chances

The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.

Final thought

We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.

Which institution has the most Nobel Prizes in Economics?

October 19, 2015 Leave a comment

Nobel Prize WinnersThe Nobel Prize in Economics was first awarded in 1969 with Angus Deaton being the 2015 recipient receiving US$975,000 for his research into policy responses to poverty and how individual choices shape a better economy. Seaton became the sixth Princeton University academic staff member to win the honor – New York Time columnist and Princeton Professor Paul Krugman being another. However if you look at the institution with the most Nobel Laureates in Economics the University of Chicago is quite far ahead with twelve. They include Milton Friedman and Gary Becker.

Categories: Economic History Tags:

Paul Mason interview on Radio New Zealand – “Pay People to Exist”

October 18, 2015 1 comment

Post Cap MasonYesterday on Radio New Zealand Kim Hill interviewed Paul Mason – Channel 4 economics correspondent – about his new book entitled PostCapitalism: A Guide to Our Future. The book gives a very radical and innovative view of history, and offers a vision of a post capitalist society.

Mason believes that after two centuries in which capitalism has dominated the western world, this economic system has become desperately dysfunctional: inequality is growing, climate change is accelerating and nations are beset with bad demographics, debt burdens and angry voters. He makes three assertions according to Gillian Tett of the Financial Times:

  1. “information technology has reduced the need for work” — or, more accurately, for all humans to be workers.For automation is now replacing jobs at a startling speed
  2. “information goods are corroding the market’s ability to form prices correctly”. For the key point about cyber-information is that it can be replicated endlessly, for free; there is no constraint on how many times we can copy and paste a Wikipedia page. “Until we had shareable information goods, the basic law of economics was that everything is scarce. Supply and demand assumes scarcity. Now certain goods are not scarce, they are abundant.”
  3. “goods, services and organisations are appearing that no longer respond to the dictates of the market and the managerial hierarchy”. More specifically, people are collaborating in a manner that does not always make sense to traditional economists, who are used to assuming that humans act in self-interest and price things according to supply and demand.

Radio NZHe also makes the point that we are going to live through a long transition from capitalism – the state and the market to post capitalism which is the state, the market and the shared collaborative economy. With technology taking a lot of the jobs in traditional industries in the UK he states that further development in this sector is not the way of creating new jobs. He talks about delinking work from wages by just paying people to actually exist – rather than tax to exist. He does come up with some very interesting thoughts and it is well worth listening to. Click below to hear the interview:

Paul Mason interview on Radio New Zealand

The Influence of Economists – Seven Bad Ideas.

April 18, 2015 Leave a comment

7 bad ideasAlan Blinder wrote a review of Jeff Madrick’s book “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World” – in the December edition of The New York Review of Books. The basis of the book is that ‘economists’ most fundamental ideas contributed centrally to the financial crisis of 2008 and the Great recession that followed.” Blinder quoted George Stigler’s contrary verdict “that economists exert a minor and scarcely detectable influence on the societies in which they live.” He comes up with a test that asks you which of the statements below comes closer to the truth.

The dominant academic thinking, research, and writing on economic policy issues exert a profound, if not dispositive, influence on decisions made by politicians.

Politicians use research findings the way a drunk uses a lamppost: for support, not for illumination.

Most people chose the second statement but Madrick’s answer seems closer to the first.

Blinder is at odds with three of Madrick’s ‘Bad Ideas’

1. The Influence of Economists – they don’t have as much influence on economic policy as Madrick suggests.

Blinder quotes his idea of Murphy’s Law of Economic Policy:
Economists have the least influence on policy where they know the most and are most agreed; they have the most influence in policy where they know the least and disagree the most vehemently.

However when you consider who has the most influence on the election of politicians it is the general public and not economic experts. According to Binder the GFC of 2008 has in part been the fault of economists. Most graduate take at least one economics paper but professors have failed to convince the public of even the most obvious lessons, like the virtues of international trade and the success of expansionary fiscal policy in a slump. It’s a pedagogical failure on a grand scale. Many economists teach and praise the efficient market hypothesis.

2. Mainstream economics is right wing.

Milton Friedman (University of Chicago) is targeted by Madrick with regard to right wing doctrine. It is quoted in the book that Keynesian economics is not part of what anybody has taught graduate students since the 1960’s. Keynesian ideas are fairly tales that have been proved false. Blinder refutes these statements with the latter being farcical. One can argue over the macroeconomic policies of the Chicago School but it’s clear that their views are far from the mainstream.

The success of Keynesian policy since the GFC has been well documented. Experts were asked whether they agreed or disagreed with the two statements about fiscal stimulus.

1. Because of the American Recovery and Reinvestment Act of 2009, the US unemployment rate was lower at the end of 2010 that it have been without the stimulus bill. 82% agreed 2% disagreed
2. Taking into account all the ARRA’s economic consequences – including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects – the benefits of the stimulus will end up exceeding its costs. 56% agreed 5% disagreed and 23% uncertain.

So from this the mainstream is overwhelmingly Keynesian.

3. Bad ideas

Madrick’s first bad idea was Adam Smith’s invisible hand. Blinder sees this as a great idea as throughout history, there has never been a serious practical alternative to free competitive markets as a mechanism for delivering the right people at the lowest possible costs. So it is essential that students learn about the virtues of the invisible hand in their first economics course.

Blinder also challenges another of Madrick’s Bad Ideas – Say’s Law, which states that supply creates its own demand, means that an economy can never have a generalized insufficiency of demand (and hence mass unemployment) because people always spend what they earn. Therefore: no recessions, no depressions. The Great Depression and then Keynes put an end to Say’s Law.

A Bad Idea – Efficient Market Hypothesis (EMH)
This Bad Idea became destructive as the EMH gave Wall Street managers the tools with which to build monstrosities like Collateralized Debt Obligations and Credit Default Swaps on top of the rickety foundation of subprime mortgages. This was further backed up by the credit rating agencies who gave AAA ratings to risky investments. EMH also handed the conservative regulators a rationale for minimal financial regulation.

According to Blinder, Madrick is an important and eloquent voice for what’s left of the American left – at least in economic matters.

University students sign petition over impossible economics exam

February 1, 2015 Leave a comment

A HT to Jane Hickey for this story about University economics exams. Final year economics students from the University of Sheffield are protesting vigorously about about their final exam as there were compulsory questions on topics which they had never been taught. According to the BBC one student said:

“We had been told it was not a maths-based paper.

“We feel misled and angry.

“Every part of the question was, ‘Calculate this, partially differentiate that.'”

Below is an image of the question.

sheffield eco paper

It seems that most major degrees in economics still focus on the neoclassical ideology and associates humans as perfectly rational walking calculators working out their utility for each purchase. The main model of consumer behaviour assumes that we never buy anything until we’ve calculated the impact on, for example, our retirement fund, and we’re so good at maths we use interest rates to compute our pleasure, over time, after buying something. However I know there is a movement for change in the composition of Economics Degrees which is discussed in the Diane Coyle edited book “What’s the use of Economics”, which examines what economists need to bring to their jobs, and the way in which education in universities could be improved to fit graduates better for the real world.

“US economist Philip Mirowski recounts how a colleague at his university was asked by students in spring 2009 to talk about the crisis. The world was apparently collapsing around them, and what better forum to discuss this in than a macroeconomics class. The response? “The students were curtly informed that it wasn’t on the syllabus, and there was nothing about it in the assigned textbook, and the instructor therefore did not wish to diverge from the set lesson plan. And he didn’t. In the 1970s at Cambridge “There were big debates, and students would study politics, the history of economic thought.” And now? “Nothing. No debates, no politics or history of economic thought and the courses are nearly all maths.”

Also have a look at this video from the New Economics Foundation – again it debates the value of mathematical models and neoclassical theory. Does the market actually reach equilibrium? I like Steve Keen’s comment – “the pirate obsession of Economics – they love X marks the spot”. It also includes Joseph Stiglitz, Gillian Tett, David Tuckett, Stephen Kinsella, John Kay, David Weinstein, and Dirk Bezemer.

WE THE ECONOMY – 20 short movies on economics

January 12, 2015 1 comment

WE THE ECONOMY website provides a series of short films that explain economic concepts or key features of the modern economy. Each of the 20 movies focuses on some aspect of the U.S. economy or on some economic concept. The films are grouped into five ‘chapters’ covering the basics of the economy:

What is the Economy?
What is Money?
What is the Role of our Government in the Economy?
What is Globalization?
What Causes Inequality?

Every 5-8 minute video is well worth watching and useful for the classroom. Below is the trailer – very professionally done and excellent reinforcement when teaching certain topics.

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