Economics for the future

With the summer holidays and more time to read, I came across a very informative journal paper, which was tweeted by @KateRaworth , in the Ecological Economics Journal entitled “Economics for the future – Beyond the superorganism” by N.J. Hagens – full paper can be found here. I have attempted to summarise part of the journal paper below.

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Hagens addressed the concern that are environment and economy are at a crossroads with the current model of:

Human behaviour + finance + energy + the economy + the environment = catastrophe

Most economies aim to grow at around 2-3% each year – hopefully maintaining inflationary targets and keeping apace with foreign competition. However in order to achieve this growth rate they will consumer as much energy in the next 30 years (approximately) as was consumed cumulatively in the last 10,000 years. Growth is now being driven in unsustainable ways with consumers in the developed world trying to satisfy unlimited wants and needs (which are not normally affordable) by debt.

Hagen articulates how a social species self-organising around surplus has metabolically morphed into a single, mindless, energy-hungry “Superorganism.”

Background – the industrial revolution and the discovery of fossil fuels (energy) influenced most aspects of daily life and heralded unprecedented growth. It also created new jobs with steel making processes, mass-production assembly lines etc – the high levels of agricultural productivity facilitated the labour required to run these new industries. How economies have developed – see table below.

Human behaviour -today status is an important aspect of life and although people are a lot better off than those 50 years ago it is where they rank in today’s society which counts and not absolute income. A trait of the consumer today is the stimuli and addiction to consumption. There appears to be no instinctual ‘full’ signal in modern brains and we are constantly looking for the next reward – episode on Netflix, the latest car, a new iPhone etc.

Modern economics assumes the rational brain is in charge, but it’s not. Our in-group nature facilitates fake news works and makes people doubt the belief about climate change and energy depletion. There is a strong tendency to care about the present rather than the future – the discount rate. Most of our challenges are in the future – recognition that the future exists and that we are part of it springs from a relatively new brain structure, the neocortex. Emotionally, the future isn’t real.

Energy – ecological economics recognises that real economies are completely dependent on energy. Energy = the currency of life. It is the ‘net energy’ after energy costs have been subtracted that is the enabler and driver of natural – and human – systems

Most economic theory suggests that if the price of one input is too expensive the market will develop a cheaper alternative. This is not the case with energy as alternatives have differences in quality, density, storability, surplus, transportability, environmental impact, and other factors. We can (for now) readily print money but we can’t print energy to give it value. We can only develop new sources or extract what exists faster or learn to use it more efficiently. Fig 3 below shows that fossil fuels are the foundation of the modern economy and are currently imperative to industrial development and growth.

Synthesis
Fig 8 below is a conceptualisation of the last few and next few hundred years (not to scale).
Green line = sustainable flow levels available to humanity which reached technological and geographical limits in the 19th century.
Red line = the one-time pulse of non-renewable natural resource inputs to human economies (oil, gas, copper, etc.).
Black line = financial markers (money, credit, etc.) of the underlying primary capital.

Point A – pre-Industrial era using relatively simple technology such. as sails and animal labour.
Point B – industrial revolution – humanity added the condensed stocks of hydrocarbons to previously flow-based human economies. Solow residual = the economic growth not explained by labour or capital was absent during this time because the black line and red line were tracking together.

Between B and C = energy crisis in the 1970s. Solved by using debt to pull consumption forward in time and globalisation and outsourcing to the cheapest areas of production

Point C = GFC 2008. New system – too-big-to-fail guarantees, artificially low interest rates quantitative easing, central bank balance sheet expansion and various GDP-friendly rule changes.

Point D, where our global monetary representations of reality continue to decouple from the underlying biophysical reality (red curve)

Humans to superorganism – a Tibetan monk might seek comfort by sitting alone on a wooden bench meditating but for the modern consumer achieving comfort means eating at a better restaurant, buying a better car, air conditioning or heat, fast internet, faster transportation, etc. For most people these preferences have a strong correlation to devices and processes requiring energy. Our ancestors didn’t live with Instagram, Fortnight, Teslas, sushi or Netflix. Furthermore, the hedonic treadmill, that is addictive consumption, is linked to energy use.

The consumer today doesn’t seem to have a sense of delayed gratification – waiting for something builds up you utility / satisfaction. Therefore we have a present bias in that, to quote the band Queen, ‘we want it now we want it all’. This pursuit of ‘stuff’ by consumers also explains the motivation for debt, which pulls energy and material consumption to the present.

Implications – Gross domestic product (GDP) → gross world burning (GWB)

Economic growth can only experience ‘absolute decoupling’ if we increase GDP while decreasing primary energy consumption. US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile. Dr Mike Ryan’s (WHO) agreed with this in his recent speech about how Covid 19 is a wake up call to how we live our lives and the fact that we can’t keep just focusing on economic growth. Yet economies still pursue the GDP carrot, often toward facetious endeavours that assure the significant financial return over the shortest time period. Although the COP27 addressed some issues to do with climate change in giving money to those developing countries that had suffered from climate change impacts, there was no agreement to reduce fossil fuel usage.

In the same way that ants pursue individual tasks for the growth of the colony, humans have outsourced our individuality to the ‘cloud’, which is itself devoid of an actual brain. N.J. Hagens

The risks associated with the reduction in energy and material well-being are two-fold:

1. Economies need to prepare for an environment with less credit, energy limitations and the changing nature of work.
2. The Great Simplification might emerge – a new economic system based on biophysical reality. Taxes on rapidly depleting resources, a reduction in risky lending and regulated incomes.

Whatever we’ll call it, we are desperately in need of a set of guideposts and principles that include not only ecology but also biology, psychology, physics and emergent behaviours. This discipline will focus at least as much on ‘what we’ll have to do’ as on ‘what we should do’. N.J. Hagens

Source: Economics for the future – Beyond the superorganism by N.J. Hagens.
Ecological Economics Volume 169, March 2020.

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Climate change: who is helping developing countries

Poor nations, which have contributed the least to climate change are among the most vulnerable to climate change today. They need some financial commitments from the developed world who have grown their economies by polluting the atmosphere. For instance Pakistan emits under 1% of global emissions but it is the eighth most vulnerable country – see graphic. It is estimated that Pakistan has had $22 billion in material damages with up to 12,000 people losing their lives with 60 million affected – 2022 saw extreme monsoon rains and the worst flooding in a decade.

It is the developed world that is most responsible for climate change – since 1850 the US has emitted more than 500 billion tonnes of CO2 which is approximately twice that of the next largest emitter China. It is vital that the richer countries assist the developing world combat extreme weather. They have the finance to do it but don’t seem to rich their target of $100bn per year year since 2020. There is a pay back here in that those got countries got rich on the problem that we now have.

1992 UN Framework Convention of Climate Change was approved and at the Conference of Parties (known as COP) and in 2009 15 developed nations committee to $100 billion each year – see graphic – to support developing countries with reducing emissions and adapting climate change. The $100 billion goal was “carefully crafted” to be deliberately vague. As a result, there’s no requirement that specific countries contribute a certain proportion of the funds. Multiple analysis have calculated that the United States, which contributed less than $3 billion of the $83.3 billion in 2020, is under delivering by tens of billions of dollars when considering its relative emissions, population size and wealth.

The IMF has also provided long-term affordable financing. The money so far has funded mitigation projects, which help developing countries transition away from fossil fuels, like building a zero-emissions transit system in Pakistan. Money has also gone toward adaptation projects, which help countries build resilience against climate risks, like restoring vegetation and reducing the risk of flooding.

Source: New York Times. Who will pay for Climate Change. Nov 7 2022

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Qatar and the economic significance of hosting the world cup

Very good video from The Economist about Qatar hosting the most expensive World Cup ever – approximately $300bn. Why has this small, gas-rich kingdom chosen to host football’s most prestigious event, and how does it fit into its broader plans for economic transformation? The video below explains the history behind Qatar,

The tournament is a big deal for a country that has fewer than three million residents. For the 2018 tournament, held in Russia, football’s governing body, FIFA, says more than one billion people tuned in to watch at least some of the final game between France and Croatia. However, academic research into the economic impact of hosting the World Cup suggests any advantages gained are at best hard to perceive and at worst non-existent. Since it won the bid to host Qatar has built eight new stadiums, more roads, hospitals and a new metro system. However the criticisms on human rights are not going away.

For Andrew Zimbalist, the author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup, the evidence is clear: “There is virtual unanimity in the scholarship that on the question of the economic impact of mega events, they don’t promote economic development.”

Nordic equality and the bumblebee

Always been interested in the Nordic economies especially when you look at their standing in HDI and other indicators like happiness, trust and ease of doing business etc. There is a series of three books that looks at the fundamental features of these societies whether it be Equality, Economic Performance and Happiness – see image.

The Nordic countries rank amongst the best for equality in society. How is it possible that these economies are some of the richest and the most equal? Many people compare the Nordic model of equality to a bumblebee. The bumblebee tends to go against the laws of aerodynamics – a very big body with tiny wings. The Nordic countries model of inequality is very expensive but there is still economic growth in the economy. Carsten Jensen talks of 3 aspects of Nordic society that makes this possible.

1. The flexicurity system – flexibility and security. This is where employment regulation is fairly lenient (ability to make employees redundant) combined with a generous welfare programme The welfare support has two main aims: to protect against loss of income that come with losing your job and ensuring that you have the right skills to better fit the labour market. Should be noted that the government play an important role in the provision of free education at the tertiary level in Nordic countries. This leads to the golden triangle of flexicurity – flexible labour markets, training and retraining, and unemployment protection – see fig below.
2. The business friendly environment. The World Bank’s Ease of Doing Business Index ranks countries according to how conducive their regulatory environment is to establishing and running a company. In the 2020 Index Denmark were 4th, Norway 9th and Sweden 10th. However this does not imply that equality is somehow intrinsically good for a country’s commercial environment.
3. Social trust – this is important for growth as it make cooperation between individual citizens and companies easier. The lower transaction costs from social trust mean the environment is more conducive to investment from entrepreneurs and banks. Those countries that have less social trust spend more time and money on monitoring employees, other companies and consumers.

Source: Equality in the Nordic world – Carsten Jensen – 2021

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Why has the US dollar got so strong and problems associated?

There has been a lot of talk about global currency’s depreciating against the US dollar but why has the dollar been so strong? In times of uncertainty people gravitate to the US dollar for safety – it is the global reserve currency and the vast majority of global trade is done in US dollars. The uncertainty in the global economy has been due to:

• The pandemic
• Expansionary fiscal and monetary policy
• Supply side problems not being able to keep up with demand
• Ukraine War which has increased energy and food prices.

From the above there has been strong inflationary pressure in the US especially and this needs contractionary monetary policy intervention – higher interest rates. The US Fed Reserve has increased interest rates ahead of other developed economies.

28th September 2022 – US dollar.

Problems with a strong US dollar
When the US dollar appreciated – see image above – it has a contractionary impact on the global economy. The dollar and US capital markets are far more globally important than the US economy itself – the currency is the world’s safe haven and its capital markets are those of the world. Therefore the exchange rate is crucial when money goes into and out of the US. Also countries worry about the exchange rate in particular when inflation is high – weak currency makes imports more expensive and can feed inflation. For those that owe money in US dollars a weak currency becomes very expensive as they have to convert more of their currency into US dollars – this is prevalent in the developing world. With Fed Chair Jerome Powell determined to bring US inflation down there is the risk of further interest rate hikes which could put economies into recession.

Source: Financial Times – Why does the strength of the US dollar matter? Martin Wolf

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A2 Revision – Oligopoly and the kinked demand curve – download

Getting onto market structures with my A2 class and here is a note on the kinked demand curve. I alluded to in a previous post that one model of oligopoly revolves around how a firm perceives its demand curve. The model relates to an oligopoly in which firms try to anticipate the reactions of rivals to their actions. As the firm cannot readily observe its demand curve with any degree of certainty, it has got to estimate how consumers will react to price changes.

In the graph below the price is set at P1 and it is selling Q1. The firm has to decide whether to alter the price. It knows that the degree of its price change will depend upon whether or not the other firms in the market will follow its lead. The graph shows the the two extremes for the demand curve which the firm perceives that it faces. Suppose that an oligopolist, for whatever reason, produces at output Q1 and price P1, determined by point X on the graph. The firm perceives that demand will be relatively elastic in response to an increase in price, because they expects its rivals to react to the price rise by keeping their prices stable, thereby gaining customers at the firm’s expense. Conversely, the oligopolist expects rivals to react to a decrease in price by cutting their prices by an equivalent amount; the firm therefore expects demand to be relatively inelastic in response to a price fall, since it cannot hope to lure many customers away from their rivals. In other words, the oligopolist’s initial position is at the junction of the two demand curves of different relative elasticity, each reflecting a different assumption about how the rivals are expected to react to a change in price. If the firm’s expectations are correct, sales revenue will be lost whether the price is raised or cut. The best policy may be to leave the price unchanged.

With this price rigidity a discontinuity exists along a vertical line above output Q1 between the two marginal revenue curves associated with the relatively elastic and inelastic demand curves. Costs can rise or fall within a certain range without causing a profit-maximising oligopolist to change either the price or output. At output Q1 and price P1 MC=MR as long as the MC curve is between an upper limit of MC2 and a lower limit of MC1.

Criticisms of the kinked demand curve theory.
Although it is a plausible explanation of price rigidity it doesn’t explain how and why an oligopolist chooses to be a point X in the first place. Research casts doubt on whether oligopolists respond to price changes in the manner assumed. Oligopolistic markets often display evidence of price leadership, which provides an alternative explanation of orderly price behaviour. Firms come to the conclusion that price-cutting is self-defeating and decide that it may be advantageous to follow the firm which takes the first steps in raising the price. If all firms follow, the price rise will be sustained to the benefit of all firms.

If you want to gradually build the kinked demand curve model download the powerpoint by clicking below.
Oligopoly

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‘The Trinity College VIII’ – amusing book on rowing

Getting away from economics and with my interest in rowing, I can recommend a very entertaining book written by my brother-in-law David Hickey. David was a member of the Trinity College (part of Dublin University) VIII that won the Ladies Plate at the Henley Royal Regatta in 1977 – the Ladies Plate is seen as the World Championships for University VIII’s.

One of the 1977 Ladies Plate crew members has written a lighthearted account of the crew’s three year campaign to try to win the event. While it deals amusingly with some of their outrageous non rowing adventures, the sections on the changes within Trinity College during those years, and especially the descriptions of rowing in general, and racing in particular, are dealt with in a far more serious vein.

Below is an interview with David about the book on the Rowing Chat podcast.

You can purchase the book from the Dublin University Boat Club website which means that they get to keep 50% of the proceeds which they can then put towards their boat funding needs.

https://duboatclub.com/book/

If you are in New Zealand just email me – m.johnston@kingscollege.school.nz – and I can arrange for delivery. You will therefore save on significant postage costs.

Negative externalities of consumption and how much sugar in a Coke?

Negative externalities of consumption is where the consumption of a good may have spillover costs or negative externalities for others e.g. passive smoking, drink driving, sugary drinks. If left to the free market goods that have negative externalities of consumption will be under priced (Pm) and over consumed (Qm) compared to the socially desirable price (Ps) and quantity (Qs). At Qm the MSC > MSB therefore the quantity needs to reduce until the MSC=MSB. The government could tax the good, increasing its price and lowering the level of consumption back to more socially desirable levels.

Source: Elearneconomics

Coke and how much sugar?

The video clip below, although a bit old, is from the BBC Newsnight Programme in which Jeremy Paxman interviews President of Coca Cola Europe James Quincey. How much sugar is in a cup of Coke? A ‘small’ cinema serving is said to contain 23 teaspoons on sugar, while a large contains 44 – ‘each to be consumed in a single sitting.’ You can see the amount of sugar for yourself when Paxman pours out the sachets in each cup. Like with the tobacco industry quite a few years ago, the pressure is now on drink companies to reduce the amount of sugar in drinks because of the negative externalities of consumption that are associated with it.

Externalities on elearneconomics has written answers that allows students to recall information and apply it to assessment style questions. Immediate feedback allows for true student-centred learning and understanding.

Africa’s resource curse lingers on.

Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. It is estimated that for every extra dollar in foreign currency earned from exporting resources reduces non-resource exports by $0.74 – Torfinn Harding of the NHH Norwegian School of Economics and Anthony Venables of Oxford University.

Economists also refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability.

According to the UN a country is dependent on commodities if they are more than 60% of its physical exports – in Africa that makes up 83% of countries. One of the major concerns for resource rich countries is the wild fluctuations in commodity prices which can lead to over investment – Sierra Leone created two new iron-ore mines in 2012 only for them to close in 2015 as prices collapsed. However the amount of jobs created in the mineral extraction industry is limited – across Sierra-Leone of 8m people, about 8,000 work in commercial mines. A major problem in these countries is that when there is money made from resources it tends to go on government salaries rather than investing in education. infrastructure and healthcare etc.

Norway – has a different approach.
In Norway hydrocarbons account for half of its exports and 19% of GDP and with further oil fields coming on tap Norway could earn an estimated $100bn over the next 50 years. Nevertheless there is a need to wean the economy off oil and avoid not only the resource curse that has plagued some countries – Venezuela is a good example as approximately 90% of government spending was dependent on oil revenue – but also the impact on climate change. Norwegians have been smart in that the revenue made from oil has been put into a sovereign wealth fund which is now worth $1.1trn – equates to $200,000 for every citizen. This ensures that they have the means to prepare for life after oil.

Source: The Economist – ‘When you are in a hole…’ January 8th 2022

Holiday reading 2021

That time of year when we hopefully head to the beach in NZ and out of internet range. Here are some books that have had very good reviews. We do live in uncertain times and one doesn’t know what might be around the corner – stay safe.

The Box (Second Edition) – Marc Levinson. The Box tells the dramatic story of the container’s creation, the decade of struggle before it was widely adopted, and the sweeping economic consequences of the sharp fall in transportation costs that containerization brought about.

Anthro-Vision – How Anthropology Can Explain Business and Life – Gillian Test (FT). how anthropology can make sense of people’s behaviour, in business and beyond. She outlines how anthropology helps explain consumer habits – revealing the ‘webs of meaning’ that underpin how we shop, and unpicking the subtle cultural shifts driving the rise of green investment.

Economics in One Virus – An Introduction to Economic Reasoning through COVID-19 – Ryan Borne. answers all these pandemic‐ related questions and many more, drawing on the dramatic events of 2020 to bring to life some of the most important principles of economic thought.

The Vietnam War – Geoffrey Ward and Kenneth Burns. This book is based on the acclaimed documentary by PBS in the US. It is a fresh and insightful account of the long and brutal conflict that reunited Vietnam while dividing the United States as nothing else had since the Civil War.

Value(s) – Building a Better World for All – Mark Carney. Former Bank of England Governor draws on a truly international perspective to our greatest problems, this book sets out a framework for the change needed for an economic and social renaissance in a post-Covid world.

AS Revision – Fiscal Policy

Useful mindmap from Unit 5 of the AS course. Multiple-choice exam tomorrow – 16th November. Source: A Level revision Susan Grant

Brazil – rapid fire with interest rate rises.

Brazil’s inflation rate is now at 10.25% from the previous year which is well above the target rate of 3.75% for 2021 – their target for 2022 is 3.5%. To counter this increase in prices the Central Bank of Brazil have been extremely aggressive with interest rate rises and since 17th March 2021 they have increased the benchmark Selic rate by 575 basis points which leaves interest rates currently at 7.75%.

This contractionary monetary policy is in response to higher prices and it is hoped that the increase in cost of borrowing and the higher return for saving will lead to a reduction in aggregate demand. However one has to be dubious about the level of savings in the economy and whether the return you get on interest in the bank outweighs the increase in the level of prices.

Political events look to destabilise the economy even more. There are concerns that an increase in government spending on welfare will fuel further inflation as President Bolsonaro seeks re-election. The so-called fiscal “ceiling” limits budget increases in line with inflation and is regarded as a pillar of the country’s economic credibility.

See table and graph below showing Selic rate rises.

Source: Central Bank of Brazil

Brazil’s Inflation Rate

Synchronous vs. Asynchronous learning and the laundry test.

As we are back in lockdown in New Zealand I thought I would share a post that I did last year relating to the challenge of finding the right balance between synchronous and asynchronous material. My ‘Webex’ lessons were predominately asynchronous in that I wanted to get through material and also the fact that a lot of the more engaging aspects of my teaching are difficult to do through the Internet. Although you could do some engaging activities through chat forums nothing beats the energy and engaging nature of face-to-face in the classroom environment.

An article which I picked up from Michael Cameron’s blog ‘Sex, Drugs and Economics’ makes for very good reading.

Dan Levy ‘The Synchronous vs. Asynchronous Balancing Act’ Harvard Business Publishing Education. 7th August 2020.

Asynchronous learning is better when you think it is important to have the following:

• Students developing a common foundation before class (especially of basic ideas or concepts).
• An assessment of your students’ perspectives or background on the subject, as this will affect how live classes would be conducted.
• Students being able to engage with the material at their own pace. This is especially useful if prior knowledge of the material varies a lot across students.
• Students spending a substantial amount of time pondering and reflecting.

Synchronous learning is better when you think it is important to have the following:

• Exchanges of perspectives among your students.
• Students learning from each other.
• Interactions in which you’re playing the role of facilitator or mediator.
• Opportunities to build community.

Levy comes up with a novel way of looking at synchronous v asynchronous delivery.

Where I teach, online classes generally get recorded; students can watch the recorded videos if they cannot attend the live session. I recently asked a student how she decided whether to engage in the live class or watch the recording later. Her answer was revealing. She said, “When I am trying to decide, I ask myself, ‘Is this a class I could attend while folding my laundry?’ If the answer is yes, I watch the recording. If the answer is no, I attend the live session.”

While I think that, in general, we should design both synchronous and asynchronous experiences that students find so engaging that they cannot fold the laundry at the same time, I think the spirit of this question might help inform your decision of what to reserve for asynchronous learning. If the students can conceivably fold their laundry while engaging in the experience, my advice is to either eliminate it or reserve it for asynchronous learning.

As Cameron points out if a student could be folding laundry in your class you need to look at how you deliver your lessons / lectures. Class time is an opportunity to engage students in learning experiences and getting them to think for themselves. For this to work not only has the teacher got to have energy but the course / assessment at the end of the year has to encourage a type of thinking.

“Real thinking does not install knowledge in the brain: rather it evokes potential that exist in the student, developing innate talents and abilities.” Mind Over Water: Lessons on Life from the Art of Rowing by Craig Lambert 1999.

US Inflation on the rise?

There have been signals from investors that they are worried about the increasing threat of inflation in the US economy. With the supply bottlenecks already prevalent from the pandemic and although the Suez Canal is now operational the impact of it being blocked to shipping will inevitably lead to increasing costs for businesses. Furthermore the huge stimulus that has been injected into the circular flow by governments is expected to put pressure on prices i.e. lower interest rates and increased government spending

Below is a diagram that I have found useful to show the differences between cost push and demand pull inflation.

Game Theory and online cheating in tests

Michael Cameron’s blog Sex, Drugs and Economics had an interesting post regarding game theory and cheating in online assessment. He mentions a paper by Eren Bilena Alexander Matros entitled ‘Online cheating amid COVID-19’ in the Journal of Economic Behavior and Organization. They use a simple game theory model below to show the payoffs of the student and the professor with the student cheating or being honest.

Sequential-move game
In the sequential-move game, the student chooses to either cheat or be honest. The professor observes the student choice and decides either to report the student for cheating or not. There are four outcomes in this game, but the professor and the student rank these outcomes differently – see table below.

The table (right) gives an example of players’ payoffs. This game has a unique mixed-strategy equilibrium, which means that the student and the professor should randomise between their two actions in equilibrium. Thus cheating as well as reporting is a part of the equilibrium.

To find the Nash equilibriums you use the ‘best response method – for each player, for each strategy, what is the best response of the other player. Where both players are selecting a best response, they are doing the best they can, given the choice of the other player (this is the textbook definition of Nash equilibrium). In this game, the best responses are:

1. If the student chooses to cheat, the professor’s best response is to report the student (since 3 is a better payoff than 2);
2. If the student chooses not to cheat, the professor’s best response is not to report the student (since 4 is a better payoff than 1);
3. If the professor chooses to report the student, the student’s best response is to not cheat (since 2 is a better payoff than 1); and
4. If the professor chooses not to report the student, the student’s best response is to cheat (since 4 is a better payoff than 3).

A Nash equilibrium occurs where both players’ best responses coincide – note that there isn’t actually any case where both players are playing a best response.

In cases such as this, we say that there is no Nash equilibrium in pure strategy. However, there will be a mixed strategy equilibrium, where the players randomise their choices of strategy. The student should cheat with some probability, and the professor should report the student with some probability.

Source: Sex, Drugs and Economics – Combating cheating in online tests

Elearneconomics

Do consider eLearneconomics for your students and a resource for you and your students to use. The site has over 130 topics with comprehensive key notes with coloured diagrams, extensive flash/cue card questions based the notes, written answers that students can do that they can compare with model answers. Printable PDFs with answers are available to fully subscribed members. It also has 10 000 plus MCQs. The site assists learning allowing students to improve results. To find out more about eLearneconomics and how it can assist students with Economics please click on the link below:

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Models of Capitalism – LMEs vs CMEs during COVID-19

The Economist Free Exchange recently ran an article looking at the various taxonomies that are used to categorise models of capitalism. The book entitled “Varieties of Capitalism” (2001), distinguished between liberal market economies (LMEs) and co-ordinated market economies (CMEs).

LMEs’ rely on market mechanisms to allocate resources and determine wages, and on financial markets to allocate capital. E.G. America, Britain and Canada
CMEs, like social organisations such as trade unions, and of bank finance. E.G. Germany, Sweden, Austria and the Netherlands

Western economies tend to sit on a continuum between these two models – below is a table outlining the main criteria each:

Source: Wikipedia

Which system is better during a pandemic?

During the pandemic, CMEs have generally had a more sound strategy for containing the spread of the virus. This may be generated by unity and consistency than by the strength of the intervention that is chosen. Some countries, e.g. Sweden, avoided lockdowns completely but seemed to get a lot of public support and relied on voluntary social distancing. New Zealand implemented a lockdown policy from the outset and relied a lot on contract tracing as well as strict system of managed isolation. LMEs such as the USA and the UK have had a policy which have been on the whole disorganised and not taken the virus seriously.

However in such situations and because of their innovative nature LMEs are more likely to focus on treatments and vaccines.

Of 34 vaccine candidates tracked by the World Health Organisation
CMEs = 4
LMEs = 13
(AstraZeneca, an Anglo-Swedish drugmaker working with Oxford University, straddles both categories).

CMEs are likely to have a lower death count but LMEs seem to hold the upper hand with regard to a vaccines. Maybe a global coalition and co-ordination is needed in future to get the best of both systems.

Source: The Economist – Which is the best market model? 12th September 2020

RIP – Pete Lyons

Very sad to hear the passing of Pete Lyons – economics teacher at St Peter’s College in Auckland. He was well-know amongst economics teachers and produced some great resources – I have his Banquet of Beauties publication which has been very useful at all levels. Always prepared to challenge the economic theory in course syllabuses and had a great passion for the subject. As well as teaching he wrote very erudite pieces in the NZ Herald and the Otago Daily Times. See tribute below from the NZ Herald

https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12354498&fbclid=IwAR1B1cCuHssdUhcADGJdgTK0pyNtUUXwLTCMJClEatUxd2IKrzU0kAWHt9s

Gold reaches record high.

Good clip here from the FT that looks at why Gold which has been getting up to record levels. Should we be buying gold today?

Gold’s ascent continues as real yields have to continue to fall. This requires that inflation expectations keep going up at the same time as low growth expectations keep nominal yields pinned right where they are – this leads to stagflation.

Back in 2011, in the last crisis, like today, the Fed was intervening strongly in a sluggish economy and Washington was in turmoil. Investors then made the same bet on stagflation and gold. As it turns out, they were wrong. The price of gold got cut in half in the years that followed. In fact, all predictions of inflation since the last crisis have turned out to be similarly wrong. And all efforts by the Federal Reserve to get inflation up to its two per cent target have failed. So a bet on stagflation and gold now is a bet against recent history. That many investors are willing to take that wager shows just how frightened they really are.

Barriers to trade not the answer during the pandemic

The WTO has warned that the reduction in global trade could be bigger than that following the GFC in 2008 – see graph below. For countries to start reducing the volume of imports because export volumes have been decreasing is not seen as the right way forward. With countries dependent on the global supply chain for PPE and pharmaceuticals, it would be wrong to focus on being self-sufficient in these essential products.

Source: WTO

As Martin Wolf of the FT pointed out the issue is not with trade but a lack of supply. Export restrictions merely relocate the shortages, by shifting them to countries with the least capacity. The natural response might be to become more self-sufficient in every product but free trade and globalisation does have its advantages: