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When does a
nudge become a
SHOVE
MEDIA
PIRACY
BLAME OR ACCLAIM?
BEHAVIOURAL
ECONOMICS:
Or How Being Human
Affects Our Decisions?
The Unsung
Economist
Bill Phillips
Achtung!Why has Germany
dominated the car
industry for so long?
WRITTEN
by students
for students
✍
ISSUE 1
connected
economistsec
The state-financed
international aid
business represents
the indefatigable
triumph of hope
over experience.
TheScarcity
Paradox
The Economics
of DEATH
book
reviews
Fear the BOOM
not the BUST
Economic
COMPLEXITY
Connected Economists is a brand new
economics magazine, written by students for
students. The four editors, all current A-Level
students from schools across the UK, have
created this free magazine for the benefit of
other like-minded students to educate, entertain
and inform with a wide range of articles, book
reviews and interviews with leading economists.
Articles have been kindly contributed by students
from around the world, creating a truly global
perspective.
Connected Economists aims to provide
students with a different take on the world of
economics, expanding the mind beyond and
complementing the school textbook. This first
edition of the magazine includes articles on
a diverse range of subjects from behavioural
economics, to German car manufacturing,
to the economics of death. There is also a
fascinating interview with, eminent economist
and best selling author, Diane Coyle.
The Editors have also chosen two books
for review in this edition, which they feel
are fantastic reading material for prospective
university economics students.
We hope you enjoy the magazine.
Yours sincerely, The Editors
✷❙❋q❇❉❋
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If you would like to contribute an article for future editions,
please email: economicstomorrow@gmail.com
Media piracy means mediaartists do not receive adequate
remuneration for their hard work.
Each time a server user pirates a
file, a media artist is deprived of
payment for his or her work. As a
result, with each passing day,
professions such as songwriting
and directing become lesslucrative, even for the mostsuccessful media artists.
To contextualize this, think of allthose ambitious teenagers whohave aspirations to pursue a career
in the media industry. Unfortunately,
between these teenagers and a stable
income lies a plethora of media piracy
servers that give consumers access
to all the media they could everdream of, for free. Due to this erosion
of copyright, the teenagers aredissuaded from pursuing careersin the media industry.
Thus, piracy servers havedisincentivized full-time mediaartists’ from producing new songs
and movies. But what does this
mean for you and me? By taking
the incentive out of songwriting
and directing, piracy drives media
artists towards their retirement and
media towards a state of oblivion
with nobody left to produce it.
At least this is what common sense
might suggest; you would not be
crazy to think this yourself. However,
statistics have, interestingly,suggested otherwise.
In spite of the ubiquity of piracyservers, more and more movie sales
and rental businesses are being set-
up. There has been a 20% rise in
DVD sales, cinemas are habitually
fully housed on peak days, andiTunes music sales have skyrocketed
to 2.4 billion USD in the last quarter.
Coincidence? No, there is a sound
explanation that explains the recent
success of the media industry, despite
the increasing popularity of piracy
servers.
If a certain piece of work is pirated
more frequently, there is a greater
likelihood of it becoming morefamous. The non-commercialdistribution of a piece of workvia piracy servers only triggersan increase in the legitimate sales
of the piece itself. The advent of
media piracy has provided valuable
information to the media industry
that will potentially lead to booming
sales as there is a strong relationship
between fame and value. Nothing will
make a media artist famous faster
than piracy servers hosted by people
willing to advertise the artistís work
by flooding free downloadable copies
online.
THUS, MEDIA ARTISTS’ WORK
IS NOT GOING UNNOTICED.CONVERSELY, IT IS BEING WIDELY
ACKNOWLEDGED AND MEDIAARTISTS ARE INDEED BEINGREWARDED AS THEIR WORK IS
DISTRIBUTED TO ALL CORNERS
OF THE GLOBE. IN THE PROCESS,
A WIDER BASE OF CONSUMERS
IS BEING USHERED IN TO ACCESS
MEDIA ARTISTS’ WORK, AND,
WITH MORE LEGAL DOWNLOADS
FOR EVERY ILLEGAL DOWNLOAD
THAT OCCURS, SALES IN THE
MEDIA INDUSTRY ARE BOOMING.
Due to this erosion ofcopyright, the teenagersare dissuaded frompursuing careers in themedia industry.
MEDIA
PIRACY
WITH THE RECENT EMERGENCE OF A LARGENUMBER OF MEDIA PIRACY SERVERS, MANY
FEAR THE IMPENDING APOCALYPSE OFTHE MEDIA INDUSTRY. NOW ONLYA FEW CLICKS SEPARATE US FROMLARGE STREAMS OF MUSIC ANDMOVIES, ACCESSIBLE ONLINE.
To Blameor To
Acclaim?BY: AHAAN ARORA (THE ECONOMEAST)
connected
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ec
PAGE3
FREE
BUYONEGET ONE
Behavioural economics is “A method of economic
analysis that applies psychological insights into
human behaviour to explain economic decision-
making”[1]. It combines “the basic principles of
neoclassical economics with the realities posed
by human psychology”[2]. “It is not from the
benevolence of the butcher, the brewer or the
baker that we expect our dinner, but from their
regard to their own interest”[3]. This famous quote
by Adam Smith highlights the main underlying
assumption in neoclassical economics, the
rational choice theory. This explains “that
individuals always make prudent and logical
decisions that provide them with the greatest
benefit or satisfaction and that are in their highest
self-interest.”[4] This key idea of “marginal utility”
was invented by “Hermann Heinrich Gossen”[5]. It
discusses the idea of a homoeconomicus, who is
an economic agent seeking to maximise his utility.
However, behavioural economists argue that we
are not perfect economic agents due to our
human nature.
Herbert Simon developed the significant theory
“that man could not always act logically because
he possessed a ‘bounded rationality.’”[6] This
theory states that humans often do not have the
ability to make a decision to maximise their utility
due to a lack of time or information. This gives
rise to a phenomenon called “decision paralysis”[7].
This was investigated by creating a test in which
two different groups sold jam. “One group sat with
6 varieties on display, and the other with 24
varieties on display. While more people stopped
by in case of the 24-jar display, the number that
bought was 10-times less than the 6-jar scenario
(3% vs. 30%).” Due to the “cognitive load”[8]
placed on consumers by excessive choice,
increased choice above around seven options can
cause decreased sales as consumers are unable
to evaluate their options and so forgo the purchase.
To cope with these sensory overloads, people use
rule rationality. This relies on heuristics, or rules of
thumb, which allow consumers to make relatively
well-informed decisions based on previous
experience.
Our bounded rationality has serious effects upon
our economic decisions. Dan Ariely, a leading
behavioural economist, explains that cognitive
illusions highlight our inability to fully interpret
sensory stimuli. He argues that if we make errors
in simple illusions, such as spatial perception
tests, then when performing more challenging and
unfamiliar tasks, such as some financial
transactions, we are bound to make even more
errors. For example, we often are deceived by
price through an irrational value assessment. An
experiment was carried out to investigate how the
value consumers place on a product varies with
price. People were given multiple bottles of wine
to taste each marked with a price tag only. “There
was a clear correlation between the rating of the
wine and the price tag — more expensive wines
got systematically higher ratings.”[9] However, the
investigators also included two bottles, which
contained the same wine, but were marked at
different prices. The one marked with the higher
price achieved a much higher rating than the
other bottle despite being identical. This idea has
been exploited in industry where luxury car
manufacturers seek to make their car the most
expensive on the market. This appeals to wealthy
but naïve customers who think that the high price
tag is always indicative of high quality.
[1] Oxford Dictionaries. (n.d.). Behavioural Economics. Retrieved from http://www.oxforddictionaries.com/definition/english/behavioural-economics Web. 13 Mar. 2013.
[2] What is Economics?. (n.d.). Behavioural Economics. Retrieved from http://www.whatiseconomics.org/behavioral-economics. Web. 13 Mar.2014.
[3] Smith, A. and Ashraf, N. (n.d.). The Wealth of Nations. Adam Smith, Behavioural Economist. Retrieved from
http://www.hss.caltech.edu/~camerer/web_material/jepadamsmith12.pdf. Web 13 Mar. 2014.
[4] Invetopedia. (n.d.). Rational Choice Theory. Retrieved from http://www.investopedia.com/terms/r/rational-choice-theory.asp. Web 13 Mar. 2014.
[5] Pasche, M. (2012) Topics in Behavioural Economics [PDF PowerPoint Slides]. Retrieved from http://www.wiwi.uni-jena.de/Makro/lehre/BR/slides_BE.pdf. 13 Mar. 2014.
[6] What is Economics?. Behavioural Economics. Retrieved from http://www.whatiseconomics.org/behavioral-economics. Web. 13 Mar. 2014.
[7] Mukul, P. (3 Jan. 2013). 5 Behavioural Economics Principles Marketers Can’t Afford to Ignore. Retrieved from http://www.forbes.com/sites/
piyankajain/2013/03/01/5-behavioral-economics-principles-for-marketeers/. 13 Mar. 2014.
[8] What is Economics?. (n.d.). Behavioural Economics. Retrieved from http://www.whatiseconomics.org/behavioral-economics. Web. 13 Mar.2014.
[9] Mukul, P. (3 Jan. 2013). 5 Behavioural Economics Principles Marketers Can’t Afford to Ignore. Retrieved from http://www.forbes.com/sites/
piyankajain/2013/03/01/5-behavioral-economics-principles-for-marketeers/. 13 Mar. 2014.
[10] Mukul, P. (3 Jan. 2013). 5 Behavioural Economics Principles Marketers Can’t Afford to Ignore. Retrieved from http://www.forbes.com/
sites/piyankajain/2013/03/01/5-behavioral-economics-principles-for-marketeers/. 13 Mar. 2014.
[11] Ariely, D. (December 2008). Are we in control of our own decisions? Retrieved from http://www.ted.com/talks/
dan_ariely_asks_are_we_in_control_of_our_own_decisions. 13 Mar. 2014.
BEHAVIOURAL ECONOMICS:
Or How Being Human
Affects Our Decisions?
by Jamie Cuffe
Another marketing ploy, which appeals to our
human nature and causes irrational consumption,
is “the power of free”[10]. To investigate this idea,
participants were offered “a choice between purchasing
a Hershey’s Kisses chocolate for 1-cent ($0.01) or
Lindt Lindor chocolate truffle for 15 cents ($0.15).”
Due to the favourable price differential, the large
majority of participants chose the usually vastly more
expensive truffles. “However, when the price of both
was reduced by 1 cent, thus making Kisses free and
the Lindt Lindor for $0.14, the preference completely
reversed with an overwhelming majority choosing
Kisses!” Our obsession with the word free is undeniable.
This manifests itself in the real world through many
buy-one-get-one-free offers, which are far more
attractive than an offer to buy two and receive
50% off.
In conclusion, our human nature and bounded
rationality cause a divergence between traditional
economics and reality. This manifests itself in the
real world through a number of marketing techniques.
However, our human condition leads to far larger
economic consequences across entire countries.
For example, one study showed that citizens of
some countries participate significantly more in
organ donations than others. Rather than this being
due to a discrepancy in benevolence or culture, it is
the result of the layout of two different forms. The
countries participating more frequently must tick a
box to opt out of the program while the countries
participating less frequently must tick a box to opt in
to the program. Due to our bounded rationality, this
simple change affects our economic actions in ways
that cannot be accounted for in traditional
economics. Thus, the effect of human nature on our
economic decisions pervades society.
The bottle marked
with the higherprice achieved amuch higher rating
than the other bottle
despite beingidentical.
Our obsession
with the word
FREE
is undeniable.
FREE
BUYONEGET ONE
FREE
100%
FREE
50%
FREE
BUYONEGET ONE
Another marketing
ploy, which appeals
to our human nature
and causes irrational
consumption, is
“the power of free”
connected
economistsec
PAGE5
The
Unsung
Economist
Bill PhillipsBY HENRY MITCHEL
Alban William Housego Phillips, otherwise
known as Bill Phillips, was born in Te
Rehunga near Dannevirke, New Zealand in
1914 to a dairy farmer and his wife. He grew
up in a “can do” environment where he
witnessed his father designing a water
powered generator to provide electricity to
their farm and other inventions such as
crystal radios and flushing toilets that made
their farm superior to that of their
neighbours. His mother, a school teacher,
was very keen that Bill should study hard
and read widely. He was a high achiever at
school but sadly was forced to leave at the
age of 15 as the effects of the Great
Depression hit and his family were not in a
position to pay for his education.
He became an apprentice electrician and
worked till the age of 20 on the
Waikaremoana power scheme.
He then embarked on what we would now
call a “gap year”, revolutionary and
adventurous at the time. He headed for
Australia, picking up jobs on the way. These
included running a cinema, hunting
crocodiles and busking on the streets.
He then headed for China, Shanghai, but
was diverted to Japan as they invaded
China. He was arrested in Hiroshima for
taking photographs and accused of
spying but on release he headed across
Russia, reaching Britain in 1937. Here he
completed his training as an electrical
engineer and joined the RAF and was
posted to Singapore.
TODAY’S ECONOMISTS ARE ACADEMICS,
MATHEMATICIANS AND THEORISTS
EQUIPPED WITH STATE OF THE ART DIGITAL
COMPUTERS AND A WEALTH OF HISTORY
FROM THE GREAT DEPRESSION THROUGH
TO THE 2008 CRASH AS USEFUL RESOURCES.
THIS IS A FAR CRY FROM MY UNSUNG
ECONOMIST WHOSE BACKGROUND WAS
UNCONVENTIONAL BUT WHO APPEARED
WAY AHEAD OF HIS TIME. A SELF-TAUGHT
AND TRUE MODERN INDEPENDENT THINKER
THAT SOUGHT TO FIND SOLUTIONS USING
HIS EXPERIENCES IN ENGINEERING,
SOCIOLOGY AND LIFE TO CHANGE THE WAY
WE THOUGHT ABOUT THE ECONOMY.
As Singapore surrendered to the might
of the Japanese, Bill fled along with
thousands of others on a cargo ship.
They were attacked from the air by
Japanese planes and it is reported that
Bill selflessly fashioned a machine-gun
post on deck and fought back valiantly.
For this he was rewarded with an MBE
for bravery.
Phillips was captured by the
Japanese and spent three and a half
years in a prisoner of war camp in
Indonesia. It was brutal but, again,
Bill used his time to learn and apply
his knowledge. He became fluent in
Chinese and used his skills to build
secret radios and immersion heaters
that were capable of providing two
thousand prisoners of war with a cup
of tea before bed. If he had been
caught, certain death would have
followed.
I write of this background because to
understand Phillips’ history allows us to
understand the man and how truly
remarkable his contributions to society
have been.
After the war Bill moved to London and
continued his studies at the London
School of Economics (LSE), Sociology
being his chosen degree; but it was his
economics modules that fuelled his
interest and he switched his course to
economics. Within eleven years he was
to become Professor of Economics – a
meteoric rise by anyone’s standards.
While a student at LSE, Phillips
developed MONIAC, a hydraulic
computer to model the workings of the
British economy. It was a simple
computer, 2 metres tall, 1.5 metres wide
and a metre deep with an assortment of
tanks, pipes, sluices and valves with
water pumped around the machine from
the windscreen wiper of a Lancaster
bomber. Perspex and fishing line were
used to channel the coloured dyes that
mimicked the flow of income around the
economy into consumer spending,
taxes, investment and exports.
The machine was used to solve
equations using hydraulics instead of
differential calculus to calculate the
answers. It could solve up to nine
differential equations simultaneously
– a complexity that was unrivalled
and unheard of. It seemed to tie
everything together.
In Phillip’s era countries had fixed
exchange rates against each other but
he introduced the concept of a floating
exchange rate, one that we are now
familiar with but at the time was very
radical.
MONIAC was ground-breaking and an
invention I think worthy of the Nobel
Prize for Economics. Phillips’ equations
were based on years of research on the
British economy – supply and demand
to prices in the economy, people’s
incomes and how much they saved,
interest rates and taxes.
He was able to manipulate scenarios
with his floats, cogs, pulleys and bits of
Perspex. He could change interest rates
and show how the economy would move
from one state to another and what
effects that had. Indeed, MONIAC was a
great educational tool. The machine
demonstrated many difficulties and
students were able to take the role of
Chancellor of the Exchequer or
Governor of the Central Bank and
control taxes, spending, interest rates,
imports and exports. It was used by the
LSE until 1992 and one machine is
housed at Cambridge University today.
Although crude in its infancy, Phillips
was able to develop the model using
his skills as an engineer. It had its
limitations as there was no provision
for inflation but it offered a fresh way
of looking at our economy and how it
could be stabilised. Indeed it is a
model that has been used worldwide
by governments, central banks and
economists alike.
We live in a very different global
economy to that of Bill Phillips, but
modern economists should emulate
his “can do, fix it” approach and
his drive to solve problems. His
background taught him to do this.
He revolutionised the study of
economics and for that I believe he
deserves more recognition. He is a
man I would have loved to have met
and believe ultimately should be
the recipient of the Nobel Prize
for Economics. He is my unsung
economist.
I write of this
background because
to understand Phillips’
history allows us to
understand the
man and how
truly remarkable
his contributions to
society have been.
connected
economistsec
PAGE7
The success of the German car
industry can especially be noted when
compared to that of Britain's. In 2011,
Germany produced 5.9 million cars,
the highest number in Europe-Britain
a paltry 1.3 million- many of these not
for British brands but for foreign ones
such as Nissan and Honda. And the
domination of the Germans extends
much further- two typical 'British' car
makers, Bentley and Mini, are far
from British; Bentley is owned by
Volkswagen, Mini by BMW. There are
in fact no longer ANY mass-market
'purely British' brands- Jaguar,
Vauxhall, Land Rover, even Aston
Martin, are all foreign-owned.
Germany's success in the car industry
must also be put into perspective-
consider that less than a century ago
the nation was facing huge economic
turmoil, the sort that provides textbook
examples of hyper-inflation: the
wheelbarrows of cash, the 200 million
mark loaves of bread, the extremely
volatile prices, the lot. Post-war
reparations had put Germany in a
terrible state in the early 20th century-
but looking at Germany now, with such
economic might that makes it the most
influential state in the EU, it is clear
that the German system has produced
fantastic results.
If you were to ask someone on the street what
car they would like to own, without doubt among
the most popular brand selections would be BMW,
Mercedes or Audi. These three manufacturers have
taken the global car market by storm in recent
decades, and are now the epitome of the well-built,
high quality yet mass-marketable luxury car.
Of course all their cars are not necessarily of the
best quality on the market- the likes of Aston Martin
and Ferrari to name just two produce cars closest to
perfection- however the crucial aspect to why BMW,
Mercedes and Audi are more successful and relevant
to this discussion is because they are open to the mass-
market. The average middle-class family cannot afford
a four-door £150,000 Aston Martin Rapide; though a
£23,000 BMW 3-Series is within the reach of many, an
achievement highlighted best by how it has consistently
maintained a spot in the ten top-selling cars in Britain
since 2004.
BY MOHAMMAD LONE
Achtung!
Why has
Germany
dominated
the car industry
for so long?
There are
numerous reasons
for the Germans'
successful car
market, but one
key reason is the
industrial mindset,
the 'manufacturing
culture' that is
fostered by the
Bavarians.
Britain's manufacturing industry has had a
rough last 30 years- in this period shrinking
by two- thirds. Margaret Thatcher's time as
PM during the 1980s to many killed the
secondary industry in Britain. I'm sure
you've seen the images of striking factory
workers, unhappy at Thatcher's crushing of
worker unions and the closures of numerous
car factories throughout the nation.
The closer relationship between workers
and management is part of Germany's
attention to what is known as the 'social
market economy'- a type of capitalism that
does not co-ordinate market activity itself,
but at the same time provides support for
society- be it in the form of universal
healthcare, unemployment insurance and,
most relevant in this discussion, trade
unions. German workers enjoy among the
highest secondary sector wages in the
world, and are provided good working
conditions. In contrast to the system in the
USA for example, where entry-level factory
wages were halved from $28 to $14 an
hour, the Germans' higher investment in
the workers pays off, creating a more
co-operative and committed environment,
where workers develop loyalty to their
company, an idea almost lost in the US
labour economy. German workers are
in fact the most loyal in Europe- the job
market is far more stable, meaning
companies can afford to invest more in
long-term training, and crucially it means
workers on the production line are
experienced and efficient in their job.
Output is also helped by the power given
to the workers on the German production
line. Almost all German factories will have
members of the regular workforce on the
executive committee of the factory- as a
result the workers are given a voice in the
running of the factory, and have the power
to suggest changes that may improve
efficiency. This system making workers
a part of the running of their factories
increases the workers' morale, making
them feel more empowered as part of a
democratic operation.
The education system is arguably the
biggest factor in German industrial
success. Whereas in Britain all youths
are pushed through the same educational
system until the age of 16, after which
they are offered either further education
or half-heartedly the option of vocational
education- such as BTEC, or
Apprenticeships. These being relatively
young programs, they are not well-
established and are avoided by many
students, partly as they are seen as for
those intellectually inferior to the further
educationers (certainly not always the case).
These extra years provides a head-start
for German workers and has created skilled,
respected workers, ready-made to enter
the world of manufacturing at the age of
18. German factories have had no shortage
of skilled workers- and as a result the
production lines are efficient and smoother
than most others in the world.
Germany have certainly set the
benchmark for efficiency in the
manufacturing industry. It must be
noted that Japan are similarly capable
in car production.
Meanwhile, Germany has only been growing since the
Second World War- whereas British car factories
became a battleground for a class war between
management and labourers, German factories were
tight-knit, harmonious and therefore far more efficient.
Meanwhile Germany offers morechoice to specialise at an earlierpoint. After the age of 10 (or 12 insome areas) student can study at theGymnasium to pursue highereducation such as university, or canopt for the Realschule or auptschule,schools that will provide education incore subjects such as Maths but havea heavier focus on vocationaleducation and practical workexperience.
connected
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PAGE9
The Austrian school of economics has a very different take on
the recent economic crisis in comparison to the prevailing
Keynesian orthodoxy that is currently taught in A-level
classrooms across the country. The Keynesians focus on the
slump and look for the problems here. The textbook Keynesian
analysis explains that the recent ‘Great Recession’ was due to a
deficiency in aggregate demand, which in turn was caused by
the 2008 global financial crisis. The Austrians, however, take the
opposite approach, seeing the preceding boom as being at the
heart of the problem.
A look back through history and similar boom
and bust cycles suggests that this could be
the case and reveals a common thread.
Fear The BOOM,
Not The
By TOM GOLDSWORTHY
Bust
The Austrian view of the most recent economic
crisis is as follows. Central banks set artificially
and historically low interest rates that significantly
diverged from the ‘natural’ rate. This fuelled the housing
bubble, where excess money poured into housing
investment in the search for yield. Eventually, it became
clear that house prices were an illusion. Investments that had
seemed profitable when they were initially made turned out not to
be; they had only seemed so due to the combination of the housing
bubble and artificially low interest rates. Boom turned to bust;
investment to malinvestment. The Austrian insight into the ‘great
recession’ is that it was the preceding boom that was the root cause of
the subsequent bust and, as ever, the bigger the boom, the greater the bust.
THE AFOREMENTIONED AUSTRIAN DIAGNOSIS WOULD THEREFORE
LOGICALLY LEAD TO A SEVERE DEGREE OF CAUTION WITH REGARD TO THE
CURRENT PROTRACTED PERIOD OF RECORD LOW, NEAR-ZERO INTEREST
RATES. WHILE THE CURRENT A-LEVEL, NARROW KEYNESIAN VIEWPOINT
WOULD, RATHER UNCRITICALLY, VIEW THIS AS A WHOLLY POSITIVE WAY TO
STIMULATE DEMAND AFTER THE RECESSION, AN AUSTRIAN PERSPECTIVE
WOULD VIEW THIS POLICY WITH CONSIDERABLY MORE CAUTION. WILL A
LONG PERIOD OF EXTREMELY LOW INTEREST RATES SIMPLY FUEL THE
NEXT BUBBLE, EFFECTIVELY SETTING IN MOTION THE NEXT CRISIS?
A look back through history and similar boom and bust cycles suggests that this could
be the case and reveals a common thread. Asset bubbles encouraged by cheap money
lead to an economic boom. The bubble may be in tulips, stocks and shares or, more
recently, housing, but easy money due to some kind of government intervention is at
the root of all of these historic asset bubbles. These bubbles, in turn, are the central
cause of economic downturns and recessions as the eventual pricking of the bubble
spreads like a contagion, leading to broader economic malaise. So, any economic
recovery the British economy is undergoing due to excessively easy monetary
policy is simply a mirage, as that boom will eventually turn to bust too.
While the contrarian and lesser-known Austrian school
of economics does not get every economic issue 100% correct
(no school of thought does), it does offer a radically different
way of looking at the current economic crisis, and past
crises like it. This alternative perspective allows for a
much more critical look at monetary policy in particular
and cautions against being too short-termist in
setting interest rates. Finally, If you remember
nothing else from this article, remember this:
Fear the boom, not the bust.
connected
economistsec
PAGE11
Capital
in the
21st Century
Written by Thomas Piketty
The
Undercover
Economist
Strikes Back
Written by Tim Harford
book
reviewsby Henry Mitchell
Capital
in the
21st Century
Written by Thomas Piketty
Capital in the 21st Century is the latest economics book to
take the world by storm. A bestseller in France, the U.S. and
Britain and seemingly kick-starting the debate on inequality,
Piketty's masterpiece must be one of the greatest economics
books of the 21st century so far.
The book focuses centrally on the idea that there is growing
wealth inequality in the Western world, increasing at a rate
which is alarmingly dangerous.
One of Piketty's main themes is to put the issue of inequality
in its broader historical context allowing the reader to see
much more clearly the causes of inequality. Piketty shows that
capital tends to accumulate faster than the rate of economic
growth in capitalist societies, demonstrating that wealth as a
result also tends to accumulate, but in a more concentrated
manner at the top. He argues this is because those with more
capital are able to earn a higher rate of return on their capital
investments - although his critics contest this. For these
reasons, Piketty believes that capitalism on its own tends to
produce a high degree of inequality and this is what
he calls the 'central contradiction of capitalism'.
The book finishes with the author giving what he feels is the
only solution to this widening inequality -steepening the
progressive taxation applied to the wealthiest, worldwide. This
idea is no doubt ambitious and some would say utopian, but
nonetheless Piketty feels it is better than the alternative - a
return to protectionism and nationalism which is in no ones
interest.
Capital in the 21st Century has received spectacular praise
and also severe criticism, many feeling that the book is
something that has revolutionized the debate on inequality and
that Piketty is the modern successor to Karl Marx whereas
others feel that Piketty fails to recognize that a degree of
inequality in any society can be beneficial and forgets the
advances in living standards that capitalism has achieved.
However no one disputes the fuel that Piketty has given to the
debate and the copious amounts of data he and his fellow
academics have managed to collect in what is a notoriously
difficult area.
Ultimately whatever your view may be on this topic,
Capital in the 21st Century is a must read especially for any
economics student wanting to push themselves beyond the
curriculum.Don't underestimate the challenge however, as the
majority of people who read it don't get past page 26!
The
Undercover
Economist
Strikes
Back
Written by Tim Harford
As an introduction to economics, Tim
Harford's latest book The Undercover
Economist Strikes Back is a perfect start.
Trying to explain macroeconomics to the
layperson is not a straightforward task, but
Tim Harford manages to do so with ease -
even adding some humour along the way
(not something eonomists are well-known
for). Tim Harford's chatty style makes the
book a light read even when discussing some
of the biggest problems confronting the
macro economy worldwide.
The book takes the reader through the most
important factors present in the macro
economy and the decisions that have to be
made by policy-makers all over the world.
Harford covers all the main macroeconomic
areas from inflation to unemployment and
also introduces the different schools of
macroeconomic thought to the reader. Whilst
maintaining a broad perspective the book still
shows depth in all areas, including an
introduction to economic models, theory and
different statistical measures, which are
essential for aspiring economists.
This book is an accessible read for all
economics students, providing textbook analysis
whilst stretching ones thought processes when it
comes to understanding the difficulty of policy
making. If you are a student wanting to learn
more about the macro economy then look no
further than Tim Harford's The Undercover
Economist Strikes Back.
ecconnected
economists
PAGE13
It is somewhat ironic that the
only certainty we have in life is
that we will die. Economists,
however, like certainty, so it should
hardly be surprising that incentive
analysis makes sense even in the context of
the afterlife. Indeed, understanding that death
has financial outcomes allows us to consider a
number of seemingly bizarre or immoral practices in a
brighter light. I want to focus on three rather different yet
death-related applications of economic principle: flipping
life insurance, death pools, and the inheritance tax. Life
insurance flipping constitutes perhaps one of the more
entertaining American capitalistic urges to buy and sell
anything in existence. The premise is ingenious: if you
have a policy which promises your family, say, $250,000
when you die, you can ‘sell’ the future gain of $250,000 to
a particularly heartless financial services executive, who
gives you $150,000 now.
While such a mechanism seems little more than financially
intriguing, it had a genuinely transformative role as AIDS killed
thousands throughout the 1980s: people suffering from the
terminal illness could get their hands on chunks of money
significant enough to pay for cutting-edge treatment. Life
insurers seemed fairly unworried by this new financial
derivative; after all, insurance flippers were driving business in
their direction. However, the idea of people selling off their own
death was too much for Congress to bear, and the practice was
eventually shut down, despite the significant benefits it was
able to bring to those who seriously needed money.
Having experimented with selling off the rights to somebody, we
move onto death pools, again an American invention. These
initially started off as simple gambling sites on which you could
try your luck as to the next celebrity you thought would die, but
with a twist. Instead of the site setting the odds, people could
buy and sell ‘shares’ in someone’s death which would pay out,
say, $1 in the event that the person died in the next year. If
someone’s
shares were
trading at 60¢,
therefore, the
markets estimated
the probability of death
as 60%. It didn’t take long
for DARPA, a US military agency
whose speciality is funding bizarre nerdy
projects, from Iron Man suits to light sabres (I kid you not), to
realise that this market model had real potential. After all, just
as with ‘real’ shares, those investing the most money in either
direction would be those most confident and the best-placed
4to know the truth; indeed, death pools for celebrities proved
uncannily accurate for a while. DARPA thus reportedly launched
a death pool online specifically for heads of state, military
leaders and other people potentially at risk of dying, in the hope
that they would be able to get the most accurate ‘inside track’
on vulnerable geopolitical situations. It is believed that they
planned to expand the model to all sorts of other events (e.g. ‘$1
payout if Egypt’s government collapses in the next six months’).
However, DARPA ran into the ever-present economist’s
problem of ill-thought-through incentives. Specifically,
their death pool software had two rather unfortunate
consequences: (1) terrorist groups could buy up shares
and then arrange a previously-unplanned assassination,
creating exactly the chaos DARPA sought to avoid; and (2)
the huge winnings of these groups after
the assassination would constitute a
direct transfer of cash from the
US government to their global
enemies. As a result, the death
pool project was canned.
TheE
conomics of
D E AT
H
By Harry
Elliott
That said, it has some intriguing civilian applications:
people buying shares that pay out in the event of an
election victory have created extremely accurate ways to
gauge electoral races, without the hassle or expense of
polls (as now the shareholders are the ones who seek out
the most accurate information about who will win).
After two somewhat entertaining ideas, it saddens me to
conclude by discussing inheritance tax, a rather more
austere policy that once attracted fierce controversy but
has now come to be accepted by both sides of the political
spectrum. While the debate of whether children should be
gifted a life of privilege versus whether the state should
have the right to tax you when you die as well as when
you live is relatively interesting, this is an economics
magazine, so I shall stick to the knock-on effects of putting
a time limit on people’s assets and investments. While
inheritance tax has successfully smashed most of the
aristocracy back into paid work, one unintended
consequence is to hit family assets that would otherwise
be passed from generation to generation. Specifically,
pension funds and bond market investments are often
long-term financial moves, and as the end draws relatively
near, parents who previously would have saved for their
children are very aware that such saving is now subject to
a 40% loss at the point of their death. As a result, there is
strong statistical evidence that parents have shifted
their spending in their final 10 to 15 years from
investment (for their kids) to consumption:
cruise ships and luxury holidays are subject
to no such guaranteed loss, so parents’
ability to improve their children’s future
lives is no longer a better spend for
them than a pleasant final decade in
life. This goes at least some way to
explaining why the elderly spend an
increasing amount of money on
consumption over investment; it’s
also an exposition of needless,
tragic economic waste. Cruise ships
are lovely, but technological leaps
and bounds are lovelier, and a drop
in long-term investment is likely to hit
precisely that sort of growth.
THE INHERITANCE TAX HAS OTHER,
MORE PERNICIOUS EFFECTS AS
WELL: WHEN BUSH HIKED THE AMOUNT
EXEMPT FROM TAXATION, MEDICAL
SPENDING ON THOSE NEARING DEATH
SOARED, IN ALL LIKELIHOOD BECAUSE CHILDREN
SAW THE FINANCIAL BENEFIT OF ESCAPING
SEVERAL HUNDRED THOUSAND DOLLARS IN
TAX WELL WORTH THE CUSHIER HOSPITAL. ONE
WONDERS WHAT THE CONSEQUENCES OF A HIKE
IN INHERITANCE TAX MIGHT BE, IF HUMANS REALLY
DO RESPOND TO THE MONETARY CONSEQUENCES
OF DEATH AS THEY SEEM TO. LIFE INSURANCE
FLIPPING, DEATH POOLS AND INHERITANCE TAX
ALL UNFURL JUST A FEW OF THE INTRICACIES OF
MICROECONOMICS THAT MAKE THE SUBJECT SO
INTRIGUING TO STUDY.
It is somewhat ironic that the only certainty we have
in life is that we will die. Economists, however, like
certainty, so it should hardly be surprising that
incentive analysis makes sense even in the context
of the afterlife. Indeed, understanding that death
has financial outcomes allows us to consider a
number of seemingly bizarre or immoral practices in
a brighter light. I want to focus on three rather
different yet death-related applications of economic
principle: flipping life insurance, death pools, and
the inheritance tax.
The
Econ
D E A
...from Iron Man suits to
light sabres (I kid you not)
ecconnected
economists
PAGE15
“From adversity comes strength” – The role of natural resource
scarcity and human capital in long-term economic development
The ScarcityParadox
The “Resource Curse” has been one of the most debated and discussed
theories within economic development since the late 20th century. This
notion suggests that economies that are heavily endowed with natural
resources often experience slowdowns in economic growth and are
hindered by imbalanced and unsustainable development. Most countries
that suffer from the phenomenon are characterised by weak governance,
corruption and surging inequality. The typical explanation for this refers to
the “Dutch Disease”, a case where the manufacturing and agricultural
sectors of an economy are made less competitive in the global market as
a result of a sudden currency appreciation. This occurs when a country
discovers a reservoir of resources triggering a large inflow of foreign
currency into the market.
However, an alternative perspective towards the
“Resource Curse” remains largely ignored and
unconsidered. Instead of focusing on why resource-rich
countries perform so poorly, economists ought to
question why many resource-poor countries fare so
well. A large number of countries that have experienced
significant development in the post-war era suffer from
a chronic shortage of natural resources. This
phenomenon, which I will call the “Scarcity Paradox”,
has been observed mainly in the East Asian Tiger
economies, and spread as far as Israel. The “Scarcity
Paradox” hypothesises that resource-poor countries
naturally develop a comparative advantage in
knowledge-based industries by building a large stock
of human capital, a critical component for long-run
economic growth.
The current wealth of Japan’s citizens is the result of the
country benefiting from the “Scarcity Paradox”. Japan’s
WWII surrender on the 2nd September 1945 marked a
turning point in its domestic economy and sowed the seeds
for a “Japanese Miracle” spanning several decades. The
government aimed to build an internationally competitive
technology and manufacturing sector that included funding
for university-industry partnerships allied with private
investment in education. Consequently, the Japanese
economy shifted away from import dependent industries
(e.g. textile industry) towards “heavier” industries (e.g. car
industry) that took advantage of the country’s surplus of
skilled workers at the time. By the turn of the millennium,
Japan’s real GDP per capita had exceeded the $30,000
barrier, some six times higher than in 1960. During a similar
time frame, Israel has become one of the most innovative
nations in the world. Today, it is home to “Silicon Wadi”, an
area concentrated by many of Israel’s 60 companies listed
on the NASDAQ. Israel’s high annual growth rates averaging
above 5% from the late-1960s to mid-1990s can be largely
attributed to the government’s large scale social programs
that aimed to build a technology based economy based on
improving education in the 1970s allied with a process of
structural change. The first element of the “Scarcity Paradox”
ties in the link between natural resource scarcity and human
capital accumulation. Heckscher (1919) and Ohlin (1933)
argued that resource-poor countries such as Japan would
not specialise in and export primary goods. The “Scarcity
Paradox” argues that these countries are forced into
developing a comparative advantage through other means,
and therefore, most, if not all turn to building a productive
and skilled workforce via an effective education system.
Unlike in resource rich nations, the key determinant
By Shunta Takino
of future income of an individual is the
extent to which they can build
knowledge and accumulate skills, giving
each person a strong motive to work
with the aim of attaining a place at an
internationally recognised university. It is
also of critical importance that the public
understands that an economy
fundamentally relies on its net human
capital which is determined by the
quality of education provided and a
willingness to work. Such fundamental
values are held throughout the Far East
and in many resource-poor nations, and
the social pressure to perform at school
borders on the extreme, giving further
support to the “Scarcity Paradox”.
Equally important is that teachers are
given the considerable level of respect
they deserve. In fact, according to the
2013 Global Teacher Status Index, the
Chinese public considers teachers to be
comparable to doctors in terms of social
class, whilst in resource-rich United
States they are equivalent to librarians.
Although China has a significant stock
of natural resources, it appears
significantly less when divided amongst
its 1.3 billion citizens. In the words of
Julian Simon, the Chinese understand
that “the main fuel to speed progress is
our stock of knowledge”.
The link between resource scarcity and
human capital accumulation is
supported resoundingly by findings of
the OECD. According to the OECD’s
Andreas Schleicher, there is “a
significant negative relationship between
the money countries extract from
national resources and the knowledge
and skills of their high school population”
The second element of the “Scarcity
Paradox” is well-documented and
focuses on importance of human capital
stock for economic growth and
development cannot be exaggerated. As
knowledge and skills are built up in an
economy, finite resources become used
more efficiently and labour productivity
rises stimulating growth. Furthermore,
fewer workers are required in the
subsistence sector creating a surplus of
labour. Higher wages rewarded in the
“capitalist” sector (e.g. manufacturing)
attract these surplus workers. As Lewis
(1954) argues, this migration of labour
leads to a gain in output due to the
higher marginal product of labour within
the “capitalist” sector. This has been
demonstrated In Israel, where only 2.6%
of the workforce are currently employed
in agriculture, in comparison to 17.5% in
1958. During this period real GDP per
capita almost quadrupled and now
exceeds $20,000. Human capital also
accelerates the rate at which new
products and innovations arise, making
firms dynamically efficient and
encouraging investment into capital and
R&D. Since most imported goods
cannot be reverse-engineered, an
important role of human capital is to
facilitate in the adoption of new
techniques as proposed by Nelson and
Phelps (1963). Lucas (1988) extended
upon this concept, suggesting that since
knowledge and skills are “infectious” and
cannot be contained, an accumulation of
human capital benefits the
macroeconomy on a more than
proportional scale.
Unfortunately, many governments have
misinterpreted the “Scarcity Paradox”
and the success of resource-poor
nations as a matter that can be
replicated by government spending on
education. In fact, public spending on
education bares little correlation to
student achievement A 5.1% growth on
spending under Labour on education
during the first decade of the century did
little to boost student performance, and
the proposed cuts to educational
spending may be a brave and admirable
decision. In the UK, too much of the
spending has been focused on
“interactive whiteboards” and other new
“gadgets”, yet in the highest ranking
countries in the TIMSS (Trends in
International Mathematics and Science
Study), many teachers use simple
blackboards with chalk. This example
illustrates that the accumulation of
human capital arises not through
spending alone, but also through
changing attitudes of the general public
towards education.
Resource-poor nations have become
prosperous frontier economies within
the global context by placing
education and human capital
accumulation at the forefront of
public thought and government
policies. They give us belief that from
what appears to be the most adverse
and undesirable situation, we can
draw on our strengths to prosper and
succeed. The “Scarcity Paradox”
clearly suggests that it is about time
that both developing and developed
countries gave education and human
capital the serious consideration they
deserve.
Instead of focusing on why
resource-rich countries perform
so poorly, economists ought
to question why many resource-
poor countries fare so well.
ecconnected
economists
PAGE17
shove?The ethics of nudge
What did
you have for
lunch today?
How did
you decide?
When does a
nudge become a
By TomGoldsworthy
When does a nudge become a shove?It is not clear where this boundary lies.Libertarians want to leave peoplecompletely free to make their ownchoices and to potentially suffer fromthe consequences of bad choices too.Paternalists believe they know what is‘right’ for people and are inclined to bemuch more prescriptive in their policies.In other words, they believe that theprovision of information, the use ofsocial norms (influencing people byinforming them of what others are doing,a kind of social pressure) and changesto default options are all morallypermissible. So, what sorts of nudgeswould be ok in my book?
The government now writes on everytax return form the proportion of peoplewho pay their taxes on time. Throughsocial pressure, more people pay theirtaxes on time, raising more governmentrevenue. In addition, automatic opt-insto pension saving schemes are also finein my view. Saving is crucial forretirement and it is often just inertia thatstops people doing this themselves. So,in my opinion, those two policies, andothers like them,are nudges, notshoves. Nudges should enable betterchoices, providing information butshould also preserve freedom of choice.A shove, for me, however, comes whenfinancial incentives and disincentivesare used and when choice is eliminated.So, a nudge would become a shove ifyou forced people to enrol in a pensionscheme because it was supposedly‘better for them this way’. Thateliminates choice and is both illiberaland immoral. Also, while I consider itacceptable to provide information aboutthe dangers of alcohol, I do not thinktaxation should be used to deter peoplefrom drinking it simply because the state
deems it to be ‘bad for us’. Informationabout the dangers of alcohol is good.Changing the ‘default’ wine glass size inshops and restaurants is also ok.Positioning it less prominently in thedrinks section is fine too. Informingpeople about the proportion of otherswho drink responsibly would also bepermissible. I would class all these as‘nudge-like’ policies that are acceptable.But, alcohol taxation, that’s a shove.Limiting the amount people can buy,that’s a shove. Banning outright wouldclearly be a shove too.
Another moral conundrum with nudgesis whether the state should be allowedto subconsciously influence ourdecisions at all. It is quite an ominousthought to think that the governmentcould use nudge theory to influence ourevery move, subconsciously mouldingall our decisions, choices andbehaviour. This question of whetherpeople should be aware of when theyare being nudged is an important one.Research suggests that when peopleare told how they are being nudged, thebeneficial effects of the nudge are oftenreduced. Does this mean that peopleshould be kept in the dark about whenthey are being nudged? Or is it a moralimperative that they do know when thisis occurring? I think it is a moralimperative. People must be fully awareof when they are being nudged. The toolshould be used openly andtransparently, no matter the reducedbenefits of the nudges themselves.Subliminal advertising is a practice thathas long been banned in the UK.Should we put nudges in the samecategory as subliminal advertising andban nudges where people are unawarethey are being nudged?
Finally, to what extent should collectivebenefits be considered when decidingupon nudges? It is easy to see thegovernment moving from nudges thatbenefit the individual to nudges wherethe collective benefits. To give you aquick example, the UK behaviouralinsights or ‘nudge’ team proposed in2013 that everyone be automaticallyopted in to donating a certain proportionof their income to charity; those notwanting to participate would need toopt-out. This policy does not give anydirect benefits to the people beingnudged. But, crucially, they do bear thedirect costs of giving the money tocharity. Some would argue that nudgessuch as these are morally permissible.Certainly, on utilitarian grounds (theprinciple of the greatest happiness forthe greatest number), these sorts ofnudges with collective benefits arelaudable as they
benefit society as a whole. However, inmy opinion, these sorts of nudges are astep too far. It is one thing to justifynudges on the grounds that theindividual will benefit but quite anotherto design nudges that benefit thecollective but in fact impose direct costson the individual. If you accept themorality of a nudge where the collectivebenefits but not the individual, youwould logically then support policies suchas an automatic opt-in to additionalincome tax, for example. Everyonewould be subject to an extra 25%income tax, unless they pro-activelyopted-out of the system. But, in myview, if a nudge does not benefit theindividual, it should never be acceptable.
Without realising, every time you walk into the dining hall to grab lunch your choices about what to eat are influenced
massively by the placement of the food. You are more likely to choose the food that is prominently placed, at eye level.
Studies have shown that people are influenced by up to 25% in their decisions about what to eat simply by the food
placement. “Ok”, I hear you say, “but how does this obscure fact relate to economics? This is an economics magazine
right?” Well, ‘nudge’ as it is dubbed, is a new branch of behavioural economics popularised in the book titled - have a
guess! - ‘Nudge’. Nudge recognises that choice is all around us. It also recognises that we can be subtly influenced in
a positive way while preserving freedom of choice; this is dubbed ‘libertarian paternalism’. One famous example of this
is the one I mentioned earlier. People can be ‘nudged’ into choosing much healthier food for lunch, reducing obesity
rates. People can also be nudged to vote for a particular candidate in an election, pay their taxes on time and even
urinate more accurately in the men’s room! However, the focus of this article is not on nudges per se, but on the ethics
of nudges. When does a nudge become a shove? Is it moral for policymakers to subconsciously influence our
decisions? Finally, should the individual or the collective be considered when designing nudges?
ecconnected
economists
PAGE19
Economic
COMPLEXITYby Oli Wood
SSOOUUNNDDSS CCOOMMPPLLEEXX.
It’s pretty simple really. Haussmann argues that an
economy can be measured by the amount of “societal
knowledge” it possesses or, more simply, how much stuff
it knows how to make. More complicated things (e.g.
Smartphones) require more advanced skills to produce;
this leads to greater knowledge in the country, giving the
economy a greater growth potential.
OOKK,, SSOO WWHHAATT MMAAKKEESS TTHHIISS DDIIFFFFEERREENNTT TTOO
AANNYY OOTTHHEERR EECCOONNOOMMIICC MMOODDEELL??
In mainstream economics complexity isn’t really
accounted for. Most of the standard models assume that
developed nations just have more “stuff” than developing
nations, which Haussmann argues is rather crude.
Compare the UK economy with the Democratic Republic
of Congo for example; standard models would tell you
that the UK simply has greater and better quality: human
capital (schools etc.), physical capital (factories, airports
etc.) and institutions (government, banks etc.). But
everyone knows that the UK economy doesn’t just have
more “stuff”, it’s entirely different and has a far more
complex structure.
SSOO HHOOWW DDOOEESS HHIISS MMOODDEELL AACCCCOOUUNNTT
FFOORR TTHHIISS??
Haussmann argues that economies are combinations of
“capabilities”, which can be combined to produce a wider
range of complex goods. A bank, for example, is a building
block, as is a good university system and a good
transport network. As a country gains more “capabilities”
they are then able to make more advanced products and
this accumulation of knowledge is the key to sustained
economic growth. A country’s score is calculated by
looking at its exports and then assessing what skills and
“capabilities” are needed to produce these goods. He
describes development as the accumulation of different
capabilities; these capabilities then help to provide a
country with sustained economic growth.
II DDOONN’’TT SSUUPPPPOOSSEE YYOOUU HHAAVVEE AANN AAMMAAZZIINNGG
IINNFFOO--GGRRAAPPHHIICC TTOO HHEELLPP EEXXPPLLAAIINN TTHHIISS??
PPOOSSSSIIBBLLYY WWIITTHH LLOOTTSS OOFF CCOOLLOORRSS AANNDD
CCIIRRCCLLEESS?? OORR MMAAYYBBEE SSOOMMEETTHHIINNGG TTHHAATT
LLOOOOKKSS LLIIKKEE AA DDAAMMIIEENN HHUURRSSTT PPAAIINNTTIINNGG??
Glad you asked….
TTHHAATT’’SS NNOOTT EECCOONNOOMMIICCSS..
It is, promise.
CCAARREE TTOO EEXXPPLLAAIINN IITT??
Haussmann created a product map of the economy
(it looks a bit like a spiders web). Each of the coloured
circles or “nodes” represents a different product. For
example, there’s a “scrap- metal node” and a “flowering
bulbs” node. The size of the node represents the good’s
share of global trade; a big circle means that the good
is traded a lot. The different colors represent different
industries; green, for example, is textiles and light blue is
chemicals. If nodes are connected then that means they
use similar “capabilities”. The node for TV’s is connected
to the node for telephones, as they both require similar
technologies to produce.
“The Atlas of Economic Complexity
attempts to measure the amount of
productive knowledge that each country
holds. Our measure of productive knowledge
can account for the enormous income
differences between the nations of the
world and has the capacity to predict
the rate at which countries will grow.”
SSOO IIFF YYOOUU PPRROODDUUCCEE OONNEE GGOOOODD ((LLEETTSS SSAAYY
TT--SSHHIIRRTTSS)),, AANNDD IITT’’SS CCOONNNNEECCTTEEDD TTOO
AANNOOTTHHEERR GGOOOODD ((FFOORR EEXXAAMMPPLLEE,, JJUUMMPPEERRSS)),,
IITT SSHHOOUULLDD BBEE RREELLAATTIIVVEELLYY EEAASSYY TTOO
PPRROODDUUCCEE JJUUMMPPEERRSS BBEECCAAUUSSEE YYOOUU
AALLRREEAADDYY HHAAVVEE TTHHEE RRIIGGHHTT SSOORRTT OOFF
““CCAAPPAABBIILLIITTIIEESS””??
Exactly.
SSOO WWHHAATT DDOOEESS TTHHIISS MMEEAANN FFOORR
DDEEVVEELLOOPPIINNGG CCOOUUNNTTRRIIEESS??
Well for some it doesn’t look good. Natural resources
are very poorly connected. You see that big grey circle at
the bottom? That’s crude oil. It’s connected to pretty
much nothing, meaning that if a country specializes in oil
then it’s very hard for them to begin producing anything
else. This has led to an “oil curse”, with many politicians
in developing countries becoming complacent with the
seemingly constant flow of oil revenues. This can lead to
impediments elsewhere in the economy, meaning its
difficult for the country to move into more complex
manufactured goods once the oil runs out.
WWEELLLL TTHHAATT’’SS DDEEPPRREESSSSIINNGG.. WWHHAATT IIFF
TTHHEEYY’’RREE NNOOTT RREELLIIAANNTT OONN OOIILL??
If they produce a good that has many connections, then
it can be a good “stepping stone”. This can facilitate
further diversification, allowing the country to develop.
SSOO YYOOUU MMEENNTTIIOONNEEDD SSOOMMEETTHHIINNGG AABBOOUUTT
PPRREEDDIICCTTIINNGG GGRROOWWTTHH??
Haussmann says that to predict economic growth they
look at three things. Firstly, how productively a nation’s
natural resources have been used. Secondly, how many
“capabilities” they currently have. Finally, how easy it is
for the economy to acquire more of them. Essentially, it
is how connected your capabilities are and how centrally
you are located on the complexity map. These three
factors combined can produce a prediction that
Haussmann argues is much more accurate than
traditional indicators.
AALLLL--RRIIGGHHTT GGEENNIIUUSS.. TTEELLLL MMEE WWHHOO’’SS GGOOIINNGG
TTOO GGRROOWW..
One specific country Haussmann mentions is Mexico.
He believes that compared to many other American
countries (specifically Brazil), Mexico is in a superb
position for growth. It has managed to diversify into many
industries whilst Brazil, despite being one of the infamous
BRIC economies, has mainly concentrated on natural
resources. China is also singled out for praise, but is
forecast to grow at a much slower rate of around 4-5%.
SSOO IITT’’SS AA NNIICCEE TTHHEEOORRYY…….. BBUUTT CCAANN IITT
HHEELLPP CCOOUUNNTTRRIIEESS TTHHAATT AARREENN’’TT GGOOIINNGG
TTOO GGRROOWW??
Yes. As the accumulation of knowledge is the key to
sustained economic growth, Haussmann argues that
bringing skilled people together can help to create
“capabilities” and stimulate growth. Whilst the creation
of collaborative business networks with developed
countries could help them to diversify their production
and develop. See, sometimes economics can help.
ecconnected
economists
PAGE21
The very cruel irony of the international aid business
is that those very problems it sets out to defeat are
the problems it perpetuates and in some instances
creates. The state-financed international aid
business represents the total disregard of past
experiences (failures) in favour of sclerotic and
counter-productive measures to alleviate poverty
and suffering. Not only has hope triumphed over
experience, in some cases, perverse incentives
(on the part of aid donors) have triumphed. Aid has
decreased significantly as a result of the global
recession in 2008; although this is welcome it
could be reduced even further as billions continue
to flow to donees.
This paper will first outline how aid has failed
African states and then explain why wealthy nations
still give despite the data collected over decades
proving they should do otherwise. It will then outline
possible solutions to move the continent forward.
Africa is not a country. It is a continent with multiple
cultures, languages and systems of governance.
Nevertheless all the states within it face common
problems including: endemic corruption, mass
poverty and a heavy reliance on aid. This paper
will be focusing on the failure of aid in African
(especially Sub-Saharan) countries because the
continent has received over $1 trillion in aid over
the past 65 years but yet the average per capita
income remains below $1 a day. Hence, the
inadequacy of systematic aid is most prominent
on the poorest continent on earth.
The international aid business can be defined as two
types, (under the umbrella of systematic aid,) firstly,
government-to-government aid, known as bilateral and
secondly multilateral aid, which is provided by
organisations such as the IMF and the World Bank. Aid
can be judged as being successful if it helps a) relieve
poverty significantly and b) establishes the fundamental
structures on which economies can grow so countries
rely less on cash transfers from wealthy nations. To be
sure, such structures include: efficient government
departments and civil service, a police force & judiciary
free of nepotism, well functioning banks, developed
infrastructure and a good education system.
Of paramount importance is the ability of a nation’s
citizenry to hold the government to account when these
systems are inadequate or non-existent. Citizens of a
nation are best placed to hold the government to account
when the government needs them to generate revenue
in order to adequately deliver public services. The
international aid business creates a schism between a
government and its people; the state no longer relies on
its own people for revenue and thus has no incentive to
develop or create the aforementioned structures required
for long-term economic growth. A wealthy and growing
middle class is almost non-existent in most African
countries. This class of people will be the ones who will
have a vested interest in a competent state; a state that
will ensure that their income and property are well
protected. According to a BBC report, the African
Development Bank has calculated that those that live on
a meagre $2 a day count as the middle classes in
countries like the Ivory Coast. It is evident that the
amount of income tax the governments of these
countries will receive from their “middle classes” is
miniscule in comparison with the stupendous amounts of
aid. It is clear therefore that by warping incentives, aid
cannot provide the long-term economic growth or even
establish the key structures necessary for it.
The
state-financed
international
aid business
represents the
indefatigable
triumph of hope
over experience. BY KELVIN ANIM
In addition talent is severely
misallocated as a result of aid
because governments receive an
alternative source of income. With
no help from their governments,
qualified members of the
population work for the private
sector or move abroad. This
includes principled people who
are unwilling to corrupt
themselves in order to win the
support of the government and
thus vast amounts of aid money.
This necessarily means that less
talented and relatively less
educated people fill the ranks of
the civil service and other public
institutions. Ethiopia, which
received over $3 billion in aid in
2010, has a net migration figure
around -300,000. It is evident that
what exists in most African
countries is taxation (however
little governments receives from
income tax) without representation.
Government inefficiencies as a result
of aid (as analysed previously in this
paper) can cause investment and
trade to stagnate. Foreign
companies fear that disordered and
corrupt governments cannot be
trusted to hand over the proceeds of
investment. Multiple layers of
unnecessary bureaucracy also
massively deter foreign direct
investment into Africa. To illustrate
the level of bureaucracy that exists
Dambisa Moyo states in ‘Dead Aid’
that, “in Cameroon, it takes an
investor who seeks a business
license on average 426 days to
perform fifteen procedures, and in
the USA, only forty days and
nineteen procedures.” In their paper
‘Regulation and Growth,’ Simeon
Djankov, Caralee McLiesh and Rita
Maria Ramalho calculated that a
country that improves business
regulation could lift GDP by 2.3% a
year. However one must concede
that a lot of investment still goes to
Africa. In 2011 there were 45
projects (funded by foreign firms) in
Nigeria and 55 in Kenya. Moreover
the continent attracted $82bn in
investment in 2011. Be that as it
may FDI should be much higher for
the continent as its very low labour
costs (comparatively lower than that
of most Asian countries) should be
of great interest to foreign investors.
If one turns their attention to Asia
one notices that FDI into China
alone exceeded $100bn in 2011.
Charity from economically developed
countries has crippled Africa’s ability
to capitalise fully on its vast mineral
resources and low labour costs.
Whilst aid is not the only reason why an
economy can fail to grow, it is has
proved to be one of the most
pernicious reasons why over 40
economies have stagnated or failed
to get anywhere near their potential.
Hope continues to triumph over
experience.
Economic models that have been
implemented (in most instances)
are, and should be judged, as a
success or a failure, based on
resultant facts and figures that
are drawn after their
implementation. So why then
does aid continue to flow in
copious amounts in defiance of
the apparent harm it is doing?
The first reason is that celebrities
and prominent politicians have
adorned the giving of aid. Shows
and concerts such as Live 8 and
indeed TV advertisements create
the hope and buzz among the
public which triumphs over
evidence and experience. Hope is
created by these ventures
because a one-sided assessment
of aid is presented. After all, it is
very difficult to openly criticize
aid when proponents of the model
depict poverty so viscerally and
present it to a Coldplay and U2
soundtrack. Discourse on the
topic literally becomes obscured
by noise and politicians are
paralysed in challenging the
dominant paradigm. Furthermore,
the voices of African leaders are
rarely ever publicized in global
discourse on aid. Recently,
critics of aid, like Rwanda’s
President Paul Kagame, have
gained prevalence and notoriety;
however the popularity of their
analysis pale in comparison to
those who advocate on behalf of
the aid model.
....TV
advertisements
create the hope
and buzz
among the
public...
...celebrities and prominent
politicians have adorned
the giving of aid.
blah,
blah,
blah.
ecconnectedeconomists
PAGE23
Charity from
economically
developed countries
has crippled Africa’s
ability to capitalise
fully on its vast
mineral resources
and low labour costs.
Another eremitic reason why
governments and multilateral
organisations still propose the aid
model is that, when combined, they
all employ over 500,000 people who
rely on interest payments to earn a
living. There also exists a
commercial incentive why the aid
bandwagon must roll on.
Rich countries, for example the UK
and USA, donate to foster ideal
political and economic practices; this
includes the promotion of democracy
and free market policies in African
countries. This practice is referred to
as tied aid. By attaching conditions to
aid economically developed countries
seek to pedal Western narratives
(which are not necessarily harmful.)
However there is both a time lag and
chicken-and-egg problem with this
approach. First, conditionalities only
work for the next batch of aid because
there is no incentive for recipients’ to
adhere to them now because they
have already received a substantial
amount of aid. Second, democracy
and an efficient free market
environment emerge organically, over
decades, after a country has accrued
wealth and a strong middle class. By
forcing change through aid, without
first creating a section of society that
has a vested interest in change,
development is stuttered and
unworkable.
Tied aid is also detrimental to the
domestic demand of African countries,
as rich nations require donees to
import certain goods and services in
return for aid. A report by the Guardian
in 2011 stated, “In Uganda, for example,
only 18% of the contract value of
World Bank-funded projects went to
local firms. For contracts valued at
over $1m, that share dropped to 11%.
Firms from China and the UK won the
bulk of large World Bank-funded
contracts in Uganda, 32% and 19%
respectively.”The disconcerting truth is
that conditional aid is in no way
benefiting recipient countries and in
this case we observe poor countries
being treated as cash cows. Not only
is experience losing in the battle with
hope, the malicious interests of some
donor states are winning as well.
In the face of all these problems
there are some solutions to Africa’s
woes. This includes the relaxing of
trade tariffs and quotas by, primarily,
the European Union and the United
States and an expansion in bond
markets. In regards to the first, Oxfam
reported in 2002 that developing
countries face tariff barriers four times
higher than those faced by rich
countries. Moreover these barriers
cost developing countries over
$100bn a year, twice as much as they
receive in aid. If developed Western
nations truly want to help Africa,
opening up their markets is critical.
Companies such as African Cotton
employ thousands of people across
the continent; but protectionist policies
prevent them expanding and creating
the all-important middle class. Trade
under the African Growth and
Opportunity Act could be expanded
to benefit more than the handful of
countries it currently does.
Protectionist policies by OECD
countries are not benign. They
actively contribute to poverty in
African countries; excess produce,
which result from over subsidised
goods, is dumped in Sub-Saharan
African states. This undercuts local
food prices and destroys businesses
whilst at the same time the EU sells
oranges and bananas above world
market price within its own borders.
Upon failing to access European
and American markets, Africa, as it
is now doing, can turn its attention
to China. With over 1.3 billion
people and only about 10% of its
land arable, China has a massive
incentive to open up its agriculture
market to Africa. Unlike its Western
counterparts the Chinese
government focuses almost
exclusively on doing business with
Africans states rather pedalling
narratives about how government
should operate. Although this may
sound counter intuitive, this
approach means that the
government of the People’s
Republic deals directly with
businesses most of the time;
investing heavily in viable projects
and building strong trade links. In
its bid to develop food security,
China invested $3.5bn in African
agriculture between 2006 and 2012.
This is an innovative alternative to
gross amounts of aid and
represents the triumph of Chinese
experience and business over hope.
The state-financed international
aid business represents the
indefatigable triumph of hope
over experience.
STATES WITHIN AFRICA COULD ALSO
RELAX TARIFFS AS TRADE BETWEEN
COUNTRIES IN THE CONTINENT AMOUNTS
TO ONLY 10% OF EXPORTS.
As noted previously, an alternative to aid is the
issuance of bonds by African countries. There
are several reasons why this form of borrowing
is better than the one that exists in the aid
model. First, donees have longer to pay back
their loans under the aid model (some World
Bank loans last for fifty years.) In the private
markets this is often under thirty years. Thus the
incentive to repay a loan and invest wisely in
viable projects and government departments is
greater under the system in which bonds are
issued. Secondly, in private bond markets, there
are harsher punishments for defaults and non-
payment and therefore better discipline among
borrowers is fostered. Third, because interest
rates attached to aid are lower, countries can
often find themselves reliant on it. Bonds
provide countries like Ghana, Rwanda, and
Gabon a sustainable route to development that
can be controlled by sovereign governments
and build up a class of African entrepreneurs,
who will later have a vested interest in a
corrupt- free government. After raising $400
million in capital Rwanda, was
able to expand an airport, build and maintain a
hydroelectricity plant (employing hundreds) and
as a result witness economic growth averaging
about 8% since 2003. This paper proposes that
in decades to come, the African Union could, as
it has talked about doing, issue bonds as a way
of mitigating against the risk of default and in
turn acquire a higher credit rating than individual
countries would receive. Fundamentally, bonds
teach states fiscal discipline in a highly
competitive environment; the rewards for
maintaining discipline can be high as Rwanda
and Ghana are discovering.
At the core of the failure of the aid model is
the belief that Africans are helpless in
shaping their own destiny. Systematic aid
has documented failures and in hardly any
other sphere of economics is it acceptable
to allow hope and the crossing of fingers to
win over hard data and experience. Charity
can take more than one form; there are
alternatives that can take a great number of
people out of poverty and quickly. Rather
than appealing to hope, states should turn
their attention to business, only then will we
see Africa reach its potential.
BY KELVIN ANIM
Bonds provide
countries like Ghana,
Rwanda, and Gabon
a sustainable route
to development
ecconnected
economists
PAGE25
Interviewed by Jamie Cuffe 15th March, 2014
with
“an interview”
Diane Coyle
DR.DIANE COYLE,OBE IS AN EMINENT ECONOMIST AND AUTHOR OF NUMEROUS BEST SELLING BOOKS ON ECONOMICS.
SHE STUDIED AT OXFORD AND HARVARD BEFORE JOINING THE UK TREASURY.SHE LATER BECAME A JOURNALIST,
WORKING FOR THE ECONOMIST,INVESTORS CHRONICLE AND INDEPENDENT,AMONGST OTHERS.SHE IS NOW TEACHING
AT THE UNIVERSITY OF MANCHESTER.
I was convinced
that the new digital
technology would change
the way we work in
economics so I wrote
about that.
What made you take to Economics when you
were at school?
I did not discover Economics until I was at
University. I went to Bury Grammar School. I was
desperate to escape to study Philosophy so chose
PPE at Oxford. My tutor there opened my eyes to
how wonderful Economics was, I stumbled into it
by accident because of a great teacher.
How did you get into writing about economics?
I had always enjoyed writing for the school
magazine and I wrote for Oxford’s independent
student newspaper, Cherwell. When I left the
Treasury I kept applying for jobs in journalism
and got a job at The Economist. An agent rang
me and said that many publishers wanted a book
on economics and would I like to write one. I was
convinced that the new digital technology would
change the way we work in economics so I wrote
about that.
From the Weightless World, published in 1997,
to GDP: A Brief but Affectionate History,
published in 2014, you have published seven
books and numerous articles. Is there something
that lead you from one book to the next?
Each time I write a book I say it is the last one, but
then I get interested in a subject and write another
one! People suggest ideas to me. My publisher,
Princeton University Press, suggested the last
one. At first I thought it was a dry topic, but, as I
researched it, I realised there was so much to it.
Do you think the actual GDP measurement
matters, so long as it is consistent?
Good question, there is such a large margin of
error, for example, measurement errors across
countries. Small revisions change the story about
how that country is doing at different times. GDP
as a measurement is flawed but we need to stick
with it for now until someone comes up with an
alternative. GDP does not measure innovation at
all well, for example. The best approach is not to
have a single measure but to look at lots of factors
like work life balance, quality of life, conventional
indicators like unemployment. That is called a
dashboard approach. In broad terms, GDP is a
useful measurement but we need to be cautious. In
the mid 1990s, for example, everyone said that US
capitalism was so good because their GDP was so
good, then they said the same thing about China
and emerging markets. The trend is probably true
but it has been over exaggerated.
Your thesis was on the dynamic behaviour
of employment. What do you think of the
unemployment situation in the UK at the
moment? With classical economic theory
stating that inflation rises with employment,
when do you think that Mark Carney will
raise interest rates?
I don’t do macroeconomic forecasts. It is too hard.
Whether or not interest rates go up is up to monetary
committee. It is very hard to predict. There is
uncertainty about how liquidity will evolve from the
assets market and where it will go from there. We
have been lucky that unemployment is not higher
but I am particularly concerned about conditions for
young people. The employment situation for them
is much worse than a generation ago.
Your book Sex, Drugs, and Economics deals
with the economics behind controversial
topics. What was the most intriguing topic you
investigated?
I was interested in the way Napster was changing
the music industry. I also liked seasonal variations
as, despite the seasonally adjusted data we are
often presented with, the economy is very seasonal.
It is a big thing in the real world that we don’t think
about.I started with the raciest issues to sell books!
In your books, The Weightless World, Governing
the World Economy, and The Soulful Science,
you discuss how economies must adapt to
changing economics and how technology
has changed economics. What are the most
significant examples of how technology has
revolutionised economics?
The internet and disruptive technology. It has
changed in lots of ways, let me give you two
examples. The first is the mobile phone revolution.
In countries like the UK, mobile phones are a nice
extra form of communication but in developing
countries, where there was no access to
communications, mobile phones are revolutionary.
Social and economic opportunities are being created
because of mobile phones.
Another example is to look at the new way in which
goods and services are now being produced due to
the disintegration of the supply chain. Components
are made in different countries for one product but
people do not break down the individual components
in trade figures. For the iphone, for example, many
components are produced and in different countries
but that is not taken into consideration when we are
looking at trade figures. The bilateral deficit between
China and the US is not as big as stated because
goods have been shipped out of the US (and Korea,
and Japan), to create goods assembled in China, but
In your book “The Economics of Enough”,
you discuss the development of a sustainable
economy, which prioritises saving and investment
over current consumption. Is it possible to achieve
this? If so, how?
I don’t know, it is very hard but we are swimming in
a sea of uncertainty about how much we are eating
up tomorrow’s resources. We don’t know what is
sustainable as you need to make assumptions about
the future. But we ought to think more carefully about
trade offs in short and long term. For example, data
on pension funds shows that the funds have a short-
term horizon when looking at returns and that can’t
be healthy.
What do you think some of your future books
might be?
I have recently taught a course in public policy and
economics for the University of Manchester where I
started in September as professor. When looking at
investing in infrastructure, there are lots of ways to
make profits but we need to think about how the
policy process itself works. How do officials deal
with that advice and what do they do about it?
You are a member of the Competition Commission.
In your opinion, how does the UK compare to
other EU countries in terms of its competitiveness
and innovation?
It is hard to make an overall judgment as it depends
on the sector. In some sectors we compare well, the
market is easy for new entrants. Some sectors are
bad both in the UK and the EU, for example getting
into electricity industry because of the large start-up
costs, but that is true everywhere. There are some
areas where the UK does badly compared to the EU,
for example in retail banking and small business
banking where banks serve less well and are less
competitive than in other countries.
The book "What's the Use of Economics" which
you edited following a conference in 2012 concerns
the revision of undergraduate courses with the
goal to equip future economists to deal with
today's challenges. What should an undergraduate
student of Economics learn that they are not being
taught now?
Students should learn more about economic history,
especially recent history. There are some universities
where students dont learn about the economic crisis.
Students need to know about basic tools, practical
data handling and statistics rather than theoretical.
They should be taught cost benefit analysis. All
undergraduates should be taught communication
skills. There are lots of areas of the economy, for
example behavioural economics, more sophisticated
two sided markets, and those with platforms, that are
never taught to undergraduates. However, if you go
into a job in the city or business you need to know
about these things and besides it is interesting to learn!
Which economists do you admire at the moment,
who should we be reading?
Ed Glaeser at Harvard writes about urban
economies. He is a creative thinker, there are no
gaps between him and the real world. Tim Besley
at LSE writes about political economic issues.
Danny Quah has done fantastic work on
emerging economies.
What are the top three interesting areas of economics
that are changing the way we look at the subject?
Randomised control trials, used in some developing
countries for aid projects for example. The UK is
good at conducting these but no other OECD country
is even piloting this.
Behavioural economics looks at how people are
making decisions on economic issues, cognitive
science and how the brain works.
Supply chain questions and how technology is
rearranging the world of work. It is interesting to note
who benefits, which jobs go and which are created
deals with the economics
behind controversial topics.
Your book
Sex,DrUGs,
and ECONOMICS
connected
economists
PAGE27
ce
connected
economists
ec When does anudge become a
SHOVE
MEDIA
PIRACYBLAME OR ACCLAIM?
BEHAVIOURALECONOMICS:Or How Being HumanAffects Our Decisions?
The UnsungEconomistBill Phillips
Achtung!Why has Germanydominated the carindustry for so long?
FOUNDERS
Jamie Cuffe and Doug Feagin
EDITORS
Jamie Cuffe, Doug Feagin, Henry Mitchell and Tom GoldsworthyCONTRIBUTORS
Mohammad Lone, Kelvin Anim, Oli Wood, Shunta Takino,
Harry Elliott, Ahaan Arora, The Economeast
GRAPHIC DESIGNER
Mr. Mark Prendergast
The editors would like to thank the following peopleand organizations for their help, advice and contribution
in putting this magazine together:
Mr. Geoff Riley, Tutor2UMrs. Diane Coyle, University of ManchesterMr. Mark Littlewood, IEAThe Economeast
All of the other economists who contributed articles
The state-financed
international aid
business represents
the indefatigable
triumph of hope
over experience.
TheScarcity
Paradox
The Economics
of DEATH
book
reviews
Fear the BOOM
not the BUST
Economic
COMPLEXITY

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Connected Economists

  • 1. When does a nudge become a SHOVE MEDIA PIRACY BLAME OR ACCLAIM? BEHAVIOURAL ECONOMICS: Or How Being Human Affects Our Decisions? The Unsung Economist Bill Phillips Achtung!Why has Germany dominated the car industry for so long? WRITTEN by students for students ✍ ISSUE 1 connected economistsec The state-financed international aid business represents the indefatigable triumph of hope over experience. TheScarcity Paradox The Economics of DEATH book reviews Fear the BOOM not the BUST Economic COMPLEXITY
  • 2. Connected Economists is a brand new economics magazine, written by students for students. The four editors, all current A-Level students from schools across the UK, have created this free magazine for the benefit of other like-minded students to educate, entertain and inform with a wide range of articles, book reviews and interviews with leading economists. Articles have been kindly contributed by students from around the world, creating a truly global perspective. Connected Economists aims to provide students with a different take on the world of economics, expanding the mind beyond and complementing the school textbook. This first edition of the magazine includes articles on a diverse range of subjects from behavioural economics, to German car manufacturing, to the economics of death. There is also a fascinating interview with, eminent economist and best selling author, Diane Coyle. The Editors have also chosen two books for review in this edition, which they feel are fantastic reading material for prospective university economics students. We hope you enjoy the magazine. Yours sincerely, The Editors ✷❙❋q❇❉❋ connected economistsec If you would like to contribute an article for future editions, please email: economicstomorrow@gmail.com
  • 3. Media piracy means mediaartists do not receive adequate remuneration for their hard work. Each time a server user pirates a file, a media artist is deprived of payment for his or her work. As a result, with each passing day, professions such as songwriting and directing become lesslucrative, even for the mostsuccessful media artists. To contextualize this, think of allthose ambitious teenagers whohave aspirations to pursue a career in the media industry. Unfortunately, between these teenagers and a stable income lies a plethora of media piracy servers that give consumers access to all the media they could everdream of, for free. Due to this erosion of copyright, the teenagers aredissuaded from pursuing careersin the media industry. Thus, piracy servers havedisincentivized full-time mediaartists’ from producing new songs and movies. But what does this mean for you and me? By taking the incentive out of songwriting and directing, piracy drives media artists towards their retirement and media towards a state of oblivion with nobody left to produce it. At least this is what common sense might suggest; you would not be crazy to think this yourself. However, statistics have, interestingly,suggested otherwise. In spite of the ubiquity of piracyservers, more and more movie sales and rental businesses are being set- up. There has been a 20% rise in DVD sales, cinemas are habitually fully housed on peak days, andiTunes music sales have skyrocketed to 2.4 billion USD in the last quarter. Coincidence? No, there is a sound explanation that explains the recent success of the media industry, despite the increasing popularity of piracy servers. If a certain piece of work is pirated more frequently, there is a greater likelihood of it becoming morefamous. The non-commercialdistribution of a piece of workvia piracy servers only triggersan increase in the legitimate sales of the piece itself. The advent of media piracy has provided valuable information to the media industry that will potentially lead to booming sales as there is a strong relationship between fame and value. Nothing will make a media artist famous faster than piracy servers hosted by people willing to advertise the artistís work by flooding free downloadable copies online. THUS, MEDIA ARTISTS’ WORK IS NOT GOING UNNOTICED.CONVERSELY, IT IS BEING WIDELY ACKNOWLEDGED AND MEDIAARTISTS ARE INDEED BEINGREWARDED AS THEIR WORK IS DISTRIBUTED TO ALL CORNERS OF THE GLOBE. IN THE PROCESS, A WIDER BASE OF CONSUMERS IS BEING USHERED IN TO ACCESS MEDIA ARTISTS’ WORK, AND, WITH MORE LEGAL DOWNLOADS FOR EVERY ILLEGAL DOWNLOAD THAT OCCURS, SALES IN THE MEDIA INDUSTRY ARE BOOMING. Due to this erosion ofcopyright, the teenagersare dissuaded frompursuing careers in themedia industry. MEDIA PIRACY WITH THE RECENT EMERGENCE OF A LARGENUMBER OF MEDIA PIRACY SERVERS, MANY FEAR THE IMPENDING APOCALYPSE OFTHE MEDIA INDUSTRY. NOW ONLYA FEW CLICKS SEPARATE US FROMLARGE STREAMS OF MUSIC ANDMOVIES, ACCESSIBLE ONLINE. To Blameor To Acclaim?BY: AHAAN ARORA (THE ECONOMEAST) connected economists ec PAGE3
  • 4. FREE BUYONEGET ONE Behavioural economics is “A method of economic analysis that applies psychological insights into human behaviour to explain economic decision- making”[1]. It combines “the basic principles of neoclassical economics with the realities posed by human psychology”[2]. “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest”[3]. This famous quote by Adam Smith highlights the main underlying assumption in neoclassical economics, the rational choice theory. This explains “that individuals always make prudent and logical decisions that provide them with the greatest benefit or satisfaction and that are in their highest self-interest.”[4] This key idea of “marginal utility” was invented by “Hermann Heinrich Gossen”[5]. It discusses the idea of a homoeconomicus, who is an economic agent seeking to maximise his utility. However, behavioural economists argue that we are not perfect economic agents due to our human nature. Herbert Simon developed the significant theory “that man could not always act logically because he possessed a ‘bounded rationality.’”[6] This theory states that humans often do not have the ability to make a decision to maximise their utility due to a lack of time or information. This gives rise to a phenomenon called “decision paralysis”[7]. This was investigated by creating a test in which two different groups sold jam. “One group sat with 6 varieties on display, and the other with 24 varieties on display. While more people stopped by in case of the 24-jar display, the number that bought was 10-times less than the 6-jar scenario (3% vs. 30%).” Due to the “cognitive load”[8] placed on consumers by excessive choice, increased choice above around seven options can cause decreased sales as consumers are unable to evaluate their options and so forgo the purchase. To cope with these sensory overloads, people use rule rationality. This relies on heuristics, or rules of thumb, which allow consumers to make relatively well-informed decisions based on previous experience. Our bounded rationality has serious effects upon our economic decisions. Dan Ariely, a leading behavioural economist, explains that cognitive illusions highlight our inability to fully interpret sensory stimuli. He argues that if we make errors in simple illusions, such as spatial perception tests, then when performing more challenging and unfamiliar tasks, such as some financial transactions, we are bound to make even more errors. For example, we often are deceived by price through an irrational value assessment. An experiment was carried out to investigate how the value consumers place on a product varies with price. People were given multiple bottles of wine to taste each marked with a price tag only. “There was a clear correlation between the rating of the wine and the price tag — more expensive wines got systematically higher ratings.”[9] However, the investigators also included two bottles, which contained the same wine, but were marked at different prices. The one marked with the higher price achieved a much higher rating than the other bottle despite being identical. This idea has been exploited in industry where luxury car manufacturers seek to make their car the most expensive on the market. This appeals to wealthy but naïve customers who think that the high price tag is always indicative of high quality. [1] Oxford Dictionaries. (n.d.). Behavioural Economics. Retrieved from http://www.oxforddictionaries.com/definition/english/behavioural-economics Web. 13 Mar. 2013. [2] What is Economics?. (n.d.). Behavioural Economics. Retrieved from http://www.whatiseconomics.org/behavioral-economics. Web. 13 Mar.2014. [3] Smith, A. and Ashraf, N. (n.d.). The Wealth of Nations. Adam Smith, Behavioural Economist. Retrieved from http://www.hss.caltech.edu/~camerer/web_material/jepadamsmith12.pdf. Web 13 Mar. 2014. [4] Invetopedia. (n.d.). Rational Choice Theory. Retrieved from http://www.investopedia.com/terms/r/rational-choice-theory.asp. Web 13 Mar. 2014. [5] Pasche, M. (2012) Topics in Behavioural Economics [PDF PowerPoint Slides]. Retrieved from http://www.wiwi.uni-jena.de/Makro/lehre/BR/slides_BE.pdf. 13 Mar. 2014. [6] What is Economics?. Behavioural Economics. Retrieved from http://www.whatiseconomics.org/behavioral-economics. Web. 13 Mar. 2014. [7] Mukul, P. (3 Jan. 2013). 5 Behavioural Economics Principles Marketers Can’t Afford to Ignore. Retrieved from http://www.forbes.com/sites/ piyankajain/2013/03/01/5-behavioral-economics-principles-for-marketeers/. 13 Mar. 2014. [8] What is Economics?. (n.d.). Behavioural Economics. Retrieved from http://www.whatiseconomics.org/behavioral-economics. Web. 13 Mar.2014. [9] Mukul, P. (3 Jan. 2013). 5 Behavioural Economics Principles Marketers Can’t Afford to Ignore. Retrieved from http://www.forbes.com/sites/ piyankajain/2013/03/01/5-behavioral-economics-principles-for-marketeers/. 13 Mar. 2014. [10] Mukul, P. (3 Jan. 2013). 5 Behavioural Economics Principles Marketers Can’t Afford to Ignore. Retrieved from http://www.forbes.com/ sites/piyankajain/2013/03/01/5-behavioral-economics-principles-for-marketeers/. 13 Mar. 2014. [11] Ariely, D. (December 2008). Are we in control of our own decisions? Retrieved from http://www.ted.com/talks/ dan_ariely_asks_are_we_in_control_of_our_own_decisions. 13 Mar. 2014. BEHAVIOURAL ECONOMICS: Or How Being Human Affects Our Decisions? by Jamie Cuffe
  • 5. Another marketing ploy, which appeals to our human nature and causes irrational consumption, is “the power of free”[10]. To investigate this idea, participants were offered “a choice between purchasing a Hershey’s Kisses chocolate for 1-cent ($0.01) or Lindt Lindor chocolate truffle for 15 cents ($0.15).” Due to the favourable price differential, the large majority of participants chose the usually vastly more expensive truffles. “However, when the price of both was reduced by 1 cent, thus making Kisses free and the Lindt Lindor for $0.14, the preference completely reversed with an overwhelming majority choosing Kisses!” Our obsession with the word free is undeniable. This manifests itself in the real world through many buy-one-get-one-free offers, which are far more attractive than an offer to buy two and receive 50% off. In conclusion, our human nature and bounded rationality cause a divergence between traditional economics and reality. This manifests itself in the real world through a number of marketing techniques. However, our human condition leads to far larger economic consequences across entire countries. For example, one study showed that citizens of some countries participate significantly more in organ donations than others. Rather than this being due to a discrepancy in benevolence or culture, it is the result of the layout of two different forms. The countries participating more frequently must tick a box to opt out of the program while the countries participating less frequently must tick a box to opt in to the program. Due to our bounded rationality, this simple change affects our economic actions in ways that cannot be accounted for in traditional economics. Thus, the effect of human nature on our economic decisions pervades society. The bottle marked with the higherprice achieved amuch higher rating than the other bottle despite beingidentical. Our obsession with the word FREE is undeniable. FREE BUYONEGET ONE FREE 100% FREE 50% FREE BUYONEGET ONE Another marketing ploy, which appeals to our human nature and causes irrational consumption, is “the power of free” connected economistsec PAGE5
  • 6. The Unsung Economist Bill PhillipsBY HENRY MITCHEL Alban William Housego Phillips, otherwise known as Bill Phillips, was born in Te Rehunga near Dannevirke, New Zealand in 1914 to a dairy farmer and his wife. He grew up in a “can do” environment where he witnessed his father designing a water powered generator to provide electricity to their farm and other inventions such as crystal radios and flushing toilets that made their farm superior to that of their neighbours. His mother, a school teacher, was very keen that Bill should study hard and read widely. He was a high achiever at school but sadly was forced to leave at the age of 15 as the effects of the Great Depression hit and his family were not in a position to pay for his education. He became an apprentice electrician and worked till the age of 20 on the Waikaremoana power scheme. He then embarked on what we would now call a “gap year”, revolutionary and adventurous at the time. He headed for Australia, picking up jobs on the way. These included running a cinema, hunting crocodiles and busking on the streets. He then headed for China, Shanghai, but was diverted to Japan as they invaded China. He was arrested in Hiroshima for taking photographs and accused of spying but on release he headed across Russia, reaching Britain in 1937. Here he completed his training as an electrical engineer and joined the RAF and was posted to Singapore. TODAY’S ECONOMISTS ARE ACADEMICS, MATHEMATICIANS AND THEORISTS EQUIPPED WITH STATE OF THE ART DIGITAL COMPUTERS AND A WEALTH OF HISTORY FROM THE GREAT DEPRESSION THROUGH TO THE 2008 CRASH AS USEFUL RESOURCES. THIS IS A FAR CRY FROM MY UNSUNG ECONOMIST WHOSE BACKGROUND WAS UNCONVENTIONAL BUT WHO APPEARED WAY AHEAD OF HIS TIME. A SELF-TAUGHT AND TRUE MODERN INDEPENDENT THINKER THAT SOUGHT TO FIND SOLUTIONS USING HIS EXPERIENCES IN ENGINEERING, SOCIOLOGY AND LIFE TO CHANGE THE WAY WE THOUGHT ABOUT THE ECONOMY.
  • 7. As Singapore surrendered to the might of the Japanese, Bill fled along with thousands of others on a cargo ship. They were attacked from the air by Japanese planes and it is reported that Bill selflessly fashioned a machine-gun post on deck and fought back valiantly. For this he was rewarded with an MBE for bravery. Phillips was captured by the Japanese and spent three and a half years in a prisoner of war camp in Indonesia. It was brutal but, again, Bill used his time to learn and apply his knowledge. He became fluent in Chinese and used his skills to build secret radios and immersion heaters that were capable of providing two thousand prisoners of war with a cup of tea before bed. If he had been caught, certain death would have followed. I write of this background because to understand Phillips’ history allows us to understand the man and how truly remarkable his contributions to society have been. After the war Bill moved to London and continued his studies at the London School of Economics (LSE), Sociology being his chosen degree; but it was his economics modules that fuelled his interest and he switched his course to economics. Within eleven years he was to become Professor of Economics – a meteoric rise by anyone’s standards. While a student at LSE, Phillips developed MONIAC, a hydraulic computer to model the workings of the British economy. It was a simple computer, 2 metres tall, 1.5 metres wide and a metre deep with an assortment of tanks, pipes, sluices and valves with water pumped around the machine from the windscreen wiper of a Lancaster bomber. Perspex and fishing line were used to channel the coloured dyes that mimicked the flow of income around the economy into consumer spending, taxes, investment and exports. The machine was used to solve equations using hydraulics instead of differential calculus to calculate the answers. It could solve up to nine differential equations simultaneously – a complexity that was unrivalled and unheard of. It seemed to tie everything together. In Phillip’s era countries had fixed exchange rates against each other but he introduced the concept of a floating exchange rate, one that we are now familiar with but at the time was very radical. MONIAC was ground-breaking and an invention I think worthy of the Nobel Prize for Economics. Phillips’ equations were based on years of research on the British economy – supply and demand to prices in the economy, people’s incomes and how much they saved, interest rates and taxes. He was able to manipulate scenarios with his floats, cogs, pulleys and bits of Perspex. He could change interest rates and show how the economy would move from one state to another and what effects that had. Indeed, MONIAC was a great educational tool. The machine demonstrated many difficulties and students were able to take the role of Chancellor of the Exchequer or Governor of the Central Bank and control taxes, spending, interest rates, imports and exports. It was used by the LSE until 1992 and one machine is housed at Cambridge University today. Although crude in its infancy, Phillips was able to develop the model using his skills as an engineer. It had its limitations as there was no provision for inflation but it offered a fresh way of looking at our economy and how it could be stabilised. Indeed it is a model that has been used worldwide by governments, central banks and economists alike. We live in a very different global economy to that of Bill Phillips, but modern economists should emulate his “can do, fix it” approach and his drive to solve problems. His background taught him to do this. He revolutionised the study of economics and for that I believe he deserves more recognition. He is a man I would have loved to have met and believe ultimately should be the recipient of the Nobel Prize for Economics. He is my unsung economist. I write of this background because to understand Phillips’ history allows us to understand the man and how truly remarkable his contributions to society have been. connected economistsec PAGE7
  • 8. The success of the German car industry can especially be noted when compared to that of Britain's. In 2011, Germany produced 5.9 million cars, the highest number in Europe-Britain a paltry 1.3 million- many of these not for British brands but for foreign ones such as Nissan and Honda. And the domination of the Germans extends much further- two typical 'British' car makers, Bentley and Mini, are far from British; Bentley is owned by Volkswagen, Mini by BMW. There are in fact no longer ANY mass-market 'purely British' brands- Jaguar, Vauxhall, Land Rover, even Aston Martin, are all foreign-owned. Germany's success in the car industry must also be put into perspective- consider that less than a century ago the nation was facing huge economic turmoil, the sort that provides textbook examples of hyper-inflation: the wheelbarrows of cash, the 200 million mark loaves of bread, the extremely volatile prices, the lot. Post-war reparations had put Germany in a terrible state in the early 20th century- but looking at Germany now, with such economic might that makes it the most influential state in the EU, it is clear that the German system has produced fantastic results. If you were to ask someone on the street what car they would like to own, without doubt among the most popular brand selections would be BMW, Mercedes or Audi. These three manufacturers have taken the global car market by storm in recent decades, and are now the epitome of the well-built, high quality yet mass-marketable luxury car. Of course all their cars are not necessarily of the best quality on the market- the likes of Aston Martin and Ferrari to name just two produce cars closest to perfection- however the crucial aspect to why BMW, Mercedes and Audi are more successful and relevant to this discussion is because they are open to the mass- market. The average middle-class family cannot afford a four-door £150,000 Aston Martin Rapide; though a £23,000 BMW 3-Series is within the reach of many, an achievement highlighted best by how it has consistently maintained a spot in the ten top-selling cars in Britain since 2004. BY MOHAMMAD LONE Achtung! Why has Germany dominated the car industry for so long? There are numerous reasons for the Germans' successful car market, but one key reason is the industrial mindset, the 'manufacturing culture' that is fostered by the Bavarians.
  • 9. Britain's manufacturing industry has had a rough last 30 years- in this period shrinking by two- thirds. Margaret Thatcher's time as PM during the 1980s to many killed the secondary industry in Britain. I'm sure you've seen the images of striking factory workers, unhappy at Thatcher's crushing of worker unions and the closures of numerous car factories throughout the nation. The closer relationship between workers and management is part of Germany's attention to what is known as the 'social market economy'- a type of capitalism that does not co-ordinate market activity itself, but at the same time provides support for society- be it in the form of universal healthcare, unemployment insurance and, most relevant in this discussion, trade unions. German workers enjoy among the highest secondary sector wages in the world, and are provided good working conditions. In contrast to the system in the USA for example, where entry-level factory wages were halved from $28 to $14 an hour, the Germans' higher investment in the workers pays off, creating a more co-operative and committed environment, where workers develop loyalty to their company, an idea almost lost in the US labour economy. German workers are in fact the most loyal in Europe- the job market is far more stable, meaning companies can afford to invest more in long-term training, and crucially it means workers on the production line are experienced and efficient in their job. Output is also helped by the power given to the workers on the German production line. Almost all German factories will have members of the regular workforce on the executive committee of the factory- as a result the workers are given a voice in the running of the factory, and have the power to suggest changes that may improve efficiency. This system making workers a part of the running of their factories increases the workers' morale, making them feel more empowered as part of a democratic operation. The education system is arguably the biggest factor in German industrial success. Whereas in Britain all youths are pushed through the same educational system until the age of 16, after which they are offered either further education or half-heartedly the option of vocational education- such as BTEC, or Apprenticeships. These being relatively young programs, they are not well- established and are avoided by many students, partly as they are seen as for those intellectually inferior to the further educationers (certainly not always the case). These extra years provides a head-start for German workers and has created skilled, respected workers, ready-made to enter the world of manufacturing at the age of 18. German factories have had no shortage of skilled workers- and as a result the production lines are efficient and smoother than most others in the world. Germany have certainly set the benchmark for efficiency in the manufacturing industry. It must be noted that Japan are similarly capable in car production. Meanwhile, Germany has only been growing since the Second World War- whereas British car factories became a battleground for a class war between management and labourers, German factories were tight-knit, harmonious and therefore far more efficient. Meanwhile Germany offers morechoice to specialise at an earlierpoint. After the age of 10 (or 12 insome areas) student can study at theGymnasium to pursue highereducation such as university, or canopt for the Realschule or auptschule,schools that will provide education incore subjects such as Maths but havea heavier focus on vocationaleducation and practical workexperience. connected economists ec PAGE9
  • 10. The Austrian school of economics has a very different take on the recent economic crisis in comparison to the prevailing Keynesian orthodoxy that is currently taught in A-level classrooms across the country. The Keynesians focus on the slump and look for the problems here. The textbook Keynesian analysis explains that the recent ‘Great Recession’ was due to a deficiency in aggregate demand, which in turn was caused by the 2008 global financial crisis. The Austrians, however, take the opposite approach, seeing the preceding boom as being at the heart of the problem. A look back through history and similar boom and bust cycles suggests that this could be the case and reveals a common thread. Fear The BOOM, Not The By TOM GOLDSWORTHY Bust
  • 11. The Austrian view of the most recent economic crisis is as follows. Central banks set artificially and historically low interest rates that significantly diverged from the ‘natural’ rate. This fuelled the housing bubble, where excess money poured into housing investment in the search for yield. Eventually, it became clear that house prices were an illusion. Investments that had seemed profitable when they were initially made turned out not to be; they had only seemed so due to the combination of the housing bubble and artificially low interest rates. Boom turned to bust; investment to malinvestment. The Austrian insight into the ‘great recession’ is that it was the preceding boom that was the root cause of the subsequent bust and, as ever, the bigger the boom, the greater the bust. THE AFOREMENTIONED AUSTRIAN DIAGNOSIS WOULD THEREFORE LOGICALLY LEAD TO A SEVERE DEGREE OF CAUTION WITH REGARD TO THE CURRENT PROTRACTED PERIOD OF RECORD LOW, NEAR-ZERO INTEREST RATES. WHILE THE CURRENT A-LEVEL, NARROW KEYNESIAN VIEWPOINT WOULD, RATHER UNCRITICALLY, VIEW THIS AS A WHOLLY POSITIVE WAY TO STIMULATE DEMAND AFTER THE RECESSION, AN AUSTRIAN PERSPECTIVE WOULD VIEW THIS POLICY WITH CONSIDERABLY MORE CAUTION. WILL A LONG PERIOD OF EXTREMELY LOW INTEREST RATES SIMPLY FUEL THE NEXT BUBBLE, EFFECTIVELY SETTING IN MOTION THE NEXT CRISIS? A look back through history and similar boom and bust cycles suggests that this could be the case and reveals a common thread. Asset bubbles encouraged by cheap money lead to an economic boom. The bubble may be in tulips, stocks and shares or, more recently, housing, but easy money due to some kind of government intervention is at the root of all of these historic asset bubbles. These bubbles, in turn, are the central cause of economic downturns and recessions as the eventual pricking of the bubble spreads like a contagion, leading to broader economic malaise. So, any economic recovery the British economy is undergoing due to excessively easy monetary policy is simply a mirage, as that boom will eventually turn to bust too. While the contrarian and lesser-known Austrian school of economics does not get every economic issue 100% correct (no school of thought does), it does offer a radically different way of looking at the current economic crisis, and past crises like it. This alternative perspective allows for a much more critical look at monetary policy in particular and cautions against being too short-termist in setting interest rates. Finally, If you remember nothing else from this article, remember this: Fear the boom, not the bust. connected economistsec PAGE11
  • 12. Capital in the 21st Century Written by Thomas Piketty The Undercover Economist Strikes Back Written by Tim Harford book reviewsby Henry Mitchell
  • 13. Capital in the 21st Century Written by Thomas Piketty Capital in the 21st Century is the latest economics book to take the world by storm. A bestseller in France, the U.S. and Britain and seemingly kick-starting the debate on inequality, Piketty's masterpiece must be one of the greatest economics books of the 21st century so far. The book focuses centrally on the idea that there is growing wealth inequality in the Western world, increasing at a rate which is alarmingly dangerous. One of Piketty's main themes is to put the issue of inequality in its broader historical context allowing the reader to see much more clearly the causes of inequality. Piketty shows that capital tends to accumulate faster than the rate of economic growth in capitalist societies, demonstrating that wealth as a result also tends to accumulate, but in a more concentrated manner at the top. He argues this is because those with more capital are able to earn a higher rate of return on their capital investments - although his critics contest this. For these reasons, Piketty believes that capitalism on its own tends to produce a high degree of inequality and this is what he calls the 'central contradiction of capitalism'. The book finishes with the author giving what he feels is the only solution to this widening inequality -steepening the progressive taxation applied to the wealthiest, worldwide. This idea is no doubt ambitious and some would say utopian, but nonetheless Piketty feels it is better than the alternative - a return to protectionism and nationalism which is in no ones interest. Capital in the 21st Century has received spectacular praise and also severe criticism, many feeling that the book is something that has revolutionized the debate on inequality and that Piketty is the modern successor to Karl Marx whereas others feel that Piketty fails to recognize that a degree of inequality in any society can be beneficial and forgets the advances in living standards that capitalism has achieved. However no one disputes the fuel that Piketty has given to the debate and the copious amounts of data he and his fellow academics have managed to collect in what is a notoriously difficult area. Ultimately whatever your view may be on this topic, Capital in the 21st Century is a must read especially for any economics student wanting to push themselves beyond the curriculum.Don't underestimate the challenge however, as the majority of people who read it don't get past page 26! The Undercover Economist Strikes Back Written by Tim Harford As an introduction to economics, Tim Harford's latest book The Undercover Economist Strikes Back is a perfect start. Trying to explain macroeconomics to the layperson is not a straightforward task, but Tim Harford manages to do so with ease - even adding some humour along the way (not something eonomists are well-known for). Tim Harford's chatty style makes the book a light read even when discussing some of the biggest problems confronting the macro economy worldwide. The book takes the reader through the most important factors present in the macro economy and the decisions that have to be made by policy-makers all over the world. Harford covers all the main macroeconomic areas from inflation to unemployment and also introduces the different schools of macroeconomic thought to the reader. Whilst maintaining a broad perspective the book still shows depth in all areas, including an introduction to economic models, theory and different statistical measures, which are essential for aspiring economists. This book is an accessible read for all economics students, providing textbook analysis whilst stretching ones thought processes when it comes to understanding the difficulty of policy making. If you are a student wanting to learn more about the macro economy then look no further than Tim Harford's The Undercover Economist Strikes Back. ecconnected economists PAGE13
  • 14. It is somewhat ironic that the only certainty we have in life is that we will die. Economists, however, like certainty, so it should hardly be surprising that incentive analysis makes sense even in the context of the afterlife. Indeed, understanding that death has financial outcomes allows us to consider a number of seemingly bizarre or immoral practices in a brighter light. I want to focus on three rather different yet death-related applications of economic principle: flipping life insurance, death pools, and the inheritance tax. Life insurance flipping constitutes perhaps one of the more entertaining American capitalistic urges to buy and sell anything in existence. The premise is ingenious: if you have a policy which promises your family, say, $250,000 when you die, you can ‘sell’ the future gain of $250,000 to a particularly heartless financial services executive, who gives you $150,000 now. While such a mechanism seems little more than financially intriguing, it had a genuinely transformative role as AIDS killed thousands throughout the 1980s: people suffering from the terminal illness could get their hands on chunks of money significant enough to pay for cutting-edge treatment. Life insurers seemed fairly unworried by this new financial derivative; after all, insurance flippers were driving business in their direction. However, the idea of people selling off their own death was too much for Congress to bear, and the practice was eventually shut down, despite the significant benefits it was able to bring to those who seriously needed money. Having experimented with selling off the rights to somebody, we move onto death pools, again an American invention. These initially started off as simple gambling sites on which you could try your luck as to the next celebrity you thought would die, but with a twist. Instead of the site setting the odds, people could buy and sell ‘shares’ in someone’s death which would pay out, say, $1 in the event that the person died in the next year. If someone’s shares were trading at 60¢, therefore, the markets estimated the probability of death as 60%. It didn’t take long for DARPA, a US military agency whose speciality is funding bizarre nerdy projects, from Iron Man suits to light sabres (I kid you not), to realise that this market model had real potential. After all, just as with ‘real’ shares, those investing the most money in either direction would be those most confident and the best-placed 4to know the truth; indeed, death pools for celebrities proved uncannily accurate for a while. DARPA thus reportedly launched a death pool online specifically for heads of state, military leaders and other people potentially at risk of dying, in the hope that they would be able to get the most accurate ‘inside track’ on vulnerable geopolitical situations. It is believed that they planned to expand the model to all sorts of other events (e.g. ‘$1 payout if Egypt’s government collapses in the next six months’). However, DARPA ran into the ever-present economist’s problem of ill-thought-through incentives. Specifically, their death pool software had two rather unfortunate consequences: (1) terrorist groups could buy up shares and then arrange a previously-unplanned assassination, creating exactly the chaos DARPA sought to avoid; and (2) the huge winnings of these groups after the assassination would constitute a direct transfer of cash from the US government to their global enemies. As a result, the death pool project was canned. TheE conomics of D E AT H By Harry Elliott
  • 15. That said, it has some intriguing civilian applications: people buying shares that pay out in the event of an election victory have created extremely accurate ways to gauge electoral races, without the hassle or expense of polls (as now the shareholders are the ones who seek out the most accurate information about who will win). After two somewhat entertaining ideas, it saddens me to conclude by discussing inheritance tax, a rather more austere policy that once attracted fierce controversy but has now come to be accepted by both sides of the political spectrum. While the debate of whether children should be gifted a life of privilege versus whether the state should have the right to tax you when you die as well as when you live is relatively interesting, this is an economics magazine, so I shall stick to the knock-on effects of putting a time limit on people’s assets and investments. While inheritance tax has successfully smashed most of the aristocracy back into paid work, one unintended consequence is to hit family assets that would otherwise be passed from generation to generation. Specifically, pension funds and bond market investments are often long-term financial moves, and as the end draws relatively near, parents who previously would have saved for their children are very aware that such saving is now subject to a 40% loss at the point of their death. As a result, there is strong statistical evidence that parents have shifted their spending in their final 10 to 15 years from investment (for their kids) to consumption: cruise ships and luxury holidays are subject to no such guaranteed loss, so parents’ ability to improve their children’s future lives is no longer a better spend for them than a pleasant final decade in life. This goes at least some way to explaining why the elderly spend an increasing amount of money on consumption over investment; it’s also an exposition of needless, tragic economic waste. Cruise ships are lovely, but technological leaps and bounds are lovelier, and a drop in long-term investment is likely to hit precisely that sort of growth. THE INHERITANCE TAX HAS OTHER, MORE PERNICIOUS EFFECTS AS WELL: WHEN BUSH HIKED THE AMOUNT EXEMPT FROM TAXATION, MEDICAL SPENDING ON THOSE NEARING DEATH SOARED, IN ALL LIKELIHOOD BECAUSE CHILDREN SAW THE FINANCIAL BENEFIT OF ESCAPING SEVERAL HUNDRED THOUSAND DOLLARS IN TAX WELL WORTH THE CUSHIER HOSPITAL. ONE WONDERS WHAT THE CONSEQUENCES OF A HIKE IN INHERITANCE TAX MIGHT BE, IF HUMANS REALLY DO RESPOND TO THE MONETARY CONSEQUENCES OF DEATH AS THEY SEEM TO. LIFE INSURANCE FLIPPING, DEATH POOLS AND INHERITANCE TAX ALL UNFURL JUST A FEW OF THE INTRICACIES OF MICROECONOMICS THAT MAKE THE SUBJECT SO INTRIGUING TO STUDY. It is somewhat ironic that the only certainty we have in life is that we will die. Economists, however, like certainty, so it should hardly be surprising that incentive analysis makes sense even in the context of the afterlife. Indeed, understanding that death has financial outcomes allows us to consider a number of seemingly bizarre or immoral practices in a brighter light. I want to focus on three rather different yet death-related applications of economic principle: flipping life insurance, death pools, and the inheritance tax. The Econ D E A ...from Iron Man suits to light sabres (I kid you not) ecconnected economists PAGE15
  • 16. “From adversity comes strength” – The role of natural resource scarcity and human capital in long-term economic development The ScarcityParadox The “Resource Curse” has been one of the most debated and discussed theories within economic development since the late 20th century. This notion suggests that economies that are heavily endowed with natural resources often experience slowdowns in economic growth and are hindered by imbalanced and unsustainable development. Most countries that suffer from the phenomenon are characterised by weak governance, corruption and surging inequality. The typical explanation for this refers to the “Dutch Disease”, a case where the manufacturing and agricultural sectors of an economy are made less competitive in the global market as a result of a sudden currency appreciation. This occurs when a country discovers a reservoir of resources triggering a large inflow of foreign currency into the market. However, an alternative perspective towards the “Resource Curse” remains largely ignored and unconsidered. Instead of focusing on why resource-rich countries perform so poorly, economists ought to question why many resource-poor countries fare so well. A large number of countries that have experienced significant development in the post-war era suffer from a chronic shortage of natural resources. This phenomenon, which I will call the “Scarcity Paradox”, has been observed mainly in the East Asian Tiger economies, and spread as far as Israel. The “Scarcity Paradox” hypothesises that resource-poor countries naturally develop a comparative advantage in knowledge-based industries by building a large stock of human capital, a critical component for long-run economic growth. The current wealth of Japan’s citizens is the result of the country benefiting from the “Scarcity Paradox”. Japan’s WWII surrender on the 2nd September 1945 marked a turning point in its domestic economy and sowed the seeds for a “Japanese Miracle” spanning several decades. The government aimed to build an internationally competitive technology and manufacturing sector that included funding for university-industry partnerships allied with private investment in education. Consequently, the Japanese economy shifted away from import dependent industries (e.g. textile industry) towards “heavier” industries (e.g. car industry) that took advantage of the country’s surplus of skilled workers at the time. By the turn of the millennium, Japan’s real GDP per capita had exceeded the $30,000 barrier, some six times higher than in 1960. During a similar time frame, Israel has become one of the most innovative nations in the world. Today, it is home to “Silicon Wadi”, an area concentrated by many of Israel’s 60 companies listed on the NASDAQ. Israel’s high annual growth rates averaging above 5% from the late-1960s to mid-1990s can be largely attributed to the government’s large scale social programs that aimed to build a technology based economy based on improving education in the 1970s allied with a process of structural change. The first element of the “Scarcity Paradox” ties in the link between natural resource scarcity and human capital accumulation. Heckscher (1919) and Ohlin (1933) argued that resource-poor countries such as Japan would not specialise in and export primary goods. The “Scarcity Paradox” argues that these countries are forced into developing a comparative advantage through other means, and therefore, most, if not all turn to building a productive and skilled workforce via an effective education system. Unlike in resource rich nations, the key determinant By Shunta Takino
  • 17. of future income of an individual is the extent to which they can build knowledge and accumulate skills, giving each person a strong motive to work with the aim of attaining a place at an internationally recognised university. It is also of critical importance that the public understands that an economy fundamentally relies on its net human capital which is determined by the quality of education provided and a willingness to work. Such fundamental values are held throughout the Far East and in many resource-poor nations, and the social pressure to perform at school borders on the extreme, giving further support to the “Scarcity Paradox”. Equally important is that teachers are given the considerable level of respect they deserve. In fact, according to the 2013 Global Teacher Status Index, the Chinese public considers teachers to be comparable to doctors in terms of social class, whilst in resource-rich United States they are equivalent to librarians. Although China has a significant stock of natural resources, it appears significantly less when divided amongst its 1.3 billion citizens. In the words of Julian Simon, the Chinese understand that “the main fuel to speed progress is our stock of knowledge”. The link between resource scarcity and human capital accumulation is supported resoundingly by findings of the OECD. According to the OECD’s Andreas Schleicher, there is “a significant negative relationship between the money countries extract from national resources and the knowledge and skills of their high school population” The second element of the “Scarcity Paradox” is well-documented and focuses on importance of human capital stock for economic growth and development cannot be exaggerated. As knowledge and skills are built up in an economy, finite resources become used more efficiently and labour productivity rises stimulating growth. Furthermore, fewer workers are required in the subsistence sector creating a surplus of labour. Higher wages rewarded in the “capitalist” sector (e.g. manufacturing) attract these surplus workers. As Lewis (1954) argues, this migration of labour leads to a gain in output due to the higher marginal product of labour within the “capitalist” sector. This has been demonstrated In Israel, where only 2.6% of the workforce are currently employed in agriculture, in comparison to 17.5% in 1958. During this period real GDP per capita almost quadrupled and now exceeds $20,000. Human capital also accelerates the rate at which new products and innovations arise, making firms dynamically efficient and encouraging investment into capital and R&D. Since most imported goods cannot be reverse-engineered, an important role of human capital is to facilitate in the adoption of new techniques as proposed by Nelson and Phelps (1963). Lucas (1988) extended upon this concept, suggesting that since knowledge and skills are “infectious” and cannot be contained, an accumulation of human capital benefits the macroeconomy on a more than proportional scale. Unfortunately, many governments have misinterpreted the “Scarcity Paradox” and the success of resource-poor nations as a matter that can be replicated by government spending on education. In fact, public spending on education bares little correlation to student achievement A 5.1% growth on spending under Labour on education during the first decade of the century did little to boost student performance, and the proposed cuts to educational spending may be a brave and admirable decision. In the UK, too much of the spending has been focused on “interactive whiteboards” and other new “gadgets”, yet in the highest ranking countries in the TIMSS (Trends in International Mathematics and Science Study), many teachers use simple blackboards with chalk. This example illustrates that the accumulation of human capital arises not through spending alone, but also through changing attitudes of the general public towards education. Resource-poor nations have become prosperous frontier economies within the global context by placing education and human capital accumulation at the forefront of public thought and government policies. They give us belief that from what appears to be the most adverse and undesirable situation, we can draw on our strengths to prosper and succeed. The “Scarcity Paradox” clearly suggests that it is about time that both developing and developed countries gave education and human capital the serious consideration they deserve. Instead of focusing on why resource-rich countries perform so poorly, economists ought to question why many resource- poor countries fare so well. ecconnected economists PAGE17
  • 18. shove?The ethics of nudge What did you have for lunch today? How did you decide? When does a nudge become a By TomGoldsworthy
  • 19. When does a nudge become a shove?It is not clear where this boundary lies.Libertarians want to leave peoplecompletely free to make their ownchoices and to potentially suffer fromthe consequences of bad choices too.Paternalists believe they know what is‘right’ for people and are inclined to bemuch more prescriptive in their policies.In other words, they believe that theprovision of information, the use ofsocial norms (influencing people byinforming them of what others are doing,a kind of social pressure) and changesto default options are all morallypermissible. So, what sorts of nudgeswould be ok in my book? The government now writes on everytax return form the proportion of peoplewho pay their taxes on time. Throughsocial pressure, more people pay theirtaxes on time, raising more governmentrevenue. In addition, automatic opt-insto pension saving schemes are also finein my view. Saving is crucial forretirement and it is often just inertia thatstops people doing this themselves. So,in my opinion, those two policies, andothers like them,are nudges, notshoves. Nudges should enable betterchoices, providing information butshould also preserve freedom of choice.A shove, for me, however, comes whenfinancial incentives and disincentivesare used and when choice is eliminated.So, a nudge would become a shove ifyou forced people to enrol in a pensionscheme because it was supposedly‘better for them this way’. Thateliminates choice and is both illiberaland immoral. Also, while I consider itacceptable to provide information aboutthe dangers of alcohol, I do not thinktaxation should be used to deter peoplefrom drinking it simply because the state deems it to be ‘bad for us’. Informationabout the dangers of alcohol is good.Changing the ‘default’ wine glass size inshops and restaurants is also ok.Positioning it less prominently in thedrinks section is fine too. Informingpeople about the proportion of otherswho drink responsibly would also bepermissible. I would class all these as‘nudge-like’ policies that are acceptable.But, alcohol taxation, that’s a shove.Limiting the amount people can buy,that’s a shove. Banning outright wouldclearly be a shove too. Another moral conundrum with nudgesis whether the state should be allowedto subconsciously influence ourdecisions at all. It is quite an ominousthought to think that the governmentcould use nudge theory to influence ourevery move, subconsciously mouldingall our decisions, choices andbehaviour. This question of whetherpeople should be aware of when theyare being nudged is an important one.Research suggests that when peopleare told how they are being nudged, thebeneficial effects of the nudge are oftenreduced. Does this mean that peopleshould be kept in the dark about whenthey are being nudged? Or is it a moralimperative that they do know when thisis occurring? I think it is a moralimperative. People must be fully awareof when they are being nudged. The toolshould be used openly andtransparently, no matter the reducedbenefits of the nudges themselves.Subliminal advertising is a practice thathas long been banned in the UK.Should we put nudges in the samecategory as subliminal advertising andban nudges where people are unawarethey are being nudged? Finally, to what extent should collectivebenefits be considered when decidingupon nudges? It is easy to see thegovernment moving from nudges thatbenefit the individual to nudges wherethe collective benefits. To give you aquick example, the UK behaviouralinsights or ‘nudge’ team proposed in2013 that everyone be automaticallyopted in to donating a certain proportionof their income to charity; those notwanting to participate would need toopt-out. This policy does not give anydirect benefits to the people beingnudged. But, crucially, they do bear thedirect costs of giving the money tocharity. Some would argue that nudgessuch as these are morally permissible.Certainly, on utilitarian grounds (theprinciple of the greatest happiness forthe greatest number), these sorts ofnudges with collective benefits arelaudable as they benefit society as a whole. However, inmy opinion, these sorts of nudges are astep too far. It is one thing to justifynudges on the grounds that theindividual will benefit but quite anotherto design nudges that benefit thecollective but in fact impose direct costson the individual. If you accept themorality of a nudge where the collectivebenefits but not the individual, youwould logically then support policies suchas an automatic opt-in to additionalincome tax, for example. Everyonewould be subject to an extra 25%income tax, unless they pro-activelyopted-out of the system. But, in myview, if a nudge does not benefit theindividual, it should never be acceptable. Without realising, every time you walk into the dining hall to grab lunch your choices about what to eat are influenced massively by the placement of the food. You are more likely to choose the food that is prominently placed, at eye level. Studies have shown that people are influenced by up to 25% in their decisions about what to eat simply by the food placement. “Ok”, I hear you say, “but how does this obscure fact relate to economics? This is an economics magazine right?” Well, ‘nudge’ as it is dubbed, is a new branch of behavioural economics popularised in the book titled - have a guess! - ‘Nudge’. Nudge recognises that choice is all around us. It also recognises that we can be subtly influenced in a positive way while preserving freedom of choice; this is dubbed ‘libertarian paternalism’. One famous example of this is the one I mentioned earlier. People can be ‘nudged’ into choosing much healthier food for lunch, reducing obesity rates. People can also be nudged to vote for a particular candidate in an election, pay their taxes on time and even urinate more accurately in the men’s room! However, the focus of this article is not on nudges per se, but on the ethics of nudges. When does a nudge become a shove? Is it moral for policymakers to subconsciously influence our decisions? Finally, should the individual or the collective be considered when designing nudges? ecconnected economists PAGE19
  • 20. Economic COMPLEXITYby Oli Wood SSOOUUNNDDSS CCOOMMPPLLEEXX. It’s pretty simple really. Haussmann argues that an economy can be measured by the amount of “societal knowledge” it possesses or, more simply, how much stuff it knows how to make. More complicated things (e.g. Smartphones) require more advanced skills to produce; this leads to greater knowledge in the country, giving the economy a greater growth potential. OOKK,, SSOO WWHHAATT MMAAKKEESS TTHHIISS DDIIFFFFEERREENNTT TTOO AANNYY OOTTHHEERR EECCOONNOOMMIICC MMOODDEELL?? In mainstream economics complexity isn’t really accounted for. Most of the standard models assume that developed nations just have more “stuff” than developing nations, which Haussmann argues is rather crude. Compare the UK economy with the Democratic Republic of Congo for example; standard models would tell you that the UK simply has greater and better quality: human capital (schools etc.), physical capital (factories, airports etc.) and institutions (government, banks etc.). But everyone knows that the UK economy doesn’t just have more “stuff”, it’s entirely different and has a far more complex structure. SSOO HHOOWW DDOOEESS HHIISS MMOODDEELL AACCCCOOUUNNTT FFOORR TTHHIISS?? Haussmann argues that economies are combinations of “capabilities”, which can be combined to produce a wider range of complex goods. A bank, for example, is a building block, as is a good university system and a good transport network. As a country gains more “capabilities” they are then able to make more advanced products and this accumulation of knowledge is the key to sustained economic growth. A country’s score is calculated by looking at its exports and then assessing what skills and “capabilities” are needed to produce these goods. He describes development as the accumulation of different capabilities; these capabilities then help to provide a country with sustained economic growth. II DDOONN’’TT SSUUPPPPOOSSEE YYOOUU HHAAVVEE AANN AAMMAAZZIINNGG IINNFFOO--GGRRAAPPHHIICC TTOO HHEELLPP EEXXPPLLAAIINN TTHHIISS?? PPOOSSSSIIBBLLYY WWIITTHH LLOOTTSS OOFF CCOOLLOORRSS AANNDD CCIIRRCCLLEESS?? OORR MMAAYYBBEE SSOOMMEETTHHIINNGG TTHHAATT LLOOOOKKSS LLIIKKEE AA DDAAMMIIEENN HHUURRSSTT PPAAIINNTTIINNGG?? Glad you asked…. TTHHAATT’’SS NNOOTT EECCOONNOOMMIICCSS.. It is, promise. CCAARREE TTOO EEXXPPLLAAIINN IITT?? Haussmann created a product map of the economy (it looks a bit like a spiders web). Each of the coloured circles or “nodes” represents a different product. For example, there’s a “scrap- metal node” and a “flowering bulbs” node. The size of the node represents the good’s share of global trade; a big circle means that the good is traded a lot. The different colors represent different industries; green, for example, is textiles and light blue is chemicals. If nodes are connected then that means they use similar “capabilities”. The node for TV’s is connected to the node for telephones, as they both require similar technologies to produce.
  • 21. “The Atlas of Economic Complexity attempts to measure the amount of productive knowledge that each country holds. Our measure of productive knowledge can account for the enormous income differences between the nations of the world and has the capacity to predict the rate at which countries will grow.” SSOO IIFF YYOOUU PPRROODDUUCCEE OONNEE GGOOOODD ((LLEETTSS SSAAYY TT--SSHHIIRRTTSS)),, AANNDD IITT’’SS CCOONNNNEECCTTEEDD TTOO AANNOOTTHHEERR GGOOOODD ((FFOORR EEXXAAMMPPLLEE,, JJUUMMPPEERRSS)),, IITT SSHHOOUULLDD BBEE RREELLAATTIIVVEELLYY EEAASSYY TTOO PPRROODDUUCCEE JJUUMMPPEERRSS BBEECCAAUUSSEE YYOOUU AALLRREEAADDYY HHAAVVEE TTHHEE RRIIGGHHTT SSOORRTT OOFF ““CCAAPPAABBIILLIITTIIEESS””?? Exactly. SSOO WWHHAATT DDOOEESS TTHHIISS MMEEAANN FFOORR DDEEVVEELLOOPPIINNGG CCOOUUNNTTRRIIEESS?? Well for some it doesn’t look good. Natural resources are very poorly connected. You see that big grey circle at the bottom? That’s crude oil. It’s connected to pretty much nothing, meaning that if a country specializes in oil then it’s very hard for them to begin producing anything else. This has led to an “oil curse”, with many politicians in developing countries becoming complacent with the seemingly constant flow of oil revenues. This can lead to impediments elsewhere in the economy, meaning its difficult for the country to move into more complex manufactured goods once the oil runs out. WWEELLLL TTHHAATT’’SS DDEEPPRREESSSSIINNGG.. WWHHAATT IIFF TTHHEEYY’’RREE NNOOTT RREELLIIAANNTT OONN OOIILL?? If they produce a good that has many connections, then it can be a good “stepping stone”. This can facilitate further diversification, allowing the country to develop. SSOO YYOOUU MMEENNTTIIOONNEEDD SSOOMMEETTHHIINNGG AABBOOUUTT PPRREEDDIICCTTIINNGG GGRROOWWTTHH?? Haussmann says that to predict economic growth they look at three things. Firstly, how productively a nation’s natural resources have been used. Secondly, how many “capabilities” they currently have. Finally, how easy it is for the economy to acquire more of them. Essentially, it is how connected your capabilities are and how centrally you are located on the complexity map. These three factors combined can produce a prediction that Haussmann argues is much more accurate than traditional indicators. AALLLL--RRIIGGHHTT GGEENNIIUUSS.. TTEELLLL MMEE WWHHOO’’SS GGOOIINNGG TTOO GGRROOWW.. One specific country Haussmann mentions is Mexico. He believes that compared to many other American countries (specifically Brazil), Mexico is in a superb position for growth. It has managed to diversify into many industries whilst Brazil, despite being one of the infamous BRIC economies, has mainly concentrated on natural resources. China is also singled out for praise, but is forecast to grow at a much slower rate of around 4-5%. SSOO IITT’’SS AA NNIICCEE TTHHEEOORRYY…….. BBUUTT CCAANN IITT HHEELLPP CCOOUUNNTTRRIIEESS TTHHAATT AARREENN’’TT GGOOIINNGG TTOO GGRROOWW?? Yes. As the accumulation of knowledge is the key to sustained economic growth, Haussmann argues that bringing skilled people together can help to create “capabilities” and stimulate growth. Whilst the creation of collaborative business networks with developed countries could help them to diversify their production and develop. See, sometimes economics can help. ecconnected economists PAGE21
  • 22. The very cruel irony of the international aid business is that those very problems it sets out to defeat are the problems it perpetuates and in some instances creates. The state-financed international aid business represents the total disregard of past experiences (failures) in favour of sclerotic and counter-productive measures to alleviate poverty and suffering. Not only has hope triumphed over experience, in some cases, perverse incentives (on the part of aid donors) have triumphed. Aid has decreased significantly as a result of the global recession in 2008; although this is welcome it could be reduced even further as billions continue to flow to donees. This paper will first outline how aid has failed African states and then explain why wealthy nations still give despite the data collected over decades proving they should do otherwise. It will then outline possible solutions to move the continent forward. Africa is not a country. It is a continent with multiple cultures, languages and systems of governance. Nevertheless all the states within it face common problems including: endemic corruption, mass poverty and a heavy reliance on aid. This paper will be focusing on the failure of aid in African (especially Sub-Saharan) countries because the continent has received over $1 trillion in aid over the past 65 years but yet the average per capita income remains below $1 a day. Hence, the inadequacy of systematic aid is most prominent on the poorest continent on earth. The international aid business can be defined as two types, (under the umbrella of systematic aid,) firstly, government-to-government aid, known as bilateral and secondly multilateral aid, which is provided by organisations such as the IMF and the World Bank. Aid can be judged as being successful if it helps a) relieve poverty significantly and b) establishes the fundamental structures on which economies can grow so countries rely less on cash transfers from wealthy nations. To be sure, such structures include: efficient government departments and civil service, a police force & judiciary free of nepotism, well functioning banks, developed infrastructure and a good education system. Of paramount importance is the ability of a nation’s citizenry to hold the government to account when these systems are inadequate or non-existent. Citizens of a nation are best placed to hold the government to account when the government needs them to generate revenue in order to adequately deliver public services. The international aid business creates a schism between a government and its people; the state no longer relies on its own people for revenue and thus has no incentive to develop or create the aforementioned structures required for long-term economic growth. A wealthy and growing middle class is almost non-existent in most African countries. This class of people will be the ones who will have a vested interest in a competent state; a state that will ensure that their income and property are well protected. According to a BBC report, the African Development Bank has calculated that those that live on a meagre $2 a day count as the middle classes in countries like the Ivory Coast. It is evident that the amount of income tax the governments of these countries will receive from their “middle classes” is miniscule in comparison with the stupendous amounts of aid. It is clear therefore that by warping incentives, aid cannot provide the long-term economic growth or even establish the key structures necessary for it. The state-financed international aid business represents the indefatigable triumph of hope over experience. BY KELVIN ANIM
  • 23. In addition talent is severely misallocated as a result of aid because governments receive an alternative source of income. With no help from their governments, qualified members of the population work for the private sector or move abroad. This includes principled people who are unwilling to corrupt themselves in order to win the support of the government and thus vast amounts of aid money. This necessarily means that less talented and relatively less educated people fill the ranks of the civil service and other public institutions. Ethiopia, which received over $3 billion in aid in 2010, has a net migration figure around -300,000. It is evident that what exists in most African countries is taxation (however little governments receives from income tax) without representation. Government inefficiencies as a result of aid (as analysed previously in this paper) can cause investment and trade to stagnate. Foreign companies fear that disordered and corrupt governments cannot be trusted to hand over the proceeds of investment. Multiple layers of unnecessary bureaucracy also massively deter foreign direct investment into Africa. To illustrate the level of bureaucracy that exists Dambisa Moyo states in ‘Dead Aid’ that, “in Cameroon, it takes an investor who seeks a business license on average 426 days to perform fifteen procedures, and in the USA, only forty days and nineteen procedures.” In their paper ‘Regulation and Growth,’ Simeon Djankov, Caralee McLiesh and Rita Maria Ramalho calculated that a country that improves business regulation could lift GDP by 2.3% a year. However one must concede that a lot of investment still goes to Africa. In 2011 there were 45 projects (funded by foreign firms) in Nigeria and 55 in Kenya. Moreover the continent attracted $82bn in investment in 2011. Be that as it may FDI should be much higher for the continent as its very low labour costs (comparatively lower than that of most Asian countries) should be of great interest to foreign investors. If one turns their attention to Asia one notices that FDI into China alone exceeded $100bn in 2011. Charity from economically developed countries has crippled Africa’s ability to capitalise fully on its vast mineral resources and low labour costs. Whilst aid is not the only reason why an economy can fail to grow, it is has proved to be one of the most pernicious reasons why over 40 economies have stagnated or failed to get anywhere near their potential. Hope continues to triumph over experience. Economic models that have been implemented (in most instances) are, and should be judged, as a success or a failure, based on resultant facts and figures that are drawn after their implementation. So why then does aid continue to flow in copious amounts in defiance of the apparent harm it is doing? The first reason is that celebrities and prominent politicians have adorned the giving of aid. Shows and concerts such as Live 8 and indeed TV advertisements create the hope and buzz among the public which triumphs over evidence and experience. Hope is created by these ventures because a one-sided assessment of aid is presented. After all, it is very difficult to openly criticize aid when proponents of the model depict poverty so viscerally and present it to a Coldplay and U2 soundtrack. Discourse on the topic literally becomes obscured by noise and politicians are paralysed in challenging the dominant paradigm. Furthermore, the voices of African leaders are rarely ever publicized in global discourse on aid. Recently, critics of aid, like Rwanda’s President Paul Kagame, have gained prevalence and notoriety; however the popularity of their analysis pale in comparison to those who advocate on behalf of the aid model. ....TV advertisements create the hope and buzz among the public... ...celebrities and prominent politicians have adorned the giving of aid. blah, blah, blah. ecconnectedeconomists PAGE23
  • 24. Charity from economically developed countries has crippled Africa’s ability to capitalise fully on its vast mineral resources and low labour costs. Another eremitic reason why governments and multilateral organisations still propose the aid model is that, when combined, they all employ over 500,000 people who rely on interest payments to earn a living. There also exists a commercial incentive why the aid bandwagon must roll on. Rich countries, for example the UK and USA, donate to foster ideal political and economic practices; this includes the promotion of democracy and free market policies in African countries. This practice is referred to as tied aid. By attaching conditions to aid economically developed countries seek to pedal Western narratives (which are not necessarily harmful.) However there is both a time lag and chicken-and-egg problem with this approach. First, conditionalities only work for the next batch of aid because there is no incentive for recipients’ to adhere to them now because they have already received a substantial amount of aid. Second, democracy and an efficient free market environment emerge organically, over decades, after a country has accrued wealth and a strong middle class. By forcing change through aid, without first creating a section of society that has a vested interest in change, development is stuttered and unworkable. Tied aid is also detrimental to the domestic demand of African countries, as rich nations require donees to import certain goods and services in return for aid. A report by the Guardian in 2011 stated, “In Uganda, for example, only 18% of the contract value of World Bank-funded projects went to local firms. For contracts valued at over $1m, that share dropped to 11%. Firms from China and the UK won the bulk of large World Bank-funded contracts in Uganda, 32% and 19% respectively.”The disconcerting truth is that conditional aid is in no way benefiting recipient countries and in this case we observe poor countries being treated as cash cows. Not only is experience losing in the battle with hope, the malicious interests of some donor states are winning as well. In the face of all these problems there are some solutions to Africa’s woes. This includes the relaxing of trade tariffs and quotas by, primarily, the European Union and the United States and an expansion in bond markets. In regards to the first, Oxfam reported in 2002 that developing countries face tariff barriers four times higher than those faced by rich countries. Moreover these barriers cost developing countries over $100bn a year, twice as much as they receive in aid. If developed Western nations truly want to help Africa, opening up their markets is critical. Companies such as African Cotton employ thousands of people across the continent; but protectionist policies prevent them expanding and creating the all-important middle class. Trade under the African Growth and Opportunity Act could be expanded to benefit more than the handful of countries it currently does. Protectionist policies by OECD countries are not benign. They actively contribute to poverty in African countries; excess produce, which result from over subsidised goods, is dumped in Sub-Saharan African states. This undercuts local food prices and destroys businesses whilst at the same time the EU sells oranges and bananas above world market price within its own borders. Upon failing to access European and American markets, Africa, as it is now doing, can turn its attention to China. With over 1.3 billion people and only about 10% of its land arable, China has a massive incentive to open up its agriculture market to Africa. Unlike its Western counterparts the Chinese government focuses almost exclusively on doing business with Africans states rather pedalling narratives about how government should operate. Although this may sound counter intuitive, this approach means that the government of the People’s Republic deals directly with businesses most of the time; investing heavily in viable projects and building strong trade links. In its bid to develop food security, China invested $3.5bn in African agriculture between 2006 and 2012. This is an innovative alternative to gross amounts of aid and represents the triumph of Chinese experience and business over hope. The state-financed international aid business represents the indefatigable triumph of hope over experience.
  • 25. STATES WITHIN AFRICA COULD ALSO RELAX TARIFFS AS TRADE BETWEEN COUNTRIES IN THE CONTINENT AMOUNTS TO ONLY 10% OF EXPORTS. As noted previously, an alternative to aid is the issuance of bonds by African countries. There are several reasons why this form of borrowing is better than the one that exists in the aid model. First, donees have longer to pay back their loans under the aid model (some World Bank loans last for fifty years.) In the private markets this is often under thirty years. Thus the incentive to repay a loan and invest wisely in viable projects and government departments is greater under the system in which bonds are issued. Secondly, in private bond markets, there are harsher punishments for defaults and non- payment and therefore better discipline among borrowers is fostered. Third, because interest rates attached to aid are lower, countries can often find themselves reliant on it. Bonds provide countries like Ghana, Rwanda, and Gabon a sustainable route to development that can be controlled by sovereign governments and build up a class of African entrepreneurs, who will later have a vested interest in a corrupt- free government. After raising $400 million in capital Rwanda, was able to expand an airport, build and maintain a hydroelectricity plant (employing hundreds) and as a result witness economic growth averaging about 8% since 2003. This paper proposes that in decades to come, the African Union could, as it has talked about doing, issue bonds as a way of mitigating against the risk of default and in turn acquire a higher credit rating than individual countries would receive. Fundamentally, bonds teach states fiscal discipline in a highly competitive environment; the rewards for maintaining discipline can be high as Rwanda and Ghana are discovering. At the core of the failure of the aid model is the belief that Africans are helpless in shaping their own destiny. Systematic aid has documented failures and in hardly any other sphere of economics is it acceptable to allow hope and the crossing of fingers to win over hard data and experience. Charity can take more than one form; there are alternatives that can take a great number of people out of poverty and quickly. Rather than appealing to hope, states should turn their attention to business, only then will we see Africa reach its potential. BY KELVIN ANIM Bonds provide countries like Ghana, Rwanda, and Gabon a sustainable route to development ecconnected economists PAGE25
  • 26. Interviewed by Jamie Cuffe 15th March, 2014 with “an interview” Diane Coyle DR.DIANE COYLE,OBE IS AN EMINENT ECONOMIST AND AUTHOR OF NUMEROUS BEST SELLING BOOKS ON ECONOMICS. SHE STUDIED AT OXFORD AND HARVARD BEFORE JOINING THE UK TREASURY.SHE LATER BECAME A JOURNALIST, WORKING FOR THE ECONOMIST,INVESTORS CHRONICLE AND INDEPENDENT,AMONGST OTHERS.SHE IS NOW TEACHING AT THE UNIVERSITY OF MANCHESTER. I was convinced that the new digital technology would change the way we work in economics so I wrote about that. What made you take to Economics when you were at school? I did not discover Economics until I was at University. I went to Bury Grammar School. I was desperate to escape to study Philosophy so chose PPE at Oxford. My tutor there opened my eyes to how wonderful Economics was, I stumbled into it by accident because of a great teacher. How did you get into writing about economics? I had always enjoyed writing for the school magazine and I wrote for Oxford’s independent student newspaper, Cherwell. When I left the Treasury I kept applying for jobs in journalism and got a job at The Economist. An agent rang me and said that many publishers wanted a book on economics and would I like to write one. I was convinced that the new digital technology would change the way we work in economics so I wrote about that. From the Weightless World, published in 1997, to GDP: A Brief but Affectionate History, published in 2014, you have published seven books and numerous articles. Is there something that lead you from one book to the next? Each time I write a book I say it is the last one, but then I get interested in a subject and write another one! People suggest ideas to me. My publisher, Princeton University Press, suggested the last one. At first I thought it was a dry topic, but, as I researched it, I realised there was so much to it. Do you think the actual GDP measurement matters, so long as it is consistent? Good question, there is such a large margin of error, for example, measurement errors across countries. Small revisions change the story about how that country is doing at different times. GDP as a measurement is flawed but we need to stick with it for now until someone comes up with an alternative. GDP does not measure innovation at all well, for example. The best approach is not to have a single measure but to look at lots of factors like work life balance, quality of life, conventional indicators like unemployment. That is called a dashboard approach. In broad terms, GDP is a useful measurement but we need to be cautious. In the mid 1990s, for example, everyone said that US capitalism was so good because their GDP was so good, then they said the same thing about China and emerging markets. The trend is probably true but it has been over exaggerated. Your thesis was on the dynamic behaviour of employment. What do you think of the unemployment situation in the UK at the moment? With classical economic theory stating that inflation rises with employment, when do you think that Mark Carney will raise interest rates? I don’t do macroeconomic forecasts. It is too hard. Whether or not interest rates go up is up to monetary committee. It is very hard to predict. There is uncertainty about how liquidity will evolve from the assets market and where it will go from there. We have been lucky that unemployment is not higher but I am particularly concerned about conditions for young people. The employment situation for them is much worse than a generation ago. Your book Sex, Drugs, and Economics deals with the economics behind controversial topics. What was the most intriguing topic you investigated? I was interested in the way Napster was changing the music industry. I also liked seasonal variations as, despite the seasonally adjusted data we are often presented with, the economy is very seasonal. It is a big thing in the real world that we don’t think about.I started with the raciest issues to sell books!
  • 27. In your books, The Weightless World, Governing the World Economy, and The Soulful Science, you discuss how economies must adapt to changing economics and how technology has changed economics. What are the most significant examples of how technology has revolutionised economics? The internet and disruptive technology. It has changed in lots of ways, let me give you two examples. The first is the mobile phone revolution. In countries like the UK, mobile phones are a nice extra form of communication but in developing countries, where there was no access to communications, mobile phones are revolutionary. Social and economic opportunities are being created because of mobile phones. Another example is to look at the new way in which goods and services are now being produced due to the disintegration of the supply chain. Components are made in different countries for one product but people do not break down the individual components in trade figures. For the iphone, for example, many components are produced and in different countries but that is not taken into consideration when we are looking at trade figures. The bilateral deficit between China and the US is not as big as stated because goods have been shipped out of the US (and Korea, and Japan), to create goods assembled in China, but In your book “The Economics of Enough”, you discuss the development of a sustainable economy, which prioritises saving and investment over current consumption. Is it possible to achieve this? If so, how? I don’t know, it is very hard but we are swimming in a sea of uncertainty about how much we are eating up tomorrow’s resources. We don’t know what is sustainable as you need to make assumptions about the future. But we ought to think more carefully about trade offs in short and long term. For example, data on pension funds shows that the funds have a short- term horizon when looking at returns and that can’t be healthy. What do you think some of your future books might be? I have recently taught a course in public policy and economics for the University of Manchester where I started in September as professor. When looking at investing in infrastructure, there are lots of ways to make profits but we need to think about how the policy process itself works. How do officials deal with that advice and what do they do about it? You are a member of the Competition Commission. In your opinion, how does the UK compare to other EU countries in terms of its competitiveness and innovation? It is hard to make an overall judgment as it depends on the sector. In some sectors we compare well, the market is easy for new entrants. Some sectors are bad both in the UK and the EU, for example getting into electricity industry because of the large start-up costs, but that is true everywhere. There are some areas where the UK does badly compared to the EU, for example in retail banking and small business banking where banks serve less well and are less competitive than in other countries. The book "What's the Use of Economics" which you edited following a conference in 2012 concerns the revision of undergraduate courses with the goal to equip future economists to deal with today's challenges. What should an undergraduate student of Economics learn that they are not being taught now? Students should learn more about economic history, especially recent history. There are some universities where students dont learn about the economic crisis. Students need to know about basic tools, practical data handling and statistics rather than theoretical. They should be taught cost benefit analysis. All undergraduates should be taught communication skills. There are lots of areas of the economy, for example behavioural economics, more sophisticated two sided markets, and those with platforms, that are never taught to undergraduates. However, if you go into a job in the city or business you need to know about these things and besides it is interesting to learn! Which economists do you admire at the moment, who should we be reading? Ed Glaeser at Harvard writes about urban economies. He is a creative thinker, there are no gaps between him and the real world. Tim Besley at LSE writes about political economic issues. Danny Quah has done fantastic work on emerging economies. What are the top three interesting areas of economics that are changing the way we look at the subject? Randomised control trials, used in some developing countries for aid projects for example. The UK is good at conducting these but no other OECD country is even piloting this. Behavioural economics looks at how people are making decisions on economic issues, cognitive science and how the brain works. Supply chain questions and how technology is rearranging the world of work. It is interesting to note who benefits, which jobs go and which are created deals with the economics behind controversial topics. Your book Sex,DrUGs, and ECONOMICS connected economists PAGE27 ce
  • 28. connected economists ec When does anudge become a SHOVE MEDIA PIRACYBLAME OR ACCLAIM? BEHAVIOURALECONOMICS:Or How Being HumanAffects Our Decisions? The UnsungEconomistBill Phillips Achtung!Why has Germanydominated the carindustry for so long? FOUNDERS Jamie Cuffe and Doug Feagin EDITORS Jamie Cuffe, Doug Feagin, Henry Mitchell and Tom GoldsworthyCONTRIBUTORS Mohammad Lone, Kelvin Anim, Oli Wood, Shunta Takino, Harry Elliott, Ahaan Arora, The Economeast GRAPHIC DESIGNER Mr. Mark Prendergast The editors would like to thank the following peopleand organizations for their help, advice and contribution in putting this magazine together: Mr. Geoff Riley, Tutor2UMrs. Diane Coyle, University of ManchesterMr. Mark Littlewood, IEAThe Economeast All of the other economists who contributed articles The state-financed international aid business represents the indefatigable triumph of hope over experience. TheScarcity Paradox The Economics of DEATH book reviews Fear the BOOM not the BUST Economic COMPLEXITY