Economics in Action

Karl Marx was an unwitting world changer. Unlike his predecessor Adam Smith, Marx saw and believed in the inequality that capitalism could bring. This inequality would lead to a revolution of the oppressed workers leading to the formation of a Communist state.  However, like the rest of his economist kin, Marx loved to write, his principal works, Das Kapital could make claim to be one of the longest (and most boring) books ever written. However his ideas when teamed up with accomplished writers were haunting.

A leaflet called the ‘Communist Manifesto’, which was distributed to the masses in London contains several passages which to this day remain a part of the canon of political economy.

“A spectre is haunting Europe — the spectre of communism”

“ The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a communist revolution. The proletarians have nothing to lose but their chains. They have a world to win.”

Despite the attractions of Marxism, it never really took hold in the US and Western Europe. Economists were just too enamored with the free market orthodoxy of classical economics. Just to remind you, these economists differed little from the original ideas postulated by Adam Smith.

However in the 1930s free market economics was to face an impossible challenge – The Great Depression. With it came mass unemployment, bankruptcies and falling output. Western democracy itself was threatened. The result of this was a new way of thinking about economic problems and the end of blind optimism that economists held that in the Long Run everything would be OK.

Thus it was in the middle of the great depression that J.M.Keynes rose to prominence retorting to orthodox economists that “In the Long Run we are all dead” Keynes saw no point in waiting a couple of decades for the depression to come to an end. Keynes argued for immediate intervention and by that he meant that in particular the government should spend, spend, spend.

We will look more at Keynes next week.

Image copyright of roland (flickr)

One of the first scholars to grace our lovely discipline was Thomas Malthus. An early proponent of “The end is nigh” syndrome he is mainly remembered for his essay on Population- where he argued the human race was doomed because the population was increasing at a faster rate than our capacity to grow food. Unsurprisingly it was Malthus who claimed for economics the label “The Dismal Science”.

The communist Lenin sharply criticized Malthus theory calling it a “reactionary doctrine” and “an attempt on the part of bourgeois ideologists to exonerate capitalism and to prove the inevitability of privation and misery for the working class under any social system”- and if you don’t understand what that means, don’t worry neither do we.

Fortunately Malthus displayed a trait that many economists would later share – he was wrong. The population didn’t starve and in fact during the nineteenth century the forces of capitalism flourished creating unprecedented wealth for those who owned the means of production. To find why we will need to look at our next great economist Adam Smith.

The Economist is running a feature article on how the world is, gradually and unevenly, becoming more prosperous and peaceful. Yes, wars and genocides are happening right now. Yes, huge numbers live in extreme poverty and millions of children die each year from preventable disease. However, the figures brought together in this article show that, while those things are horrible, far fewer people are experiencing them than in previous decades. Public health, birth control, immigration and Middle East conflict are among the issues touched on.

It’s not easy being a pirate on the high seas. There is always a possibility that your crew will kill you and take your share of the loot. Since piracy is criminal by definition, you can’t call on the police or courts to enforce contracts. So a pirate ship needs a way of keeping order, just as a country does.

Economist Peter T. Leeson of West Virginia University has released a working paper arguing that 17th Century pirates actually used constitutional democracy, achieving this before either the USA or England. This is is an important recurring theme in economics: how self-interested individuals can work together to achieve a common good.

Read More: An-arrgh-chy: The Law and Economics of Pirate Organization (Abstract of the paper on Social Science Research Network)

Peter T. Leeson (2007) An-arrgh-chy: The Law and Economics of Pirate Organization (full paper in PDF format)

In the second of a series of interviews with economics researchers at the Royal Economic Society Conference 2007, Romesh Vaitilingam talks to Richard Kneller about the effect of exchange rate movements on UK exports.

Listen to this interview

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Changes in exchange rates have little impact on UK manufacturing exports and are likely to have only a modest effect in reducing the countrys record trade deficit, according to research by Dr Richard Kneller and colleagues, presented to the Royal Economic Society’s 2007 annual conference at the University of Warwick.

Dr Kneller said:

The findings may surprise many people intuitively you would expect a strong pound to be bad for exports and a weak pound to lead to much greater exports. (more…)

Volatile Bangladesh pins hopes on an economist Associated Press proclaimed this month, headlining the story of how the country’s former central bank head Fakhruddin Ahmed was called in to lead its interim government and rescue scheduled elections.

In fact, Bangladesh turned not once, but twice, to an economist to resolve its political deadlock. Dr Ahmed, who worked at the World Bank after his economics PhD from Princeton, took the job after it was turned down by Professor Muhammad Yunus, awarded this year’s Nobel Peace Prize for pioneering micro-credit at the Grameen Bank.

(more…)

How can we help the developing countries of Africa? This three-minute BBC radio interview (RealPlayer required) features an interesting take on the issue from Paul Collier, an Oxford Professor of Economics.

Collier points out that Africa has some fragile democracies which are at real risk of falling to a military coup or descending into civil war. The security that comes from stable government makes it more feasible to escape the cycle of poverty. Hence the rich European countries could help by supplying some of their military power, if backed with a legitimate authority.

The UK has the fourth cleanest water in the world, and the fourth highest per capita military spending. A coffee from Starbucks involves resources from up to nineteen different countries. These are some of the hundreds of facts presented in interesting visual summaries by the International Networks Archive. Topics include The Global Arms Trade, the Coming Water Wars and the global success of McDonald’s.

Hatred of immigrants, sometimes translating into violence, is not only harmful to the immigrants themselves but is damaging the South African economy, reports the South African Human Rights Commission.

Immigrants workers and traders not only help the economy by providing skilled labour, but also spend money on goods and services. Traditional prejudices about immigrants from the rest of Africa contribute to an incorrect perception that they are contributing to crime and abusing social services.

Read more: “Xenophobia has an economic cost”, IRINNews.org, 31 July 2006.

Reference: “Report of the Open Hearings on Xenophobia and problems related to it”, SAHRC, 15 June 2006.

Listen to the interview

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Does lack of freedom result in greater support for rebellion in countries like China or Saudi Arabia? And if so, what is the cost of buying off the potential threat of greater instability via faster economic growth?

Research by Robert MacCulloch and Silvia Pezzini suggests that a policy of buying off trouble by going for growth when freedoms continue to be denied requires close to unattainable rates of sustained economic growth. Instead, more should be done to promote political rights and democracy, where revolutionary fervour is strongly increased by lack of freedom. (more…)