Blog: Economics in Action

A great article in the wall street journal shows the link between economics and the recent earthquakes.

“It’s not by chance that Chileans were living in houses of brick—and Haitians in houses of straw—when the wolf arrived to try to blow them down. In 1973, the year the proto-Chavista government of Salvador Allende was overthrown by Gen. Augusto Pinochet, Chile was an economic shambles. Inflation topped out at an annual rate of 1000%, foreign-currency reserves were totally depleted, and per capita GDP was roughly that of Peru and well below Argentina’s…

Milton Friedman has been dead for more than three years. But his spirit was surely hovering protectively over Chile in the early morning hours of Saturday. Thanks largely to him, the country has endured a tragedy that elsewhere would have been an apocalypse.”

Read the article here.

“Fear the Boom and Bust” a Hayek vs. Keynes Rap Battle

Econstories.tv is a place to learn about the economic way of thinking through the eyes of creative director John Papola and creative economist Russ Roberts.

In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis.

Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there’s a “boom and bust” cycle in modern economies (as you do) and good reason to fear it.

Get the full lyrics, story and free download of the song in high quality MP3 and AAC files at www.econstories.tv

Discuss and enjoy guys!

In many ways economics is the study of incentives. An incentive is any factor (financial or non-financial) that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives.

In English, Incentives make you want to do something you otherwise wouldn’t want to do. Today let’s talk about an incentive which is in the media at the moment, the oft criticised, proposed , marriage tax break.

The plan, is essentially an easy one. Cut the cost’s for people who want to get married via a tax rebate, and it makes sense. There is a lot of evidence to support the claim that marriage is good for society.

As the Telegraph reports

The statistical evidence is overwhelming: children brought up by two parents do much better, on average, than children brought up by just one. They are less likely to drop out of school or end up in prison, and more likely to pay taxes and remain in employment. This is not to deny that single parents do an excellent job and raise children who grow up to contribute much to society. It is simply to point out that across the population as a whole, two-parent families are more likely to achieve that result – and couples who marry are five times more likely to stay together, and provide that positive environment, than those who cohabit without any public commitment.

We all benefit from well-adjusted children, who are ‘polite, well educated and contribute to society’ this is what economics calls an ‘externality’ a benefit by a party that is not directly involved in the transaction. Parents are paying an extra  cost which we all benefit from.

Well the first is the claim by Ed Balls that the tax is “trying to socially engineer family life through a tax policy… [it] is hugely expensive and unfair.”. An economist would claim however that “Ahhhh! All taxes change peoples behaviour”  and The Working Families Tax Credit increased the benefits available to single mothers who sought employment thus penalising women who stayed home to look after their children or who remained with their husbands.(the latter claim being VERY  VERY contentious)

The second claim is that the credits “could stigmatise children” whose parents are not married. Again many feel that this is false by providing tax incentives for marriage it is difficult to see how it would  “stigmatise” the children of the unmarried, any more than providing incentives for single parenthood would “stigmatise” those whose parents live together.

There is of course one issue with the above arguments, they all involve children,  supporting and subsidising ALL married couples regardless of their parental status, in effect , penalises everyone else. So should the ‘tax break’ be administered to just  married couples with children? I don’t know?  Of course, nothing will replace a loving, stable, family; interested in their child’s upbringing and this is something that no taxbreak can fix.

Lets talk about debts.

There has been a lot of talk in the media about debt. Whether it’s Greece’s spiraling debt, Iceland’s refusal to pay its debt, Dubai having its debt bailed out, Football clubs fighting to stay afloat in sea of debt, student loans and student debt, or the spiraling levels of consumer debt, debt is in the news a lot at the moment. The UK is currently at a record level of national debt, and so is the United States.

But what is debt, and what does economics have to say about it? Debt is borrowing something; an asset, and then paying it back over time.  This immediately leads to some issues; how do you know the person you’re lending to can pay you back? Why would you lend your money to someone? And how do you make money out of lending your money to other people?

One way this is dealt with is via the interest rate. This is a percentage that is paid on top of the amount borrowed, for example a 10% rate on a 100-pound loan results in £110 to be paid back (10/100*100=10). This economic revelation results in all 3 criteria being fulfilled, money being made, money being lent to those who can pay it back (via a method known as self-selection) and therefore an incentive to lend.

Economics teaches us a wide variety of ways to calculate the interest rate. This seemingly asinine thing is fascinating the more you study it. You see the interest rate affects all sorts of things. If the rate of interest falls, then the charges on a loan to buy larger items like cars, furniture, electrical equipment and so on is also likely to fall. Therefore total sales of these goods are likely to increase. Holidays are likely to become more likely and more houses will be sold. You will likely see more tourists as the exchange rate falls (and pounds become cheaper) One of the key things you will learn from economics is that changes to things like the interest rate have knock-on effects (also called externalities). This principle applies to a whole variety of things from signage to coffee prices. Your question this week is what implications could there be to Iceland not paying off their debt?

Answers on a postcard please.

What does economics teach? Why study economics Whats the big deal? In a lecture
by Robert P. Murphy of the ‘Mises Institute’ he explains ‘ The Core of What Economics Teaches’
in yet another fascinating video.

Economics is a fascinating subject, but it is always controversial.
Here the always controversial ‘Mises Institute’ present their take on the recycling debate and whilst we don’t have to agree with their solutions the arguments are important to understand!

Let us Know what you think!?

Image copyright of mises.org/

John Maynard Keynes was born in 1883 the same year that Karl Marx died, and whilst both wrote critiques of the capitalist system here the similarities end. Marx was an angry loner, his ventures and business failed and the majority of his life was spent in exile. Working anonymously and alone in  the British library, Marx spent many years sculpting his theories about the inevitable overthrow of the free market system. Perhaps the saddest thing is that Marx never lived to see his theories proved wrong.

Keynes was very different, a dashing figure and a brilliant economist, who could also mix with the elite of British society. Keynes attacked the inequalities and inefficiencies of the capitalist system it didn’t stop him from making a small fortune speculating on the foreign exchange markets.

Keynes was also a visionary, while the Allies were clamoring reparations to be imposed on Germany he saw that they would be would be impossible to repay claiming that it would reduce

His book on the subject “The economic consequences of the Peace” became a best seller. Keynes didn’t just restrict himself to economics, he wrote a book on mathematical philosophy, was a leading figure in the Bloomsbury group of leading artists, poets and writers. He even opened his own theater, which proved a great success.

Keynes was brilliant at many things and he knew it. Once he was placed second in an economics exam. His only reply was that:

“That shows I know more economics than the examiner.”

It was the effect of the great depression that led Keynes to his greatest work. He scoffed at the orthodox free market economists who said the government should do nothing in the face of mass unemployment. Keynes’s strategy was for the government to intervene by spending, if necessary by borrowing. This would create jobs, which would give income for others to spend thus creating more jobs. A simple idea but one too radical for western governments who were too unwilling to borrow. (Un)fortunately it wasn’t until the Second World War that  governments were forced to spend so that employment increased to pre 1929 levels.

Unlike the  radical ideas from economists such as Malthus, and  Marx .  Keynesianism wasn’t rejected by later theorists the vine but became part of the economic orthodoxy in turn creating a whole section of economics (Macro Economics).

The legacy of Keynes is remarkable; governments in the West followed Keynesian policy’s up to the 1970s. Generally these decades were seen as a time of great stability and prosperity. Full employment was maintained and many countries experienced record growth.

However economics is a fluid subject,  Keynesian economics fell out of favor with a recent resurgence of support for neo-classical ideologies with governments once again praising the ideals of the free market.

However following the rise and fall of (Neo)Orthodoxy Keynesian theory has seen a resurgence fortunately time and space prohibit a discussion of this latest development right now . The previous Bush administration showed remarkable fiscal irresponsibility. The current budget deficit is approaching $600 billion combined with a current account deficit of approximately $665 the US economy is anything but a paradigm of classical economics.

In our next Blog we will look at the rise of (Neo) Orthodoxy and we will look at Keynes’s doppelganger Milton Friedman.

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.

It is debatable whether economics should actually be defined as being a science. After all, unlike Chemistry or Physics in which you type in some numbers, solve a complex equation and Bob’s your uncle there’s the answer. Economics involves an argument. Whereas science  attempts to prove something is irreversibly, permanently, and everlastingly true. Economics will rarely give a simple answer. Ask 5 economists a question and the joke goes-you’ll get 6 different answers.

Because of this economics has provided us with a wide variety of rich and interesting characters and over the next few weeks we hope to introduce you to some of them!

So you want to be an investment banker?

Banking and finance are a common destination for economics graduates. Banks value economist’s as they have quantitative skills as well as an analytical flair and a good business knowledge.

On good website to see what a life in investment banking is really like visit a great website we found called ‘mergers and inquisitions’ detailing every thing from investment banking ‘lingo’ to an average day and of course the pay- it’s a good starting point for those who want to know models about this highly demanding but very well paid career.

Another great site is the Deuchste bank website which have published this guide

Of course if you don’t fancy doing something like Banking there is a wide variety of subjects which can be studied