Economics in Action

Is this economics explained in one picture?

Who would you give the iPod to?

Hat tip @gregmankiw

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. Read the rest of this entry »

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.

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 K R Ranjith (flickr)

One of Economics’ strongest exports was the economist Adam Smith.

In his book “The Wealth of Nations” Smith made the seemingly paradoxical claim that if people follow their own self interest, this will have the remarkable effect of increasing the overall benefit too society. This seemingly simple principle unfortunately took Adam Smith 1,260 pages to say. (Unfortunately very few economists have ever learnt the art of being concise.)

Adam Smith has become synonymous with free market economics. However, people often forget this Scottish intellectual
was primarily a professor of moral philosophy at Glasgow University.

At any rate this contradictory yet accurate argument about the free market remains the centre of all major debates in economics.

Is unbridled free-market Capitalism really the best economic system?

Even the most ardent free market economist cannot ignore the fact capitalism creates inequality and if you just look around this inequality is painfully evident. Thus many economists came along to challenge the free market ideologies of Adam Smith.

This takes us to our next great economist- Karl Marx