Economics in Action

The inevitable has finally come!

In his Spending Review yesterday, George Osborne announced a 40% cut in the teaching budget for universities. This is part of the coalition’s plan to tackle the UK’s historical deficit. Universities now have no other option than increase tuition fees in order to fill the new gap in funding. This will be possible if Browne plan is implemented. Essentially, the implementation of this proposal will create a free market for higher education in the UK, very similar to what already exists in the US. However, this also signals the end to a great education system that used to be free and available to everyone. So, what do we take from this?

The cost of teaching a degree is estimated to be around £7,000. Under the current system, universities are allowed to charge students up to £3,290, which most of them do. The remaining cost is then subsidised by the government. If the cap on tuition fees is removed, we can expect most elite universities to raise their fees without facing a decrease in demand for places (demand for places at big universities is indeed very inelastic). This will enable them to invest more in researches and compete with big American universities.

However, there is also a downside to this. Firstly, creating a market place for higher education will benefit only a certain group of universities. As in any other competitive market, smaller and less prestigious universities will struggle to compete and shut down eventually. This will increase unemployment level in the public sector (not every lecturer can go and work for a private company), which in turn will have a wider adverse effect on our newly recovered economy. Furthermore, bright students from poor families will no longer be able to go to places like Oxford or Cambridge simply because they cannot afford them.

In the end, higher education is a public good that will always be under provided in a market system. This is why government provision of education is so vital. However, a market for higher education now means it is money that gets you into the best universities, not your real academic potential.

Please comment below to let us know what you think.

With Greece’s debt rated ‘junk’ what effect will it have on the rest of Europe and the UK?

Stephine Flanders writes that

“Like other governments that are borrowing a lot, ours would be vulnerable if international investors decide, overnight, that sovereign debt isn’t a safe bet after all. We recently won the chance to host the Olympics. But there the similarity ends…

That may change. We may, after all, have some serious political uncertainty coming down the track. But market movements today are a good reflection of the distance between London and Athens.

Investors may worry a lot more about Britain’s public finances than they did a few years ago. But they worry half as much about it as they worry about Greece.”

Its worth a read you can find it here.

Why does this matter? Well think back to the banking crisis two years ago and the knock on effect that one shake can have on a nation. Imagine rather than banks whole nations collapsing.  Economist Jonathan Loynes, of Capital Economics, said that Greece could be a “sovereign equivalent” of Lehman Brothers; the bank which started the collapse.

Will we have to bail out a whole country? Several countries? Time will tell.

We’re not out of the woods yet.

“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. (more…)

Graffito of Keynes, photographed by r2hox, via Wikimedia Commons

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 (more…)

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.