Griffenomics - Issue 1 by Abingdon Publications

ABINGDON SCHOOL’S

GRIFFENOMICS SUMMER TERM

ISSUE ONE

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PAGE EIGHT

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INTRODUCTION

INDUSTRIALISATION

PROFILE: ADAM SMITH

ECONOMIC DECLINE

We take a look at the economics of the fairly recent London 2012 Olympic Games

Industrialisation may not always be a good thing. We look to India as an example.

Find out about the man whose face is on our £20 notes and his impact on modern economics.

The Romans, the Turks and the Spanish. Find out how economics is linked to their failing empires.

GRIFFENOMICS ISSUE 1

CONTENTS

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INTRODUCTION

BUSINESS STRATEGIES

INDUSTRIALISATION

LAND REFORM

Find out the London 2012 Olympic games affected the UK economy.

Businesses can behave in seemingly irrational ways. Find out the hidden logic.

Industrialisation may not always be a good thing. We look to India as an example.

How much influence does agriculture and land reform have on economic development?

WILLIAM TONG

HANJIN LO

LUKE SHEPHERD

NICKLAUS PANNU-YUON

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PAGE 15

PROFILE: ADAM SMITH

AS EXAMS

LUXURY BRANDS

EDUCATION

Find out about the man whose face is on our £20 notes and his impact on modern economics.

Worried about the upcoming exams? We have a few tips that are sure to help.

What makes them stand out above the rest? Find out all about it here.

Why does Britain’s education system attract thousands of international students each year?

WILLIAM CLAMP-GRAY

HENRIK COX

NATHAN ALLABY

JACK GU

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ECONOMIC DECLINE

FINANCIAL ECONOMICS

HEDGE FUNDS

UK AUSTERITY

The Romans, the Turks and the Spanish. Find out how economics is linked to their failing empires.

Unpredictable and uncertain; we find out more about financial economics in this article.

Simple bet or calculated investment? We discover the realities of hedge funds.

Torn between the debates of the Coalition and the Labour Party? We break it down for you.

ADAM PEARSON

HENRY CHEUNG

LIAM FRAHM

WILLIAM TONG

FACT: YOU CAN STUDY ECONOMICS AT UNIVERSITY EITHER AS A SCIENCE OR AN ART

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Photo courtesy of Wikimedia Commons

GRIFFENOMICS NEWSPAPER

managing director BEN PONNIAH chief editor WILLIAM TONG copy editors LUKE SHEPHERD LIAM FRAHM creative/design director ASTEN YEO

A LETTER FROM THE TEAM A quick foreword to Griﬀenomics by the very people who made it

‘T

he Dismal Science’, a cruelly blunt term coined by Victorian writer Thomas Carlyle to describe economics, really does not do the subject justice. Given the current economic situation, one could, however, be forgiven for assuming that economics is presently steeped in doom and gloom, though the truth is most certainly the opposite. The aftermath of the credit crunch has made it a very exciting time to be studying economics. The shocks of the past few years have taught us that the economic models and theories of the future are yet to be written and that current economics students may well be the ones to write them. With this inaugural issue of Griffenomics, we have aimed to make economics accessible to everyone, from the intelligent economist to the bemused outsider. Our hardy team of economics students have produced essays and articles that define the fundamental nature of economics for those who have been too afraid to introduce themselves before, from works that cast a light on undisclosed business strategies, to more advanced works that chart the rise and fall of various empires. Also, we explore various topics that have sparked controversy, such as the timeless debate on the effectiveness of austerity, or the more contemporary issue regarding the economic benefits of the 2012 Olympic Games. In fact, even if your interests lie somewhere other than economics, there is certain to be something in this issue for you, whether it in-

volves flicking through our articles on historical decline, the geographical nature of land-reform and industrialisation, or if it just means skimming the pages for the info boxes, quote collections or quick facts that lie on the bottom of each article. And so, before we lose your attention, we invite you to take a look through our publication and maybe you will find that this ‘Dismal Science’ isn’t really as uninviting as you would have once thought. And maybe, just maybe, it could actually be quite exciting. — The Griffenomics Team

contributors NATHAN ALLABY HENRY CHEUNG WILL CLAMP-GRAY HENRIK COX LIAM FRAHM JACK GU HANJIN LO NICKLAUS PANNU-YUON ADAM PEARSON LUKE SHEPHERD WILLIAM TONG publisher NICK FIELDHOUSE Design by Asten Yeo Printed by Newspaper Club www.newspaperclub.com Every effort has been made to trace and contact copyright holders. We apologise for any possible infringements and ask that you contact us so that we can correct any oversights as soon as possible Cover image based on: ‘Close-up of Electronic Stock Ticker’ by Royalty-Free/Corbis

Want to join the Griffenomics team? Submit an article proposal to griffenomics@abingdon.org.uk

More Information

Visit the Abingdon School website by scanning the code below.

If you have any comments or queries, please feel free to write to us at griﬀenomics@abingdon.org.uk

FACT: ACCORDING TO QS RANKINGS, HARVARD UNIVERSITY IS THE BEST PLACE TO STUDY ECONOMICS

GRIFFENOMICS ISSUE 1

INTRODUCTION

OLYMPIC ECONOMICS

The basics of economics using the Olympics as a case study Photo courtesy of Wikimedia Commons

WAS IT WORTH IT? The Queen Elizabeth Olympic Park was one of the many stadiums built for the Olympics

conomics is closely linked to our daily lives. It appears in day-to-day activity that we do. For example, the London 2012 Olympics covers several aspects of fundamental economics, including opportunity cost, factors of production, the Production Possibility Frontier, and Aggregate Demand. Despite the fact that the effects of the 2012 Olympics on the UK economy remain controversial and highly debatable, it goes without saying that it did attract a lot of tourism and business for the UK. Nevertheless, we must examine several key economic ideas to make a judgment about the impacts of the London 2012 Olympics. What is the most fundamental economic problem? The fundamental problem of economics is that people have infinite wants but there are finite resources. Therefore, we have to make economic choices about what goods and services we want, from the limited resources that we have. This leads to a phenomenon

known as scarcity, a situation in which it is impossible to satisfy infinite wants with finite resources. The London 2012 Olympics was estimated at the cost of £2.375bn, and the concept of opportunity cost allows us to consider this from a holistic approach. Opportunity cost is the next best alternative that we give up when an economic choice is made due to the fundamental economic problem: scarcity of resources. So, what else could the government spend £2.375bn on? Well, a lot, actually. An advanced hospital with the most comprehensive infrastructures would cost £400m to build. The cost of building a new primary school is estimated at £1.5m and a new secondary school at £13m. The average cost of constructing one mile of dual three-lane motorway is estimated at £17.1m. So if the government spent £2.375bn on the Olympics, the opportunity cost would be either 6 new super hospitals, 158 new primary schools, 18 new secondary schools, or 140 miles of

new motorway. Not only does this seem like a bad economic decision, it was calculated that the total amount of money used to host the Olympics was actually £8.921bn which is 3.75 times more than the projected budget. This means that the opportunity cost of the Olympics was actually far greater than first predicted. The Olympics also used up scarce resources that could have been used elsewhere. These resources are known as the factors of production and they can be split into four categories: land, labour, capital and entrepreneurship. The main factor of production that the Olympics used was land. The amount of land in the UK was already insufficient due to the prominence of urbanisation. Instead of building more houses, the government decided to build the Olympic park, which takes up the land. The Olympic park is in competing demand with houses, meaning that they require the same set of factors of production: land. Therefore, when land is used for the Olympic park, less is

available for the construction of houses. The economic decision of building the Olympic park leads to an opportunity cost: the potential houses that could have been built, had the Olympic park not been built. The UK government has many economic objectives, and one of the most important objectives is to achieve low unemployment. Unemployment is the number of people that are currently not engaged in an economically productive activity, but are looking for jobs at current wage levels. During the Olympics, the unemployment rate decreased due to the large-scale construction of the Olympic park, which employed a large number of low-skilled labour. Although the construction of the Olympic park had temporarily reduced unemployment, most of these workers became unemployed once the Olympics was finished and this offered no long term job security for these workers. The government wanted to use the

FACT: REPORTS SAY THAT THE LONDON 2012 OLYMPICS COULD GENERATE UP TO 41 BILLION POUNDS WORTH OF ECONOMIC GROWTH BY 2020

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Photo courtesy of Wikimedia Commons

OXFORD STREET Did consumers spend enough to justify the Olympics?

LIGHTNING BOLT Which took longer? Usain Bolt finishing the 100m race or the government’s Olympic budget meeting?

Olympics to stimulate economic recovery through employment opportunities. Why does the UK government want a high employment rate? Well, it means that Britain will move towards its Production Possibility Frontier, or PPF. The PPF of a country is a curved graph that indicates the maximum amount of goods and services that it is able to produce during a period of time with a fixed quality and quantity of factors of production. As of now, the UK is far from its PPF due to unemployment (7.2% as of October to December 2013) and the under-utilisation of other factors of production such as land, capital, and entrepreneurship. The government wants a high employment rate because the employment of spare labour will allow these people to have a stable income, and this is beneficial for the UK in many ways. With more income, people are able to spend more money, leading to an increase in the consumption of goods and services in the country. Also, the government

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Scarcity is a situation in which it is impossible to satisfy infinite wants with finite resources.

will be able to receive more tax revenue since more people are able to pay tax with more income. The reduction of the unemployment rate will allow the UK government to reduce its unemployment welfare expenditure and potentially use that money elsewhere, such as building new schools and hospitals. Overall, the increase in consumption and the potential increase of government expenditure due to increased tax revenue, causes the Aggregate Demand of the UK economy to increase. Aggregate Demand is the total spending on goods and services in an economy over a period of time. It consists of consumption, government expenditure, investment, and the balance of payments (exports - imports). When Aggregate Demand increases, it creates short-term economic growth which is beneficial for the economic recovery of the UK after the recession. Furthermore, the increased government expenditure on public services, such as education and health care, increases the

quality of the factors of production because the labour force will be more efficient and productive, due to better education and health care. Moreover, the provision of better education may lead to a higher number of entrepreneurs, the people who are willing to take risks to gather other factors of production to provide goods or services. In the long term, this increase in the quality and quantity of factors of production will cause the PPF of the UK to shift outwards, meaning that more goods and services can be provided. This is a longstanding objective that the UK government would like to achieve through establishing high employment rates. So, there it is, a fundamental introduction to the complicated world of economics, all through the London 2012 Olympics.

FURTHER READING: ‘The Olympic Games Effect’ by John Davis

“A question on many people’s minds is whether the London 2012 budget could have been spent on something else, perhaps with bigger benefits?” PATRICK FOLEY (chief economist, lloyds banking group)

FACT: THE OLYMPICS TAKE PLACE EVERY 4 YEARS, WHICH IS THE NUMBER OF YEARS NEEDED TO COMPLETE AN ECONOMICS COURSE AT SOME UNIVERSITIES

GRIFFENOMICS ISSUE 1

BUSINESS STRATEGIES

POPULAR For every 10 drinks sold in a pub, seven of those are beers while the other three are wine, spirits and cider

WEIRD OR WISE?

We unravel the seemingly strange behaviour sometimes seen in the business world.

ave you wondered about weird decisions by renowned businesses and shops? Some of them seemingly go against the most important business principle - maximising profits, while some of them seem to have motives that are unknown to us outsiders. So, what exactly is going on in their minds? Are they weird or wise? WHY DO BARS OFFER FREE SNACKS BUT CHARGE FOR WATER? If you have been to a bar, you may have noticed something interesting: they charge you for bottled water, sometimes as much as £3 for a glass, but free snacks such as bowls of salted peanuts are always within easy reach, on every table and refillable when needed. This seems to be counterintuitive, given the fact that the money cost of supplying snacks is relatively higher than that of water. Shouldn’t bar owners do it the other way around?

Truth is, a bar’s main income comes from selling alcoholic beverages; they want to focus on selling as much alcohol as possible in order to gain profit. Snacks such as salted peanuts and crisps can be seen as complements to alcoholic drinks, they are consumed together (sometimes they make you thirsty for even more drinks!). Moreover, snacks are relatively cheap while each alcoholic drink sold contributes to a relatively high proportion of the bar’s profit, so it is no surprise that bars are happy to provide more than enough free snacks. Conversely, bottled water can be seen as a substitute to alcoholic drinks. One can only put so much liquid into one’s stomach, and the more water, the less beer, vodka, and rum. Most bars realise that in order to keep the demand for alcoholic drinks high, they have to charge for water to discourage its consumption. But, come on, who goes to a bar to drink water?

WHY DO COMPUTER MANUFACTURERS INCLUDE VALUABLE SOFTWARE IN THE COMPUTERS THEY SELL? Nowadays if you buy a computer, not only will you get the computer itself, but it will often be equipped with the latest software. Some of this software includes Microsoft Office, Norton Internet Security, and other music and photo editing software. Funnily enough, this software is also available for sale in the market at somewhat high prices. For example, Microsoft Office & Home 2013, which includes Word, Powerpoint, Excel, Outlook and Onenote, costs a whole £220. The question is, why would computer manufacturers provide such expensive software in their computers, when they can sell them as separate software for good sums of money? Some may say that the computer manufacturers would’ve incorporated the price of the software into that of the computer, but there is actually much more to it than that.

Product compatibility is the crucial element here, life is much easier if different members of a presentation group use the same software to produce their presentation. Likewise, it would better if you and your colleague use the same word processing software. We can see that the more people using a particular software, the larger the benefit is to owning and using it. Knowing this, computer manufacturers will do almost anything to make its software more widely used, increase its market share, and make it difficult for other software companies to break into the market. It can be seen as an attempt to monopolise the market. One way of doing this is to put free software into computers. For example, several computer manufacturers are willing to include Norton Anti-virus into their computers since it is a selling point. Norton not only get more people to use their software, but will also have higher demand for related products and upgrades under its brand.

FACT: ACCORDING TO AN NPR REPORT, THERE ARE 74476 REASONS WHY YOU SHOULD ALWAYS BUY A LARGE-SIZED PIZZA

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Photo courtesy of Wikimedia Commons

BUSINESS DOESN’T ALWAYS MAKE SENSE... “There are times at which it is right not to listen to customers, right to invest in developing lower performance products that promise lower margins, and right to aggressively pursue small, rather than substantial, markets.” CLAYTON CHRISTENSEN The Innovator’s Dilemma (1997)

SEA OF GOODS The discounts frequently found in supermarkets are common examples

“You read a book from beginning to end. You run a business the opposite way. You start with the end, and then you do everything you must to reach it.” Harold Geneen Businessman (1910-97)

of loss leaders

WHY DO SHOPS SELL GOODS AT RIDICULOUSLY LOW PRICES ON BLACK FRIDAY SALES OR OTHER BIG SALES? Black Friday originated from the United States, it is the Friday following Thanksgiving Day and marks the beginning of the Christmas shopping season. On this day, retailers offer promotional sales and extend opening hours, and this trend has spread to different parts of the world in recent years, including Canada and the UK. Lowering the price of goods will most certainly increase the demand for them. However, on the Black Friday sale or some other big sales, the discounts offered seem over the top - the selling price may even be lower than the cost to produce the good. How are retailers supposed to earn anything, when they are selling the goods this cheaply? In fact, this kind of pricing strategy is based on an economic concept called “loss leader”, where a product is sold at a price below cost, to stimulate the sale

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How are retailers supposed to earn anything when they are selling the goods far too cheaply?

of other products. Retailers expect that when customers are drawn into the store by hugely discounted goods, they are likely to be buying other goods too. Ideally, the profit retailers get from selling these other goods will break even or possibly exceed the loss incurred in selling the under-priced goods. Moreover, the retailer may be able to establish a commercial relationship with their customers through brand affinity and memberships, for example. Another reason for holding sales on Black Friday relates to price discrimination. Price discrimination can be thought of as businesses trying to charge higher prices to people who are willing to pay more, while retaining price sensitive customers who want to spend as little mon-

ey as possible. Therefore, retailers give out huge discounts in Black Friday sales, which is a form of price discrimination. They acknowledge the fact that relatively rich customers, who are relatively insensitive to price changes, are less likely to join the crowds and buy cheap merchandise. However, at the same time, there will be a huge influx of price sensitive buyers generating revenue.

FURTHER READING: ‘Freakonomics’ by Steven Levitt and Stephen J. Dubner

‘The Business Book’ by DK Publishing

‘Business Economics’ by Andrew Gillespie

FACT: DURING THE BLACK FRIDAY WEEKEND, 58 BILLION DOLLARS WERE SPENT BY CONSUMERS IN THE US

“The essence of strategy is choosing what not to do.” MICHAEL PORTER On Competition (1998)

“It’s not the customer’s job to know what they want.” Steve JOBS Businessman (1955-2011)

“In preparing for battle I’ve always found that plans are useless, but planning is essential.” DWIGHT EISENHOWER US President from 1953-1961

“Show competitors what you are doing. They will learn soon enough anyway. Just don’t tell them what you are thinking.” Bill hewlett Founder of HP (1913-2001)

GRIFFENOMICS ISSUE 1

Photo courtesy of Google Images

INDUSTRIALISATION

A DOUBLE-EDGED SWORD Is industrialisation something the should be praised or criticized?

BLOOD, BRICKS AND

BAD ASSUMPTIONS Break through the myths and dive into the hard reality of industrialisation.

owadays, industrialisation is given quite a hard time by the modern media. If it’s not single-handedly killing polar bears, it’s consigning millions into a life of economic servitude. The classic image of industrialisation is of Britain’s dark Turner Mills, flanked in smog and relying on child labour. People may also picture the new factories of China, similarly flanked in smog and relying on child labour, even more than the schools of yesteryear. Yet no one thinks of the almost unimaginable benefits that are created by industrialisation. In the most ruthlessly Wikipedia terms, industrialisation is simply the transition between an agrarian society into an industrial society. However, if one looks at the true benefits that are rendered by industrialisation, simply treating this as a relatively unremarkable transition between one part of an economic model to another is missing the fundamental greatness

behind a process that has helped the lives of innumerable people. However, as much as I would wish to sing the praises of industrialisation until the proverbial cows come home, one cannot ignore the potential effects of industrialisation, with its rapid population growth, dramatic social change and environmental

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a fundamental shift of a country’s socio-economic position. It is hard to communicate the great effects that industrialisation has had on society. In this situation, it is useful to consider the example of the washing machine. To many a washing machine is, in fact, a sign of great privilege, one that

It would be puerile of me not to recognise that industrialisation is no silver bullet for the world’s problems.

impacts. All of these factors contribute often to hugely adverse effects on both society and the country as a whole. Nevertheless, I believe that, perhaps naïvely, there is a way to reconcile the great power of good that industrialisation can give with the risks and consequences of such

we don’t, but probably should, recognise in our life. For many people, struggling to get by on two dollars a day, who may spend upwards of four hours a day cleaning their clothes, the washing machine is not just something in which you put dirty clothes in and miraculously receive clean

clothes out of at the end of the spin cycle. At the end of that cycle, you do not only receive clean Lenor fresh clothes, but also an education. As every hour that you do not spend scrubbing clothes by hand, fetching water, scrubbing pots and pans, you gain an hour of education. This could be an hour that you spend learning a language, or an hour that is used to teach children how to read and write. This miracle of modern technology is made entirely possible because of industrialisation. Industrialisation facilitates this grand surplus of time that could be wonderously filled with education, learning and improvements, that would have such a profound and beneficial affect on society. Washing machines are only one example that yields benefits to the quality of peoples’ lives by giving them greater freedom to act autonomously and live their lives the way that they wish to as a result of industrialisation.

FACT: INDIA’S ECONOMY CURRENTLY GROWS AT A RATE OF 4.7% PER YEAR

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bating climate change, so much so that the delegate from the Philippines at the recent Warsaw Summit, went on hunger strike due to the inability for delegates to come to any meaningful conclusions. Some may say that this inability to form targets for climate change and international cohesion on the issue is due to the self-interested nature of independent nation-states. Redressing the idea and culture of hypocrisy is the area that, in my opinion, should have the greatest amount of political capital invested in. Currently industrialising, BRIC nations often cite the unchecked and uninhibited industrialisation of other Western nations, through the burning of fossil fuels, arguing that they should be entitled to the same freedom of industrialisation and the benefits that come with it, as we were during our industrial revolution. This unfortunately is undeniably true, and poses the industrialised nations with a great dilemma. It is a dilemma that sadly no nation has proposed a solution to. However, I do not believe that the world is consigned to a Day After Tomorrow fate due to the inability for compromise. Though I’m fearful of human nature; I do not believe it to be a particularly good thing, I have read too much Hobbes to think humans are good; least of all when it is magnified through the lens of the free market. There is the very real possibility of governments not understanding that every action they take does not merely affect them, but the whole world. Or not appreciating such a global change will have such an unpredictable effect on the world that it would be an exercise in madness to bet on the outcomes of a roulette game where one does not see nor know the wheel, where one does not know where one is placing their bet and cannot tell if one has won. Yet the only certainty that I would bet upon is that the house will always win. Nonetheless, it would be perhaps too cynical to assume that nothing can be done, that we are consigned to the destruction of our planet and our society, held to ransom by our own self-interest. I think, I hope, that countries will start to think of themselves as not merely individual nations that only cooperate with others because it is beneficial for them; instead to think of themselves as a cohesive global unit of governance. This is why supranational agencies are so important:

FACT: INDIA IS THE TENTH LARGEST ECONOMY IN THE WORLD

Photo by: Jonas Bendiksen/Magnum Photos

On top of the wonder of washing machines, there have been seismic changes in medical and social provisions: the establishment of Social Security, due to the government’s sufficient revenue sources. This is only one way that industrialisation enriches the lives of its citizens, but it is also one of the most compelling, because even the most diehard green activist still uses their washing machine. To deprive a family in the slums of Rio from such a luxury that we take for granted, seems callous at best, and inexcusable in any just world. On the other hand, it would be puerile of me not to recognise that industrialisation is no silver bullet for the world’s problems. In fact, many would argue that industrialisation has caused most of these problems. Often, the effects of industrialisation are rapid population growth, such, that the ability of infrastructure to cope is overwhelmed, resulting in overcrowding and the general degradation of livelihoods. Moreover, we see how people become exploited by the opportunities created by industrialisation. In Hyderabad, India, there are great brick kilns supplying India with millions of bricks, supporting its rapidly growing property industry. However, working in kilns requires such stoicism and resilience to hardship, I both question, and admire, how any man, woman and, sadly, child can endure such conditions. Often each worker will produce around 1500 bricks per day, which are hardened by burning coal, the smoke of which lingers on the ground, causing innumerable cases of bronchial diseases, as well as barbaric punishments. Workers who refuse to work, in what looks like the aftermath of Sodom and Gomorrah with the sulphur still burning the land, in some cases can expect to have their hands cut off. All of which is fuelled by India’s industrialisation, which uses the bricks baked in the blood of the poor, that are bought by those who are both blind to the price and consequences. Sadly, the idea of industrialisation also leads us, unfortunately, onto the issue of climate change. The IPCC, in its latest report, stated that we, the world, have used half of our carbon budget to prevent dangerously high temperature rises of over two degrees. Despite this worrying ruling, it is still as hard as ever to build international support for com-

BRICK KILN A worker digs up submerged bricks from a brick kiln after a heavy storm

they break down entrenched state lines, encouraging and fostering an attitude of mutual respect and collaboration, free from the constraints and diktats of the status quo from economic hierarchy. If we start to see ourselves as a collective, then the issues of climate change on emission targets may potentially become easier to negotiate and attain. However; there is another benefit to this collective system: if you are flying to St Marie, first class; of course, what else; and halfway across the Atlantic, a fire breaks out in cattle, I mean economy, class one would not simply sit back and say, ‘Oh it’s their problem, let them deal with it themselves, no need to get involved’. No, you would sacrifice your complimentary flute of Bollinger for the good of the plane (if I may add, putting fires out with champagne is not advised by this writer, mainly as it’s an awful waste of such a wonderful elixir for its basest of properties, it also does get quite expensive after a while). I believe it is high time to see these problems are not only confined to the borders of arbitrary lines on a map; we, as nations that have the means to intercede to prevent the suffering of thousands, have a moral responsibility to do so. This is not to disregard the sovereignty of the

country and impose what we naively think is the right way of governance or development; but instead to acknowledge the problems that face that country, not patronising them on their inability to govern, or judge their past actions. “To understand the heart and the mind of a person, look not at what he has already achieved”- Kahlil Gibran, but at what he aspires to do. We should allow these nations to benefit from the mistakes that we have made and share in the advantages of prudent actions that benefit all of society. The West should allow these countries to develop in the best possible way, not hindered by the constraints and amorality of the market, so that they can truly fulfil their mandate of responsibility to their people. Perhaps then, when countries do not feel the need to compete and see each other through the lessons of ignorance and distrust, might we be able to truly affect the world for the better, for all.

FURTHER READING: ‘Reservation Capitalism’ by Robert Miller

‘Governing the Market’ by Robert Wade

GRIFFENOMICS ISSUE 1

LAND REFORM

REFORM TO RICHES

Image courtesy of Wikimedia Commons

How important is agriculture and land reform in a country’s development?

FIELDS OF GREEN Rice paddies near lake Inawashiro in Fukushima Prefecture, Japan

ave you ever wondered what came before this technological era? Many people are fascinated at the development in the world economy over the last few decades, as well as the technological developments over the last 10 years. What was the journey for many of these countries? Why are some countries as economically powerful as Japan, but others still in economic turmoil, such as the Philippines (even prior to Typhoon Haiyan)? One of the areas that has captivated many economists is the development of the various economies in Asia, and it is apparent that amongst the Asian countries some have fared far better than others. In his book How Asia Works, Joe Studwell provides some interesting insights as well as the journey of development for some of the key Asian economies, such as Japan, Taiwan and China. Through travelling around Asia, Joe Studwell has gathered sufficient information from many different countries in order to make a very effective and per-

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If you wish for industrialisation, prepare to develop agriculture. MICHAEL LIPTON

ceptive comparison on this subject. The level of economic development in a country depends on many factors such as government policies, cultural inclinations, resource availability and climatic influences. However, I believe that it would be naive to overlook the importance of agricultural advancement that came at the onset of this journey, and how it subsequently affected the level of economic and technological development of the country. As famous economist Michael Lipton once said “If you wish for industrialisation, prepare to develop agriculture.” Looking at Meiji Japan (1868-1912), a group of people called the Daimyo came into power during this period. These people were quasi-feudal lords, and they had accrued a large amount of land. The

Daimyo were landlords who rented their land to smallholders and also controlled the grain-trading system. The Meiji government realised that the only way to move the country forwards would be through rigorous land reform. Therefore, the administration pensioned off the Daimyo and gave them seats in the House of Peers in Tokyo. After that, the government proceeded to issue certificates of ownership to the peasants in Japan, and people for the first time could mortgage and sell land. The farmers were also encouraged to invest in their land. This led to an extremely high growth in yields, in particular the doubling of rice production. Following this success, Japan then rapidly grew and expanded into the industrial sector, riding on this success which lead to an

economic take off. Of course, many other factors came into play as well, but the initial success of the agricultural reform was pivotal as a platform for subsequent economic growth. The pace of development was so high that the modernisation of Japan led to it being able to defeat China over the control of Korea in the First Sino-Japanese War in 1895 and Russia in 1905. Throughout the whole development of Asia, there has been one extremely important person who significantly altered the pace and the way agriculture was reformed. Wolf Ladejinsky was an American agricultural economist and researcher, and he was dispatched by the USA in 1945 to General MacArthur’s SCAP (Supreme Commander for the Allied Powers) staff. He gave advice on how the Japanese land reform should be laid out and in Taiwan, Ladejinsky’s influence continued to be felt as he recommended that the Kuomintang set up tenancy committees. This was an extremely effective policy as farmers, tenants and landlords all

FACT: TAIWAN WAS ONE OF THE WORLD’S FIRST COUNTRIES TO CONJURE COUNTRY-WIDE LAND REFORM PROGRAMS

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This was the main driving force which led to the boom in Taiwan’s economy. Photo courtesy of Wikimedia Commons

participated, which helped to stop widespread evasion of the rules. The government legislation passed in 1953 dictated that there would be expropriation of land in excess of around three hectares, and the landlords would be compensated for it. These terms were quite similar to those of Japan, and very soon Taiwan saw a positive effect. One estimate shows that around 13 percent of Taiwan’s GDP was passed from one group of people to another, which shows the scale of the reform. In 1960, 64 percent of agricultural land was being farmed by owner-cultivators (people that own and farm their own land), which was up from the 30 percent in 1945. This evened out the income distribution of Taiwan, and led to the country moving towards equality. In fact, surveys showed that Taiwan moved from a Gini coefficient of 0.56 in 1950 to 0.33 in 1960, which was unprecedented for a developing country. The Taiwanese government was also highly supportive, encouraging farms to diversify their crops and to grow produce such as mushrooms and asparagus, which is much more labour intensive, but has a much higher value added. This variety of crops led to a dominance in exports, and soon this was the main driving force which led to the boom in Taiwan’s economy. Unfortunately, not every country followed this model to economic success. In the case of the Philippines, one huge problem is evident: there was no radical land reform in which compulsory land redistribution was promoted. The main reason for this was that, although the US embassy in Manila supported this land reform, it did not win support in Washington. This was very key as it meant that the huge driving force that was present in both Japan and Taiwan was lacking here. Ferdinand Marcos, the leader at that time, declared that he would execute a set of land reforms, but by the time of his fall (1986), he had only achieved less than a quarter of his own targets. This was mainly because he targeted property largely owned by his political enemies,

OOLONG TEA from Taiwan, produced in tea plantations like this one, accounts for about 20% of world production

and the land reform was more for his own gain than for the country’s wellbeing. As Corazon Aquino took over in 1986, the country was destined to have no successful land reform. One of the main reasons for this was that she owned a 6,400-hectare estate, which was her main asset. Promises were made to the people about land reform, and the Philippines congress came up with a Comprehensive Agrarian Reform Law (CARL), which has many loopholes within it and is still being implemented today. Problems with the CARL include an absurdly high retention limit and exploitable loopholes, such as the Stock Distribution Option, which allowed landlords to give its tenants equity instead of plots. Furthermore, rich clans, such as the Benedictos, simply refused to give up the land that they owned, and due to the fact that they were close with the government as well as considerably powerful, nothing was done about it. Finally, after a while, the government decided to move

along with compulsory land reform and issued Certificates of Land Ownership Awards (CLOAs) to farmers. As you can probably guess, this didn’t end well unfortunately. The main reason for failure was that there was complete lack of state backing. The peasants that received the CLOAs were simply too poor to farm their own land, and hence, most of them immediately leased their land back to the Benedicto family, and went back to becoming wage labourers. Ironically, the only land reform that has worked in the Philippines was when non-governmental organisations stepped in to help a handful of families through providing lending, crop processing, marketing support, and other services of this sort. This group of farmers are much better off than the average Filipino farmer, and they are so successful that they have enough money to invest in capital to further boost their yield. The importance and significance of successful land reform cannot be under-

FACT: BETWEEN 1952 AND 1961, TAIWAN’S ECONOMY GREW BY AN AVERAGE OF 9.21% EACH YEAR

stated in the lead up to the current state of play amongst the Asian powerhouses. Ironically, out of the three countries that have been compared above, the Philippines is the one which has the most suited climate and the greatest amount of arable land for agriculture. This shows that it is not the climate which hinders countries from growing, but the human will and determination.

FURTHER READING: ‘How Asia Works’ by Joe Studwell How Asia Works gives an insight which can still be referenced in many of the developing economies of the world. The rest of his book then looks at how economic reform over the last two decades further differentiated the development of the Asian economies and I would highly recommend this book to those who have an interest in the Asian economies.

GRIFFENOMICS ISSUE 1

PROFILE: ADAM SMITH

THE FACE OF THE £20 note Meet the man considered to be the founder of modern economics.

THE MAN BEHIND THE FACE A portrait of Adam Smith can be found on all modern-day £20 notes

DID YOU KNOW? Bread, Butter and Tea It has been said that Smith once put into his teapot, some slices of bread and butter, along with the tea itself. On tasting this, he declared it to be the worst cup of tea he’d ever had. Gypsies! It was reported by his biographer that aged 3, Smith was abducted by gypsies, before subsequently being released as soon as his kidnappers heard news of a search party.

BIOGRAPHY Born: 5th June 1723 in Kirkcaldy, Scotland Died: 17th July 1790 in Edinburgh, Scotland Notable Publications: The Wealth of Nations (1776), The Theory of Moral Sentiments (1759)

“The real tragedy of the poor is the poverty of their aspirations.” ADAM SMITH

ADAM SMITH

dam Smith was first educated at the Burgh School of Kirkcaldy, before entering the University of Glasgow aged only 14, studying moral philosophy. Proceeding this, he continued on to Balliol College, Oxford. Very little is known about Adam Smith’s character, but to those who knew him well, he was described often as “comically absent-minded”. Smith was known to exhibit a number of odd habits, such as talking to himself and, on occasion, holding a conversation with an imaginary associate. Smith remained a bachelor for his whole life, and the only close relationship he was known to have upheld was with his mother, Margaret Douglas. Smith is most commonly known for his theory of classical economics. This, in its most basic form, is the idea that no one person can control or govern the market, but that order is maintained by the action of an “invisible hand”, this is to say that the market is self-regulatory. For example, firms exist in a market to make a profit, and to do this, they must provide the goods and services demanded in said market. Thus, self-interest sustains the economy, to an extent. Today, many of Smith’s

theories have been overshadowed and somewhat overlooked by those of other influential economists, in particular John Maynard Keynes. To illustrate this, if an economy goes into recession, Smith’s idea of an invisible hand suggests that as prices fall, wages fall, thus restoring full employment with no government intervention necessary. However, Keynesian economics opposes this theory with the idea that government spending is in fact very much necessary, due to the presence of sticky wages and subsequent persistent unemployment, in order to stimulate aggregate demand and bring the economy back out of recession. This is an approach taken by many governments today, for example Barack Obama’s stimulus plan for the US economy. To conclude, Adam Smith’s ideas and writings have been very influential in the understanding of how a market functions. However, as is the case with almost all economic theories, much question and debate surrounds his work.

FURTHER READING: ‘The Theory of Moral Sentiments’ by Adam Smith

FACT: MARGARET THATCHER, FORMER UK PRIME MINISTER, USED TO CARRY ADAM SMITH’S BOOK, THE WEALTH OF NATIONS, IN HER HANDBAG

SPRING ISSUE GRIFFENOMICS

AS EXAMS

REVISING FOR THE AS Nothing is out of reach if you are willing to work for it.

ersonally, revising for my Econ 1 and 2 last year was a challenge, since I was also taking two science subjects and art. Economics was the only time I developed any essay writing style, and I learned how to answer very quickly through a paper. It was important to create a personal, yet efficient way of ‘mastering’ all the knowledge, facts and evaluations from the year of Micro and Macroeconomics. As such, when I was studying for AS, I remember taking two aspects of the exam into account: multiple choice and the more extended answers. Well in truth, the revision for multiple choice, as well as the 5 and 12 mark questions, will fall under notemaking, memorising and understanding key concepts. Do this first, either in the early stages of the Easter holiday, or beforehand. Using one coloured ink will leave you with pages of endless passages that will make the task of learning much harder. Instead break up your notes with diagrams, colours and make mind maps for each chapter as an essential ‘summary page.’ By all means, download the free popplet app that the Economics department has trained you to use throughout the year. So by the Easter ‘break’, it’s a good idea to have already highlighted your handouts, and made your own revision notes, so that you can learn from them and summarise them further. After each essay you do, it’s vital to make a page of essay feedback once your work is returned, with notes on what you got wrong and what to improve on next time. This is especially important if your grades were disappointing. The worst you can do is bin a poor piece of work, thinking you’ll be fine for the exam, because the teachers are testing you on REAL past questions that students have actually seen in front of them in the exam hall. It’s possible you’ll see that same question, perhaps phrased differently, come the Summer AS exams. Once you know your chains of reason and understand key definitions, you can start to argue against your own ideas. This is where evaluation comes into play, and it’s a good idea to get used to seeing situations in two opposite views, as this concept only gets more important and worth more marks as you move onto A2. If there’s anyone who’s keen enough to write out a full 25 mark essay for every question that’s ever existed, you’re wasting your time. The best thing to do is to go to the AQA Economics website and search past AS papers, and paste all the available 25 mark questions into one word document (the list only starts at about 2007). It’s also possible that your teachers have already handed you one of these sheets and they are very im-

“

he best you can do on the T day is walk into the hall with a clear mind.

portant during your revision sessions. Next, go through each essay, make notes and plan what you would write in the actual essay. Make it neat and put in more effort than the plans you’ll make in the AS exams. Write out the chains of reasoning you’d use and evaluative points under each chain. This way you will have answered every single past paper question that exists for AQA without having to cramp up your hand. Finally, on the day before your exam, the best thing to do is some final light revision in the morning/afternoon. Don’t even bother looking at your books in the evening, and especially not outside the exam hall the next morning. If you’re still finishing revision notes the night before, you’ve left it too late. The best you can do on the day is walk into the hall with a clear mind and knowing that you’ve prepared for it. Good luck in the Summer!

WHAT TO EXPECT FROM THE AS Paper One and Two 75 minutes 75 total marks Multiple Choice 25 questions, one mark each. Data Response (choice of two) 4 parts; 5, 8, 12, 25 marks respectively.

IN SUMMARY… Revise

Self-check

Evaluate

Practise

By Easter break, ensure that your handouts are highlighted and your revision notes are finished.

Make feedback sheets once your work is returned and note what you got wrong and what you can improve on.

Always consider a viewpoint from two opposite sides. This concept gets more important in A2.

Use past papers and mark schemes to master exam technique. You don’t need to write out full essays, just plan them.

FACT: THE AS ECONOMICS EXAMS FOR 2014 ARE ON THE 13TH AND 21ST OF MAY

GRIFFENOMICS ISSUE 1

LUXURY BRANDS

LUXURY THAT LASTED Not every world-renowned business ended up like Lehman Brothers.

300: The approximate number of shops on Oxford Street

ne may be under the impression that the recession, beginning in 2008, affected everyone. That is, everyone had to cut back on their spending as they were under financial pressure. The spotlight of the UK news, in relation to the effects of the recession, was on the type of British middle class that shop at Sainsbury’s and Marks and Spencer. However, this is far from the actual truth. The two main areas of consumption can be separated into utilitarian needs: shelter, food and water. The second area covers hedonistic needs: pleasure and entertainment. Luxury goods are clearly listed under hedonistic needs. Although the middle class consumers, who were affected by the recession, may occasionally dip into the odd Louis Vuitton handbag or a pair of Chanel heels once a year, the major contributors to revenue for luxury retailers are the ‘super-rich’: people who may have forgotten what tap water tastes like. This group of people were barely affected by the recession and may even have benefited from it. They could often exploit their workers more, due to the large number of people searching for work, through methods such as zero-hour contracts, which allow the employer to only pay for the hours that they need their staff to work; thus, not paying

employees when there is a lack of demand for labour during the recession. To elaborate, salaries can be dropped due to the excess supply of labour. Although one might expect demand for luxury goods to fall during recession, the appeal of luxury goods and availability has increased massively over recent years. This is due to a mixture of factors, including more aggressive marketing and advertising. For example, there has been an increase in the hours of TV that people watch and the effects of easier access (online) for advertisers can be shown by the higher number of stores around the country and the development of retail parks, such as Bicester Village near Oxford. It is mainly the internet that has revolutionised the access to luxury goods. No longer is there a need to travel hundreds of miles to pick up a pair of socks from Versace. Even food from high end food stores, such as Waitrose, can now be bought from your couch and driven to you. This is compounded by higher standards of living - £2,068 average a month for a full-time employee before tax in the UK in 2013, compared to an inflation-adjusted equivalent of £1,583 in 1980. One could also argue that the rise in counterfeit luxury goods, whilst losing retailers’ money, can raise the awareness of their brand globally. In a way, it is al-

most free advertising if one assumes that some people will be drawn to purchase genuine items. The relative impact of the recession on luxury compared with other brands was exemplified this winter, in the UK, as Debenhams experienced a 25% drop in expected profit and, as a result, their chief financial officer resigned over the festive period. In comparison to this, House of Fraser, a high-end version of the store Debenhams, achieved their ‘highest ever gross profit of £403.8 million, up £4.7 million’ for the 52 weeks leading up to the January 26, 2013. Furthermore, John Lewis reinforces this trend as online sales are rising by almost 23 per cent annually. However, the main contributing factor to the success of luxury brands during the recession has arguably been China. China is the second largest luxury goods consumer, behind Japan, and in 2010 accounted for around 25% of the world’s luxury sales. From 2008 to 2011, China experienced an astonishing average growth rate of 9.525%, compared to most of Europe’s negative growth rates, such as the UK’s record low of -6.80%, in the first quarter of 2009. Without the rise in China’s appetite for luxury due to their economic prosperity, many brands such as Louis Vuitton, Tiffany’s and Burberry

wouldn’t have achieved such high profits, such as Burberry’s £206.3 million in 2011. In conclusion, luxury brands benefit from the recession, since the richest sector of society is able to weather the economic slump best, by exploiting workers more in some cases and through the demise of weaker competitors in the market. In addition to this, the global demand for luxury goods has increased over recent years because of consumers’ rising ability and willingness to pay for them. Moreover, this is compounded by the fact that consumers have easier access to international designer brands, thus providing a wider range of choice to select from. Finally, China’s rapid economic growth has boosted luxury sales, whilst some other countries’ growth rates decreased. However, in the future, China’s contribution to luxury sales may decrease as their economy’s growth slows even though it is still looking stronger than most other countries currently.

FURTHER READING: ‘Luxury Retail Management’ by Michael Chevalier and Michel Gutsatz

‘Luxury Fashion Branding’ by Uche Okonkwo

FACT: IF APPLE INC. WAS A COUNTRY, ITS CASH RESERVES WOULD MAKE IT THE 58TH LARGEST ECONOMY IN THE WORLD

SPRING ISSUE GRIFFENOMICS

EDUCATION

AWAY FROM HOME Why would students want to study abroad?

Photo courtesy of Wikimedia Commons

here are more than 500,000 international students studying in UK universities and alternative providers such as private colleges and secondary schools. During this decade, however, this number could rise by a further 100,000. Why would students from abroad want to seek education in the UK, instead of staying in their own country where they grew up and hence, where they are most familiar? Why give up their old, comfortable life and put their future well-being at stake? Steve Woodfield, a senior researcher in higher education policy at Kingston University in the UK, suggests that students are looking for a better education. As economies in developing countries such as the BRICs have grown, the disposable income of middle class families, who want to send their children to a better study environment, grows. As a result, families who are willing to send their children abroad will do so. Education from high quality universities and colleges is a luxury service, hence the income elasticity of demand, which is the responsiveness of the quantity demanded of a good or service to a percentage change in the income of the customer, for high quality education is positive and greater than one. This shows that education is a service that will receive a relatively large increase in demand when people earn more. Therefore, students with the economic power to study abroad will flock to countries with universities of better quality, such as those in the UK and the USA. Students may also study abroad as many developed countries contain multiple universities that are recognised by the world as ideal sites at which to study. Students will choose those well-known universities because they will receive a value added education. A value added feature is an add-on that gives an item a greater sense of value, which in other words is basically an eye catching piece of jewellery that will make one stand out from the crowd. In this case, the value added item is a degree from a world fa-

BOARDING There are around 465 independent boarding schools in the UK, one of which is our very own

mous university, which acts as a highlight in your CV. Some firms receive thousands of applications per month, meaning that they will only pick “interesting” or “colourful” resumes from the pile. Therefore, a degree from a famous university will give one an edge over other competitors when looking for employment. Education is used to adjust the productive capacity of an economy, which is the maximum value of goods and services a country can provide in a given amount of time, as a better education will increase an employee’s productivity or rate of work. Countries would benefit from the increase in productive capacity, as the country would be able to produce more goods and services at the same price level. Therefore, governments have adopted schemes or policies that give aid to students who want and have the ability to study abroad. For example, the Macau government, which is near Hong Kong, will give full economic aid to students who have been accepted by any university that is featured in the top 50 around the world, as long as they come back to work in Macau for four years after graduation. Government aid to students can be seen as a form of spending, while students are the labour, which is a factor that affects the rate of production of a country. If a government increases spending on labour, the country should in theory be able to produce more goods at the same price level in the long run, when they return after their period of

study. The international competitiveness of a country should increase, which gives an incentive for governments to give aid to students with potential. Policies may also be introduced by governments to increase the number or quota of international students they accept. By having more students in their country, the total consumption within the country will increase, meaning that firms that produce domestic goods will gain more customers and profit. Relatives and family members of students may also visit occasionally. This means that the country will receive a boost to exports, as money gained outside the country is being spent within the country. The current account of a country, which, essentially, is the difference between money going out of a nation and money coming in, should therefore be boosted, as money from outside has flown in. If the nation has a current account deficit, like the UK, the addition of tourists in the country should help balance it out. Another effect of the increased number of students from abroad may be an increase in population, if students choose to relocate (assuming they’re not contractually obliged to return to their country of origin, as previously mentioned). Consequently, the country’s productive capacity should increase, as there would be an increase in the quantity of labour. This, as stated before, will increase the competitiveness of a country. Certain firms in developing countries

FACT: ACCORDING TO THE FINANCIAL TIMES SCHOOL RANKINGS, ABINGDON SCHOOL WAS RANKED 42ND IN 2011

may offer economic aid to students who choose to study at universities abroad, with the condition that the student has to sign a work contract with the firm, which will immediately come into effect after graduation. Not only would this increase the productivity of future employees by methods of education and training, it would also increase the business ties of less well-known firms in developing nations with established firms in developed countries. This can be seen as an investment by a firm, as the firm is spending money on people who they believe will help in the future development of the firm. Moreover, the business ties may provide trading opportunities, which could benefit both firms in the long term, with further economic aid being made available for talented students, potentially. As one can see, education abroad holds many possibilities for both students and governments. For students, not only will the trip be a valuable piece of experience and knowledge, it may also help some gain friends and connections with people around the world. In a future where an increasingly globalised world has raised the levels of competition dramatically, some friends here and there will surely help one on the road to success.

FURTHER READING: ‘Does Education Matter?’ by Alison Wolf

GRIFFENOMICS ISSUE 1

ECONOMIC DECLINE Photo courtesy of Wikimedia Commons

PUBLIC DISTRACTION Gladiator fights, held in amphitheaters like the Colosseum, were used to draw attention from the decreasing standard of living in Rome

HISTORICAL DECLINE The three steps to economic demise.

hroughout history, many great powers and empires have risen and fallen. When we visualise the decline of the Roman Empire, scenes of invading Germanic barbarians appear. Similar mental images of military defeat are painted in consideration of the collapse of the Ottoman Empire following World War II, the demise of the Ming dynasty in China, or the fall of the Spanish Empire. The reality, however, behind the glossy front cover of climactic battles and juicy internal feuds, is all too often economic decline. More surprising is the fact that these downfalls follow a common template, and worse, is the fact that politicians, in modern America today, are making the same mistakes as Roman Emperors did in the 3rd century AD. STEP 1: INSTITUTIONAL STAGNATION The first step in the common pattern, Glenn Hubbard and Tim Kane argue in their book Balance: The Economics of Great Powers, is internal stagnation. The authors believe that the key to economic growth is the establishment of institutions. Though this may sound like a mundane piece of economic jargon, the reality is far from it. Institutions provide the basis for a legal system that protects in-

tellectual property, a stable currency, and an educational system that allows the innovative minds of the next generation to blossom. However, with the stagnation of institutional development, economic demise is sure to follow. Let us first turn to some historic examples of great empires, starting with the Roman Empire’s success. It was Augustus, the first Roman emperor, who quite literally paved the way for economic dominance, turning the corrupt and inefficient republic into a dictatorial powerhouse. His streamlining of the bureaucratic powers enabled labour specialisation and urbanisation. The Ming dynasty of the 14th century yielded vast riches. The imperial Chinese government’s decisions were based on Confucianism, the idea that benevolence and morality should be the guiding principle behind policy. Encouraging meritocracy while discouraging corruption, this ideology enabled bureaucrats to strive for the true interests of its people. At its peak in about 1600, China was the leading inventor of the world, producing paper, gunpowder and the wheelbarrow. They traded with the Persians and the Turks, while voyagers such as Zheng He in 1405 returned with a giraffe and vast treasures. The expeditions, however, imposed a de-

bilitating burden on the empire’s pockets. The Spanish Empire of 1469-1898 funded a powerful army and navy with excesses of silver after its discovery and exploitation of the New World. Consequently, Spain was able to extend its empire, becoming known as the ‘empire on which the sun never sets’ long before the British. The Ottoman Empire, which survived for six centuries, was known as the ‘sick man of Europe’ before its fall in 1923, after the First World War. The rich cultural and political history that preceded its downfall is often forgotten. In 1699, the Turkish Empire spanned from Greece to Iraq to Morocco. Its culture flourished, with universities, libraries, and ornate mosques, combined with considerable advances in mathematics, science and industry. Hubbard and Kane’s analysis focuses on America. Cherishing civil liberties and free-market capitalism, the USA rose to great heights in the 20th century. It was arguably its institutions, founded on its enshrined constitution, which has allowed the USA to dominate the world economy. The initial turning point, however, for all of the great powers above, was the moment when their institutions failed to develop. Time and again, seemingly invincible powers have been sucked

into the black hole of institutional stubbornness. Could the stagnation of America’s establishments not only help to bring about China’s dominance, but the fall of the great power itself? STEP 2: CENTRALISATION OF POWER The second fatal error that politicians are inclined to make, Hubbard and Kane suggest, is the centralisation of power. When Rome’s institutions were incapable of adaptation and Roman emperors, such as Hadrian, shied away from border expansion and conquest, state socialism was a desperate attempt to salvage the economy from fiscal catastrophe. Diocletian doubled the size of the army, declared price controls, and even banned the free movement of rural Romans. All this was paid for with corrupt fiscal policy. Eventually, with no money to pay the army or to protect the frontier, barbarian invasions were a symptom, rather than a cause, of the fall of the Roman Empire. In China, the relentless pursuit of Confucianism ultimately hindered their economic development. Trade was suppressed by the over-centralized state, almost to the point of disappearance. Profit came to be scorned upon and no corporate bodies independent from the state

FACT: THE ROMAN ECONOMY PRODUCED 82500 TONNES OF IRON PER YEAR, WHICH IS EQUAL TO THE CURRENT DAY OUTPUT OF INDONESIA

SPRING ISSUE GRIFFENOMICS

Photo courtesy of Wikimedia Commons

GROWING UNHAPPINESS

SPANISH SILVER

In an attempt to gain

Spanish silver coins

popularity, Hadrian cancelled all state loans

were famous for their consistent weight and purity

EMPIRE FACT FILE Roman Empire 753 BC - 476 AD Capitals: Ravenna, Constantinople, Rome Government: Autocracy

Ottoman Empire 1299 AD - 1922 AD Capitals: İnegöl, Constantinople, Istanbul, Bursa, Söğüt, Edirne Government: Absolute monarchy

Spanish Empire

“

Photo courtesy of Wikimedia Commons

Emperors in Rome spent lavishly, splashing out on security, transportation, and food.

emerged. The inventions therefore were merely toys that never left the artisan’s shop. Unlike China or Rome, Spain lacked technological innovation, relying instead upon violent conquest. The Spanish rulers imposed an oppressive tax system and individual wealth was resented, exemplified by the expulsion of the Jewish merchants in 1492. The precious silver trade was centralised, and the crown reaped the fortune. Combined, these factors prevented a rise in both productivity and the living-standards of its citizens. As a consequence, the population decreased by 25% in the 17th century, due largely to manufacturing decline and emigration. The turning point in the Ottoman Empire was in the latter half of the 16th century, Hubbard and Kane suggest. While the Western world evolved through the Renaissance and then the Industrial Revolution, the Turks refused to adapt. The rise of Shia Islam in Persia signalled the end of acceptance of foreign languages and cultures. Inflexibility began the Ot-

toman Empire’s long road to destruction. STEP 3: OVERSPENDING Short-changing the future to overspend in the present is the final ingredient in the cauldron of economic demise. Emperors in Rome spent lavishly, splashing out on security, transportation, and food, disturbing market forces. In a move to gain popularity, Hadrian even cancelled all state loans. Gladiator fights in magnificent amphitheatres, much like NBA or NFL in modern America, were a means of diverting public attention away from the worsening standard of living. The final straw for the Roman economy was the debasing of coinage. The Romans made coins smaller and more impure, with silver reaching just 3% purity by 284 AD. Crippling inflation followed, eroding the value of the empire’s debt, which was, of course, the Senate’s intention. With a meaningless currency, exchange became impossible. In an empire founded on trade, its future, or rather its lack of

one, was inevitable. Spain’s productivity problem was exacerbated by its ruler’s decision to vastly overspend on the military. Fortunately, the USA has noticed this particular pitfall, and has cut their expenditure significantly over the past decades. Spain’s pursuit of silver to fund the military did yield greater supply. However, because silver was used for currency, inflation took hold, and Spain became gripped by the same disease as Rome, as too much money chased too few goods. In Turkey, sultans lost sight of longrun economic growth, becoming caught in political negotiation with interest groups. Objecting to any reforms that threatened their interests, the military corps, known as the Janissaries, was powerful and particularly problematic. Since the state was forced to sustain spending on the corps, large debt piled up. In the 19th century, Turkey declared bankruptcy. None of the examples mentioned above, however, come close to the scale of American expenditure. Annually, the USA spends above $6 trillion and public debt, as a percentage of GDP, stands at roughly 75%. In the past, American debt can be pinned down to major wars. This is not the case currently. Hubbard and Kane believe that the emergence of the

FACT: THE ROMAN ECONOMY IS ESTIMATED TO HAVE A GDP PER CAPITA OF 940 USD, JUST ABOVE THAT OF CURRENT DAY BURMA

1492 AD - 1975 AD Capitals: Madrid, Toledo, Valladolid Government: Monarchy

entitlement state of social security and Medicare lie behind the mountain of US debt. Politicians are prepared to forgo a balanced budget in return for political popularity. Such is the nature of democracy. Term-limits discourage future economic planning. Politicians rack up huge debts, only to leave the problem to the next person in charge.

FURTHER READING: ‘Balance: The Economics of Great Powers’ by Glenn Hubbard and Tim Kane Balance: the economics of great powers is an eloquently argued book that deals with key issues about the formula for economic growth. Governments must respect underlying economic principles, value the importance of institutions, and avoid unnecessary intervention. Otherwise, monopolisation, the destruction of incentives and corruption are bound to crash the economic party. Hubbard and Kane reject the theory that America will fall. The growing burden of debt poses a serious threat, but the threat is not existential. Partisan squabbles and short-term loss aversion need to be overcome. Debt needs to be dealt with. The future needs to become a priority. How else can America preserve its global economic status?

GRIFFENOMICS ISSUE 1

FINANCIAL ECONOMICS

FINANCIAL UNPREDICTABILITY Delve into the unpredictable realm of financial economics.

All photos on this page are courtesy of Wikimedia Commons

TOSHO The Tokyo Stock Exchange is one of the three largest in the world

conomics is the study of human behaviour. What has been referred to as the ‘dismal science’ examines topics such as allocating resources, maximising profits and distributing products efficiently and fairly to individuals. However, many of the ideas in traditional economics are quite theoretical and they sometimes don’t perfectly resonate with real world occurrences. Puzzled by this problem, many economists have taken an interest in a branch of the subject known as ‘Financial Economics’ in recent years. Financial Economics relates typical economic principles and models to real world financial situations. Financial Economics is referred to as the study of the allocation and distribution of assets within a period of time in an uncertain environment, with the aim of maximising the rate of return and minimising the risk involved when investing. Let’s take a classic example - The Stock Exchange. People invest their money in certain companies in the hope that they can gain from the growth of the firm.

Time is required for the expansion. Once the companies grow, investors earn benefits and sell on their stocks. This reflects the process of the allocation and distribution of assets within a certain period of time. However, what if a company suffers a huge loss due to a natural disaster? There is no doubt that investors in this situation will also have a bad time. People experience a great deal of uncertainty regarding their returns on stock markets. They could make a killing or be overcome by serious debts leading to eventual bankruptcy. The study of Financial Economics requires that risks and uncertainties are taken into consideration. The Stock Exchange system is usually used as an economic model for illustrating the concept of Financial Economics, as it functions similarly to the features of this particular branch of economics. REAL VALUE vs. NOMINAL VALUES Let’s suppose you hold a pound in your hand and you have two options. You can either use this pound to buy two choco-

WALL STREET The eight-block long street has become a metonym for the American financial sector.

late bars, which cost fifty pence each, or you can save this pound in your pocket and buy this chocolate later. Many people tend to choose the latter option. They are persuaded that they can buy more if they save more. If you are one such person then you should be careful - you have fallen into a common trap! The value of money changes over time. This may be due simply to inflation or to the more complicated control of prices by governments and monopolists. Hence, the pound in your hand will not always be worth a pound as we know it. The real value of it could rise or fall. This affects how many chocolate bars you can buy. Dealing with and understanding nominal

“Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.” HENRY FORD

FACT: ON OCTOBER 24TH 1929, A DAY KNOWN AS BLACK THURSDAY, THE AMERICAN STOCK MARKET LOST 11% OF ITS VALUE

SPRING ISSUE GRIFFENOMICS

Photo courtesy of Wikimedia Commons

values and real values is a core element in the world of Financial Economics. We must understand how to value money effectively before jumping into other aspects. WHAT MAKES FINANCIAL ECONOMICS SO DISTINCTIVE TO OTHER BRANCHES OF STUDY? You have a reasonably sized pot of money in hand, however, you want to turn this pot into even more money. You throw your whole pot into the stock market, which provides high rates of return. You act rationally (as any economics textbook suggests) by buying and selling stocks that maximise your gains. However, following a sudden economic shock in your country, you discover that your pot of cash has evaporated completely, and left in its place are nothing but debts and bankruptcy. Why might this happen? The answer is fairly simple - risk! In most ideological economic models we assume risks don’t occur and every individual will make their actions rationally. However, in the real world, where Financial Economics is concerned, risk is always the first thing people consider. The 2008 financial crisis in the United States is a particularly poignant issue in the study of Financial Economics. People at this time were crazy for profit. They didn’t properly consider the many risks involved in their actions and this constituted the start of the collapse of the USA’s economy. Since Financial Economics observes the world in an uncertain environment, it is necessary to take account of the risks involved in performing any economic activity. WHAT ARE PORTFOLIOS AND FINANCIAL INSTRUMENTS? One major study in Financial Economics is the justification of the value of various financial assets within a portfolio, based on the rate of return, time frame, liquidity and potential risk. As seen in real life, people may encounter lots of different investment combinations. They will value various assets differently to other people. The case is similar when choosing different meal combinations from a set three course dinner menu. People will place different values on various types of food. For example, in many cases, steak is the most popular option available on a menu. Hence the value of steak to most

QUANTITATIVE EASING QE is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.

consumers will be high. However, there may be some customers who are vegetarian. As a result, the value of steak to them will not be as high. The same theory applies to the combination of investments chosen for a portfolio. It is always wise to view all the different types of financial instruments on offer. They are the major components of a portfolio. Stock is perhaps the best known type of financial asset. It generally provides fairly high rates of return and a controllable time frame. It also involves only a medium level of risk. Bonds, in contrast, offer a fixed time contract. However, they are a relatively safe asset, meaning the rate of return on them is usually quite low. In housing markets, mortgages are another financial asset. This asset can bring an exceptionally high rate of return, however the risk incurred is also very high. This originates from the extensive speculating behaviour involved in this market, which acts to drive house prices higher and higher. Foreign currencies are an alternative choice for investors who want to gain an appreciable return, yet do not want to bare too much risk. Foreign currencies are not as risky as mortgages, but they do generate higher returns than bonds. Another category of assets worth mentioning is that of precious metals. These are usually referred to as “harbours” against economic crises.

Metals such as gold and silver are undoubtedly some of the safest assets people can put their pot into, since the price of them won’t fluctuate a great deal, even when an economy faces severe shocks. They are preferable for people who seek long-term investments yet do not want to bear too much risk. A fascinating aspect of studying Financial Economics is judging the benefits and costs of all the above mentioned assets, and in turn determining a preferred portfolio which maximises the rate of return and minimises the risks involved as much as possible. WHAT DO BUBBLES AND SPECULATION REFLECTS? The study of Financial Economics can be used to explain some rather unnatural behaviours which humans undertake in the real world. Normally, when people invest their money they gain profits by means of interest, dividends or capital gains. However, everyone is ambitious. To gain higher profits they make use of the short-term fluctuations of financial instruments to earn money. This is essentially how speculation arises. Typically, the Stock Exchange has numerous investors who speculate continuously and repeatedly. As stock prices rise, more and more investors join the speculation army. Prices start to rise abnormally and at an increasingly rapid rate. Bubbles,

which signal an irregular stock price movement, appear one by one. They are extremely dangerous. Once the market experiences a sudden shock, bubbles may eventually burst and prices start to collapse. The consequences are devastating and this have been proven by both the dot-com crisis and the financial crisis in 2000 and 2008 respectively. The theory of economics assumes that humans behave rationally and make correct decisions. However, in the real world, caprice occurs for most people. Financial Economists will analyse these factors comprehensively and make comparisons between people acting theoretically and in actual circumstances. In general, Financial Economics gives rise to a brand new aspect of economic study. It gives economists (who rely on traditional theories and models) a pair of eyes to view the real market. Therefore, it is surely worth our while investigating the principles that lie behind Financial Economics.

FURTHER READING: ‘The Economics of Money, Banking and Financial Markets’ by Frederic Mishkin

FACT: DURING THE FOURTH QUARTER OF 2008, THE OUTPUT OF GOODS AND SERVICES IN THE USA DECREASED AT AN ANNUAL RATE OF 6%

GRIFFENOMICS ISSUE 1

HEDGE FUNDS

What they are, how they work and their impact on the global economy Photo courtesy of Wikimedia Commons

REGULATING INDUSTRY The headquarters of the U.S. SEC is pictured above

edge fund is a term that I found to be used frequently in the media, usually with negative connotations, such as the Bernie Madoff scandal of late 2008, but I never really understood what they were or how they actually made money. So, I looked into it, and this is what I found. In order to determine what a hedge fund is, we must first know what a fund is, and why people invest in them. A fund pools money from individuals or firms, which is then invested. Having a pooled investment is beneficial because not only does it mean that you take advantage of the fund manager’s specialist knowledge, it also means that by pooling your money, the fund has access to investments that would not be available to you as an individual investor. Also, the risk is spread between the large numbers of investors, so the investment does not depend heavily on any one individual or company. A hedge fund is effectively an investment partnership between the fund manager and the investors in the hedge fund, also called limited partners. The limited partners provide the money for the fund manager to manage according to the fund’s strategy, which is essentially how the fund manager decides to invest the hedge fund’s money. As hedge funds are not currently regulated by the US Securities and Exchange Commission (SEC), or another international equivalent, they

are able to invest in a wider range of securities than other types of funds, such as mutual funds. However, they do still invest in traditional securities. A security, in financial terms, is a tradable asset of any kind, such as stocks, bonds, commodities and real estate. An example of a hedge fund is the Bridgewater Pure Alpha fund, part of Bridgewater Associates, which made $35.8bn of profit between 1975 and the start of 2012, making it the most successful hedge fund in the world. One recent example is The Children’s Investment Fund (TCI), a British hedge fund, which became the biggest shareholder in the recently privatized Royal Mail, in October 2013. Although hedge funds can differ greatly, they usually have similar key characteristics. Firstly, as I have already mentioned, a hedge fund’s investment universe is only limited by what the fund manager decides to invest in. Secondly, hedge funds are only open to investors that have a certain net worth that exceeds the required amount needed to be able to invest in them. Hedge fund managers in the US are legally required to ask you if you have the money, as the SEC, responsible for protecting individual investors in the US, do not scrutinise hedge funds. This means that, due to the funds’ risky investing strategies, there may be a high chance that you lose some, if not all, of the money that you invested into the

fund. Thirdly, hedge funds often use borrowed money, known as leverage, to amplify their returns. However, this is also a risky strategy as losses are magnified if the returns from the asset are less than the costs of borrowing. Finally, the fee structure of a hedge fund is slightly different to other types of funds. A common fee structure is known as “Two and Twenty”, which means that not only does the fund manager take an asset management fee, usually 2%, he also takes a cut of the profits made by the fund, usually 20%. This is different to other funds, which generally only have a management fee. Estimates say that over $1tn is managed by the thousands of hedge funds active in the world today. Hedge funds

can pursue many different types of strategies, including macro or equity strategies, amongst many others. Macro hedge funds invest in stocks, bonds and currencies with the aim of making a profit from macroeconomic variables, such as countries’ economic policies or interest rates. An equity hedge fund, which may be global or country specific, invests in attractive stocks, or hedges against downturns in equity markets, which means that an investment is made to prevent a potentially risky or uncontrollable situation. An example of hedging is buying gold as a “hedge” against the effects of inflation on the US Dollar, which means that an investor will buy gold in order to prevent inflation from reducing the purchasing power of the US dollar, as infla-

FACT: THE CHURCH OF ENGLAND HAS PLANS TO EXPAND ITS HEDGE FUND INVESTMENT USING MONEY FROM ITS ENDOWMENTS

SPRING ISSUE GRIFFENOMICS

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Hedge funds can seriously impact on a country’s economy. They can cause sharp increases in share prices, known as run-ups, which can cause unsophisticated individual investors to buy these stocks.

Photo by Jin Lee/Bloomberg

Photo courtesy of Wikimedia Commons

MAKING CHANGES The Dodd-Frank Wall Street Reform, signed at the Ronald Regan Building shown above, was passed as a response to the Great Recession MADOFF Bernard Madoff directed a Ponzi scheme that totalled around 6.8b USD

tion does not decrease the value of gold. This is what hedge funds do, except on a much larger scale. Not only can hedge funds invest in normal securities, they can also invest in other hedge funds: a process which is called a “fund of funds”. This is when a hedge fund mixes hedge funds with other pooled investment vehicles, such as mutual funds. Hedge funds can seriously affect a country’s economy. Hedge funds can cause sharp increases in share prices, known as run-ups, which can cause unsophisticated individual investors to buy these stocks. This is because the individual investors have seen a tremendous increase in the price of the share, and they assume that the stock will continue to do so and that they can make a profit if they

buy in. However, if the hedge fund should then sell their shares in the stock market, and invest elsewhere, in bonds or commodities for example, then the individual investors can lose a lot of money as the decrease in share prices encourages people to rapidly sell. This loss of confidence may potentially mean that people lose their savings, which they’ve invested, as a result of the hedge funds’ actions. Another way in which hedge funds can cause serious implications is through fraud, and a good example of how hedge funds may be abused is the Madoff Investment Scandal which broke in December 2008. In June 2009, Bernard L. Madoff was sentenced to 150 years in prison for fraud, after creating the biggest Ponzi scheme in existence through the wealth management arm of his business, Bernard L. Madoff Investment Securities LLC. A Ponzi scheme is when an investment operation pays returns to its investors from its existing capital, or new capital from new investors, rather than from profit earned by the fund manager.

Madoff admitted that he hadn’t actually traded since the early 1990s, with the size of his fraud estimated to be $64.8bn. This scandal was not only devastating for stocks overall, but also created a chain reaction throughout the world’s business and philanthropic communities, which forced many organizations, such as the Picower Foundation, to, at the very least, temporarily close. However, on the whole, I don’t feel that hedge funds are as wholly evil as the media portrays them to be. Despite these recent challenges, such as the Madoff fraud, hedge funds continue to offer a solid alternative to traditional investment funds, and as a result, I think that they are here to stay, especially if they begin to be regulated, which has been suggested by the US government through the implementation of the Dodd-Frank reforms in July 2010.

TOP PERFORMING HEDGE FUNDS Ranked in YTD total return (%)

1) Glenview Capital Opportunity - 84.2 2) Matrix Capital Management - 56.0 3 ) Paulson Recovery - 45.0 4) Lansdowne Developed Markets SIF - 44.5 5) The Children’s Investment - 39.7 6) Owl Creek Overseas 38.1 7) Glenview Capital Partners - 37.4 8) Trian Partners - 34.9 9) Palomino - 31.5 10) Pelham Long/Short 30.3

FURTHER READING: ‘More Money Than God’ by Sebastien Mallaby

FACT: HEDGE FUNDS ARE ONE OF THE MANY WAYS THAT INDIVIDUALS CAN INVEST IN THE ECONOMY

Source: Bloomberg Media

GRIFFENOMICS ISSUE 1

UK AUSTERITY Photo by The Press Association

Photo courtesy of Helen Cobain

THE RED BOX George Osbourne poses with his signature briefcase

UK AUSTERITY Deficit reduction for growth or growth for deficit reduction?

uring the post-war period, Keynesianism was the most prominent economic movement. Keynesianism is built on the ideas of John Maynard Keynes, who recommended that governments could increase government spending to reduce mass unemployment in the economy and suggested the Keynesian model of macroeconomics. However, since the 1970s, Thatcherism in the UK and Reaganism in the USA were very different from the ideas of Keynes, they were adaptations of neoliberalism, which was a theory stressing the efficiency of the private sector relative to the inefficiency of the public sector. Therefore, neoliberalism sought to diminish the role of the government in the economy and introduced policies such as privatisation of the public sector, encouragement of international free trade, reduction of taxation, and deregulation in the market. Blairism did not deviate much from the core values of neoliberalism and the Labour Party led by Tony Blair and Gordon Brown accepted the need for a free market with relatively little government intervention to an extent.

Unfortunately, the global financial crisis of 2008 and the global recession that followed have brought an end to this economic consensus. A recession is a time period of two or more consecutive quarters of negative economic growth. Since then, the two major parties in the UK now propose different plans to tackle the problems that have emerged for the UK economy due to the credit crunch. A depression is a long period of negative economic growth from which it is very difficult to recover. In order to prevent the economy from sinking into this more severe state of economic recession, the Labour government under Gordon Brown adopted a Keynesian-style reflation of the economy. An example of reflationary policy is where the government reduces taxation and increases government spending to boost overall economic activity and hence bring the economy out of recession. In theory, this type of expansionary fiscal policy (use of taxation and government expenditure to achieve the government’s macroeconomic objectives) should increase economic growth by decreasing taxation, thus allowing

individuals and firms to have more disposable income, which is the amount of individual income or corporate revenue retained after taxation. This increase in disposable income should cause Aggregate Demand to increase, bringing about short term economic growth. This is because consumers are likely to spend more if they have more disposable income due to the decrease in income tax. Furthermore, firms are likely to spend more of their profits on investment due to the decrease in corporation tax. Aggregate Demand (AD) is the total amount of spending on goods and services in an economy over a period of time. It consists of consumption, investment, government expenditure and the balance of payments (exports - imports). The growing AD will lead to lower unemployment as more workers are needed to satisfy the growing demand for goods and services. This also highlights the idea of derived demand, which is where the demand for one good or service is caused by the demand for another good or service. For instance, the demand for labour is derived from the demand for goods and

services in an economy because labour is used in the provision of these goods and services. While Brown’s reflationary policy—based on Keynes’ famous idea that governments can spend their way out of a recession—worked to a certain extent, it caused a huge budget deficit for the UK government, which is the difference between the government’s annual taxation revenue and their spending. Both the coalition government and the Labour Party have placed great emphasis on reducing the budget deficit, and here lies the greatest divergence of economic policy between the two parties. While both parties agree that the UK’s budget deficit needs to be substantially reduced if not eliminated, they fundamentally disagree on the speed with which this should occur as well as the

FACT: UK’S NATIONAL DEBT IS INCREASING AT AROUND 2.3 BILLION POUNDS PER WEEK DUE TO UK’S BUDGET DEFICIT

SPRING ISSUE GRIFFENOMICS

MINIMISING UNEMPLOYMENT Pictured left, Job Centre provides job opportunities for the unemployed

“We used to think you could spend your way out of recession and increase employment by boosting government spending” JAMES Callaghan (Pm 1976-79)

extent to which this should be achieved by decreasing government spending and increasing taxation. The Chancellor of the Exchequer, George Osborne, has set out the ambitious target of completely eliminating the UK budget deficit within the lifetime of the current parliament, which lasts until the 2015 election. He has enacted two methods to achieve his target—tax raises and spending cuts. The VAT was increased to 20% in January 2011 while income and corporation tax remained at previous levels because increasing these taxes may have aggravated negative economic growth by reducing consumption and investment in the economy. Most importantly, Osborne announced a 6.2 billion pound spending cut in May 2010. He stated that this was necessary be-

cause it would effectively reduce the budget deficit and allow the UK to remain at a trustworthy credit rating. A lower credit rating would mean that the UK government must pay a higher interest rate for the debt issued. On the other hand, the Labour Party claims that the rapid spending cuts undertaken by the coalition government would threaten to damage the fragile economic recovery by reducing Aggregate Demand, which would cause a slower rate of economic growth. The slower rate of economic growth means that the government would receive less tax revenue in two ways. Since individuals are earning less, they are likely to be spending less, meaning that the government would receive less income tax and VAT. Moreover, the lower consumption of

FACT: UK’S CREDIT RATING WAS DROPPED BY MOODY’S FROM ‘AAA’ TO ‘Aa1’

goods and services would mean that some firms will earn less profit, and thereby reduce the amount of corporation tax that the government receives. Therefore, not only would the government have less money to repay its national debt, it would also have to spend more on social security due to the existence of cyclical unemployment. Cyclical unemployment is where individuals become out of work due to a lack of aggregate demand in an economy. In response to Osborne’s economic policies, the Shadow Chancellor— Ed Balls, announced in June 2011 that instead of increasing the VAT, it should be decreased to stimulate economic growth and create more AD in the economy. His policy, theoretically, would lead to more consumption in the UK as people will spend more on goods and services due to

THE IRON LADY Margaret Thatcher was extremely supportive of UK Austerity

a lower VAT. So, who is right? The coalition government with its contractionary fiscal policy or the Labour Party with its expansionary fiscal policy? Well, only time will tell. This is because economics is a social science, making it largely unpredictable by even the best economists. But if there is one thing that we know for sure, it is that budget deficit reduction and stable economic growth must come hand in hand.

FURTHER READING: ‘Austerity: The History of a Dangerous Idea’ by Mark Blyth

‘Austerity: The Great Failure’ by Florian Schui

GRIFFENOMICS Griffenomics is an Abingdon School economics publication. Email: griffenomics@abingdon.org.uk