Economics newsletter edition #7

JANUARY 2016

The Age Of The Robot

DUBAI COLLEGE

Let’s Stop Doing What Is Expected Of Us

New York Trip 2015

Agricultural Skyscrapers

In The UAE

DC ECONOMICS The Age Of The Robot: Should We Be Worried?

From the invention of the steam engine to the Internet, technology has always driven human progress. However, renowned economists such as Michael Osbourne and Martin Ford believe that we are now at a tipping point where robotics, if not handled correctly, may trigger mass unemployment and economic collapse. With so many jobs potentially at risk, it is arguable that the government should intervene to slow down this ‘progress’ in order to protect American jobs in low-skill sectors.

This introduction of robotics into the economy could be catastrophic in the long run. Since there will be more unemployed individuals in the economy, consumers will have less purchasing power, which means demand for goods and services will likely fall. This is especially a problem in countries like Britain and the US, since they haven’t had strong consumer demand since before the ’08 recession, and the prospect of a further fall in demand spells catastrophic consequences for the economy.

As is always the case with progress, it is futile and counter-productive to slow it down.

Rather, governments across the world must learn to adapt to the influx of robots into the world economy and make the necessary structural changes. The US government can do several things to combat the adverse effects of robotics, but since the US economy is based on free market principles, a more important question might be, “Should it intervene?”

Considering the fact that 47% of US jobs are at risk of disappearing, as well as the prospect of even further unemployment in the long term, I believe it is justifiable for the US to intervene in the short term and oversee the transition from a human labor force, to a robotic one. The simplistic solution is that the Government needs to implement more effective training schemes and increase the minimum wage; however, this will merely hasten the replacement !1

JANUARY 2016

of workers, and make the labor market increasingly inflexible. The government will have to intervene more than it usually does, firstly by reducing its generosity for people who aren’t working, but increasing it for those who are. This might mean cutting health benefits for the affluent elderly, while increasing wage subsidies to employers who hire the long term-unemployed. The government can also increase the geographic mobility of labor by issuing relocation subsidies so that people living in high-unemployment areas can move elsewhere to work. This should increase the flexibility of the labor market so that when robots replace workers, these unemployed individuals are soaked up by employers elsewhere, thus reducing the number of unemployed.

To combat the potential polarisation of the rich and the poor, the government could move towards an ideal progressive consumption tax model. This would subsidise the middle class, while also reducing the gap between the rich and the poor. The government should aggressively seek to increase the human capital of its workforce, establishing and developing institutions such as community colleges. This can allow individuals to use their degrees to increase their earnings significantly, and further reduce inequality.

Overall, the prospect of robots replacing half the jobs in the US economy is terrifying, but it is also inevitable. The government can oversee the transition, and implement the necessary policies and models, allowing the American labor market to become more flexible, thus capable of dealing with the influx of robots in the near future. The American people may have to endure a more prominent government presence in their economy, but it will be justified considering the risk of potential economic collapse and social polarity - Aneeb Sheikh

Let’s Stop Doing What Is Expected Of Us Economics traditionally conceptualises a world populated by calculating, unemotional maximisers that have been dubbed Homo Economicus. The standard economic framework ignores or rules out virtually all the behaviour studied by cognitive and social psychologists. This “unbehavioural” economic agent was once defended on numerous grounds: some claimed that the model was “right”; most others simply argued that the standard model was

DUBAI COLLEGE

Recent News Headlines That Have Caught Our Eye… ‣ In 2015, there was an 8.5% increase in the amount of jobs that required an economics Ph.D ‣ Britain is set to become the fourth largest economy in the world by 2030 overtaking Brazil and Germany. ‣ The economic confidence index fell by 3.8% to 100.18, this could be because of rising tensions between Turkey and Russia. ‣ Switzerland to vote on banning commercial banks from printing money after a petition got over 110,000 signatures ‣ America lifts its ban on oil exports after a vote in Congress. ‣ The Chinese Yuan depreciated, it has not been this low in 4.5 years.

!2

JANUARY 2016

DUBAI COLLEGE

easier to formalise and practically more relevant. Behavioural economics blossomed from the realisation that for years the model used by our policy makers was to some extent flawed These deviations from traditional theory are necessary if economists are to understand empirically how people make decisions about what to consume, how much to save, how hard to work, how much schooling to get, etc. Furthermore, if economists understand the biases that people exhibit that lower their objective happiness, they can put on a bit of a normative, hat in either a policy or a general life advice sense. For example the classical idea of political economy is to let wages rates fall to what the market determines and then provide everyone with a safety net of unemployment benefit, healthcare etc. Although this policy does assist those in need, it negates the desire for people to do something with their lives besides consuming goods and leisure time. A lot of people have a desire to participate in a community in which they can interact and develop new skills and self-esteem. Below are 7 of the core principles of behavioural economics that in the near future may be instrumental in influencing policy 1. Other people’s behaviour matters: people do many things by observing others and copying; people are encouraged to continue to do things when they feel other people approve of their behaviour.

2. Habits are important: people do many things without consciously thinking about them.

These habits are hard to change – even though people might want to change their behaviour, it is not easy for them.

3.People are motivated to ‘do the right thing’: there are cases where money is de-motivating as it undermines people’s intrinsic motivation, for example, you would quickly stop inviting friends to dinner if they insisted on paying you.

4. People’s self-expectations influence how they behave: they want their actions to be in line with their values and their commitments.

5. People are loss-averse and hang on to what they consider ‘theirs’.

6. People are bad at computation when making decisions: they put undue weight on recent events and too little on far-off ones; they cannot calculate probabilities well and worry too much about unlikely events; and they are strongly influenced by how the problem/ information is presented to them.

7. People need to feel involved and effective to make a change: just giving people the incentives and information is not necessarily enough .

It now becomes clearer than ever that the time for change in the field of economics is now, As President FDR once said ‘We have always known that heedless self-interest was bad morals; we now know that it is bad economics. - Yash Bhansali

New York Trip 2015 In November, fifteen students accompanied by two teachers, Mr. Christopher and Ms. York, embarked on an economics trip to New York, the financial capital of the world. Throughout the duration of the trip, we visited many of the famous attractions on offer and our schedule was jam-packed with exciting things to do and places to visit. !3

JANUARY 2016

DUBAI COLLEGE

Included in our itinerary was a visit to Grand Central Station, a tour of Wall Street and its history, a tour of Brooklyn, Queens and the Bronx and their diverse ethnic backgrounds, a brief visit to The Metropolitan Museum of Art, watching a basketball game at Madison Square Gardens, between the New York Knicks and the Houston Rockets, a ferry journey and tour of Ellis Island and its history, an insightful tour of the investment bank Neuberger Berman and advice from the employees, a night visit to the Rockefeller Centre, providing us with a excellent sense of perspective of the city, and a very moving tour of the 9/11 memorial site, including listening to what some of the survivors had to say.

On our last day, we went to the United Nations Headquarters for a guided tour of the building and were informed about the organisation’s purpose, as well as being granted a look inside many of the chambers. Subsequently, we visited the Bloomberg building where we were given a great insight into the day-to-day workings of the company and their new and transparent modern style of working. Before we left for the airport, we squeezed in the cable car tour to Roosevelt Island, which was especially wonderful at sunset.

Being in New York, we all took the opportunity to take full advantage of the Black Friday sales, investing in a range of goods, including clothes, souvenirs and a whole range of keepsakes from both Times Square and 5th Av.. Due to the excellent positioning of our hotel, we were in a prime location to walk two blocks south into Times Square, which was constantly lit up irrelevant of whether it was day or night. A lucky few of us were even able to watch the new Star Wars interviews on Good Morning America live in Times Square, with the thrill of seeing the cast in person. Food was obviously a major topic on the trip and we ate at a memorable range of famous restaurants, including Joe’s Pizza, the first Shake Shack, Grimaldi’s Pizza and The Hard Rock Café in Times Square. We also visited the factory of local business Waffles & Dinges for a look into how they made their delicious waffles, available throughout New York. The food however was probably very unhealthy despite its amazing taste. Economics at its most inspirational!

Overall, the trip was both memorable and extremely enjoyable, exploring every avenue available to us by taking full advantage of the Subway system and by walking in excess of fifteen kilometres on some days. The weather was very pleasant and probably hovered from around 5 to 10 degrees Celsius. A massive thank you must go to both Mr. Christopher and Ms. York for their lengthy planning, without whom the trip would not have been possible, and for making the trip such a memorable and unique experience. - Barnaby Brett

!4

JANUARY 2016

DUBAI COLLEGE

Agricultural Skyscrapers: Bringing Farming To The 21st Century As of today, according to the United Nations, there are roughly one billion people worldwide suffering from starvation. Approximately 42% of these chronically hungry people are from the world’s two most populous nations - India and China. The problem will grow exponentially due to the rising populations of these countries. To add, these transition economies must further adapt to the rapidly improving dietary standards of these populations that now require more nutrients vitamins and minerals due to the ever increasing amount of people with purchasing power.

To solve this problem, as well as the use of land and water, engineers have come up with vertical farms. Although these futuristic towers could easily be placed in a sci-fi movie, they may soon become a reality. The concept is a simple one: take all the land a farm uses and stack it all up into one tower. This creates a successful farming process that creates much higher yields and can maximise profit in the long run. VF only requires 1 acre of vertical space compared to 3-4 acres of land space for agriculture. Since better technology will be used to carry out better practices, there will be a smaller chance of harvest failure as conditions will be controlled. VF also creates many job opportunities in R&D that will improve both new and old farming practices. One major advantage, is that crop production-due to artificial conditions- will happen year round and so farming will be more like a manufacturing process.

There are problems though. Space, light, carbon dioxide and water cannot all be supplied naturally and so providing the crops with these necessities will be costly. Also, delivery systems will be costly as they will need to supply nutrients all over the tower. There is huge market potential for these towers - especially in urban areas. The UN have predicted that by 2050, six billion more people will migrate to or be born in urban areas, 90% of which will be in developing countries. To add, these towers will be highly beneficial as there is less land used and there will be a large market to cater to. However, there are problems. Since these will be developing countries, there are lots of farmers that will still be using traditional farming (due to high starting costs of VF) methods that will produce cheaper goods that cannot be competed with. Another region which is a potential market for such modern farming techniques is the GCC. Developed countries in the GCC will welcome these vertical farms for more than one reason. The first is that VFs can provide high food sovereignty for the people here who will be more than happy to pay for these foods. Also, there is a poor supply of rainfall here (which eliminates the chances of any conventional farming from this source) and the non-renewable water supply will last for less than 20 years in countries like Saudi Arabia at the current rate of 10000000000 cubic metres per annum for traditional agriculture. with the more efficient use of water, VFs will preserve the water for longer and produce more crops. In fact, the UAE has the potential to build 82 of these farms.

As you can see, Vertical Farming is a huge step for technology related to this field and can be of benefit to mankind, especially in places like Dubai. - Ishaan Arora

!5

JANUARY 2016

DUBAI COLLEGE

IN THE UAE As the New Year begins, the government has to planned out their spending for 2016. For 2016, the government has set out ambitious plans of increasing spending by 12%. Dubai wants to increase they're spending in order to help maintain economic growth.

However, the government has said that they are expecting their revenues to increase in 2016, this will ensure they are on track to balancing the budget. The ruler of Dubai announced that spending in 2016 will be 46.1 billion dirham’s which is a 12% increase from 2015 where the budget was 41.2 billion dirham’s.

Although, a lot of oil exporting economies have suffered due to the decrease in oil prices, the government expects incomes to rise by 12% in 2016 due to the increase in revenue from government services. The government has set aside 16.6 billion dirham’s to spend on transport and infrastructure. This has increase by 1.8 billion as Dubai wants to prepare to host Expo 2020.

The government also plans on adding 3000 jobs to the economy in 2016 in order to help growth and consumption.

The government is expecting 74% of their revenue to come from fees and fines. Another 19% to come from customs and duties on foreign banks and other taxes. They expect only 6% of revenue to be generated through oil.

Authorities say the increase reflects projected growth rates and the evolution and diversity of government services. - Natasha Valrani

Economics Cartoons

- By James Lemon

!6