Equilibrium - issue 7 by Christopher Scott

What's changed, what hasn't, and what needs to? •••••••••••••••••••••••••••••••••••••••

INSIDE:

Have The Tables Really Turned in Favour of Emerging Markets?

••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

What Free Market Economists can Learn from the Informal Economy

••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

How Immigration Has Affected Post Crash Britain

••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

CON TEN TS

Global Round Up Our Banking Woes A look at what's going on in the world of Has the banking sector cowed away economics

from its responsibility to help SMEs during the economic recovery?

Immigration on Post-Crash Britain Labouring Under False Impressions Factors affecting the UK labour

Still Too Big To Fail? How has the financial crisis changed the face of economics?

Sticky Velocity An uneasy quantification of quantitative easing

6 9

Module Choices An overview from a reluctant veteran

Can the BRICS Remain the World's Economic Powerhouse?

market

Seeing in More Than One Dimension A look at the nuances behind the data Technocrats or Democrats? Who should be trusted to run our economy? The Irony of the Informal Economy Examining an oft-overlooked sector

Looking Beyond the Mainstream Alternative interpretations of post-crash economics

Welcome to the New Church of Lean

EDITORIAL

University ofYork Economics Society Magazine

CONSOC is proud to present the latest edition of Equilibrium magazine. Our focus in this issue is the world of economics following the global economic crisis, the so called ‘Great Recession’. In the following pages we will be asking, ‘what’s changed, what hasn’t and what needs to?’ both in terms of real economic systems and policies, and economics as a social science. There is no doubt by now that the crisis has challenged economists and economic policy makers in many ways. In its wake it leaves many questions: why did economists fail to predict such a large crisis?; what do we need to change about our economic systems to ensure it doesn’t happen again? - and do we need a paradigm shift in economic thinking to achieve this? These will not be easy questions to answer. Addressing them will require significant soul searching and humility on the part of economists. It may even require the abandonment of much of the hard fought consensus regarding economic policy making and economic methodology that has been achieved over the last few decades. It also seems likely that the 'Great Recession' will weaken the idea of economics as a science with widely applicable ‘laws’. In the debate and discussion needed to rebuild a consensus there will be many opinions, many contradictions and many bitter arguments. Economics may once again look more like a battlefield, as it did in the 70’s, rather than a form of academia with science like qualities, clearly defined parameters and uncontested truths.

ensure that the next ‘Great Recession’ awaits us, just round the corner, and there is no guarantee that our institutions and governments, much beleaguered and bloated, will be able to cope with round two. Thus, whilst it is clear that one small student magazine cannot possibly resolve this debate, what we believe we can do is ensure that York students are aware of and talking about it. This debate is not just the pet project of Oxbridge and Harvard graduates, nor the uncontested territory of academics, locked in their ivory towers, but for everyone, from first year undergraduates upwards. We therefore trust you will enjoy reading this edition of Equilibrium, and hope that it will spark an ongoing debate about the future of economics here at the University of York. Editors Harry Quilter-Pinner & Usama Polani

Regardless, failure to have this debate will ultimately Sub-editors: Chris Scott & Paul Blower

Printed by The Max Design & Print

Copy editing and graphic design: Lucy Wheeler

Current affairs in the world of economics Usama Polani, 2nd Year Economics

Mystslv Chernov | Wikimedia Commons

Global Round-Up No Longer the Perfect Child

anada came seemingly unscratched out of the financial crisis, with no bank bailouts needed and an economy which kept on charging through while other developed nations collapsed. Although 5 years on from the crisis and 6 banks dominate the financial sectors with assets worth 5 times the value of GDP, meanwhile low interest rates since 2008 have caused an explosion of household debt(most of it mortgages which is fostering a housing bubble) to 93% of GDP. Furthermore investment and exports are still below pre-2008 levels and the economy still relies on the USA for three-quarters of goods exports. Although the government is finally taking much needed steps like signing up for trade agreements, strengthening its financial regulators and changing the rules for mortgages. But if there is a demand shock- before the effects of these policyâ&#x20AC;&#x2122;s materialise -reducing consumption in a time when the government is in the process of cutting spending, then letâ&#x20AC;&#x2122;s just say the perfect child will need rehab. And lots of it.

Sunshine in the Gloomy British Economy

labour market even with weak labour demand it didnâ&#x20AC;&#x2122;t increase verage wages adjusting unemployment much, just for inflation are still lowered wages. The problem with 4.2% lower than 2010 the lower wages is that it has led but employment to firms relying on labour to do growth over the last 4 years has low skilled work rather than been surprisingly robust, mostly investing in machines which have attributed to baby boomers led to a very low productivity putting of retirement. Due to the rates. Although spending has flexible nature of the British started to recover which has also

led to increased hiring which is pushing up wages finally. Official data also suggests that Investment is picking up with the increased wages incentivizing firms to invest in labour saving technology, boosting productivity. Because of this for once real wages are rising without interest rates having to follow, halleluiah!

University ofYork Economics Society Magazine It won't end with Crimea

between pro- and antigovernment protestors on streets he hope that the Russia’s and takeovers of local police imperial appetite would stations by protestors; yet the be sated by its police are largely invisible. annexation of Crimea Ukraine pays its police very little, are looking increasingly naïve. which does not really incentivise Now pro-Russian protestors them to put their lives in danger (many sent in by Russia) are to clash with anti-Kiev protestors. spreading through Eastern The mix of tough language and Ukraine, resulting in clashes minimal sanctions from the USA

SACOM Hong Kiong

have been ineffective in halting Russia. This reluctance to impose harsh sanctions are also mirrored in the EU, especially Germany which trades heavily with Russia. EU companies are even warier of sanctions, constantly reassuring Russia that they are happy to still do business. Russia is acting like a petulant child; the problem is no one is willing to discipline it.

Growing Pains in China

I Elections in a Broken State

forces, bullied the courts into submission and meddled with the financial institutions. Yet th n April 30 Iraq it speaks to the fractured held its first nature of Iraqi politics that elections since even with that CV Mr alAmerican forces Malik is still odds on to win. left the country in 2011, The winner will have to deal although peaceful (or fair) with the problem of the rebel might not be the most group ISIS which has slowly suitable words to describe the gained huge territories process. The sectarian between Baghdad and the animosity between Sunni and Syrian border, with the Shia groups isn’t helped by fighting leading over a 1000 the incumbent prime people a month being killed minister Nuri al-Malik. Over since January. Through all the last 8 years he has taken this America has tried to keep control of the government’s away; for once it doesn’t have security and intelligence time for the Middle East.

n Southern China tens of thousands of workers for Yue Yuen-contracted by Nike- have been striking since April 5th. Their anger is fuelled by the revelation that the company has not been paying towards their pensions and that the local authorities have been worryingly lax in monitoring if the firm was keeping up with its obligations Even though Yue Yuen has now offered to make up for the missing social security combinations, workers are reluctant to trust them again. The issue of pensions is a growing concern as low skilled migrant workers realise that labour costs are now cheaper in places like Vietnam where production is slowly moving, with this change comes the harsh reality that they are ill-suited for higher skilled jobs and that without pensions their life in old age will be extremely difficult. China has banned national media from covering this story but that won’t halt the change which is taking place or its consequences. China is growing up but it might not be ready for the growing pains of adolescence.

Still from Too Big To Fail | IMDB

STILL "TOO BIG TO FAIL?"

A WRI Staff | Wikimedia Commons

T 1:45am on September the 15th 2008 Lehman Brothers, the fourth largest US investment bank, filed for bankruptcy, the largest in corporate history. As a result, the already strained global financial system collapsed, with market capitalization eroding to the tune of almost US$10 trillion

The 2011 film Too Big To Fail dramatised the events that led to the financial crisis.

in a month. The affect on the real economy seen over the following years was even more staggering. In 2009 worldwide GDP contracted by 2.6% and by the end of 2009 the International Labour Organisation put global joblessness at 205 million people, 27 million more than in 2007. However, whilst businesses, livelihoods and in some countries, undoubtedly lives, were the main casualty of the so called Great Recession, there was another victim of the crisis in 2008. Very few headlines have been Richard Fuld Jr, the last CEO of Lehan Brothers, was arguably written about the first of many victims of the financial crisis. it; very few

protests have been made; but it is one of the most interesting and potentially concerning issues facing the post crisis world. The casualty I am referring to is that of economics as a social science and economists at its practitioners. Economists have been criticised since 2008 because, with a few notable exceptions, they failed to predict the economic crisis. The mathematically brilliant, robustly tested and internally consistent models used by economists in well regarded institutions across the world, from the Bank of England to the International Monetary fund, failed to see it coming. Ascertaining the reasons for this failure is a difficult business. Many have argued that it was because economists got the models wrong. They contend that if economists had just calibrated them differently, added another

University ofYork Economics Society Magazine variable, performed a more perceptive statistical test they would have predicted the crisis. Robert Shiller of Yale, for example, would argue that if economic models had factored in house price inflation more explicitly, signs of crisis would have been forthcoming.

“

Other commentators such as Raghuram Rajan, former Chief Economist at the IMF, have argued that the fault lies elsewhere. The failing of economists to predict the crisis, he argues, was because, ‘like medicine, economics’ became ‘highly compartmentalised’ and specialist, at the expense of an understanding of the whole system. Only an economist with knowledge of all areas of economics – macro, micro, development, financial, behavioural – would have been able to foresee the crisis.

were wrong; it was that they didn’t have the ability to be conclusively ‘right’ in the first place. Proponents of this view would argue that economists became overconfident in their

own ability to forecast and recommend the right policies, too certain that their theories and models were entirely applicable to the real world. Not so long ago Harry Truman demanded a ‘one handed economist’ by which he meant an economist who made a clear recommendation rather than a long list of caveats. Alas, in recent times economists became so sure of their solutions, which they argued they had ‘proved scientifically’, that it seemed his wish had been granted. ‘Spread the truth,’ said Larry Summers, then Chief Economist at the World Bank, ‘the laws of economics are like the laws of engineering. One set of laws work everywhere’.

demonstrate that it offered individuals the most prosperous and productive future. Economists responded by looking to prove their capitalist theories mathematically and test them ‘scientifically’ using econometrics. Doing so led to ‘conclusive’ and ‘definitive’ policy prescriptions used by the IMF and World Bank in the 80’s and 90’s which came to be known, courtesy of John Williamson, as the Washington Consensus. These policy recommendations were driven by ideology as well as research. This is something that the IMF has subsequently admitted. In an internal investigation following the Asian Economic crisis they comment that ‘it was heresy to suggest that financial markets were not distributing world capital in a rational and stable way’ even in the face of significant economic instability in countries with reasonably well balanced economies.

”

Whilst both of these explanations undoubtedly have more than a This same overconfidence fuelled grain of truth and at first glance by the idea of economics as a seem to show a reasonable degree science, this time in the form of of humility, proffering the illusion of accepting responsibility, they both defend the greater status quo. They make the same assumption, which is that there was and is nothing fundamentally These ‘laws’, it can be argued, wrong with the economic emerged in part as a response to methods and theories that have the fight against Communism been used over the last few during the Cold War. Capitalism decades. Instead it was simply had to comprehensively that the practitioners weren’t "Like medicine, economics has become highly quite good enough at using them. compartmentalised; macro-economists typically

Raghuram Rajan, former Chief Economist at the IMF

IMF

A more radical and greater criticism comes from those who argue that the problem with economics wasn’t that the models

do not pay attention to what financial economists or real estate economists study, and vice versa."

“ the Scholes-Black Model, led to economists arguing that securitization would make financial markets safer. In fact these financial tools, subsequently described as ‘weapons of mass destruction’, played a central role increasing structural risk in financial markets, contributing to the 2008 crisis. In 2003 confidence peaked leading Robert Lucas to declare that the “central problem of depressionprevention has been solved’ whilst in the UK Treasury Gordon Brown agreed; ‘boom and bust’ had been abolished he claimed. In 2008 both were proved spectacularly wrong. The events of the last few years have demonstrated that many of the theories that were once considered certainties amongst the economic community are not so clear cut. Policymaking as a result is at a crossroads with no clear way forward, especially given the unprecedented challenges facing Governments and Central Banks across the globe. With many of the old policy prescriptions seen as part of the cause of the crisis, and others rendered ineffective by the current economic climate, economists have resorted to new, largely unproven tools such as quantitative easing.

“

The old pre-crisis economics, the economics which claimed to be a conclusive science, is no longer. This is not to say that economics as a social science hasn’t got a huge amount to offer but it must adapt to this new reality. Greater value must be placed on applied economics and economic history – the only example where economic policy is really tested. Economics must also become more pluralistic and look to adopt the best of other social sciences to explain the things that remain outside of its conventional models and theories. In summary, it must strip away some of the unrealistic assumptions and be unafraid of the messy realities of life.

”

This would have been a controversial statement five years ago. It would have led to cries of derision and accusations of

ignorance and ideology from free market economists. However, more recently, well regarded institutions have come forward espousing the same conclusions. A commission, led by the Bank of England and the Government Economic Service found that a ‘greater awareness of economic history and current real-world context’ and ‘a more pluralistic approach to economics’ is needed in future economic policy makers. This has also been recognised by the economic focused press; the Financial Times argued in a recent editorial that ‘excessive faith was

invested in abstract mathematical models while insufficient effort was made to link these to real-life experience’. These pronouncements are a clear sign of progress. What is not yet quite as clear is the extent to which these conclusions have been accepted by high ranking policy makers or by academics across the UK and US. If these key groups fail to learn the lessons of history it could be severely damaging both to economics as a social science and, through government policy, to the population at large.

outsidethebeltway

University ofYork Economics Society Magazine

Dr Andrew Pickering of Economics Department fame gives us an uneasy quantification of quantitative easing

UCH, but not all, of what can be said with confidence about the effects of Quantitative Easing (QE) follows from the quantity equation.1 In a monetary economy - and we assuredly live in one of these, nominal income (PY) is equal to the quantity of money (M) times the velocity of circulation (V), hence MV = PY. Crudely, and leaving mechanics aside, QE simply represents an increase in M. What happens to the 300 economy?

In the quantity theory of money V is fixed. If we also add in the classical (and if you like, Austrian) assumption that Y is also independent, for example decided only by factors of production and

Something is wrong in the multiple set of assumptions underpinning this ‘obvious’ account. 2. But not a pure liquidity trap.

To cut a long story short,2 in the liquidity trap increases in M are perfectly offset by reductions in V. In this the liquidity trap is the polar opposite of the quantity theory – where V is fixed. In the liquidity trap the left side of the quantity equation is unaffected, and hence so is the right. However, note here that in terms of real GDP, Y, there is Both Relative assets from January 2008 equivalence. predict no The figures in grey show the stories effect.

reserves ($trn) in January 2011 Federal Reserve

250

Assets, %

1. No inflation, whatsoever.

whatever is going on in the supply side of the economy, then for the quantity equation to hold it follows that any monetary expansion must be inflationary. This line of reasoning underpinned many dire predictions at the outset of QE, notably from the Republican presidential candidate Ron Paul. But observe that QE, e.g. in the UK – not unrepresentative internationally – manifested (approximately) in a three-fold increase in the monetary base. The inflation that has transpired since 2008 – when QE began – just has not matched the predictions.

Bank of England

200

European Central Bank

1 50 1 00 2008

2009

201 0

Year

2011

But in reality did QE really have no effect on real output? Here inference is awkward –from a scientific point of view a concrete answer would require knowledge of how the world would have looked without QE, and this we do not have. Nonetheless history provides us

1. Note to Macro 2 students: this does not mean you can avoid using the IS-LM model in your exam answers. 2. See Footnote 1.

Ralph Orlowski | Getty Images

Mario Draghi and Mervin King, the central bankers of the ECB and Bank of England respectively, were strong proponents of quantative easing.

with clues. Following the financial crash in 1929, in the US at least, the line of reasoning underneath point 1 above was dominant; monetary expansion must always be debasing, and can only lead to inflation. Maintenance of the gold standard implied minimal interventions in the bond market – at least nothing comparable with the recent QE programme. So a major policy difference followed the two events: a ‘natural experiment’. Whatever the mechanism (and here things are undeniably murky), 4 years on from the outset, real GDP in the US in 1933 was 30% below trend, whilst ‘only’ 10% below trend in 2011. So if 1929 and 2007/8 are comparable, then money seems to matter – a lot, at least in conditions of recession following major financial collapses. How is this reconciled with the quantity equation? Well if M has risen, causing (somehow) an increase in Y (relative to what it would otherwise have been) but no concurrent increase in P, this must mean that V hasn’t fallen to perfectly offset M. Velocity may not be fixed – as in the quantity

theory, but neither does it adjust perfectly to offset increased M – as in the pure liquidity trap. Velocity must be ‘sticky’. 3. So all good then? Not entirely, for two reasons. Firstly we – and I am talking about central bankers as well as academic macroeconomists – do not really know how QE works. In terms of the quantity equation it is not known why V (and for that matter P) is sticky. Fortunately policymakers learned from history that QE ‘works’, but from a scientific point of view it would be desirable to know how and why it works.3 There are of course candidate explanations – involving frictions in the financial sector, and perhaps behavioural economics, but this is very much work in progress. Secondly, whilst I believe the macroeconomic case for QE, in terms of actual experience if not formal theory, to be strong, a point that does not get mentioned enough is that there are and have been considerable redistributive consequences. This is not necessarily in itself bad (think of

Pareto) but one such redistribution involved is a transfer from the general public to the banking sector – traditionally not considered to be an impoverished sector. Recall that QE was (I argue rightly) initiated very rapidly following the collapse of Lehman brothers. One quite possible outcome at that time was a generalised bank run. By providing liquidity to the rest of the financial system, QE allowed banks to service their short-run debts, and continue in business. But this provision was and is essentially free insurance. QE therefore does nothing to discourage excessive leverage and irresponsible lending, quite plausibly the opposite. But at this point we are doing the splits. As Charles Goodhart observes,4 you cannot achieve two policy goals – here stability in the financial sector and a target level of GDP – with just one policy instrument. To my mind the right policy combination would be QE plus appropriate macroprudential regulation in the financial sector. Though quite what shape this should take must be a matter for another day.

3. Note there are parallels with medicine here. e.g. it is known that (in very small doses) lithium reduces the risk of suicide in some cases of major depression. The mechanism through which this works is not currently known. 4. Albeit in a slightly different context. See: bit.ly/1homfFa

University ofYork Economics Society Magazine

Module Choices:

an overview from a reluctant veteran

This article is primarily directed at 1 st years, but if you are a 2 nd or 3 rd year of course you can read the unadulterated joy which is me rambling for two pages as well - Usama Polani, 2nd year Economics

OU might think this article is coming bit late, since you submitted your module choices long ago and you're already locked in to doing two years of advanced econometrics, but fortunately that’s not the case. Even though you've submitted your module choices for your 2nd and 3rd year you still have the opportunity to change your choices up to a few weeks after the module starts (of course the later you leave it, the more likely it is that other modules will be full). As a 2nd year who has organized the Module Choices event for the last two years, talked to countless 2nd and 3rd years about how they chose their modules, and frequently gatecrashes lectures for modules which he is not registered for, I feel qualified provide tips on how to choose your modules. The major disclaimer is that I could be wrong about all of this - so take my words with a few tablespoons of salt. 1) Don’t follow your friends This sounds harsh but you are not your friends. You might support the same football team, but that doesn't mean that you will like the same areas of economics. I know it can be daunting to see your friends disappearing off towards the finance-orientated modules when you stay awake at night thinking about development economics. But while being

“

isolated from your friends is a grim prospect, choosing modules you're not interested in will lead to dissatisfaction with your course and lower marks. It means you're not squeezing as much value out of the £9000 you blindly hand over to the department every year. Furthermore, doing a module which none of your friends take can be a very positive experience, as you meet new people and will more often than not build new friendships. So invest in your future or, as economists would say, be rational (I had to squeeze that in somewhere)! 2) Don't just pick the “easy” modules I know that it's easy to make all your decisions based on which module has the highest average mark. I myself did that during my first attempt at picking my module choices. But according to most 2nd and 3rd years I’ve spoken to, it isn't a good strategy in hindsight; more often than not you find yourself choosing modules which neither interest you nor suit the skills you excel at. You are more likely to do well in a module you find engaging than one as dull as Econ 1, which

”

means you will probably do well in a notoriously difficult module like Econometric Theory 1 if you find it interesting (some people do - we tried to start a society but you need at least five members). The difficulty of a module is a subjective thing, so don’t just believe the rumours you hear. For those of you with a passion for the intellectual side of study, there's also a certain thrill in being challenged by a module. Also nothing bonds you more with your coursemates than an allnighter in the library, and nothing is more satisfying than getting the results months later and knowing the hard work was worth it. 3) Try to leave with a variety of skills I received this advice when I was picking my modules and it is still very helpful to me. Choose your modules in a way that provides you with a set of skills: from having a detailed knowledge of economic theory , to having the skills to apply that theory, and to be able to reduce complex

economic processes into mathematical equations, as well as understanding econometric tools - and the statistics which underpin them. Every module teaches a few of these skills, but few teach them all. In order to have a balanced skill set you need to choose a range of modules; the return to this investment in variety is that when you finish your course you are suitable for a range of careers. 4) Quantitative modules improve Master's applications Even thinking about complex mathematics gives most people cold shivers but given the increasingly mathematical nature of economics, Master's courses value quantitative modules very highly. Even though these modules tend to have lower average marks, they are aware of that and take a holistic view of the effect it has on your grades. If you are thinking of doing a Master's in an economics related subject, choosing a module such as Econometric Theory 1 or Mathematics for Economists will be a worthwhile investment. 5) Sneak into a few Lectures Unsure of what a module actually entails even though you've looked at the material the lecturers provided and have spoken to them as well as students? Try

”

6) Finance modules won’t get you into finance

applicant. To find out how to increase your chances of getting an internship come to career events hosted by IFS and EconSoc, where representatives from companies such as EY and Citi Bank are there to answer any questions you might have. So there's my collection of tips on how to handle module choices, even if you are a 2nd year still nervous about the murky waters of the final year. Module choices are a very important part of your degree and there is a lot to consider so consider this advice, talk to your friends/2nd and 3rd years/lecturers/the supervisor

Many students (including myself last year) assume that a finance module will increase their chances of getting an internship in the financial sector. The truth is that the knowledge which could be relevant in an internship interview can easily be picked If you want to work here doing extra reading will benefit you up by reading a more than taking financial modules you're not interested in few books. Corporate awareness is more you met once at the start of the useful in interviews, and can be year and have never seen since, nourished by reading publications and make the decisions which feel like The Economist and FT rather right to you. This year's Module than taking a financial module. Of Choices Event, which had mini course, if you enjoy financial talks from lecturers and students economics then take those from various 2nd and 3rd year modules, but now if you view modules, is available to watch them as a stepping stone to being online and can be accessed via the a front desk trader, because they EconSoc Facebook page. My rant aren’t. There is also a myth that full of opinions and plug-ins for economic history modules various societies, briefly decrease your chances of getting a interrupted by useful advice, is good job. This is bogus! These finally over so you can go back to fascinating modules enable you to worrying about your upcoming view current problems in the exams or whether World War III is context of economic history and about to happen due to the make you a more varied Ukraine kerfuffle.

Gren | Wikimedia Commons

“

popping into a few lectures of the modules you're curious about to see if you find the material and the lecturer engaging enough to commit your precious optional credits to it.

University ofYork Economics Society Magazine

SCOOP: an alternative business model?

eep in the bowels of Wentworth, there is a small office filled not with books and paperwork, but shelves of jars, tins and bottles. This is the York Student Co-operative, or SCOOP, one of many organisations across the country which run on the cooperative model. Co-operatives are certainly nothing new; nor will they ever be game-changers in today's economy of big business and bigger profits. But the concept of shared ownership and not-for-

profit enterprise deserves consideration nonetheless. Even though it is a relatively small organisation with just over 60 members, SCOOP can compete on price with supermarkets due to its low overheads and volunteer-run shop. Its product range is also much more flexible: because it is run by its members, SCOOP can easily stock specifically requested products. SCOOP's primary aim is to provide organic, fairtrade and ethically sourced goods at prices students can afford, but it also does a lot more than that. It shows that a

company doesn't have to keystone to break even. That it only takes each member to give a small amount of their time to keep a shop stocked and running. That you really can buy organic pasta for just 14p per 100g.

SCOOP is situated in W/021. It currenly opens from 6:008:00 on Mondays, Tuesdays, Thursdays and Fridays, and from 1:30-6:30 on Wednesdays. If you'd like to find out more or get involved, visit us at the shop or email scoop@yusu.org.

MERGING market countries, countries deemed to be in the transition stage between the developing and the developed status, have been the star performers since the onset of the 2008-09 global financial crisis. Unlike their past experiences, they emerged from the financial crisis much faster and stronger than the advanced economies.

beforeitsnews.com

In the post-crash world, the tables seem to be turning against advanced economies. Professor Gulcin Ozkan from the Department of Economics and Related Studies asks;

REMAIN THE WORLD'S ECONOMIC POWERHOUSE?

Global financial crisis experience For emerging market countries, consistent with the ‘this time is different’ phenomenon, the recent global financial crisis was very different from their past experiences. First, the source of the initial disturbance that triggered the onset of the financial crisis –financial excesses in the advanced economies- had not been originated in their own economies. Secondly, emerging market countries had been much less exposed to the global financial shock. As a result, these countries proved much more resilient than the advanced economies since 2008, particularly during the downturn in 2009. For example, while the advanced economies contracted by more than 3

“

per cent in 2009, emerging and developing countries only observed a growth slowdown from 8.7 % in 2007 to 2.8 in 2009. Consequently, the share of emerging economies in the global output went up from twenty five per cent in 2007 to 31 per cent in 2011 while that of the US , Eurozone and the UK, went down, respectively, from 27, 24 and 5 to 24, 22 and 4 per cent over the same period. Similarly, the share of the emerging economies in the global distribution of net government debt fell from 17 to 14 per cent between 2007 and 2011 while those of the US and the UK rose from 27 and 5 percent to 31 and 6 percent, respectively.

Why have the tables turned? The above mentioned figures led many observers to refer to such changes in the fortunes of emerging market economies, particularly in comparative terms with those of the advanced economies, as ‘the tables have turned’ . How was this possible when emerging economies had deep crises of their own only a decade earlier when a series of currency and financial collapses inflicted serious damage to the economies of Mexico, Thailand, South Korea, Russia, Turkey, Brazil and Argentina? There are three good reasons underlying such improved performance. First, emerging market economies managed to graduate from the ‘original sin’ – inability of a country to borrow from foreigners in its own currency - by transforming their liabilities to domestic currency terms. This clearly has reduced the costs associated with the change in the exchange rate.

”

University ofYork Economics Society Magazine New risks from US monetary policy tapering

EPA

It was then perhaps surprising that emerging market currencies tumbled against the dollar upon announcements by the US Federal Reserve in Janet Yellen, the vice chairwoman of the Federal Reserve, which carries out Fed taping - a litmus test for May and again in emerging markets. December 2013 that the Secondly, most emerging reversal of US monetary policy economies now operate flexible expansion was imminent. The exchange rate regimes that do not reason for such responses is that suffer from the vulnerabilities of although these economies greatly their past currency pegs that reduced their collapsed one after another fragilities they during 1990s. Finally, emerging are still open to economies now enjoy much more risks of sound macroeconomic external. Both fundamentals, including bond and substantial holdings of foreign equity markets currency reserves. in a number of

â&#x20AC;&#x153;

these economies still heavily rely on foreign investors. As a result, many central banks have been intervening in currency markets aggressively to reduce pressure on the exchange rates and thus have been steadily losing reserves since the May announcement. It is therefore clear that the unwinding of US lax monetary policy will play a litmus test of strength for emerging market economies and may reveal new grouping of those who have really emerged.

CIA Factbook, 2009 | BN

Emerging Markets vs Advanced Economies

This infographic shows the top five countries for a range of economic indicators. China is shown in red.

David Shankbone | Foter

looking beyond the mainstream

Jonathan Neo, 2nd Year PPE, takes a look at alternative interpretations of post-crash macroeconomics.

the International Monetary Fund (IMF) did not foresee the risks within the global economy and, up till as late as Spring 2007, IMF reports were still suggesting that “global economic risks [had] declined” since September 2006

IMF

HE gradual erosion in global financial stability that culminated in the failure of Lehman Brothers in September 2008 triggered possibly the greatest financial crisis in history since the Great Depression of the 1930s. But not only was there an economic crisis, the very failure to predict the collapse of the financial systems represented a major crisis in its own right. Both the United States Federal Reserve Board and

failure to predict was seen as an indicator of shortcomings in the neoclassi-cal economic theory, and provided an impetus for renewed interests in alternative economic interpretations.

John Maynard Keynes Economic and that approaches are ways of framing “the reality, each with its own set of overall biasness and probl-ems. The U.S. standard macroeconomic model economy generally referred to as the [was] neoclassical synthesis, the melding holding of Keynesian ideas with that of his up well.” predecessors, is merely one of The them. (It should be noted that

University ofYork Economics Society Magazine

What may be of interest to us is to examine the causes of the financial crisis. The standard model’s failure to anticipate the calamity drove its proponents to review its existing models, from which the roles of changing market sentiment or ‘animal spirits’, and the breakdown of trust in the banking industry have been widely cited as key explanations.1 Despite so, there remains to be no clear consensus on whether the problems were caused by inappropriate policy measures following the failure of mainstream economic analysis or inherent flaws in the economic

LadyofHats | Wikimedia Commons

many of Keynes’ followers would reject various elements of the standard model as their own.) Alternative approaches exist, but they have been traditionally sidelined for a variety of reasons. In light of the crisis, considering them will open up a wide range of possibilities for new economic thinking, which could be translated into better policy decisions and improvements in the way in which economics is understood. But what are the questions that should be asked and what are the issues we should focus on, as we look beyond the orthodox models? system. The attempt to capture behavior and emotions in a deductive mathematical system has itself come under attack. While the approach has advantages of clarity and consistency in those aspects of reality which are made commensurable, this comes at the expense of limiting what else can be considered.2 Arguments based

on the mainstream model are therefore inevitably partial. To increase the weight of the argument would require us to

cross-reference its case against a broader purview of evidences from different methodological approaches. To this end, a myriad of heterodox approaches offers alternative perspectives. On one hand, the Post Keynesian approach suggests an understanding of market sentiment as the normal mechanism for economic decisions under uncertainty. Its proponents argue that, economies seldom behave in a law- like manner that allows sentiments to be incorporated into the quantification of risk. To focus on law-like behavior is therefore to focus on what appears to be the unique case, leaving little scope to the application of results of such an inadequate approach. Instead, theories developed to explain trends in the financial markets

should include analysis of decisionmaking under uncertainty without constrains of analyzing behavior in terms of rational optimization. This suggests contributions from institutionalist3 and behavioral4 theories into the Post Keynesian literature. Many overlapping viewpoints and shared key concepts exist across a number of alternative perspectives and also the mainstream approach, but that is not to say that all these perspectives come from a single direction. Heterodox economic approaches have been found on a wide range of positions arising from different, sometimes opposing, economic traditions. Looking at the crisis through Marx brings us to a very different interpretation, where the immediate goal of remedial policies should not be restoring the financial system but placing priority on what needs to be delivered, be it industrial restructuring, employment generation, or health, education and welfare. This is an outcome based on the Marxian understanding of the nature of the capitalist financial system. Moving from accumulation to finance to financialization, and finally to contemporary capitalism, the approach asserts that contemporary financial markets has created nothing but fictitious value, and often sacrificed the restructuring of

productive capital for realization of short-term gains or shareholder value.5 Different ways of theorizing have led us to different interpretations and consequently, policy measures. While the majority of todayâ&#x20AC;&#x2122;s economic policies have been dominated by the mainstream economic approach, it is far from being the only option. For all its appeal, this approach has limited the coverage of important issues which might have been exposed by the recent

crisis. One can further question whether the mainstream deductive model, or any other model, would ever be a sufficient argument in itself. It may be that each model is only able to generate an incomplete analysis that would require inputs from different interpretations, and that the way ahead is for us to advocate some form of methodological pluralism through a triangulation of approaches. By challenging conventions and considering alternatives, we have opened up ourselves to new possibilities in our understanding, and perhaps the best criterion for our judgment is the ability of any method to finally give us a proper account of reality.

References 1 ) Greenspan, A., 201 3. Never Saw It Coming: Why the Financial Crisis Took Economists By Surprise. Foreign Affairs. http://fam.ag/1 jLJbzI 2) Dow, S., 201 2. Different Approaches to the Financial Crisis. Economic Thought, 1 , pp.80-93. 3) Rutherford, M., 1 994. Institutions in Economics: the Old and the New Institutionalism. Cambridge: Cambridge University Press. Hodgson, G.M., 1 999. Evolution and Institutions: On Evolutionary Economics and the Evolution of Institutions. Cheltenham: Edward Elgar. 4) Earl, P.E., ed. 1 989. Behavioural Economics. Aldershot: Edward Elgar. 5) Fine, B., 2009. Looking at the crisis through Marx. International Socialist Review, 64, Marchâ&#x20AC;&#x201C;April, pp.40â&#x20AC;&#x201C;47.

See also:

Kates, S., 201 0. Macroeconomic Theory and its Failings: Alternative Perspectives on the Global Financial Crisis. Massachusetts: USA. Earle, T.C., 2009. Trust, Confidence, and the 2008 Global Financial Crisis. Risk Analysis, 29(6), pp.785-792.

University ofYork Economics Society Magazine

Dave Pape | Wikimedia Commons

has the banking sector cowed away from its responsibility to help SMEs during the economic recovery?

T is clear that a vital part of any sustainable economic recovery is being supported by and emerging out of recession alongside a banking industry that is able to provide all areas of the economy with financial capital. One mechanism set up by the Bank of England to ensure this is done is the Funding for Lending (FLS) scheme, a provision of subsidised-rate four year funding given to banks linked to mortgage and business lending. This was intended to encourage them to increase lending at lower rates and to open up access to credit. We now have data for the scheme up to the third quarter of 2013, showing the impact the scheme has had over the five quarters it has been running for since it was launched in mid-2012. The figures show

that £23bn has been drawn out by the banks through FLS, but that cumulative net lending to individuals and businesses has so far only been £3.6bn. In other words, it has taken more than £6 of subsidised funding for a bank to increase their lending in the economy by £1.

This picture becomes even worse when looked at for each individual bank, with only Barclays and Nationwide having a positive cumulative net impact on lending through FLS – and it should be noted that Nationwide

participates not in business lending but only in mortgage lending, something the new Bank governor Mark Carney has decided FLS will no longer be involved in. The two partnationalised banks, RBS and Lloyds, have individually had negative cumulative impacts on the lending market through their FLS prop ups, amounting to £2.2bn and £6.5bn respectively being taken out of lending markets. Our economic recovery so far has not been investment-led, and it is clear that to maintain sustainable growth, the economy needs rebalancing towards being fuelled by investment spending, away from consumer debt and unsupported consumption

growth. Although large corporations currently find themselves sitting on large piles of cash with the potential of being used to invest, small and medium sized enterprises (SMEs) rely on bank lending to fund their expansion, and many have not been able to find the funding they require, as shown through the shortcomings of FLS. Poor productivity growth is one area that the UK has lagged behind other countries for several years recently, and more business investment would surely make an impact on this.

Boris Loffert | Foter

The conclusion one comes to from this is simply that banks have not been up to lending to SMEs in the way they should have been. Some form of reform must be sought out in order to alter this. Ringfencing banks, that is splitting high street banking departments from supposedly riskier investment banking divisions, is

on the brink of being implemented, and Ed Miliband has further chipped into the debate on banking reform recently by arguing for caps on market share in the banking sector. However, though both of those options might appear to be sensible, neither particularly gets to the centre of our banking woes. Separating high street operations out from their sibling-investment banks may only mean an end to free personal banking, and limiting market share may not necessarily induce a more competitive market structure. Why would new entrants into the banking market suddenly feel incentivised to behave differently from older institutions?

There are certainly other changes that should be considered. Although non-bank lending in the UK is at its highest level since 2008 (mainly through peer-topeer lending and invoice financing), other stakeholder owned financials â&#x20AC;&#x201C; such as credit unions and cooperative banks â&#x20AC;&#x201C; should be encouraged. For both SMEs and The GroĂ&#x;erPreis des Mittelstandes: Germany's support for individuals, small enterprise has accelerated its economic recovery. stakeholder

banks would provide a greater focus on their own needs, be aimed at customers that commercial banks neglected to help, and create a paradigm shift in financial stability expectations, providing higher levels of capital and lower volatility. A local focus within our banking industry is also practically nonexistent at the moment, and local banks around the world show to be powerhouses of SME growth. Local cooperative banks have shown to have a significantly larger proportion of SME loans compared to other products, for instance if you look at market share of SME loans compared to overall market share taken up by local banks. In Austria, local banks hold 46% of SME loans compared to 33% of the overall market, in Germany this is 28% compared to 17% and in the Netherlands this is 43% compared to 29%. To put the UK into perspective, the amount of banking done with local banks is 67% in Germany and 57% in Japan, compared to just 3% in the UK. The German Mittelstand companies (their label for SMEs, of whom 75% use local banks) are widely acknowledged to be the backbone of the German economy, supporting sustainable growth and creating a balanced aggregate demand base. If that is the sort of economic recovery and future we are hoping for, perhaps it is time to start thinking more broadly and seriously about what to change in our own banking sector.

Paul Blower 1st Year Economics

UKIP Election Campaign

University ofYork Economics Society Magazine

The effect of immigration in post-crash Britain the subject of fierce political debate. What do the facts say?

ONS | Migration Statistics Quarterly Report, 201 3

HE recent ending of implement transitional controls run particularly in certain low transitional controls on on migration from the so called skill occupations although it all Bulgarian and Romanian â&#x20AC;&#x2DC;A8 groupâ&#x20AC;&#x2122; (Poland, Czech depends of course on the state of migrants may have got a Republic, Hungary, Lithuania, the economy and existing supply lot of coverage, but debate about Latvia, Lithuania, Slovakia and of labour. Empirical evidence has immigration in the UK has been Slovenia) in 2004 like its French, mostly shown little or no negative intense ever since the coalition German and other European effects of immigration on native government came to power. The counterparts. Additional wages and unemployment rates as taboo that lasted almost the immigration was actually a result of A8 migration. whole of the last decade is now identified in 2000 by government Anecdotal evidence on the other over with the stagnant economy economists as essential to meet hand would suggest there are forcing it to the top of the unsatisfied demand for both high many tradesmen who have been political agenda, where it and low skilled workers but civil undercut by eastern European remains. High levels of servants massively rivals and found it more difficult immigration are seen by many as underestimated just how many A8 to get work. There is no doubt one cause of the nation's migrants who would arrive. that individuals in some economic professions have problems. The suffered but British Social probably not to Attitudes Survey the extent people produced by think. NatCenm, revealed that in On the other hand, 2013, 77% of the immigration has public wanted to helped to hold see a reduction in down prices, immigration, up which will have two percentage benefited points from 2011. consumers at all This graph shows UK migration between 1964 and 2012. Net migration did not levels of the change significantly between 2000 and 2012. Long-term income international migration, ONS Former ministers have admitted the last government made a mistake with its failure to

Conventional theory would suggest that immigration might lead to lower wages in the short

distribution. By reigning in inflation it also helped allow the Bank of England to set relatively low interest rates, which fueled

Johnathan McIntosh | Wikipedia Commons

currently being attached to these figures.

the housing boom. Immigration will likely have contributed directly to rises in house prices and rental rates as well as the scarcity of social housing with supply not adequately adjusting but there is little evidence as to what extent. The majority of immigrants are of working age, meaning they are likely to pay more in taxes than they receive in benefits. A study by researches at UCL has found immigrants net fiscal contribution to have been some £25 billion between 2001 and 2011.

has increased net migration. While two fifths of immigrant side of the balance in fact consists international students, who have an overwhelmingly positive effect on the economy. According to the government’s own figures, International students contribute a net £10 billion to the UK economy through tuition fees and living costs that they pay. It is worth remembering the government migration figures come from the questionable International Passenger Survey (IPS), which surveys 0.2% of travellers at ports. Despite recent backing of its robustness in a government commissioned review, the IPS is no substitute for a population register so it is concerning how much weight is

Government policy is focused on reducing net migration from ‘hundreds of thousands to tens of thousands’ but by its very definition they can only influence part of this figure. Unsurprisingly, during a period of global economic uncertainty Britain’s have been less likely to leave the (relative) stability of the UK to either retire or seek work elsewhere, which Annual applicants for asylum in the UK, 1 995-2008

Somewhat reassuringly given the evidence, there has been a reduction in the proportion of people who think immigration is ‘generally bad for the economy’ from 52% in 2011 to 47% in 2013. It is wrong to dismiss entirely the concerns of those at the lower end of the labour market but the problem could be partially resolved as has recently been suggested by better enforcement of the minimum wage. Immigration policy is not and indeed should not be totally an economic decision anyway. However, those of us who advocate the overall benefits of migration could still do with more robust evidence from research about its economic benefits to win the argument once and for all. This should focus on both impacts on wages and the cost of living to find what has happened to disposable incomes.

References NatCen, 201 4: More than 3 in 4 want reduction in immigration: http://bit.ly/1 dcxJz1 Migration: An Economic and Social Analysis, October 2000:

http://bit.ly/1 h4frNJ Dustmann, C. and Frattini, T.

The Fiscal Effects of Immigration to the UK. Centre

for Research and Analysis of Migration: http://bit.ly/1 hqcz37 HM Government, 201 3. International Education: Global Growth and Prosperity: http://bit.ly/1 nxI1 hB HM Government, 201 3 . Immigration Statistics, April to June 2013:

http://bit.ly/1 nxHZX3

University ofYork Economics Society Magazine

labouring under false impressions Peter Spencer, Lecturer in the DERS, takes a look at the factors affecting the UK labour market.

oodhart’s Law says that once you target an economic indicator it starts to misbehave. This was originally used by Professor Charles Goodhart (who recently retired from the LSE) to describe the behaviour of the M3 monetary aggregate which was targeted by Mrs Thatcher’s government in 1979. However since August, when the Monetary Policy Committee set out its forward interest rate guidance in terms of a 7% unemployment threshold, unemployment has started to behave very strangely. In August the MPC thought it would take two years for unemployment to fall to 7%. But it is already down to 7.1% and falling like a stone.

Normally, an economic recovery sees an increase in the demand for labour which moves us up the supply curve and increases both real wages and employment. But this time we are seeing employment rise strongly while real wages continue to fall. It is interesting that CPI inflation has fallen from 4.7% to 2.0%, but the effect of this has been blunted by the fall in earnings inflation, from 3.2% to below 1%. It seems that the increase in the demand for labour has been matched by an increase in supply that has moved us down the demand curve as additional workers priced themselves into jobs. Whatever the reason for this situation, it leaves the MPC with a big

headache. What are they likely to do? The labour market is increasing… Employment topped 30 million last year, showing an increase nearly a million over two years. However, the continued subsidence in real wages is proving to be the government's Achilles’ heel and could indeed prove to be the weak spot in the recovery. Consumers cannot continue to drive growth for much longer without a recovery in real wages. So far they have

been happy to finance their spending spree by reducing their saving rate, which has come down from 7.9% in the first half of 2012 to 5.4%, but the scope for further falls is limited. …pushing up employment and depressing real wages and productivity It is hard to find another episode in which employment has been rising and wages falling for any significant period of time. This seems to be the result of series of positive influences on the supply of labour which have depressed real wages as people priced themselves into jobs. It is not hard to see the influences that are at work. Immigration is another thorn in the government’s side. Besides its social and political impact, it weakens the bargaining power of native workers and undermines real wages. Older workers are delaying retirement, swelling the workforce and adding to the downward pressure on remuneration. The coalition’s cuts have similar effects on employment and wages. Immigration is boosting the labour force… Let’s take a look at the way these labour supply influences are evolving. EU immigration is the first on the list, with Bulgaria and Romania in the headlines at the moment. The first chart shows the wave of immigration from Poland and the other 7 countries that joined the EU in 2004. The financial crisis broke this wave in 2007, but it has since picked up

momentum, adding nearly 400 thousand to the workforce since the end of 2009. So far, immigration from Bulgaria and Romania has been relatively small. However, it is interesting that immigration from the core EU 14 states has picked up since

the Euro crisis, increasing the UK labour force by 130 thousand over the last two years. …but late retirement and benefit cuts are more important Youth unemployment is also high on the political agenda. Actually, it was increasing well before the recession struck. However, the strength of the demand for labour

is at last making inroads to this. At the other end of the age range, workers faced by a collapse in annuity rates due to longevity and falling bond yields are remaining in the workforce for much longer. The move towards early retirement, which reduced participation by the 50-64 year age group during the 1990s, has now been reversed. Despite the burgeoning numbers of older workers, the number of 50-64 year olds that are economically inactive due to retirement has fallen by 232 thousand over the last two years. Meanwhile, the numbers of over 65s in work have increased by 208 thousands. It seems clear that later retirement has quietly added more to the labour force than EU immigration over the last two years, more than twice as much on these figures. Moreover, unlike immigration, which tends to hurt native workers at the bottom end of the earnings scale, its effects are felt right across the board, with prospects for responsibility and remuneration held back across a wide range of occupations and age groups. The coalition’s benefit cuts are having a similar impact and are likely to continue well into the next Parliament if the Conservatives will the election. They come hot on the heels of the Labour government’s push to get off welfare and back into work. This package included a concerted and remarkably successful campaign to get teenage pregnancy rates down. Single parents have all been encouraged to find employment. The number of lone parent households has practically halved,

University ofYork Economics Society Magazine

from nearly a million in 1997 to just over half a million currently. The numbers on Incapacity Benefit rose under the first Labour administration, but had stabilized by 2003. In October 2008 Incapacity Benefit and Severe Disablement Allowance was replaced by Employment and Support Allowance and subject to more stringent medical assessments. The numbers receiving these benefits have since fallen by 150 thousand, with 130 thousand coming off this benefit over the last two years. The total number of those receiving in work benefits has fallen by 287 thousand over the last two years, with most of these being deemed fit rather than unfit for work.

for employment in the private sector. It is remarkable that the labour market has accommodated this increase without a rise in unemployment. Some of these individuals will have lacked skills and motivation initially, but others will be highly skilled and enthusiastic. Indeed, the biggest area of recruitment has been seen in the Professional, Scientific and Technical industries, which added 137 thousand to payroll in the last year and 191 thousands over the last two years. â&#x20AC;Śbut their effect on the economy is hard to predictâ&#x20AC;Ś Not all of these people will have found jobs yet. However, these factors have probably increased the labour force by around 3% over the last two years. The CobbDouglas model would suggest that

with investment fixed, this would increase output by 2% and depress the marginal product of labour and hence the real wage by 1%. It would thus go a long way to explaining the developments we have witnessed in output and labour markets over the last couple of years. ...adding to the uncertainties faced by the MPC So what should the MPC do? The fall in unemployment is very welcome and has boosted consumer confidence and spending because people feel more secure in their jobs. However, real wages are also important for confidence and have not shared in the recovery. I think this makes unemployment a very misleading indicator. If the MPC hike interest rates before the labour market has stabilized properly and real wages have begun to recover this could easily knock the recovery on the head. Fortunately, now that inflation has come back in line with the target, the MPC will have the time to wait for a proper recovery to set in.

All in all, these calculations would suggest that EU immigration, delayed retirement and benefit reforms increased the potential UK workforce by around 900 thousand (nearly 3%) in two years. Adding in the 325 thousand redundancies seen in the public sector over the last two years, suggests an increase of well over a million in the numbers available

Bank of England

These trends are likely to persistâ&#x20AC;Ś

The current MPC of the Bank of England.

seeingin morethan onedimension

Econometrics lecturer Michael Thornton takes a look at the nuances behind the data

% premium relative to someone with two or more A-Levels

80 Men Women

70 60 50 40 30 20

ost people, it seems fair to assume, conduct some research before making their choices about what to study. I did once teach a year 10 pupil who had chosen GCSE Economics expecting to learn how to make cakes, but that was some time in the past and in

Humberside, both of which, by all accounts, should be considered another country1. Before committing three years at University, however, a little background investigation is the norm. Anyone whose background investigation went as far as a quick trawl of the internet2 or attending a presentation here at

Arts/Hums

Class/Lang

Soc Sci

Education

Science

Eng/Tech

Maths/Stat

Law

Bus/Man

Health

Economics

the University of York will have come across the above graph. The graph shows the earnings premium for graduates, relative to those with two or more A levels, by different academic discipline. At first sight, the picture it paints is clear and unambiguous: degrees in general

improve earning power; the effect is stronger for females more than males in all disciplines; and, the premium is highest for graduates in Economics. Perhaps unsurprisingly, I quite often find myself using this graph on potential applicants, but even as I do so there is, I must confess, a part of me that feels uncomfortable with it, for it is riven with subtle deceptions and, even as I am extolling the virtues of my discipline, I am tempted to explain how it provides the training to examine precisely this kind of thing more closely. There are a number of issues that could be causing me discomfort but aren’t. One is the veracity of data and the size of sample used to generate it. If this were a comparison of random group of friends, drawn together infrequently to watch one another get married, the picture would be unreliable, but thankfully it is not. The data were published by the Office of National Statistics based on the Labour Force Survey, the national survey that underpins the unemployment statistics. They are not as reliable as administrative data there is evidence that people are not entirely honest when reporting their earnings - but still widely trusted. Another is the choice of categories in the presentation. If a category entitled `Medicine and Dentistry’ were to be split from within the `Health’ category would `Economics’ still come out

Allied Vision Tec

University ofYork Economics Society Magazine

Financial hubs like the London Stock Exchange may be inflating the average earnings of Economics graduates. on top? Probably not, but no one, I am sure, needs me to tell them that such professions are well remunerated. A third is that the presentation is only averages, behind which lurk a collection of distributions. Clearly, there are a number of fabulously wealthy male arts graduates in the country and the odd impoverished female statistician.

The dubious aspect is that the graph invites the untrained individual to put themselves into the graph and forecast the impact that studying Economics will have on their own earnings. You may, even now, be luxuriating in the clear, positive correlation

between completing a degree in Economics and earnings. But other issues, currently hidden beneath this excel-generated iceberg tip, might change that view. Given fuller consideration, a different picture might emerge. The only mitigating feature under consideration here is gender. It is long established in empirical work3 that the longer an individual has been in post, in fact the longer they have been in employment, the higher their wages tend to be. The data in the graph were collected in surveys between 1996 and 2006 and contains graduates who are at different stages in their careers. If graduates of discipline A tend to be older and in work for longer than those of discipline B then discipline A would, other things being equal, have a higher average wage premium than discipline B. But what would cause a disparity in the seniority of graduates in a sample? Well if the numbers nationally studying

1. L.P. Hartley, The Go-Between: http://bit.ly/1mgedCt 2. http://studyingeconomics.ac.uk/where-next/jobs-and-careers/money-you-could-earn/ 3. Mincer, Jacob (1958). "Investment in Human Capital and Personal Income Distribution". Journal of Political Economy 66 (4): 281–302

Econometrics is often misunderstood in a number of senses. Many students, I know, feel that the rolling landscape of Greek letters, subscripts, superscripts and hats represent a secret language through which the high priests of the religion exact torture. (A more elegant language is available for those prepared to master its grammar.) But anyone wishing to turn their back has to be prepared to answer the question: what else would you like to do with all this data, flooding out of the realm of economics in the form of prices,

quantities, decisions and activities? If Economics is to have any truck with the scientific method, that answer cannot be to ignore them. You may not find the tools easy to master, but clearly there is a job to be done. The job is not just estimating the effect of a degree on earnings, but assessing how reliable that estimate is: how likely it is to have been generated just by randomness; how confident can we be?

As in many disciplines, a little learning is a dangerous thing and one of the most important things to understand is what an econometric technique cannot tell you; where it is inappropriate, untrustworthy, and even deceitful. My argument about the earnings data might make for a clearer and fairer analysis between disciplines, but still doesn’t quite get to grips with the question going through the mind of potential student: what will studying Economics mean for me? Here the relevant counter-factual is not someone with two or more A-levels, but you if you chose not to go to University at all. Employers reward a range of things in their employees, including self-discipline,

xkcd.com

discipline A are falling relative to those studying discipline B, then that is exactly what would happen to the sample. Failure to control for job tenure is a serious oversight in the analysis: the less popular a discipline becomes the better it looks. Now we’ve got started, we might want to control for other things, such as: attending a Russell group university; whether the degree was a BA or a BSc; whether a postgraduate degree was also taken; whether employed in the financial services industry. Some of these will be of interest in their own right, many will not, but all will help to sweep out clutter and provide a more refined picture of the effect of an Economics degree on earnings. But a graph featuring all of these dimensions, and their interrelations, would be impossible to understand. How could we, feasibly, split out that many effects? The answer lies in Econometrics.

dedication and the intellectual ability to absorb and to manipulate difficult concepts. But these are all skills needed to complete a degree. Indeed all potential students have formed some idea of the extent to which they possess, or could develop, these skills before applying to study at University. In other words, those more likely to want to go to University would also be more likely to command higher wages because of their innate abilities. This is a classic sample selection problem. If we can’t observe these innate abilities, and typically we can’t, then we are at risk of overestimating the wage premium. There are however, on occasion, ingenious ways to overcome this problem. Indeed many academic careers are underpinned by such ingenuities. For what it’s worth, looking at some other sources around, my guess is that the wage premium for Economics graduate is very healthy. For that reason we still use the graph. Looking at which other disciplines also command a premium there is evidence that, not only could Econometrics give us a better understanding of the premium for Economics graduates, it is probably one of the reasons the premium is there.

University ofYork Economics Society Magazine

Who should be trusted to run our economy: democrats or technocrats? Chris Scott, 1st Year Economics, examines the arguments.

he 20th century is often associated with the gradual spread of democracy in Europe, culminating in the collapse of the Soviet Union in the 1990s. However in light of the recent financial crises people have begun to more openly question whether democrats are the best stewards for the economy. In particular technocrats, or technical experts, have been cited as a potential alternative to democrats. This trail of thought reached a highpoint in response to the Eurozone crisis, where as a result of market pressure both Greece and Italy replaced their democratically elected governments with unelected technocratic ones. Proponents of this system cite how monetary policy is often in

the hands of unelected officials in many Western countries. In countries such as the UK this involves having an independent central bank, which is responsible for maintaining price stability and preserving confidence in the financial system. This has helped it to respond effectively to changing circumstances since the financial crash of 2007, where both the Bank of England and other central banks have been able to use loose monetary policy to help sustain the economy. This has entailed keeping interest rates close to 0% in an attempt to encourage businesses to invest.

Additionally because central bankers are not directly accountable to the electorate, they have had far more scope to

Data from the Bank of England

experiment in terms of their response to the crisis. This has consisted of unconventional monetary policy tools such as â&#x20AC;&#x2DC;quantitative easingâ&#x20AC;&#x2122;, in which the central bank purchases bonds from private firms such as banks, which in turn can be lent to households and business. As a result borrowing costs have been lower and consumer spending higher than otherwise would have been the case during the crisis. Such a policy is less likely to have been pursued by elected officials, due to the ambiguous nature of the effects that it may have, which could be to the detriment of future reelection.

Wikimedia Commons

yields subsequently fell from over 7% in January 2012 to just over 4.5% in December 2012, suggesting that market confidence was being restored. However while Montiâ&#x20AC;&#x2122;s government did instigate some reform, it inspired a lot of protests from Italian civilians. Many were particularly alienated by having policies thrust upon them which had never been given a democratic mandate. Similarly if fiscal policy, in addition to monetary policy, was put into the hands of technical experts then the influence they had over our every day lives would greatly increase. While it is evident that many people do not trust the current political class, it is not clear that they would trust an unelected and unaccountable official either; especially If their standards of living depreciated as a result of their actions.

Mario Monti served as Prime Minister of Italy from 2011 -201 3, in the wake of the Italian debt crisis Similarly if technocrats were in charge of fiscal policy this would enable them to make decisions on issues such as spending without political constraints. This is particularly important, since some democratic governments have made promises, perhaps to attract votes, which subsequently their countries were unable to afford, leading to a further buildup of debt. Perhaps the best modern day example of what technocratic governments can achieve can be found in Italy. In late 2011 an unelected government led by Mario Monti was brought in to manage Italyâ&#x20AC;&#x2122;s economy. This was in light of increasing yields on Italian bonds and a lack of confidence in the elected government of Silvio Berlusconi to enact the necessary economic reforms that the country required. Although it was constrained by the fact it still relied upon support from the political parties to pass legislation through parliament, the government was able to pass vital reforms to areas such as the labor market. Italian government bond

In response to the financial crises since 2007 there have been few radical reforms undertaken by democratic governments. However they have previously had far greater success at revitalizing their economies. During the early 2000s Germany underwent radical labour market reforms, which have since helped to ensure it has one of the most flexible labour markets in Europe. More recently this has helped it

perform strongly in spite of the recent Eurozone crisis, since the competitiveness of her exports has enabled her to build up markets in developing countries such as China. The democratic legitimacy these governments had also made it easier to negotiate with pressure groups such as unions, eventually reaching a consensus on issues such as wage expectations and implementing reforms that survived in the longer term. It remains perfectly possible that democratic governments will be able to seize the initiative again as circumstances require them to. Technocratic governments can be used as a short term measure to stabilize the economy where the political system appears too weak and unstable to achieve this. This was the case in Italy, where without technocratic government

it is still unclear whether Italy could have avoided a bailout. However ultimately their lack of democratic accountability makes reforms they do instigate more difficult to accept. This ultimately makes it more likely that they will be watered down in the future. Where possible it should therefore remain the role of governments to be responsible for fiscal policy.

University ofYork Economics Society Magazine

Spyros P | Foter

the irony of the informal economy by Harry Quilter-Pinner

Wikimedia Commons

he Arab Uprisings were the result of ‘the desire of a vast, underclass of people to work in a legal market economy’, at least according to the free market economist, Hernando De Soto of the Institute of Liberty and Democracy. Essentially he argues that the informal economy - those people whose work goes unregulated and unrecorded by the state, such as the gamut of traders and producers who fill the souks and

Free market economist Hernando de Soto

squares across the Middle East – faced an inability to access the benefits of the free market. The result, according to De Soto, was poverty, neglect and an increased propensity to face the kind of expropriation experienced by Mohammed Bouazizi. An ordinary fruit stall owner in Tunisia, Bouazizi committed selfimmolation: ushering in the first protests of the Arab Uprisings, having had his cart and produce confiscated by the police. De Soto’s argument has many merits and some notable weaknesses, but these are not the focus of this article. Instead consider the wider landscape of

economics and the ironic nature of his argument. That is, economists the world over have largely ignored the existence of the informal economy, despite the fact that it is worth US$10 trillion across the globe every year. And yet the informal economy exhibits many of the characteristics of the free market economists’ panacea, perfect competition. Defined as much by its inverse, a monopoly of one producer and many customers, perfect competition is a theoretical market in which no participants have control over price; in which many buyers and sellers operate, none of which have a significant market share; where firms can enter or leave the market without significant cost; and where the goods that are traded are identical or very similar.

Now consider the characteristics of the informal economy, the villain of the Arab Uprisings according to De Soto. A survey conducted by the Global Fairness Initiative (GFI) in the birth place of the Arab Uprisings, Tunisia, finds that it has startlingly similar characteristics to a perfectly competitive market. For example, the data shows that the cost of entering the informal sector is relatively low with 56% of businesses in the informal economy needing less than 1000 Tunisian Dinar, equivalent to approximately 100 work hours, in start-up capital. The survey also finds that businesses (especially those operating in market places) produce and sell very similar

products, resulting in respondents to the GFI survey highlighting high levels of competition as one of the biggest barriers to personal income growth. Everything we know about the informal economy

suggests that producers cannot set their own price, but have to take the price the market sets. This is a result of the fact that informal businesses by their very nature command a small market share, something suggested by the small size of informal businesses in Tunisia. 47.9% of businesses are made up of just one person, with just 8.7% made up of more than 4 people.

Studies also find that inflation is a key concern for informal businesses, as is the inability of informal traders (in some cases) to buy wholesale, forcing them to rely on middle man. These concerns occur, in all likeliness, because informal businessmen realise that these issues lead to variation in the cost of their goods in comparison with their competitors, with a resulting decline in their market share and income. Furthermore, the likenesses donâ&#x20AC;&#x2122;t end there. The informal economy also demonstrates many of the conditions prized in a perfectly competitive labour market. This is the ideal labour market that economists point to when recommending that that we make our labour markets in the West more â&#x20AC;&#x2DC;flexibleâ&#x20AC;&#x2122;, by which they mean, make it easier and cheaper for firms to hire and lay off workers. They argue that flexible labour markets make firms more profitable and ensure that unemployment becomes a shorter

Wikimedia Commons

As a result of these characteristics customers do not mind where they purchase their goods. Instead they are just concerned about how much they cost. Any increase in the price of a good at one supplier leads to a complete loss of market share as customers shift to one of the other suppliers who offer the same good but at a lower price. This competition, economists argue, creates efficient markets where the minimum resources are used to produce the most goods possible and therefore costs, and the price to the consumer, are kept to a minimum.

University ofYork Economics Society Magazine term phenomena and affects less people. The GFI dataset finds that these conditions, so sought after in the West, are in fact prevalent in the informal economy in developing countries. For example, 92.6% of salaried informal employees surveyed had no contract and could therefore be hired or fired with ease and at

Capital: Tunis Population: 1 0,777,500 (201 2) GDP (PPP): $1 05.347bn GDP (PPP) per capita: $9,774 GINI Index: 36.1 (medium)

(201 0) HDI: 0.71 2 (ranked 94 th ) (201 3) Tunisia achieved independence from France in 1 956. The country was controlled by the Constitutional Democratic Rally until Zine El Abidine Ben Ali assumed the presidency in a bloodless coup in 1 987. In 2011 , a revolution resulted in the overthrow of President Ben Ali followed by the country's first free elections. Since then, Tunisia has been consolidating its young democracy. Tunisia is an export orientated country which has been experiencing an average of 5% annual growth since the 1 990's, although its development is severely constrained by corruption.

low cost. Furthermore, other ‘labour market rigidities’ are also not present in the informal economy. 99% of those surveyed were not part of a trade union, and despite Tunisia officially having a minimum wage the informal sector has no need to comply with it; 37% of those in the informal economy are paid below the minimum wage. The result of these conditions, as free market economists would predict, is an almost limitless number of jobs created in the informal sector. Indeed, economists at the International Labour Organisation and UN find that when there is a recession, the informal economy expands by absorbing the unemployment created by ‘labour market rigidities’ in the formal sector. The irony revealed by De Soto’s arguments is therefore that, given the informal economy is the most closely applicable example we have of perfect competition, why have mainstream economists ignored if for so long? This is a question with many possible answers but let me suggest two. The first is that, as noted in a recent editorial by the Financial Times, economists over the last few decades have ‘invested in abstract mathematic models, whilst insufficient effort’ has been ‘made to link these to real-life experience’. Therefore, a possible explanation to this irony is that it

was simply an oversight of economist s to not apply perfect competiti on to real life. They were so busy crafting theories and conclusively proving them mathematically that applying them to the murky realities of the world outside never became a priority. There is another, more cynical, alternative. The GFI dataset finds that the informal economy, a close proxy of the perfectly competitive market, fails to provide even a basic standard of living or any kind of social justice. For example, the average participant in the informal sector earns what formally employed Tunisians made over a decade ago, well below the wage suggested by Tunisia’s middle income status. It also shows that most informal sector workers don’t have access to healthcare, social security, overtime pay, holidays, breaks or any form of labour protection. The evidence provided by the survey weakens the assertions made by proponents of the free market that perfect competition is in fact the panacea of economics. It shows that in reality flexible labour markets (at least in the most extreme form) are most flexible in terms of standards of living and social justice. It is much better, a free market economist might conclude, that our panacea remains a beacon of hope which can be heralded as the solution, rather than attaching it to the messy, imperfect systems of reality.

leanstartup.com

n a packed out lecture hall in West London, a colourful collection of students have congregated as if to hear holy testament. People sit on the stairs and line the walls, leaning forward in eager silence. They were promised a scientific method.

leanstartup.com

“What do you think is the number one reason that startups fail?” comes the question from the speaker.

Dominic Falcao, DERS Alumnus, reports. “Not enough capital?” “An insufficiently detailed business model?” “failure to reach efficient scale fast enough?” come the responses. “Almost, not quite, good idea. But the number one reason that businesses fail is that they build products that noone wants.” This is Customer Development, the Lean Startup. This is the Build Measure Learn feedback loop. The method of discovering how to fail fast and fail publicly, how to learn who your customers are, what the product they want looks like: without asking them and without traditional “Market Research”. The idea is: if you ask a customer if they want a new invention, they probably won’t give you a helpful answer (they don’t really know what you’re talking about, they want to stop pestering them or they want to make you happy). What you really want is proof that they will actually buy. And it is

almost impossible to do this without presenting a product to them and asking them to actually buy it. It is a philosophy like this that old school infomercials and shopping channels used. They used to have a 4-6 week shipping time. Often, this was the time required to actually produce the products.

Similarly: kickstarter proves, to some extent that people will pay money to see your product exist. As do pre-ordering, beta modes for sites and apps, pop-up shops. These are all versions of what Lean Startup methodology calls “Minimum Viable Products”: the very least amount of work on a product that you can get away with and still test demand. For the latter examples, a lean startup philosophy is arguably driving the increasing prevalence

University ofYork Economics Society Magazine So say I think that I have a brilliant idea. I am going to build a widget that can regulate the heat of an electric blanket and the power setting on my fan, keeping me in the perfect equilibrium temperature. I see that the market for fans is x, the market for electric blankets is y, and figure I will be able to disrupt both. To prove the product, I could make a video that demonstrated how the technology would work if it existed (without building anything) in order to gauge interest (as Dropbox did). I might create a product that does what the final product would do, but not using the final technology they wanted to use as it would be expensive, for example having consumers test out the product, but manually adjusting the blanket and fan to reach the ideal

Cohort Analysis

Where possible, we might use cohort analysis. That is, in a particular time period, we measure the group of individuals who interacted with our service as a ‘cohort’, using percentages rather than numbers (volumes can be achieved later, starting up, we only want to know how effective certain elements are). What percentage were new customers? How many of them registered? How many who registered referred a friend? How many actually bought the product? That way, we cut to the conversions straight away, can compare over time to see if we are getting better at building or representing our product, and filtering out artificial bumps in PR, Marketing or exposure.

lstartupquote.com

of these types of de-risked presales.

temperature (a so called ‘concierge MVP’). Building is the first stage. Next I Measure. I ought to actually have two landing pages, and split test (also known as A/B testing) differences in layout, in messaging, in the actual product. And the more iterations I can build and measure, the better. After every iteration, I take the winning element and test another as soon as I am reasonably sure of statistical significance. Build Measure Learn, repeat, as fast as humanly possible. Coupled with the Lean Startup methodology is an exhilarating sense of empowerment. That it is possible to build a huge customer base on an idea, if you can represent it sufficiently well. If you cannot build it in the end, just apologise, refund your customers and try again: it was just a prototype, an experiment, a test, and these things are more or less meant to fail. Anyone can do this, from their kitchen, from a laptop in Delhi, riding their giant mountain dog bareback through the

Himalayas. I think you should at least try starting up before getting washed into graduate scheme applications on a tide of panicked peer pressure. You probably have some kind of idea, some passion or hobby you would rather do as a job. Noone can possibly blame you for thinking about how to commercialise it. The myth is that starting up and going into startups is exceptionally risky for you personally. Really it is only really the business itself which suffers the risk. But the fact is that there are vastly more jobs at SMEs and startups than graduate schemes and the majority of graduates end up in SMEs anyway. Hence, less risky. And in my experience, the prestige from being brave enough to take an alternative route is just as great as the prestige of working for a graduate scheme, though perhaps different in nature. So that even if you decide you really would prefer to have an accountancy qualification after everything, your experience strikes you out as an innovative individual, rather than as just another student who freaked out about the huge undetermined void that awaited them after uni and used that fear to breed false passion for auditing someone else’s boring business. Because really, no-one cares that much about auditing. Amen.