Equilibrium - Issue 1 by Jim Norton

A talk to Karl Marx from beyond the grave The economic case for electoral reform NHS Reforms: Lansley is not the best medicine Enterprise: The Challenge for Economic Theory

What next for the Egyptian economy?

Contents 4 6 9 14

World View: Whatâ&#x20AC;&#x2122;s going on in the world? Leader: Economic Impact of the Egyption Revolution A Marx From The Past: A talk to Karl Marx from beyond the grave Considering the Alternative: The economic case for electoral reform

The Departure of Modern Economics from its founding father

25 26 29 30 31 EQUILIBRIUM

Tuition Fees Rise: For and Against

15 16 18 20 24

The Economics of Happiness: Worthwile or Wooly? Africa: Underneath its Vast Problems, a silent one lurks NHS Reforms: Lansley is not the best medicine The Black Market: The Proclivity Towards Violence

Economic Development: Columbia Lecture Analysis: Lord Nicholas Stern Trouble in Paradise: A greek trajedy Ernst & Young: An Insight

Tim Hill

Enterprise: The Challenge for Economic Theory

IFS Report:

Editorial

omprised of intellectually stimulating articles and vigorous economic analysis, Equilibrium is the new economics based magazine on campus, brought to you every term in association with the University’s economics society, Econsoc. The aim of the magazine is to make available to students the opportunity to get articles published, and to provide interesting reading material for all students at the University of York, both economics and non-economics. With a blend of current economic issues and wide-ranging intellectual discussions we cover an extensive array of topics in each issue. In this issue we delve into domestian revolution has had to trade and industry, with relevant lessons to be

learnt as North African and Middle Eastern unrest spreads to Libya and beyond. We take a voyage into the past to converse with one of the most and feature an article on the Challenge to Economic Theory from one of the world’s foremost market analysts of today, Andrew Smithers. Finally we would like to express our gratitude to all the students who

Financial Market Summary BY Jordan Rankin

which include subjects as diverse as Columbia and the Black Market, to Tuition fees and African Corruption, and many more. We look forward with enthusiasm and anticipation to submissions for future issues to come. - Equilibrium Editors

the 6000 mark in the New Year, with a low of 5863 on 31st January and a high of 6091 on 8th February. The US Commerce Department announced on 11th February that the US trade gap had widened in December. Due to rising imports and the climbing GDP ($40.6 billion). Greece has announced plans to try and raise €50bn through privatisation. The hope is that over the next 4 years this plan of privatisation will reduce

Ben Turner

Guy Wallace

Jack Eastwood

A Note From The Society

n important aim of the new rein-

introduce a new professional network scheme within the whole society. This will entail graduates advising third years about application processes, assessment centres and the like for graduate roles, third years who were lucky enough to carry out summer internships advising second years seeking out an internship of their own years about spring weeks and how they can make themselves more emStudents who are interested will be matched with the corresponding stu-

dent in the year above them based on the industry they want to enter. The networking can be carried out over incentive for both sides of the equation to build an active relationship and network. We are also in discussion with various speakers in regards to visit the University in the summer term to present their views on the current economic climate, so keep your eyes peeled and please come along. Thoughts and comments please email economics@yusu.org

help avoid a sovereign default. The price of copper, which is considered a benchmark for all other metals, has reached $10000 a tonne, a new record. A reduction in Aluminium supply, particularly after China has curbed its production, looks likely to push up its price as well; on Wednesday Aluminium hit a 2 year high of $2575.25. Since January, Brent Crude Oil has remained around $101 a barrel. However WTI, Brent’s main competitor, has failed to breach $100 a barrel in the past 3 months. Thus the usually cheaper Brent has been trading for almost ten dollars per gallon more than WTI. This anomaly has been caused by instability in the Arab world over the past month. The Euro has depreciated amid fears that Portugal could follow Ireland and Greece in asking for a bail out. Portugal’s 10 year government bonds rose to a Euro-era high, forcing the ECB to intervene and start buying bonds.

Yorkshire Web EQUILIBRIUM

Global View What’s happening in the world of economics?

USA Legislation President Barack Obama sent Congress a $3.7 trillion budget year forecasted to hit a record $1.6 trillion -- 10.9 percent of gross domestic product. The budget aims to achieve a decline in the don’t believe it goes far enough, some Democrats fear it goes too far. Social Security in the form of Medicare and Medicad has been untouched, even though it makes up a large part of the budget, politics rather than economics is dictating that.

Spending cuts in Brazil Brazil’s government is to carry out and preventing the economy from overheating. According to without affecting welfare and infrastructure, all stimulus packages introduced as a result of be abolished. The central bank raised interest rates a month ago

economy, Latin America’s prin-

EQUILIBRIUM

Middle East oil speculation Over the past month Oil prices have been looking like they might reach the $100 dollar a barrel mark, which has brought with it all the usual speculation and worry. This has been further exacerbated by the revolutions in both Egypt and Tunisia and the rising feeling of discontent in the Middle East that has threatened to spiral out of control and engulf the region. It is going to be a tense time for markets across the world as this develops.

Bankers’ Bonuses The coalition government has just unveiled its controversial new plan to try to curb bonuses in the city while trying to stimulate the economy. The new project, called Project Merlin, requires banks to lend around £190bn to businesses, including £76 to small businesses (BBC). The project has led to the resignation of Lord Oakeshott, the Lib Dem peer.

5 Valentines day The Valentines Day celebrations in Malaysia lead to the arrest of 80 Muslims in Kuala Lumpur for contravening Islamic law and being too close to a person of the

Chinese markets After another rise in interest rates in China the markets proved once again their resilience after a drop in value of 0.9 per cent. The market recovered mostly by mid morning to being just 0.2 per cent down. Trading had been stopped for a week after the celebration of the new lunar calendar. The Peoples Bank of China raised rates by 25 basis points to 6.06 per cent on the last day of the holiday. Analysts are expecting more increases to come.

hotels to make sure unmarried couples were not sharing rooms. Similar scenes occurred in Pakistan with the arrest of Balloon sellers. It appears like this market will take a hit over present sales in these parts of the world.

Friday’s earthquake and tsunami have left areas of Japan’s economy “frozen”, but analysts estimate that it will bounce back later this year. Some of the country’s leading producers, together with the world’s major carmaker, Toyota, have shut all of their plants in the nation. Analysts at Nomura anticipate that damage of production to damage the economy throughout this quarter and the next. Nonetheless they believe growth would come back in the third quarter. “This disaster has in effect temporarily frozen the world’s third largest economy,” said Richard Soultanian of NUS Consulting, which focuses on the energy supply industry

Cyclone Yasi

Peugeot and India Europe’s second largest car manufacturer, Peugeot, is now planning to expand into India. The company has been relatively slow to set up market in other emerging market and has previously focused on Latin America, dant that it can make 50 per cent of its sales come from outside of Europe by 2015. Europe’s car market has been described as being in decline for some time. This could show a shift away from the West’s economic dominance.

Japan’s Tsunami

Asia’s Emerging Markets

could potentially erode the value of equity investments. Consequently, central banks began increasing interest rates to stop

Australia’s most powerful cyclone struck the north coast of Queensland on the 2nd of February leading to what estimators guess to be AUS$3.5 billion worth of damage (Reuters). The consequence of this damage will almost certainly stretch forward into the foreseeable future having untold consequences on the successful tourist industry that thrives around that area. Coupled with

growth thus causing investment withdrawals.

hard year for the Australian tourist board.

to withdraw their money from developing markets in Asia. This has been caused by rise in oil prices and fears of overheating

EQUILIBRIUM

6 Leader:

Economic impact of the Egyptian Revolution

Guy Wallace examines the economics of the road to democracy in Egypt

iddle Eastern unrest is spreading at an inexorable speed - Libya being the most notable recent case, and the knock-on economic effects are proving severe. The tumult in Libya, as the ever erratic Colonel

impact on oil prices. With the revolu-

a backdrop of pyramids and the

to experience as tourism accounts for 5% of the entire Egyptian economy; though during the recent revoluTravel agencies postponed or cancelled nearly all departures for Egypt and most governments advised their to the huge uncertainty in the capital,

Egyptian turmoil, a revolution seen conjured up a picturesque image of EQUILIBRIUM

the country, including the aforementioned near complete destruction of tourism. Tourism is perhaps the least lution lasted over 18 days taking hun-

inevitable. Furthermore as a spirit of civil insubordination spread, tens of thousands of labourers across numerous industries such as telecommunications, steel and textiles grasped the opportunity and staged protests and -

conditions for the majority of the population, with vast numbers continually living below the $2 a day poverty line. This has been especially true with the growing problem of low employment amongst the under 30’s. Undoubtedly this bred much resentment among Egypt’s driven youth, many of whom weren’t even born when Mubarak came to power. Enlightened by events in Tunisia and united by internet based social networking sites, they bravely and unothers following) to successfully remove their dictator. The economic factors - as well as the persecution and oppression of the regime - are what caused this revolution to be so broadly based in nature. Men and women, Christians and Muslims, doctors and lawyers all marched as one, protecting each other from police hostility. The economy of Egypt, an oil nation with a population of 84 million, was immediately hit hard by the massive disruption caused. In the era of globalisation, a country of this worried investors worldwide. After protests broke out, the benchmark Egyptian index lost around 17% of its value within two days of trading.

Photo courtesy of Prospect Magazine

“

The economy of Egypt, an oil nation with 84 million, was immediately hit hard by the disruption and worried investors worldwide.

Subsequently Egypt’s bourse (stock market) closed on the 28th January and remained closed for many days after, due to a strike by bank employCommercial banks across Egypt were told to remain closed by the Central Bank of Egypt, due to the strikes at the main state bank: the National Bank. quickly noticeable. The stock market reaction in Saudi Arabia was severe as the Tadawul All Share Index fell 6.4 percent on Saturday 5/02/11 and continued to fall as investors sold shares in response to Egyptian uncertainty. This was perhaps one of the reasons, along with security concerns, why King Abdullah of Saudi Arabia allegedly pledged support to Mubarak during a telephone call to President Obama. The Saudi stock recoil followed extensive selling the day before, at exchanges all over Asia, Europe and the U.S.; analysts said these were linked to the turbulence.

“

tions. In the Fiscal Year ending June 2011, economic growth is expected to drop to about 2% - the 2009 estimate being 4.7%. Egypt’s economy (like all others) ical crisis, and so was not in a great way even before the revolution. Over a longer period of time however, its economy has been doing relatively well. Since the year 2000 there was an increase in the pace of reforms, cies, privatisation and new business legislations. These strengthened macroeconomic growth results averaged 5% annually and encouraged Egypt to move in the direction of a more market-based economy. Though this increased foreign investment, these opportunities were largely monopolised by Mubarak’s family and friends, most notably his sons; a trend seen in many of the other countries now experiencing unrest. A succession of IMF injections, coupled with massive external debt relief from Egypt’s participation in the Gulf War coalition (both in the 90s) helped Egypt improve its macroeconomic performance. Sums as large as half a million US dollars were paid per Egyptian solider deployed to push Iraqi forces from Kuwait. However, the problem was that not much of the economic

remains a mystery. Things could have been far worse if the intensity and length of the protests had increased for much longer. For example if passage through the Suez Canal, the once pipeline of the British Empire, had been disrupted, world shipping and energy supplies would have been abruptly affected. Up to 36,000 ships pass through the Suez annually - many of them crude oil tankers. Shares in tanker companies surged during the revolution due to apprehension of a Suez impasse; a scenario that would result in many ships needing to make expensive trips around the southern tip of Africa. Shipping companies emerged this turning point in history. Throughout the revolution, one of Egypt’s key allies, the U.S., was taken on a diplomatic rollercoaster. On the one hand, President Mubarak was an ally for over thirty years, helping EQUILIBRIUM

8 maintain stability and peace (most notably with Israel), and consequently helping to keep the balance against Iran. The U.S. has also made a considerable investment, with up to $1.3 billion dollars of military aid given to the regime annually. On the other hand, America is the most powerful nation in the world, regularly adopting endless rhetoric with regard to freedom and democracy. To therefore consistently support the regime in pursuit of stability and its own interests would have been seen by the entire world as hypocrisy. Their credibility would have been damaged and international diplomatic clout, particularly in this key

The White House’s behalf, they decided to pledge support for a faster transition to democracy. This led however to its own problems, with the Egyptian government denouncing the U.S. as a traitor meddling in Mubarak’s fall, many in Egypt think western governments only care is for security and principally a peace deal with Israel. Many even believe they the people to obtain this. Fortunately the Military Council has agreed that the 1979 peace agreement with the Israelis will remain. According to Reuters, the Obama administration studied the ecopolitical crisis carefully. It believed progress toward democratic reforms would help bring to an end economic instability. On Wednesday 9th February Ben Rhodes, White House deputy national security adviser for communications, said: “We’re certainly mindful of the economic impact. We’re certainly monitoring it closely”. He also said that “insuf-

cables suggest he is not exactly one of revolutionary spirit: he has resolutely ‘opposed both economic and political reforms’ that he perceives to be ‘eroding central government power’;

until both a democratic government is elected and the economy gets back on track. Looking at their predecessor Tunisia, where the post-revolution police state has recently collapsed, the future appears uncertain. For Libya, with its tribal structure and a complete lack of future looks even more challenging and unclear. The man now in charge is Mohamad Hussain Tantawi, the head of Egypt’s Higher Military Council who is to oversee Egypt through the 6 months transition to democracy approaching the elections. However, to many, stubborn forces staying entrenched at the centre of a regime that may have not its fundamental nature. Wikileaks

label him as “Mubarak’s poodle”. Strikes still sometimes continue, particularly in the civil service and banking sector and even the police force; this is the biggest challenge that the military government face. These three sectors are vital to ensure the economy returns to business as usual as soon as possible. Furthermore, insistence on the increase of food subsidies and extended disruption to tourism won’t help. The military must act immediately to provide adequate wages and guarantee social welfare - a monumental task. They have however taken some steps, such as dissolving the fraudulently elected parliament and scrapping the Mubarak favouring constitution. They have ordered the discontented employees to return to work, but many still remain in protest. One thing is sure, if they want to keep the people on their side use of force must be avoided. The Tunisian and Egyptian revolutionary contagion is spreading, with protests occurring all over the Middle East, from Bahrain, Yemen and Iran, to

now taking place here produces even greater concern for world oil prices than Egypt has. The people have so much to gain from ousting a dictatorship, particularly in respect to political freedom, civil liberties and democracy. In economic terms the world watches on with apprehension. EQ

Problem

government to meet the demands of troubles. At the cost of 384 lives and 6,467 injured citizens - with many more missing - ex-President Hosni over. To the anger of many Egyptians, as Mubarak steps down he is expected to have £25 billion in assets stored away abroad. These are mainly properties, with many of the millions stored away during his last days; a persuasive retirement fund to say the least. Now the army is in control, most Egyptians, and many people globally, hope Egypt will return to economic normality. As revoluthat there is still a long way to go EQUILIBRIUM

The Organization for Economic Cooperation and Development (OECD) has estimated that the Egyptian government’s 5 day block on Internet services cost the national economy more than US$90 million. Telecommunications and Internet services comprise 3% to 4% of Egypt’s GDP.

The OECD also warned that by severing telecommunications links between do-

tract foreign companies and assure them that the networks will remain reliable.”

A MARX FROM THE PAST Equilibrium speaks to KARL MARX from beyond the grave to sound him out on the current state of economics...

rmed only with an idiots guide to summoning and an ancient ouiji board, the three musketeers jumped on a train bound for London. The aim of this short expedition was to place in Highbury cemetery and to

the spirit of freedom, that certainly helped to create my views. The most important thing was being expelled in 1848 to go to Britain and to see the country that was leading the industrial revolution and to study its main theorists, the writers of political economy, without that I would not have been able to write Kapital.

some very odd looks from the general the great man himself and began our surreal interview. Good Afternoon Mr. Marx, how have you been? Marx: E: We’ll start at the beginning. You’re a very well travelled man, certainly in your youth. Do you think this helped you to create your views and theories? M: Most of my travelling was enforced, I’d been expelled from various countries on a number of occasions. I did travel voluntarily to France because I was excited by the revolution,

E: You famously said that you were not a Marxist. What do you think of Marxism today? M: First I said I didn’t want to be called a Marxist because I didn’t want to be a founder of a school of epigones as it were. Scholarship depends on heretics, on independence of mind, on humor and cunning. It depends on wanting to know critical people who trust their own judgment and are led by their own intelligence. I don’t think there should be any Marxism, there should be followers. I left behind a legacy that

scrutiny and critical development, interpretation. E: As you can see the world has changed dramatically over the past 127 years. The hot topics today are climate change, globalisation and poverty. Do you think your theories are applicable today, if so, how?

10 M: On poverty, my main work, Kapital, tells the story as to why poverty is a necessary product of the capitalist mode of production. Climate change I of course didn’t write about it, it didn’t come to mind. I did however say that the capitalist mode of production is destructive of the two sources of wealth, that is, the soil and the worker. What I wrote about the worker is very well known but what I wrote about the destruction of the environment is not, which is not surprising since I did not emphasis it. I was too much taken in by sheer possibilities that the immense increase in producness of the bourgeois conception of wealth. In my time, it was rather damp and cold in the UK. Has that changed much?

“

The accumulation of making money out of money is an accumulation of claims of future exploitations of the worker

“

E: Over the past century several

opment of Marxism, such as communism. All seem to have been unsuccessful. What do you think have been states? M: Every movement that wants to burst asunder existing relations of domination tries to hook itself up on what it sees to be the most radical theory around and that, at the time of Russian communism, happened to be mine. Their interpretations of my work felt like being kissed by a vampire – they put their teeth into me and sucked me dry. theories are that they extended what they criticized into the future rather than stopping it, as it were. You see human emancipation was, and still is, is not governed by the idea of power, the seizure of power and preservation of power, or of economic value and tonomy, that is, human emancipation entail that humans achieve control of their own social world. perceive in practice. What happened with these movements that called EQUILIBRIUM

themselves communist – which means communis - is that they proclaimed in favor of human emancipation by which they understood just what the term revolution indicates in conventional terms: a relationships is turned around. Human emancipation does not seek to turn false society around. It seeks its abolition. E: That said China has emerged from the recent recession faster than western states due to its strong governmental control of the economy. Do you think this model, of strong market control would be applicable to Europe and the US to help prevent further collapses? M: I’m not so sure about applicable. What we have in China really is a command economy, one controlled by suppression of very cheap labor, both skilled and unskilled. Adam Smith is in China. I am not, unfortunately. I would not wish Chinese labor conditions on anyone. Whether it is this or that, we need to see how the class struggle pans out. I might yet get to China. E: So do you think that since your death the UK and America have made good steps in the right direction towards supporting the worker and him? M: No, I would not say that. It’s not that countries or states or governments take a step or steps. Working class forced concessions more in Britain than the US, more in continental Western Europe than Britain and the US. But there is the question of how strong these welfare state defenses are in the context of the current crisis. In the country of my birth, Germany, and in a context of deep economic crisis and political turmoil, the working class movement appeared strong and then in 1933 it ‘was’ disappeared. E:On the topic of that, do you think feminism helped drive that sort of movement towards equalisation and a more egalitarian states. You moved to France when it seemed revolution was coming and a more egalitarian society was coming. Do you think the feminist movement is part of that? M: It’s a very easy question which once one thinks about it becomes very complex. I celebrated the outcome of the French revolution because most of Europe was in the Dark Ages of provincialism and parochialism; then the idea of being equal before the law was indeed revolutionary.

Marx Timeline 1818 1835 Goes to Bonn to study Law

5th May Marx born in Trier

1836 Moves to Berlin to study

1841 Attains his Doctorate from the University of Jena

1843 Marries Jenny Von Westphalen and moves to Paris where he meets Engels

1845 Marx & Engels publish a book attacking the Hegelians

1848 The Communist Manifesto is published

1867 Das Kapital published

1883 14th March Karl Marx passes away and is buried in Highbury

1842 Marx loses his job when his paper is banned

1844 daughter born

1847 Marx & Engels asked to write Communist Manifesto

1849 Marx & Engels expelled from Prussia

1881 Marx’s wife dies

11 I think in your time, feminism demands, at least conventional feminism does, equality before the law, equality on the labour market, etc, and these demands are in fact the liberal demands, that is, man and woman are free when they are only dependent on the law, not persons. In my work, I endorsed human rights and deciphered them as rights of exploitation qua equivalence exchange. So the struggle for equality before the law belongs to the very logic of capitalist social relations. They seek to realize liberal rights, in this conventional feminism concerned with contributing to the fullest developemn t of capitalist social relations. I argued for their abolition. When I talked about equality – the society of the free and equal, I did not mean equality and freedom before the law, some abstract equality, an equality as equivalence. I meant the equality of needs, concrete equality, an equality based on and through need. E: Africa has generally had a strong right wing government. Do you think socialism should be looked at as an alternative? M: Again a vey important question that is not very easy to answer. You may rememthe great Russian socialist, who had asked me whether it is possible for Russia to transform into socialism without capitalism in the middle. I was not really able to say if that was possible or not, and I still don’t know. In fact I quite doubt it nite terms. You will also remember my writings about India, where I argued that the fate of India is to be occupied either the British or the Dutch or by somebody else. I guess this fate of being occupied is still the fate of Africa, not by the Dutch or British but by the dollar or the yuan, and their respective advisors and engineers. E: Do you think it is possible for a state to survive with a non-capitalist economy? M: Well it depends, the state is the political expression of a class society, disagreement is on whether class society is an eternal thing. If in the future there is a class society that is none capitalist, then I suppose the form of the state will survive. And if we mean by non-capitalist economy an egalitarian communist or cooperative society, I called it the society of the free and equal in the Communist Manifesto, then I guess no, the state as a political form will not survive. E:You said in Das Kapital that capitalism creates crisis by making money from money, which ultimately leads to a crash. How much do you think our recent crisis

mirrors the crisis shown in Das Kapital? M: I don’t think its possible that my analysis of the then crisis can be immediately applicable to your times. What I wrote in Das Kapital was two things. First of all, I established the laws of motion of a capitalist society, and showed that the laws of motion are crisis-ridden. You can not apply these illustrations as mirrors. What I argued is this: money tries to make more money, and this might take the form of credit and debt. This form is in fact an investment, if you like, on the future extraction of surplus value. There is thus uncertainty, there is the potential for monetary claims to accumulate without basis in the real economy, or in your language, without basis in real incomes. You know from yourself if you have a debt then the debt itself is in fact an investment by somebody else on your future earnings. In a capitalist society that means the accumulation or making of money out of money is in fact an accumulation of claims of future exploitations of the worker. What that of course means is that the future and the present are forced into a relationship of constant deferral. At some point, things snap - the promise of the future surplus value is revealed in the present as

E: Has this also been shown in the increase in welfare systems around the globe? M: Which increase do you have in mind? Whatever, I think it is important for the workers who produce what Adam Smith called the wealth of nations to not to starve to death. For that very reason the welfare state is a welcomed development because it allows those whose hands are no longer needed to at least survive. Besides they are fed and kept warm by what their brothers and sisters have produced. So, in that sense, I’m quite happy with the welfare state and hope that it is indeed spreading around the world. They sustain the poor, in poverty, and keep them available as hands for hire. E: Over all what do you think legacy? M: legacy is the categorical imperative that I formulated very early in my life. I agree with

Professor Kant that only that theory is true, which helps the common Man to his or her dignity. That is relationships where Man exists as an exploited and debased being have to be overthrown because they are not worthy of Man. E: Cleopatra’s nose had it been shorter, the whole face of the world would have been changed. Do you think that if your beard had not been so bushy the same could be said for you? M: Now there are two things in answer have time to shave myself I was too busy studying the classics, your classics, especially the Scots. The second thing is that daughter died and I myself died shortly after that. E: Mr. Marx, thank you very much for your time.

Interview by Jack, Ben and Guy. Thanks to Werner Bonefeld acting as Karl Marx.

The Debate:

Tuition Fees FOR

BY Chris jackson Second Year Politics Undergraduate

he debate around tuition fees is one that can be tackled from many angles; some would argue that there is a moral obligation, others economic and political. But considering the nature of this publication let us consider the key arguments with a broader focus on the economics.

previously against tuition fees to the higher education as graduates ought to

distinction will help to introduce the much desired competition that the previous system failed to achieve, and as such place the onus on universities to money. These changes are already being seen in courses like politics where student pressure has increased the contact hours for students from 5 to 10 hours in Another key aspect of placing the cost of fees into the hands of students is to encourage them to look for value in their degree. The Confederation of British Industry claimed in 2010 that the UK’s “inadequately educated workto doing business in the UK, with lack of business skills and acumen being a EQUILIBRIUM

key consideration. With this in mind, it seems that students would be forced to consider the value of their degree more carefully if they were to pay more for them. It would also ask students to look which hitherto is under-acknowledged by many students. This increased focus on the career applications of a degree will also help redress the imbalance of the current system where taxpayers receive a far smaller return from higher education than the students completing the degrees do. This is supported by OECD higher education to the individual are, on average, over 50% higher than public the new system include more business skills, then the overall employability of the workforce should increase and so nesses. Therefore a skilled workforce will not only reduce unemployment, but increase corporation tax revenue,

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By changing the source of funding universities must student demands

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quote from the Browne commission, which claims to have the backing of the National Union of Students (NUS), employers and higher education institutions (HEIs), helps us to narrow the debate to a central issue: if tuition fees are right, how much should they be? The previous system saw HEIs rely on the government for the vast majority of their funding; this then meant that any pressure for these institutions to change had to be led by the government. Changes of this manner were often slow and did not address the concerns closest to students. However, by changing the source of funding and placing the emphasis on appeasing students, who now pay the lion’s share of the fees, universities must respond

income tax revenue and reduce welfare demands on the state. The future of higher education in the UK will depend not only on the ability of universities to provide degrees which meet the needs of students and business, but also on students to see degrees as worthy of their increased investment. Currently the Browne report claims that the average student earns over £100,000 more in their lifetimes A-levels; it is this important factor and employer requirements for degrees that will be key to maintaining demand for university places. EQ

Picture: Victoria Elmore

AGAINST:

Second Year Economics Undergraduate

nless you have been living in a cave for the past 6 months, you will know that the recent vote by the government to raise university tuition fees to a possible £9000 per year, has caused a bit of unrest with the student body. Who can blame them? For the average person studying in an institution within the UK, £9000 is a lot of money which they will one day have to pay. The government says that it is a fair and reduce the massive amount of debt the nation is in. But is this really fair to those who have now had to start rethinking their life plans? Surely for young graduates, many of whom still onto the property ladder, coming out of university with large isn’t an ideal position for the UK economy to be in. Strangely enough, the govern-

universities to raise fees to £9000 per year. The price of the degree can tell the consumer a lot about the quality of the degree they are studying at a particular institution. Universities don’t want to give the consumers the impression that a degree from them is worth less than one from a rival and may therefore bid up the price of their degree. The Minister too many institutions set tuition fees at too high a level, more cuts will have to be enforced on the universities in order to fund student loans. What must also be considered is the competition from abroad. Since the there has been a surge in the number of people applying for places in universities outside of the UK. Places are not so tuition fees are often lower than those in the UK. This could potentially be very problematic for the UK if this 1960’s, the so called “brain drain” saw many of Britain’s brightest and avoid high levels of income tax. Should

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If too many institutions set tuition fees at too high a level, more cuts will have to be enforced

“

BY Ben Turner

tuition fees continue on this upward spiral, a similar thing may happen to UK students as more and more of our potential elite opt to study in other parts of the world and possibly remain after completing their degree. Should tuition fees be raised? PosUK has yet to be seen and we are once more moving through uncertain waters. The devil we knew was that the institutions and student loans were costing the nation a lot of money and measures had to be taken to try and reduce this somehow, but the devil we don’t is if

the short and in the long run. As always, time will tell. EQ EQUILIBRIUM

John Bone, a senior lecturer in Economics at York, assesses the economic case for electoral reform

y birthday last year was all the more memorable for an announcement by Wil-

the Liberal Democrats a referendum on voting reform. A day later, Hague was Foreign Secretary in the new coalition government. A year later, the nation will be assessing the relative merits of First Past The Post (FPTP) and Alternative Vote (AV). As economists we have something

45% of the vote. In fact each of the by a majority (55%) of voters. Under AV, candidate Z is eliminatand therefore wins. But, while Y wins by a majority

ical constituency this is exactly what each of the other candidates, although Generally, a winner under AV must

ences, although the outcomes we usually

one candidate, which is more than can be said of FPTP. But any number

Claim 3:

of goods as determined through a market mechanism, rather than the election of through a voting mechanism. FPTP selects the candidate mostthe greatest number of voters. AV selects instead by successive elimination until only one candidate remains, at each stage of those remaining, by fewest voters. Let’s examine three related claims cal constituency with three candidates {X,Y,Z} and where voters are of just three

45%: X [Z]

40%: Y [Z]

15%: Z [Y]

Claim 1: Under AV, unlike FPTP, the winner always has a majority of votes Under FPTP, X wins here with only EQUILIBRIUM

And from Arrow’s Theorem we know that this form of ‘collective irrationality’ is latent in any voting system.

AV avoids the wasted/tactical votes problem of FPTP Under FPTP, with X and Y the clear front-runners, a vote for Z could be viewed as wasted. This might induce cally’ for Y. If enough of them do so then the outcome is not X but Y, which

other.

Claim 2: AV avoids the split votes problem of FPTP

AV allows them to achieve the same result by voting sincerely, and

Under FPTP the anti-X majority been standing then the winner would have been Y instead of X. And this in

for Z then the outcome is not Y but Z,

But less obviously there is an

And in neither case can a single tactical vote change the outcome. Indeed

standing, then the AV-winner would have been Z instead of Y. An individual selecting a from {a,b,c} and b from {a,b} would be -

by voting at all. Every vote is ‘wasted’, under any mass electoral system. But that’s another story. EQ

The Economics of Happiness:

Worthwile or Woolly?

he unfortunate phrase “the dismal science” may be challenged by the increasingly popular branch of economics that focuses on maximising happiness rather than wealth or utility. In November last year, David Cameron announced the government’s intention to measure the happiness of British citizens, with 2012. It has been promoted as a tool to refocus the government’s priorities and economic policies. However, with no word, critics are questioning how any meaning can be drawn from this index, and whether the government should instead be focusing wholly on economic growth as the country emerges from recession.

“

Our understanding of happiness ations, cultures, and even genders

“

BY Aurora Phillips

parts of this hierarchy. Gross domestic product (GDP), the most common measure of economic activity, measures the total income of a country, and is correlated with living standards. Using GDP along with statistical measurements

of the inequality of income distribution, helps us determine whether the population has access to basic needs such as food and shelter. The Human Development Index, or HDI, is a more comprehensive measure of well-being that takes into account additional factors such as life expectancy and education, as well as income per capita.

contributions to welfare economics. The tive methods of measuring happiness.

capture population well-being though combinations of solid, quantitative

new measures will cover the quality of life of people in the UK, environmental and sustainability issues, as well as the economic performance of the country.”

requires self-reported happiness: asking individuals to report levels of factors

considers being the main contributors to well-being. Fig.1. Measuring National Well-being: Income and wealth

Source: ONS

Abraham Maslow, an American psychologist, theorised in 1943 that human happiness was dependent upon the realisation of a hierarchy of needs. The hierarchy ranges from fundamental physiological needs (food, sex, sleep, etc.), to safety, love/belonging, esteem creativity, etc.). Most conventional mea-

personal life and quality of healthcare and education. While the results of the index may provide an insight into attitudes towards government-provided services, much of the data may be so substance to it. The world of experimental economics has been divided over this issue for some time. While some economists feel they can draw meaningful conclusions from asking subjects to rate emotions and concepts such as morality on a scale from one to ten, others argue that results are too subjective to be compared between subjects. Not only does the unindividuals, but between generations, cultures and even genders. For example, as reported in the American Economic Journal:

“In aggregate, women’s subjective well-being has declined relative to that of men, but with which aspects of their lives are women now less

occurred over the past four decades have increased the opportunities available to women, and a standard economic framework would suggest that these expanded opportunities for women would have increased their Many sociologists he argued that women’s increased opportunities for market work have led to an increase in the total amount of work that women do.” of Declining Female Happiness’*

This raises questions about the comparability of this type of data over time. Perhaps, for example, women’s standards for happiness have been raised along with their increased economic presence. In economics, the assumption of ceteris paribus (“all other things remaining constant”) is central to our ability to measure one variable in isolation. Most forms of quantitative economic data are adjusted for changes over time, such as the adjustment of nominal interest rates to take into account price would be unfeasible to similarly adjust qualitative data such as happiness. It is problems like this that have led to the planned index being criticised as being “woolly”, and generated accusations that the government is collecting soft data that is likely to be manipulated or misinterpreted. While the happiness index is likely to yield some useful data and interesting insights into the views of the population, it is important to realise the limitations of the results, and take the statistics with a pinch of salt. The debate over the happiness index brings up fundamental questions about the purpose and responsibilities of government. While it is reasonable to expect the government to provide the tools and environment, such as good education, healthcare and low crime rates with which individuals can maximise their welfare, it is less

a more paternalistic state, and we may begin to wonder whether freedom from an overbearing government is itself a factor of happiness. EQ *American Economic Journal: Economic Policy 2009, 1:2, 190–225) EQUILIBRIUM

Underneath Africa’s Vast Problems, a silent one lurks The poor do not dare talk about it; reform is needed culturally and structurally. BY Jivan Mohanty Third Year Economics Undergraduate

recent World Bank report entitled ‘Africa Development Indicators 2010’ has given an insight into the ominously termed “quiet corruption”, which is corruption at a grass roots level. Grand corruption can encompass many things, for example, political by many frontline service workers, absentee teachers who know they will still get paid and building inspectors who purposely do an inadequate structural check on a new shopping mall to save time. These are just two examples of

prevalent in many developing nations. Shantayanan Devarajan, Chief Economist for the African Region says, people directly, but it also has long

goods or services. Therefore, many African countries may have the labour freely available to produce goods or all important investment due to the lack of skills. Furthermore, a child that lacks adequate primary education realistically has no chance of entrepreneurialism. African nations need enterprise to have a solid domestic economy. Without it, the vicious poverty cycle may be sustained. Children cannot grow up to become active members of a highly demanding workforce if they are not equipped to do so. As a result, multiple generations may be born in to poverty. There are many examples of quiet EQUILIBRIUM

corruption, the report contains some

Only 13 % of the resources set aside for schools actually materialised, -

In Chad, 99% of non-salary funds

“quiet corruption” is ironic, it is not “qui-

pay informal fees to speed up the process

“

termed ‘quiet corruption’ is corruption at

“

a child who does not learn due to their teacher being absent. The child may not get a good job and this could even lead to ill-health because of their subsequent inability to purchase medicine. If this is widespread, the work-force will lack the necessary skills to compete in the international market. In our globalised world, companies’

The reason quiet corruption has not had the same media coverage that grand corruption has had is because it is very hard to quantify. In most cases, money exchanging hands is not necessary. Therefore the immediate impact is not seen. The long term

ADI (Africa Development Indicators) report, it blames grand corruption for lower ranked individuals see their seniors involved in large scandals and

“

Quiet corruption is when public services due to poor people are not delivered to them even though somebody has paid for them. It is failure of service delivery, but if you look at it carefully, it looks like corruption. - Shantayanan Devarajan, therefore assume that they can abuse their powers. there is a solution according to Shantayanan Devarajan. He says that quiet corruption arises due to “po-

or policemen for example. The only real way to combat quiet corruption is to “enable poor people to bring pressure on those politicians in order to bring about change”. This ity and a freer media. Shantayanan gives a Ugandan school resources were reaching their dan people demanded change. The local authorities began publishing money was actually arriving at the schools. He says that today around its intended destination.

media press for granted. Our enviperfect information enables us to hold politicians accountable for their actions. An example of this would be the previous Prime Minister Gordon Brown calling a voter a “bigot” when his lapel microphone was still on and it was reported within minutes by the press. Many African media outlets are very limited in what they are allowed to report or are actually government run. In this way the government can control

Statistics The Corruption Price Index placed most African countries within the bottom half, with only Botswana scoring more than 5/10. According to 1996 estimates, $30bn of aid for Africa ended up in foreign bank accounts. This was twice the size of Kenya’s GDP that year.

their perception of the government. There has been a gradual progress in freeing the media in Africa with groups such as the Society for the Development of Media in Africa. Eduard R. Bos from the World ing” is another possible solution to quash quiet corruption. This would

The African Development Bank estimates that around 50% of tax revenue is lost due to corruption. The bank also believes that 2-3% of a low income households income is spent on bribes

public organisations to record all of their activities. This would hold

In 2002, corruption was believed to be costing the continent $148bn a year.

“

Chief Economist for the African Region

could warrant incentives. Obvi-

vent this from happening. Quiet corruption is a very complex phenomenon and as the

reform need to be tailored for that. In order for Africa to become crease their economic development only then can it begin to compete in this highly globalised environment. Contained within this economic development is quiet corruption; it is other major hurdles such as grand and natural disasters. Although the term is referred to as “quiet corruptude and grasp over Africa. EQ EQUILIBRIUM

Lansley is not the best medicine

BY Jim Norton Third Year Economics Undergraduate

he desperation to leave a legacy, after 13 years in opposition, seems set to plague the current Conservative government as poor reforms are hastily implemented. Michael Gove restructuring of the education sector, and so too has Andrew Lansley for his projected changes to the NHS. It is not so much the objective - after an sary requirement to work to a smaller budget – that is objected to, but instead the speed of the ill-thought sultation or evidence to support them. Despite the coalition government’s agreement to “stop the topdown reorganisations of the NHS that have got in the way of patient care”, Lansley intends to restructure the healthcare system by abolishing 152 primary care trusts and 10 strategic health authorities. He intends to set up consortiums of GPs in their place EQUILIBRIUM

“It is a phony revolution, driven not by patients or clinicians, but by business interests” Catherine Blake, Trauma surgeon

to commission the £80 billion a year of healthcare. In his plan, GPs choose the providers; inducing competition Yet the proposed NHS transformation has fuelled fear of an impending piecemeal privatisation as the government opens up a part of its vital welfare programme to the free market. It represents a “profound shift in power away from the NHS and the principles that underpin it” says trauma surgeon Catherine Blake, and “the end of the NHS as we know it” according to the chair of the Royal College of GPs it is. This is surprising considering the Conservatives appeared to be pro-NHS pre-election. The fear comes from the pricebased competition being implemented. But will variable-price competition work in healthcare markets? It seems counter-intuitive to compete on price rather than quality in healthcare, yet this is the direction proposed by Lansley. Surely there is compelling evidence to suggest that these proposed

government certainly believes there data condemning previous results and supporting a competition-driven change. In reality though, there is In his Bad Science column for the Guardian, Ben Goldacre recently highlighted four papers that studied GP fundholding (which is similar to the proposed GP consortiums): - Kay (2002) found it was introduced and then abolished without - Greener and Mannion (2006) saw varied results, but no evidence that patient care was improved; - Coulter (1995) found no sign responsiveness or quality - Petchley (1995) data to make a judgement. The evidence so far is ambiguous and in no way supports the argument that shifting the onus onto GP consortiums will be any more In fact, some academics believe

19 that the actual process of restructuring is counter-productive in itself. The argument goes that the perceived failures of healthcare commissioning are the result of constant change and disruption over the past 30 years, in which health bodies have been created, merged, and abolished at least 15 times. According to Kieran Walshe, professor of health policy and management at the University of Manchester, these changes were often “initiated in advance of formal legislative approval, the details of reforms being worked out as they are implemented, and the timetable for hasty consultation and implementation being a the latest reforms? He believes they “look likely to make all these misFurthermore, the transition faces further costs in terms of both money and service. Closing down, merging, NHS will be expensive due to redunnew premises. Using the National estimates that this may well cost between £2bn and £3bn. The transition also creates a distraction that can demands managerial and clinical time uncertain of their future So are reforms necessary? If we rely on the evidence given by Cameron and Lansley, the need seems great.

Care Bill, the UK spends the same amount on healthcare as France, yet it has double the rate of death from heart disease. This data is deceptive though when taken out of context, as John Appleby, the chief economist at the British medical Journal, noted recently: “not only has the UK had the largest fall in death rates from myocardial infarction between 1980 and 2006 of any European country, if trends over

the past 30 years continue, it will have a lower death rate than France observes that this trend was achieved with a slower rate of growth in healthcare spending than France. The most recent OECD spending comparisons (2008) showing that the UK spent 8.7% of GDP on health, whereas France spent 11.2%. statistics misrepresent the performance of the NHS and, far from highlighting the need for drastic restructuring, points towards the need to persevere with the current system. It also exposes the changes as far more ideological rather than a reaction to any great need, with the data being employed for political expedience. Improving the NHS through structural reform is a decent objective, but not if it undermines the foundation of the institution through privatisation. Changes need to be scrutinised carefully and debated openly, in and outside of parliament. Many reforms instigated through ideology are left open to reform every time a new government comes in.

A History of healthcare Reforms UNIVERSAL coverage of medical care was introduced in the UK in 1948, and was followed by a number of other countries such as Japan in 1960, Canada in 1966, and France in 1967. The provision of medical concentrated on equality, rather than ef-

of altruistic healthcare systems were very generous, and low in terms of cost-sharing. However, this lack of restraint resulted in rapidly increasing health expenditure – between 1960 and 1980, expenditure rose from 3.8% to 7.2% - which was largely due to technological advancements in medicine increasing the cost of treatment. Empirical estimates have since suggested that technological change accounts for at least half of overall growth in costs. So, countries care were faced with escalating costs. As a result, the 1980s saw a shift in governments’ objective: cost-containment, rather than equity. In order to do this, governments had two options: induce people to spend less, by either increasing cost-sharing or taking services off public provision, or to increase

the government needs to implement a “pragmatic, centrist philosophy for a sustainable state-run healthcare that could command widespread support This is not done by hurriedly bundling together an ideological reform

regulation, by introducing caps and restricting technology. The majority of countries and could implement controls with relative ease as doctors had state-funded salaries and hospitals were publically owned. The regulatory constraints were effective to an extent; costs were lowered but high-quality care was still achieved.

This already has widespread opposition and carries a huge risk of major failure. As Catherine Blake says, in her damning assessment, “it is a phony revolution, driven not by patients or clinicians, but by business interests. Less of a cure, I would say, more like a second dose of the same EQ

However, support for the system faded. Consequently, a third wave of reforms were implemented, which attempted to increase cost-sharing and competition. The three waves of reform show the evolution of healthcare. The original systems trade-off, and the process of adapting to increasing costs whilst maintaining quality has proved hazardous.

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20 BY Sam Carr-Archer Second Year History Undergraduate

The Departure of

Modern Economics

from its Founding Father

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dam Smith has been given the title, warranted or not, of the Founder of Economics. His book, the Wealth of Nations (1776), has been accepted by history as one of those classics rarely read but often mentioned, especially economics. The Smith of popular thought was the pioneer of the principles of liberal capitalism and free markets. of the commercial society, it is more useful to understand Smith in the political context of his time. Smith was also a moral philosopher and saw the political economy he was undertaking as part of the ‘Science of the statesman or legislator’.[1] It seems that whatever later readers took from Smith, he himself wanted to entangle his text in the atmosphere surrounding statesmen who were in the process of leaving behind feudalism, dealing with industrialisation and creating a virtuous society. Although he was writing two centuries ago, his thoughts are just as relevant today as Britain comes to terms with a broken society.

the period known as the enlightenment. This period saw the growth of empiricism and science, which in our

of man. His most famous text has already been eluded to, the Wealth of Nations, but to fully appreciate Smith account must be taken of his earlier work: The Theory of Moral Sentiments. The two books were intended to be part of a trilogy that would go pretation of the science of man. In The Theory of Moral Sentiments, Smith explains all humans as having sympathy for their fellow man. The book opens with the may be supposed, there are... some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.’[2] Man’s sympathy came from the desire to identify with the emotion of others and the shaping of men’s moral sentiments and ideas of propriety were the product of day to day social

“The view that Smith propagated an unbridled free market with minimal government involvement is based in

interaction. The reading of these ideas alongside The Wealth of Nations, where men were put on an equal footing by their new role as consumers and producers interacting in the marketplace, allows us to see happiness and virtue as the product of economic relationships. For Smith the marketplace had taken on the role of the polis of ancient Greece and virtue could be achieved through economic relations. These elements of Smith show him as having a moral vision of capitalism, where an invisible hand can produce social harmony through competition. Although this commercial society was desirable, it did breed its own corruptions and remedying these was the role that Smith saw for the statesman. The wretched spirit of monopoly was everywhere, encouraging a move towards mass production which threatened the regional based production that so many ordinary men’s happiness depended upon. [3] Additionally, Smith realised that the division of labour would result in ‘[men] whose whole life is spent in performing a few simple operations, same... [and so]... has no occasion to exert his understanding or to exercise ties which never occur. He... generally becomes as stupid and ignorant as it is possible for a human creature to become.’[4] These are just two of the ills Smith foresaw in the commercial society and it was very much the statesman’s role to cure these woes through public institutions such as free education and a form of competition commission. I have tried in this small space to open up ideas about Adam Smith which help historians and economists realise that, at root, economics was not the discipline of how to make

morals and philosophy of the enlightenment and the science of man. The thrust of political economy was towards how to develop a virtuous society rather than simply how to produce economic growth. Coupled with this was the acceptance from the very beginning that the commercial system itself, although

required government intervention. The retrospective view that Adam Smith propagated an unbridled free market with minimal governTherefore it is somewhat contradictory that Smith now lends his name to modern institutions and arguments that promulgate those principles. Furthermore the modern notion that the free market structure is natural and it is enough to allow the market to play out its peculiarities without too much worry, was not something that beset the so called founder of economics. Perhaps in the future there should be a return to the original concerns of Adam Smith surrounding ideas about the condition of

With politicians speaking about ‘broken Britain’, we may lament that so much of the morals and of economics. It may even become important to change our perception of economic performance and realise that there were concerns other than growth for the original political economists. EQ

References [1] R. F. Teichgraeber III, ‘Adam Smith and the Tradition’, in Economy, Polity and Society: British Intellectual History 1750 – 1950, eds. S. Collini, Richard Whatmore and Brian Young, (Cambridge, Cambridge University Press, 2000), p. 86. [2] Bonar, J. (1926) ‘The Theory of Moral Sentiments by Adam Smith’, Journal of Philosophical Studies, vol. 1, (1926), pp. 333-353.

[3] N. Phillipson, ‘The Scottish Enlightenment’, in The Enlightenment in National Context, eds. Roy Porter and Mikulas Teich, (Cambridge, Cambridge University Press, 2001), p. 36. [4] An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith, (London: Methuen and Co., Ltd., ed. Edwin Cannan, 1904), vol. 1, p.178.

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ENTERPRISE:

The Challenge for Economic Theory T

he sociologist, T.S. Kuhn, described the way in which

vital ones. The neo-classical model of the economy has no place for debt or asset prices. The recent disaster followed excesses in both, which were ignored by policy makers. It has thus become clear that the model is is essential if we are to understand how the economy works and to avoid repeating the policy errors which led to the present “great recession”. While it is generally agreed that consensus economics theory has been found wanting, there have been a about what went wrong. I have read many claims as to why it failed EQUILIBRIUM

By Andrew Smithers and I won’t give you a list, as so many seem to have been penned by “disgusted of Tunbridge Wells”. But a common theme has been to blame the maths. I think this is wrong. In method, rather than bad maths, that has been the root cause of the failure. The world is too complicated for tion. Description alone is inadequate. We therefore build models. Satisfactory ones have two characteristics.

“

We are, I hope, at the beginning of a very important change in economic theory that will create a new paradigm.

“

and starts.[1] Periods of advance and discovery are followed by times when everything seems to have become bogged down. After stagnation, renewed advance requires a “paradigm shift”, which is a change in the basic model and its associated assumptions and its replacement by a new one. Such changes are habitually resisted by many established scientists. Few welcome the idea that the learned articles that they have been writing are without relevance. As these scientists are the gatekeepers to the learned journals in which younger scientists must publish if they are to advance their careers, the young are also discouraged from breaking into new territory. It has therefore been remarked, with more truth and wit than charity, that science advances obituary by obituary. Economics today needs a paradigm shift.[2] Prior to recent events, a large measure of agreement had been built up about the discipline’s underlying theory, which became known as the neo-classical consensus. It had, however, major omissions and these have been revealed by the

First, they are self-consistent and second, they work. We have found

“

lytical failure was allowed to persist

The view that Smith propagated an unbridled free market with minimal government involvement is based in

“

that the economy is perhaps even more complicated than the physical universe. Complex and self-consis-

so is no criticism. Economists have constructed models which are based, like Euclid’s geometry, on a number of axioms. Unfortunately many economists have thought that the self-consistency of these models is don’t blame the maths. Self- consistency is only one of the two requirements. The second one is that the models work. We must therefore be able to test them against the facts and only accept them if they pass these tests. It is here that so much modern economics has fallen down. An outstanding example is

no-one any more assumes can be applied to the real economy. In the

when tested, it didn’t work. It was

became testable or dropped. It has not proved possible to modify into a testable form. It is a sad comment on the economics profession that many less continued to use the theory as if it were correct. There are often arguments as to whether or not economics is a able debate, as it can be approached

exactly the course followed by those that it is not a testable hypothesis. Their work then falls the wrong side of the philosopher, Karl Popper’s, famous demarcation between science and non-science.[3]

why macroeconomists so commonly refuse to look at empirical observations in their theoretical formulation In an exchange of emails on this subject Charles Goodhart reminded me of the story favoured by economists who are critical of the profession’s reliance on assumptions rather than facts. It recounts how a group of starving people on a desert island who have lots of canned food but no opener. They have an economist among them, who says “Let’s assume

Andrew Smithers is one of the world’s foremost economists. mentator, columnist, and has authored several acadameic publications. In 1989, he founded Smithers & Co, a company that provides advice on internationasset allocation. He co-authored Valuing Wall Street with Stephen Wright (2000)and wrote ‘Wall Street Revalued: Imperfect Markets and Inept Central Bankers’ (2009).

In a paper which Stephen Wright and I published nearly a decade ago[5] we argued that central bankers ran great risks by ignoring asset prices. This they proudly claimed to lectual foundation for their inaction. Not only were they basing their argument on an untestable and thus Wright and I have shown that the stock market can become dangerously overpriced and that the model which demonstrated this was testable and robust when tested.[6] The risks

prices will cause a severe recession. We are, I hope, at the beginning of a very important change in economic theory which will create a new paradigm. The faults of the previous consensus are of course more obvious than the form in which the new paradigm will develop. I expect that this will have a number of strands. First, it will have room for the way

real. I have remarked that the neoclassical consensus has, notoriously, no place in its model for debt or from a massive build-up of debt and overblown asset prices. Asset bubbles and excess debt go together and asset prices provide valuable signals of danger. A lot of debt is borrowed against the apparent value of property and investment portfolios. When asset prices fall, there tends to be a panic among both debtors, who worry that they will have problems

recognise that assets can be dangerously mispriced. I am happy to be able to write in your magazine that a former alumnus of York University’s economics department is doing valuable work in this area.[7] I hope this will encourage you to be similarly critical of the current received wisdom in economics. I must of course warn you that it is wise to hide or at least control your scepticism when taking exams. EQ

who doubt whether they will be repaid. These panics cause recessions and the more debt there is, the greater the risk that falling asset

[1]

[5]

[2]

[6] ‘

of this. Charles Goodhart has noted a similar failure in monetary economthe old approach, which uses the so-called money multiplier, is constructed from axioms and ignores the -

[3]

[7] ‘

[4]

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The proclivity of black market participants towards violence BY Fred Furash Second Year Economics Undergraduate

enable the thing in question to satisfy

over the thing to direct it towards the satisfaction of said need. No where does the factor of legality come into play. The legal status of a good does however send signals to market actors about the risk involved. Most people will automatically cease consumption and trade of a good deemed illegal. These people can be roughly categorised as

developed link between state laws and their own perception of morality. Thus we are left with people who do not fear the State’s power, people who

to violently resist the State’s own violence. In this set of people, very few will enter black markets just for thrill-seeking purposes. Most will enter because of that comes from restriction of supply in the market. It would seem that from the very beginning, a very restricted and black markets. Moreover, black markets fail to have many of the characteristics common to white markets. The State’s monopoly

on legitimate judicial arbitration and simultaneous prohibition of certain goods, makes arbitration through State courts for inside disputes impossible. Thus a demand for the arbitrating function of many crime organisations arise, which, because of the violence-prone set of people that participate in it, will itself display a harsh and violent form of dispute resolution. The need to stay secretive about their operations will also create incentives for criminal organisations to take on a form which is perhaps in some ways economifor security. “Blood is bad for business”,

resilient, which is why when one cut’s ately grows in its place. This is to be the perennial outcome if countless billions of taxpayers’ money continues to be spent hacking away at the branches, and not The irony is that the harder the government tries to eradicate black markets, the more it will fuel them. With every new restriction and regulation the gov-

the government raises the risk, and hence in a black market. To further complicate this problem, incentives arise for the corruption of the police itself. Just think of the Prohibition era. There is an obvious connection between modern drug regulations and the alcohol prohibition of the 1920’s and early 30’s. It is no surprise that the drug trade is today one of the greatest sources of revenue for organised crime, just as alcohol was during its prohibition.

“

Staying secretive

“

hy is it that illicit black market activities always seem so full of violence, even if violence itself is not one of the goods or services provided in that market? Let us take the example of drugs. Drugs that are legal, such as paracetamol and antihistamines, can be bought either over the counter, or with a simple prescription. At no point in the transaction between my chemist and the consumer does violence occur. Nor is there any violence involved in the manufacture or supply of pharmaceuticals. Is it then the nature of illegal drugs that makes business surrounding them violent, or is it their status as illegal? This question can be answered using simple economic theory. When a State decrees an economic good illegal, it does not suddenly stop being traded and consumed. Why is that? In explaining the nature of a good, Carl Menger outlines four requirements that must be

Note that I have so far ignored entirely the moral aspect of the argument, which concerns itself with whether people have the right to do what they will to their own bodies. There are a lot there, and vast police resources are being allocated towards catching and prosecuting people who peacefully consumed drugs without harming anyone but (perhaps) themselves. Does anyone wonder use dealing with the murderers, rapists, and thieves out there? Proponents of prohibition argue that if, for example, drug markets were decriminalised, drug addiction would explode, yet empirical evidence conducted over the past decade in countries that have successfully decriminalized drug use suggests otherwise. The United Kingdom has some of the harshest drug laws in Europe, and yet Cocaine use in the general population aged 15-64 has reached an astounding country. Portugal on the other hand, which has decriminalized all forms of drugs from Cannabis to Cocaine and Heroin back in 2001, and replaced inhave seen a reduction in its use to 0.9% . It is time policy stopped being made on an intuitive level, and some measure of common sense and economic theory are introduced. EQ

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Economic development in:

n 2005 Colombia was ranked 14th in an index of failed states. The criteria considered included the extent of severe economic decline, uneven economic development, and a range other political and social factors. However in 2009 GDP per capita (measured on a PPP basis, in $US) was $8,936.41, an improvement on the 2005 ployment is at one of its lowest levels in ten years, although still in double

Columbia

Productive Transformation Program in such objectives as increasing competiforeign investment. Having a high level of security is vital to economic development. The Revolutionary Armed Forces of Colombia (FARC) are one of the largest anti – government insurgent groups, who claim to represent the rural poor, with the government. Groups such as these can deter potential investors from the country. However, the government is taking action against such movements, and with the collective action of Colombia’s security forces, successful raids on FARC bases have taken place.

“

The new BRICS, including Colombia, are countries with a brilliant future. Any company with global ambitions will have to take immediate action in these markets.

markets, domestic industries had to adapt. They had two options. Either they could move into new sectors of activity, or specialise in their current market. The government helped support this, with a Public – Private Partnership policy, which aimed to seek development of new sectors, as well as making existing sectors competitive

allowed, but in return the government would provide education, improved regulation and develop infrastructure. Sixty six free trade zones currently exist in the country, which seek to a range of incentives. This allows for new opportunities to open, such as business-processing-outsourcing ventures, serving the US Hispanic market in voice services. This could potentially lead to 300,000 jobs being created by 2019. To provide a greater level of secu-

- Michael Geoghegan, CEO of HSBC, 2006-10

“

there popularity is no longer strong enough to over through the government. As the security of the nation improves, this provides a fundamental building block, in aiding the construction of the Colombian economy, allowing for tourism, and greater foreign direct investment.

Columbia, currently ranked 46th, has improved 32 places since 2005

rity to investors, the government created Legal Stability Pacts. This ensures regulation is stabilized, and if it were to change, the previous regulation will be guaranteed throughout the period, of up to twenty years. Five years after Colombia was ranked placed 14th on the failed state index, it has improved its position. Although still on the 2010 index, it now sits at 46th. Colombia has even gained

Geoghegan (CEO of HSBC from 2006 – 2010), stating “The new BRICs are Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (CIVETS). They are countries with major populations, dynamic, diverse economies, political stability and each of them has a brilliant future. Any company with global ambitions will have to take immediate action in these markets.” EQ EQUILIBRIUM

26 Lecture Analysis:

LORD STERN BY Elena Villarreal

Third Year PPE Undergraduate

About the Speaker:

ord Nicholas Stern is the IG Patel Professor of Economics and Government at the LSE’s Asia Research Centre, as well as Chairman of the Grantham Institute on Climate Change and the Environment, also at the LSE. He is also special advisor to the Group Chairman of HSBC on Climate Change and the Environment, has been a World Bank Chief Economist and Head of the Government Economic Service. He headed the Stern Review on the Economics of Climate Change , published on October 30th, 2006, which has been labelled ‘the most comprehensive review ever carried out on the economics of climate change’ (OCC, 2009). It has sparked debates on climate change from politicians to ordinary people, turning Nicholas Stern, who became Lord Stern of Brentford in 2007, into a household name. On Tuesday 9th March 2010, before giving the annual Ken Dixon lecture, in which he called for “Strong Decisions” to be made by world leaders over the coming year, Lord Stern agreed to meet with students of the Economics Society for a question and answer session revolving around the future of climate change policy.

student started the discussion by asking Lord Stern

response to his report, published in 2006, Lord Stern answered that there has certainly been some positive change over the last 3.5 years. Governments have begun to pay much more in 2006 it was glazed over at the G8 summit. In 2010, more than 100 world leaders showed up to the UN Climate Change Conference in Copenhagen during December 2009. The fact that there have been advanced discussions clearly shows that governments are beginning to act. This can be seen in develop-

of climate change in their 11th 5 year plan to combat climate change , while India has imposed tax controls on CO2 emissions . However, when asked about the

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It is possible that competition in the market will push private corporations to green policies even more than government initiatives risks of climate change, three years after the Stern Review Lord Stern did allow that emissions are growing faster than he had expected, and that the capacity of the planet to cope with this was less robust, as the speed with which the polar ice-caps are melting shows. That does not mean, however, that we cannot solve climate change. He pointed out that the rate of technological progress in the areas of ‘green’ technology, as well as government willingness to act can adapt fast enough to combat the increasing emissions. Although, at the moment, he also acknowledged that no technology can be shed yet, in response to queries about the role of nuclear energy, he claimed that it is still needed in conjunction with other sources of energy. Lord

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The discussion:

Stern also appeared to be hopeful of the commitment of the future government of Britain to climate change. He claimed that all three major parties seem to be ment on this issue for strong-policies to survive even a hung-parliament. In answer to questions about scepticism, Lord Stern acknowledged that short-term weather does have a people’s perceptions of climate change, despite the evidence we can see in severe threat to environmental stability. He explained that one piece of evidence the low surface temperatures of oceans and solar activity, yet the observation

27 of trends over the last few decades has shown that it is becoming warmer. He being made. He argued that, although this is partly due to a favour of government to communicate, newspapers and the media in general have a lot to answer for, as do some academics. He claimed there is a need for stronger arguments for the urgency of climate change, and that it should be treated as an issue which is particularly sensitive to counter-arguments, much like health campaigns against smoking. He also noted that, despite the global recession, as many people do still believe there is a strong argument for urgent action, but environmental issues. There were several questions to recession on the willingness to invest in ‘green’ technology, as well as general corporate policies on controlling greenhouse gas emissions. He replied by arguing that investors considering carbon constraints will be ‘too biting to ignore now’. What is important to investors is that investments can be longterm, credible and transparent. He also argued that corporate social responsibility has become extremely important for a company’s image to consumers and investors. It is possible that competition in the market will push private corporations to green policies even more than government initiatives. He cited the fact that Walmart now feels the pressure to use clean produce, shown by its communications with suppliers . However, it is always governments that need to set emissions targets; organise carbontrading schemes; regulate deforestation; and invest in public R&D. When asked about the merits of carbon-trading schemes, and the potential to expand them globally, Lord Stern argued that these schemes do have real advantages. The closer to tightening the competition between companies to be ‘green’, it is feasible that the EU may be able to come close to its target of a 30% cut in emissions by 2020. He also pointed out that China has been considering a cap and trade scheme in order to regulate greenhouse gas emissions. Despite the action we have taken to Lord Stern argued that even with responsible action, we cannot prevent the change of 1°c from damage done previously, and so we need to have some measures to adapt to climate change. While this may not seem much, over millions of years the earth might only experience a 3°c change in temperature, over centuries this is very serious. In order to prevent more change, we need to invest further funds into the mitigaallocated on a regional basis.

CV: Nicholas Stern Name: Nicholas Herbert Stern, Baron Stern of Brentford, Kt, FBA Born: 22 April 1946, Hammersmith Nationality: United Kingdom Profession: British economist and academic. Institution: London School of Economics Field: Political economics Alma mater: University of Oxford, University of Cambridge Contributions: The Stern Review Currently: IG Patel Professor of Economics and Government, Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE), and 2010 Professor of Collège de France. Previous: Senior Vice President of the World Bank (25 September 2000) Students asked Lord Stern how important it was that developing countries curb their greenhouse gas emissions, and how the richer countries CO2 could convince them to do so? He replied that we can only combat climate change through collaboration; it China, as the fastest developing country in the world should lead the way to low-carbon growth. We need to break the link between growth and carbon emissions. There needs to be a 40% drop in CO2 emissions from 1990 levels by 2020. There are certainly inequitable contributions to greenhouse gas emiscountries cannot achieve what the 2020 goals . Lord Stern pointed out that there is and telling someone what to do. While developing countries are most at risk of being ‘told what to do’, they have their own scientists, and there needs to be a genuine discussion between countries, partnerships designed to combat greenhouse gas emissions on a global scale. This kind of approach is taken by corporations like DSM Desotech who have made several breakthroughs on tackling

and who have shared this information with governmental bodies and NGOs . Governments need to come to their own understanding of the risks of climate change. Mexico for one has shown a much stronger commitment than many other countries, and China and India also recognise their own vulnerability. The problem is convincing people to act together to change radically, although we can’t see exactly where we’re going. Despite the need for collaborative measures can be taken against climate change without a global agreement, but what is really needed is mutual assurance between countries and their people that everybody will be making change. He argued that there is a need for countries to lead, such as China and the US, and for global commitments to create a sense of going forward that can be depended on. EQ

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TALK TO US!

Trouble in Paradise The story behind the Greek tragedy

BY Chair of Economics Society ‘10

reece, who 7 years ago was prospering economically

celebrating the hosting of an Olympic football championship, now stares into strikers and the police in the streets of denly and so dramatically. The story perhaps goes back as far -

A worried looking Giorgous Papaconstantinou, the Greek Finance Minister

The debt crisis hit Greece two-fold; tourism

istration blames its predecessors, etc.

The onset of the debt crisis had a

The next and perhaps larger impact was

away from the brink of catastrophe and which they now see as responsible for their lowered incomes and higher taxes (which are now being implemented in an almost arbitrary manner as the

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ability to borrow cheaply. And borrow

calling general strikes. Short memories,

dependence that has crippled their hand that has fed them for so long has

trickle Greek ship owners had less cargo to transport and ships that cost $10,000s way.

to borrow as ratings agencies down-

the streets. And so the blame game

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The view from an often over looked service line in one of the Biggest Transaction Tax

or individuals with a taste for the business world, there are few more exciting places to be than in the front line of the big

Name: Department:

achieve our very best for our clients, whether that’s

Location

will be able to point to banking or corporate

Degree:

this market, it is often the unseen tax advisor who is truly in the centre of the

work for Ernst and Young in the IT Risk and Assurance (ITRA) department, based in the

the Financial Services sector and so my main clients are Investment and Asset ManageThe recruitment process for EY was actually very candidates who ask lots of questions and show interest in the department they wish to probing questions, they simply want to get to know the is all based on your strengths, which means that even if you have no past experience you will have as much chance as anyone else if you demonstrate the right skills, no

most notable part of my job is the exposure I get to senior EY puts a lot of faith into its recruitment process, so you ing interviews and meetings at the client site by yourself within months, if not weeks, part of the job, and we get to in amazing locations across The main challenge of the job is the workload during the cant overload of work when you have to balance 4 or 5 cli-

the support structure of EY always people around willing guidance, which goes a long

The main function of ITRA We ensure that the systems and controls around clients’ IT infrastructure can be relied upon; identifying areas where control failures or fraudulent transactions may have an

The work I do day to

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Tax people are excited by the business world, and want to be right in the

If you apply for a position at EY, you can be sure that you will work in a company with many like-minded individuals who have a hugely want a fast-paced, challenging introduction to a professional environment, EY may be the

Every single step taken in a transaction will have tax implications, whether that transaction is an acquisition of a multinanancing a bank debt for a ing and planning for these implications can mitigate the risks of a transaction, enhance the economic returns for the client and provide crucial negotiation Working on the front line of a transaction means being a completely integrated part of the client’s with the legal advisors, providing tax comments on the legal documents to protect against the risks we

tax structures to ensure maximum returns on an investment or by identifying the hidden tax risks in a company which may change the whole nature of Thanks to our Global network, we can support our clients in every country in the world and you overseeing the tax work on a deal covering more than ten locations, from Japan approach means companies gain access to highquality, globally coordinated tax advice, wherever their transaction occurs – although this can result in some interestingly timed conference calls…! To be a Transaction Tax advisor with Ernst & Young is to be a supportive guide for the layman, a mediator to all parties, a pragmatist in the face

with the client regularly, making sure they know exactly what’s going on so that there are no surprises have to build a transaction structure which will be acceptable to all investors, each of whom may well

At Ernst & Young, we have developed our Transaction Tax department to

can be a very demanding career path – most Transaction Tax advisors handle several deals at a time, and an ability to prioritise tasks is a must – but it is ultimately extremely rewardhas been your focus for three weeks on the front page of the FT is a thrill that I never tire of!

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Degree: - Interview by Boyang Xiao

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Good academic grades alone are not

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