The Ricardian (February 2011) by Abdur-Razzaq Ahmed

‟

Editorial Board Abdur-Razzaq Ahmed Hakim Bahri Chief Editors Sebastian Hicks Maximillian Melsa James Pepper Khalid Hayat Topic Editors James Chauncy Tom Hill Adam Salisbury Rayhan Uddin Assistant Editors Abdur-Razzaq Ahmed Designer

Why

Ricardo?

Ricardo is the economist most identified with the importance of trade in economics, arguing that free trade will lead to benefits for all. Whether or not you believe Ricardo, we are living in a world when trade is increasingly seen as the way for countries to grow out of poverty. India, China and Africa are recording impressive growth figures backed by a trade based development model. The idea of interconnectivity underpins Ricardo‟s theories and with the rise of the behavioural economists we are seeing this inter-connectivity more and more at the micro-economic level. It is this scope which provides us with a focus for The Ricardian magazine and you can see the idea of inter-connectivity deep within the idea of globalization on page 34, you can understand its effects in UK education on page 10 and in the behaviour of millions of entrepreneurs around the world, which we discuss on page 26. ‘I was surprised to hear that The Ricardian is produced by sixth form students at Tiffin School. It looks and reads like something that should be available in WHSmith. The study of economics will be enhanced by this welldesigned and well-written magazine. David Ricardo would be proud to lend his name to such a project.’ Alan Johnson MP

The Ricardian Magazine Issue 2, February 2011

Editor’s Piece 6 The Money Love Illusion Capitalist Behaviour & Perverse Incentives

News & Current Affairs 8 Top News Stories

Front cover ‗Money Love.‘ The love of money has made us question the true stability of economies. The Ricardian‘s Chief Editor digs deep to explain one of the underlying causes of the crisis with the use of historical and contemporary examples. Pg 6. Photograph: lav_nida on Flickr.

10 A Lost Generation? „Education, Education, Education‟ 11 The World of Tomorrow An increasingly entrepreneurial population

Column: Cromwell 12 A social network for a social revolution

Features 14 Special Interview (Historic) Dr. Howard Archer

Another perspective on QE Keynesian stimulus packages have arguably worked wonders for major economies. Quantitative Easing is a contemporary and clever idea along the same lines, but some argue it contains a silent, yet significant consequence. Pg 23

21 India’s Triumph A brief look at India‟s challenge, adversity and vindication 22 Black Markets and why cutting drugs is so lucrative The changing nature of the underground risk 23 Is Quantitative Easing Inflationary? 24 The Ignored Holocaust 26 Entrepreneurship: Small Business may be the answer to big debt 28 Brand New World How the Brand eclipsed the Product 30 Saving our Skin Encouraging people to save and why saving is good

Column: Euler 34 Leonard Euler: A Hidden Economist

16 Is Foreign Aid Hindering Development A misguided deed? 18 The Perfect State Mankind‟s eternal search for an efficient society 20 The Price of War The blunt truth about the real costs of war Contents continues overleaf >

A Still and Silent War Supermarket shelves are stacked with thousands of products that never move. But there is a war going on that you are right at the centre of, yet you cannot see it: the brand war. Pg 28

Double Review The Ricardian reviews both the bestseller „Freakonomics‟ and the recent film version, pg 48

Page 18 The Economist as a Philosopher: opposite sides of the same coin

Lectures Market for Drugs The Ricardian applies an economic perspective to the issue of drugs, pg 22

Arts and Books

36 Lectures in the future

46 23 Things They Don’t Tell Us About Capitalism Ha-Joon Chang

38 From the Lecture Editor: What makes the perfect lecture?

Double Review: 48 Freakonomics (Book) Steven D. Levitt and Stephen J. Dubner 49 Freakonomics (Film)

40 The Economist as a Philosopher Opposite sides of the same coin

You!? A Detective?! Tim Harford‟s fantastic book that takes the reader on an investigative journey through the world on an economic rollercoaster. We give our view on pg 50

42 A conversation with James Caan

“To spare you is no profit, to destroy you is no loss” Khmer Rouge 1975 The ignored holocaust in Cambodia, page 24

50 The Undercover Economist Tim Harford

Contact To contact The Ricardian: Chairman: pbridges@tiffin.kingston.sch.uk Chief Editor: AA.Ricardian@live.co.uk

’

Editor’s Piece The Money Love Illusion The financial crisis of 2007 will perhaps always be remembered as ‗the crisis caused by greedy bankers.‘ However, if one was to probe deeper into the origins of the crisis, they would not find greed only in bankers, but throughout society; in consumers all the way through to national governments. In all of these different individuals and economic bodies, the greed was always hooked onto one mad-made material; money.

Abdur-Razzaq Ahmed

he 20th century brought the Cold War, which illustrated that money had the might to force authority over entire nations, yet during the same period money was used peacefully and progressively by being sent to assist development of struggling economies such as Africa. Global aid schemes are worth a reported $1 trillion and have, to an extent, helped millions of Africans surface from the horror of war, disease and starvation over the past sixty years. The late 20th century and the early 21st century demonstrated that money could bring happiness to the poorest people in Western society by giving them the opportunity to take out a loan and own their own house. But within just a few years, global markets began haemorrhaging and money deceitfully uncovered its ability to inject despondency and despair into the lives of troubled and burdened families. It begs the question; why has mankind allowed one of its own creations, money (or liquidity as the financiers seem to label it), become so powerful that it has almost become the puppeteer of human emotion? Arguably, the latest crisis has fed the argument that people and financial institutions simply love the prospect of being immersed in money without fully considering the potentially disastrous consequences– the money love illusion.

Economists recently rummaged deep into the past and brought out the works of Adam Smith, the most notable freemarketer the economics profession has witnessed. His idea essentially stated that an individual‟s actions are such that he acts in his own self interest, and the result of his actions benefit both himself and the entire economy. This was also the view Alan Greenspan held prudently while running the US Federal Reserve.

But when Henry Waxman interrogated the sheepish-looking Greenspan in October 2008 about his views, it was clear Greenspan knew he had completely misinterpreted the way financial markets innately operated and the true methods and incentives of individuals:

“ So powerful that it

has almost become the puppeteer of human emotion

”

‗I made a mistake in presuming that the self interest of organizations was such as if they were best capable of protecting their shareholders...a critical pillar to market competition and free-markets did break down and that shocked me.‘ The self interest that Smith and Greenspan refer to, in this case, is the pursuit of money, wealth and power. The West reached a point such that individuals in mortgage broker firms and investment banks were taking gratuitous actions in the search of m o r e money-

Image: whosoeverdesires blog

7 actions driven by the inherent greed within these institutions‟ bankers and traders. This is a trait that now seems like a basic job requirement on Wall Street, in Britain‟s financial hub and in all major global financial districts. The nature of bankers was well expressed through Gordon Gekko, a character in Oliver Stone‟s 1987 film, Wall Street and the recent 2010 sequel, Wall Street: Money Never Sleeps. Although the banking crisis materialized in 2007, the seeds were sown long before by the bankers of the 80s and 90s, who became naive and firm believers in Gekko‟s famous phrase „greed is good.‟ These films remind us why the emotion of greed, so grotesque and enthralling, is appropriately classed as one of the seven deadly sins. In addition, the films are embarrassing indictments of rampant capitalism. The portrayal and perception of banker behaviour is relatively accurate in the films, but in reality, there were many other individuals that displayed blithe greed for money and thus helped contribute to the crisis. Rating agencies, such as Standard and Poor‟s, Moody‟s and Fitch, give a rating to debt issued by banks before they can be traded with other financial institutions. Mortgage-back securities, were created by investment banks, and are one form of debt that must be rated. Theoretically, if the world operated like it did in Greenspan‟s mind, the debt would have been rated poorly, making it unattractive to investors. However, due to the fact that such debt securities were generating around 40% of rating agencies‟ revenue between 2002 and 2005, they acted within their self interest, and overvalued them. This is a topic we discussed in our interview with Dr. Gary Van Vuuren for the first edition of The Ricardian. In fact, the rating agencies undertook actions that were an example of „rational irrationality,‟ a concept devised by The New Yorker‟s John Cassidy. It essentially describes an action that is rational on a private level, but inherently irrational and damaging on a social level. It was rational to grade such poor quality debt highly

because it would generate money for the rating agency, but on a social level, this meant creating a false image of the market and inducing yet more hidden information which would inevitably contribute to a banking crisis. Some question this logic however. Why did sophisticated investment banks and rating agencies act in such a perverse way– surely The banks were playing a game of musical chairs, and they knew the risk asso- they were driven by their greed. ciated with sub-prime Image: Jupiter Images mortgages? This is true, but there is a failed to pick up on this and the conselogical reason as to why it still oc- quences proved to be disastrous. curred and it can be explained through game theory. There was no doubt that A Deeper Argument large sums of money could be made in Even though there is a very strong arsub-prime mortgages and so any bank gument that it was the West‟s avid bethat did not have a department focused lief in free-market capitalism that on mortgages, was waiting for a slap caused the crisis, I believe the problem from their shareholders. Citigroup‟s ran, and will continue to run, deep former Chief Executive, Charles Prince within the veins of humans. The crisis aptly summed the situation up: “as long was partly caused by ideological fallaas the music is playing you‟ve got to cies, but an overriding issue was manget up and dance.” His words may kind‟s emotions and behaviour around seem metaphorical, but it was a clear money. Oliver Stone hinted this by example of the Prisoner‟s Dilemma. He tugging Gekko‟s character with humanwas also essentially tagging the ideas ity in his second Wall Street film, Keynes mentioned in The General The- where he also focused much more on ory, who likened such a situation to a human practices rather than financial game of musical chairs: techniques and behaviours. I consider the money love illu―it is, so to speak, a game of Musical sion and „greedy‟ behaviour as probChairs– a pastime in which he is the lems that cannot be fixed with Keynesvictor who secures a chair for himself ian stimulus packages. In financial when the music stops. When the music markets especially, it will require all stops some of the players will find participants to realise the blunders of themselves unseated.‖ their ways. As the German President stated in 2008, “financial markets are If Citigroup refused to operate a mort- like the mirror of mankind, revealing gage desk, the investors would pull out every hour of every working day the and invest in one of Citigroup‟s com- way we value ourselves and the repetitors. Now imagine every invest- sources of the world around us. It is not ment bank in a similar position. The the fault of the mirror if it reflects our same went for rating agencies; if blemishes as clearly as our beauty.” Moody‟s refused to rate debt (or rate it highly), banks would refuse their ser- Abdur-Razzaq Ahmed has been the Chief Editor of The Ricardian since it began. Next vices and seek the services of another year he will leave Tiffin to work at a corpocompeting rating agency. Greenspan, rate law firm before going to university. the driver behind financial deregulation R

Tom Hill, Jordan Doughty and Nathan Holt summarize the world‘s most important news and assess the situations of global economies.

Canada

GDP Growth 2010: 3.4% Interest Rate: 1.00% Current Account: -2.57% of GDP Budget Deficit / Surplus: Deficit of 3.6% of GDP

GDP Growth 2010: 1.90% Interest Rate: 0.5% Current Account: -1.66% of GDP Budget Deficit / Surplus: Deficit of 4.71% of GDP

Not all countries in the world were looking glum after their GDP results for 2010. Canada‟s economy grew by 0.4% in November alone last year, meaning an overall growth that totalled 3.4% for 2010 – way above market expectation. Some economists believe this was due to exceptional oil and gas extraction in the third quarter, while others hold a slightly more generalised opinion. However, analysts predict a slower start to 2011, and most likely a smaller growth this year compared with last. In other news, Canada has, for the third time since 2004, implemented stricter regulations surrounding mortgages amid concerns about consumer debt fuelled by high property prices and low interest rates. Jim Flaherty, finance minister, said that the changes were designed to encourage savings and insulate taxpayers from risks associated with consumer debt. Currently, large banks require insurance when the down-payment is less than 20 per cent of the purchase price, but this is set to be changed.

On Thursday 9th December, Parliament successfully voted through the plans to increase university tuition fees to a maximum of £9000. This created anger from thousands of students who had assembled in London to protest – many arrests were made with injuries to police officers and demonstrators. University fees are currently set at just over £3000 p/a, but with up to a £6000 increase to be implemented in 2012, students could soon see their debts accumulating quickly. In other news, the coldest December on record reached a low of -18oC in some places, leading to snow and ice that caused treacherous road conditions. The engagement of Price William and Kate Middleton was announced in mid-November, amidst months of speculation. Their Royal wedding to take place this April is estimated to cost in excess of £40 million – and, as it stands, guess who‟ll be footing the bill; the taxpayer!

USA

Brazil

GDP Growth 2010: 2.80% Interest Rate: 0.25% Current Account: -3.29% of GDP Budget Deficit/Surplus: Deficit of 9.10% of GDP

GDP Growth 2010: 6.70% Interest Rate: 11.25% Current Account: -2.91% of GDP Budget Deficit/Surplus: Surplus of 3.35% of GDP

On Sunday 28th November, WikiLeaks published just over 250,000 leaked United States Embassy cables, along with other documentation detailing the breakdown of military leadership and control in Iraq and Afghanistan; leading to much embarrassment for the US Army. The recent leak will undoubtedly lead to a deterioration of international relations between the US and other countries, as details of their rather frank opinions came to light. The documents also included sensitive information which were said to “endanger the lives of US military personnel globally”. The cables included information of a possible Saudi Arabian / American alliance, discussions with Robert Mugabe and details of international spying. Although ground breaking in theory, many do not believe that WikiLeaks will cause much harm toward international relations. The US will, of course, have suffered a case of red-faced embarrassment, but once the next batch of stories humiliates another nation, America will have faded from the headlines.

Brazil‟s Finance Minister, Guido Mantega, recently expressed his doubts about the success of the Government‟s Fiscal Policy, as the public and private sectors both struggled to reach their targets for 2010. The public sector needed to account for 3.1% of the country‟s GDP, but poor results throughout the year meant that at the beginning of December, a percentage of only 2.99 had been reached – 0.11% short. The Government has also announced, that, in partnership with the Brazilian Development Bank, a credit line of R$ 4.8 billion (£1.75 bn) has been set aside for construction of 5 new football stadiums, and 7 stadium upgrades, in preparation for the FIFA World Cup competition in 2014. This will undoubtedly supply Brazil with the much needed tourism and money it requires, and may even help the country retain, or even entice back, their many footballing stars who left to find international fame in Europe.

9 European Union

China

GDP Growth 2010: 1.90% Interest Rate: 1.00% Current Account: 0.20% of GDP Budget Deficit/Surplus: Deficit of 2.00% of GDP

GDP Growth 2010: 9.80% Interest Rate: 5.81% Current Account: 6.24% of GDP Budget Deficit/Surplus: Deficit of 0.40% of GDP

Ireland, under pressure from the EU and World Bank, reluctantly requested an estimated €90 billion (£77.3 bn) bailout package, mainly supplied from the IMF, which could soon leave Britain £7 billion out of pocket. At this stage, nobody is quite sure of the exact consequences this will have, but fear is undoubtedly spreading through the Euro zone, namely the three remaining countries which form the PIGS (Portugal, Ireland, Greece and Spain). Similarly, many UK banks, such as the Royal Bank of Scotland and Lloyds Banking Group, are feeling the impact as a result of their exposure to the faltering Irish economy.

Huge urban areas are being „purpose built‟ across China, with the aim of increasing the rural-urban migration process. The Chinese Government argues that they are planning long term; with the Kangbashi project (Inner Mongolia) a ten year investment, costing an estimated $150bn. This, they hope, will increase their GDP and thus their economy. However, there is no guarantee of the migration, especially not in the numbers expected. If the houses are left empty, it will be seen as a failure of the state planned system, and consequently the Chinese Government. And, as the West knows all too well, there are significant problems associated with property bubbles. People generally do not expect property prices to fall, but devaluation can lead to many red faces. The Chinese also have a strange attitude to housing - they believe if houses are lived in, their value depreciates. However, it is necessary to take into account the standard economic principle of supply and demand.

Middle East GDP Growth 2010: 4.20% Interest Rate: 2.25% Current Account: 3.88% of GDP Budget Deficit/Surplus: Deficit of 3.50% of GDP

It appears to be the same story once again, with Israel dominating familiar headlines. The Israeli-Palestinian peace talks, with the USA acting as an active third party, are once again faltering. The USA is desperately seeking another freeze on Israel‟s settlement building in the occupied Palestinian West Bank, this time using bribery as the incentive for the Israeli Prime Minister Netanyahu. That is, twenty “F-35” stealth fighters, worth $3 billion. And this new deal is particularly important for Israel, as their economy, having floundered in the recession, grew by a measly 0.5% in 2009. Meanwhile, Saudi Arabia, with a fifth of the world‟s oil reserves, is taking advantage of the fuel-hungry West and is sitting back watching the rest of the Middle East unravel. Finally, similar stagnation in the post-recession period can be seen in other Eastern economies, with the focus again on political, rather than economic, issues. South Africa (Africa) GDP Growth 2010: 3.00% Interest Rate: 5.50% Current Account: -4.95% of GDP Budget Deficit/Surplus: Surplus of 0.18% of GDP

With a state of emergency in Guinea and a brutal rebel reign in Uganda, foreign investors are crucial in bringing Africa out of its stagnating, and even regressive, financial situation - but are being given every good reason to look elsewhere. Nevertheless, even when exciting opportunities arise, Africa‟s governments are failing to harness these God-forsaken gifts. For example, Sierra Leone‟s vast mineral resources are being increasingly exploited by foreign mining companies. With the miniscule state revenue of $10.5m for 2007 (accounting for only 0.6% of the country‟s GDP), it is looking likely to stay as low when profits are being consistently funnelled abroad. And similarly, Nigeria is still stuck in poverty despite the 2.5 million barrels of oil being exported from the country every day. But the picture seems bleak even in the continent‟s most stable and developed countries. South Africa's real GDP growth slowed by 2.6 per cent in the third quarter of 2010 - significantly below market expectation.

Australia GDP Growth 2010: 2.70% Interest Rate: 4.75% Current Account: -3.49% of GDP Budget Deficit/Surplus: Surplus of 0.29% of GDP

Australia‟s election in August last year ended with its first ever hung parliament – with both parties, Labour and Liberal, winning 72 seats. Labour‟s leader, and Prime Minister since June 2010, Julia Gillard, managed to retain power having formed a minority government with three independents and an Australian Greens MP. Elsewhere, Australia had the highest increase in house prices for 2010 – a growth of 9.4% compared to the second highest of 6.8% from France. However, news was not as good for Spain as they recorded a drop of 5.2%. Nonetheless, good news aside, Australia reached an unemployment rate of 5.6% in 2010, over 1% higher than in 2009. The Australian Reserve Bank has decided to keep the interest rate of 4.75% in operation until the end of February, when a decision will be made as to a change. The announcement followed fragile economic results late December showing the Australian economy grew just 0.2% in the third quarter, significantly below expectations.

A lost Generation? Education, Education, Education Nathan Holt

hen we look at the world, it is strange to think that, with our sophisticated modelling and projections, nearly three years after the beginning of the biggest recession since 1928, the UK‟s economic future is as unsure as ever. Socially and politically the situation remains uncertain, with a Con-Lib coalition that seems potentially doomed. The Comprehensive Spending Review in October created political and social division on a scale only last seen in the lead up to the Iraq War. But one thing does seem certain, and that is the UK‟s golden era of education is set to come crashing down under the Coalition Government. For many, a decade under Tony Blair‟s leadership reinforced priorities of „Education, Education, Education‟. And this was indeed at the top of Labour‟s political agenda. Between 1997 and 2007, state school pupil funding rose by 48% - or £1,450 more per child, and schools saw an increase of 35,000 teachers. Today, the Coalition claims that the education sector has been least affected by the cuts, with schools promised increased funding every year for the next four years. But whilst the Government has made a pledge to protect future education, the current cohort of academics going on to university is rapidly becoming a „Lost Generation‟. Lord Browne‟s review of Higher Education has led to the remo-

val of the tuition fee cap which, in turn, will now result in university fees of around £7,000 - £9,000 a year to be implemented from 2012 (to compensate for severely reduced public funding). This could result in college seeming a more attractive option, with the cost of an average degree-level course being nearly £2,000 per annum less than at university. However, it is more likely that thousands will simply bypass the education system, a factor that has made the UK one of the leading powers in the world. Education is, as we know, the key to success.

replaced with "targeted support" for those facing particular financial barriers. Furthermore, as well as abolishing EMA, 16 to 19-year-olds appear to have been left out in the cold with regards to funding for sixth-formers. And, although the Government has promised to double the number of apprenticeships, (for over-19s), there is worry that the Government is removing the vital bridge between school and higher education. Finally, the Business Secretary, Vince Cable, has controversially suggested that graduates moving into higher paid jobs should not be allowed to repay their student loans too quickly. The logic being that the interest rate for student loans will be set at inflation plus 2.2%, to make them „profitable‟. That is, of course, if the next generation of students are able to find jobs paying over £21,000 per year! So with heavily increased tuition fees, and no guarantee of a job when they graduate, a student‟s life is looking increasingly bleak from 2012. And this will inevitably result in fewer One of the many cuts which student applications to university, crewill directly affect thousands of stu- ating a „Lost Generation‟ of potentially dents considering higher education, is brilliant academics. the abolition of the Education Mainte- Students demonstrating over increased nance Allowance (EMA); a grant in- tuition fees and government cuts such as tended to keep less privileged 16 to 19- EMA– but has the campaign already year-olds in education. This will be been lost?

“ The current cohort

of academics going on to university is rapidly becoming a „Lost Generation‟

”

The World of Tomorrow An increasingly entrepreneurial population Jordan Doughty

t‟s almost certain that anyone aware of the world around them will be mindful of the economic meltdown the West has willingly directed itself towards. For too long now, the West has fallen victim to the culture of temptation, and now the walls of wealth have come dramatically crashing down. As we stagger out of the worst recession to hit the planet for decades, a new age of austerity is almost certain, where the US, UK and other „MEDCs‟ can no longer dominate the planet; economically or culturally. The „established economies‟ are facing ever slowing GDP growth, meanwhile, the emerging markets of the BRIC (Brazil, Russia, India and China) countries are rapidly expanding. For example, the latter take their education extremely seriously whilst capitalising on an increasingly entrepreneurial population who are hungry to succeed. And this could be one of the reasons why India produces over two million university graduates annually. Many argue that the emergence of these „new powers‟ has a positive effect, and that we should be embracing the change by backing their growth. And there is indeed potential for large profits to be made. However, there is concern that these emerging superpowers are becoming too domineering for

“ But the big question is whether this is a blessing in disguise

”

the West. The potentially damaging aspect is that they own most of the debt from many „established countries‟ and thus control, to some extent, their economic activity. For example, China recently purchased ¥2 trillion of Japanese debt and sold it soon after, causing inflation to the otherwise stable Japanese currency. Furthermore, not only does China own most of the USA‟s debt, it is buying many western industries, while at the same time keeping its own currency artificially low. Although the exact future of the global economy and distribution of wealth remains unclear, what seems certain is that the wealth gap between the East and West will continue to shrink (but perhaps not as quickly as we have seen lately). Arguably the best solution, and the way forward for many Western countries to combat this swing in world finances, is teamwork; the most notable example being the European Union. Most significant is the single market membership which results in China‘s easier and more influence cost effective trade throughout with other coun- the world is tries, thereby lead- growing. ing to increased profits. In addition to this, the free movement of labour creates more jobs for people who might otherwise be out

Completing the jigsaw - are the BRIC countries now holding the world together? Of work. Money is also donated to deprived regions across numerous EU countries, regardless of the country‟s wealth. The UK was allocated a total of £10bn of European Structural Funds between 2000 and 2006, and a further £595m for Community Initiatives. Furthermore, the central currency system means protection and „bail-outs‟ in times of economic hardship - most recently in Ireland, with the possibility of Spain and Portugal following. Some say that the decline of the US and other „established economies‟ in the West was inevitable, and that sooner rather than later, the BRIC countries could potentially swing the balance of power from the West to the East. But the big question is whether this is a blessing in disguise, or, perhaps, a battle that has yet to be fought.

Cromwell A social network for a social revolution

Respect for the Military, not the Police. Image: BBC

very revolution that has ever attempted to shake off the shackles of an oppressive regime in the past has relied on exchanges of information to achieve a successful transition. Methods of distributing this information have however, changed dramatically since the 1789 Storming of the Bastille, and even the more recent case of the Petrograd revolution is not comparable with todayâ&#x20AC;&#x;s situation. We have entered into an age of technological and communicative enlightenment; where thoughts, ideas and, perhaps most significantly, plans can be shared on a global scale in a matter of seconds. It is the development of this intricate network of communication which today poses the greatest threat to questionable governments and despotic leaders in the world. The internet is possibly the most increasingly influential medium in world politics. The recent overthrow of President Zine El Abidine Ben Ali in Tunisia is a sterling example of this. One clear catalyst that stirred up the revolutionary climate in the country was the Wikileaks releases concerning the presidentâ&#x20AC;&#x;s regime. Ben Ali had maintained a tight control over broadcasters and editors at the time of the releases, but even with all the powerful instruments of government at his disposal, he was unable to stem the flow of unfavourable articles emerging on the web. The leaks confirmed the already wide-spread suspicions of corruption in the political elite and were aimed to destabilize the already precarious relationship between the people

and the government of Tunisia. Once the desire for a regime change resonated throughout the masses, the internet was deployed in its greatest capacity in the revolt. Opposition leaders used social networking sites such as Facebook and Twitter to devastating effect, posting details of gatherings and marches of protest for the expressed purpose of rallying support against Ben Ali. This allowed people to come together with a precision and coordination of aims and actions that no state had had to contend with before. The efforts of these highly-organised protesters undoubtedly lead to the fall of a president, and the move towards greater democracy in this troubled region of North Africa. What transpired in Tunisia, however, had a far greater consequence on the region than any revolutionary leader at the time could have anticipated. The imminent fall of the Egyptian leadership is again testament to what is possible with such rapid transfer of information. News of the Tunisian success reached the 80 million strong population of Egypt, many of whom have spent their whole life under the rule of the autocratic Muhammad Hosni Sayyid Mubarak, and may have gone some way to spurring them on in their pursuit of greater democracy. The current struggle in Egypt however is vastly different to the Tunisian crisis in that the Government foresaw the dangers of social networking sites and moved to 'turn-off' the internet in an attempt to block out the primary source of anti-government propaganda. The failure of this course of action may at the surface appear to undermine the argument that the spread of information is the underlying factor in the success of public opposition. However, what is important in Egypt's case is that, unlike previous examples, the motivational news reached the disgruntled population and at the same time enabled them to form a unified front against the 30year old regime, concentrating their resistance and giving them a far greater

chance of achieving their goals. Of course, for any revolution to be successful there has to be significant and widespread discontent amongst the population. What the Tunisian and Egyptian examples do show is that once the desire is there for a leader or government to be toppled, the free internet is an incredibly effective mechanism in enabling the mobilization of civilian forces, at the same time weakening the regime's control over the spread of revolutionary ideologies, making this state of discontent far more likely to occur. It is clear that the internet in particular facilitated the revolutions in these two states; however, the fates of the governments in other Arab states with similar economic and social problems are far more ambiguous. Again, news of Tunisia and Egypt has spread to nearby states in the region, notably Libya, Jordon and Algeria, where revolts have already been experienced. We are yet to see if social network sites and the internet in general play as big a part in these nations as they did in Tunisia and Egypt, however, equally as concerning is the potential impact which could be felt in Israel with the fall of an Egyptian government which was responsible for the negotiation of peaceful relations with the diplomatically volatile state. The events in North Africa and the Middle East show clearly that with media outlets such as the internet, simple words can quickly destabilize huge areas, affecting many millions of people; it is incredible to think that diplomatic leaks in America are at least partially responsible for toppling a friendly government in Tunisia, an even friendlier regime in Egypt, potentially threatening the security of their long-time ally, Israel. Though the content of thoughts, ideas and words is similar to how they were centuries ago, the impact they can have on societies the world over is overwhelmingly greater as we move further into the 21st century. R

About: Dr Howard Archer is one of the most prolific and respected economic commentators in Britain Today. He currently works for IHS Global Insight as their Chief U.K. and Eurozone Economist and Managing Director of Western European Forecasting and Analysis. He holds a PhD in multinational businesses from the University of Reading. If you look at daily economic articles in some of London‟s biggest newspapers, Howard‟s name appears regularly and he is presented as a highly credible source.

They haven‟t got much choice... Dr. Howard Archer spoke to The Ricardian back in November 2010 about the MPC‟s decision-making and China‟s prospects in the long term. Ric: You recently said that firms may increase in productivity as they try to compete. By saying that, do you believe that there is a lot to gain from the recession for British companies? HA: The point I was trying to make was that if there are major job losses in the public sector and if the total unemployment rate is not going to rise, more people will have to be employed in the private sector. The problem is I think private sector companies are going to be increasingly worried about the economic outlook as the fiscal tightening increasingly bites. They will be very reluctant to take on extra workers and, in particular, full time workers. You have already seen an increasing trend in this country towards part time employment and what you may well find is that companies that do need workers will take them on part time rather than full time. Another thing you may find is that unemployment did not rise as much as people thought it would during the recession, and rather, employers and employees seemed to adopt a more flexible ap-

proach. Instead of making people redundant they made people part time staff, gave unpaid leave, freezing wages etc. What you could find going forward is that if companies and businesses do pick up, they start to use this approach more in the future. This means that companies can make more use of their existing workers rather than taking on new ones.

“ People are desper-

ately trying to save more because they‟re worried about outlook and their jobs,

”

Ric: With regard to these workers who are essentially consumers, do you think with the proposed fiscal measures could mean we observe the paradox of thrift? Whilst consumers begin to rapidly save because of this weak outlook, will they

find their wages decreasing in the medium term? HA: During the recession we have seen a lot of people who are trying to save more because they‟re worried about losing jobs. You've seen the savings ratio has spiked up quite remarkably to an 11 year high at one point last year. But if you look at the latest figures that came out earlier this week, the savings ratio has fallen right back down again. That was partly because there was a pick-up in consumer spending in the second quarter. This was influenced by a number of factors, one of these being the football world cup with people buying things like widescreen TVs. There was this pick-up in spending but at the same time wage growth as a percentage of disposable income actually fell in the second quarter. That extra spending was thus financed by many people dipping into their savings which is primarily why the savings ratio fell in that second quarter. I think you're going to have the dual problem over the next two or even three years where some people are desperately trying to save more because

15 they‟re worried about outlook and their jobs, but other people are actually dipping into their savings to finance their spending because of wage growth being significantly weak. Ric: What should the MPC should do to control this rise in consumer spending which is one of the causes of persistently high inflation?

argue that if companies think inflation is going to be high in the next quarter they might start raising their prices. I personally think that with the pressures facing the economy and the consumers, any company that tries to raise prices significantly will find the demand for its products hit quite badly. Inflation has undoubtedly been sticky, and it will stay above target for very much of the next year because of the VAT increase to 20% in January. That will stop inflation coming down any time soon. Although inflation has been surprisingly upside, I do actually agree with the fundamental view of the bank of England that sooner or later inflation will fall back very sharply because of temporary hikes that are bringing it up such as the VAT increase and high energy prices. One thing that a lot of people have not looked at however, is that in the breakdown of inflation in the data, there is an inflationary measure which excludes changes in indirect taxes. This rate of inflation is just 1.4%! This shows perhaps that maybe the underlying rate of inflation is much less than people think. There's not much the Bank of England can do to combat inflation that is being created by taxes and oil prices. Given the amount of spare capacity in the economy, shown by high unemployment and wage growth being fairly muted, it does suggest that underlying inflation will be pretty subdued going forward.

HA: Nothing. Absolutely nothing. It would be suicide for the economy if they raised interest rates. I don't think they will raise interest rates until possibly the end of 2011 or maybe 2012. They have got to keep monetary policy extremely weak to accommodate the extent of the fiscal squeeze. If they try to increase interest rates while the fiscal tightening is being implemented that would really put the economy in trouble. Another thing is that the European Central Bank, or the Federal Reserve in America, are going to raise interest rates anytime soon. If you start putting up interest rates in the UK, it will almost certainly lead to the pound rising sharply and, in turn, hit UK exports and make the risk of a renewed recession even higher. I personally disagree completely with Andrew Sentance at the moment who is talking about an interest hike and has voted Ric: You mention fiscal tightening. Do for it in recent times. I completely you think that high corporation taxes disagree with him. combined with other increases in indirect taxes could drive companies away Ric: Do you think this proposed inter- from the UK in the future? An examest hike by Andrew Sentance could ple being the plumbing firm, Woolaffect consumers/producers in that it sey's, which chose to move to Switcould make it more apparent to them zerland only last week. that the economy is suffering from HA: Well the government has said inflationary pressure? they‟re going to try and bring the corHA: Well if you look at most surveys, poration tax down, and what you're consumers‟ expectations of inflation seeing in quite a lot of countries is that haven't risen that much. That's one of governments are trying to make the the reasons that the Bank of England environment more friendly to corpohas decided not to raise interest rates - rates. It's definitely not going to be because consumer inflation expecta- driving consumers away, although it tions has remain subdued. You could may limit consumer spending. To be

honest we‟re in such a mess you've only got to see what's happening to Greece and now more recently to Ireland, Portugal and to lesser extend Spain, you see the governments are under to pressure to reign in public finances. They have obviously got to keep an eye on how much the economy does slow down going forward, and if there is real evidence that the economy is heading back into a recession they might well have to temporarily ease back on fiscal tightening. I personally think that they haven't got much choice but to do what they're doing! Ric: What about Britain's future economy, do you think we will still be specialising in services in the next 10 years? HA: Well I don't think there's much option on that so yes I do think we will be exporting services. But I do think we should try and identify how we could rebalance the economy but that is easier said than done. If it was easy to do we would be doing it now. We are never going to be able to compete in low cost, high volume, manufacturing because there are much more competitive economies such as in Asia. However, I think there is scope for developing niche or high tech manufacturing and that's certainly worth doing. Although the finance sector has had its problems recently, it is not going to be the same growth driver as it has been in the past. As a country we are good at providing financial services such as accountancy and we will still have to rely heavily on that. As services account for 75% of the economy it will remain crucial to our future performance. Ric: Lastly, China's economic growth has boomed over the last decade but do you really think its sustainable? HA: I don't look at any huge detail on China but our view as a company is that China can't sustain growth rates as it has done. However, we still believe it will remain a rapidly growing economy and will remain that way for a long time. R

Is Foreign Aid Hindering Development? A misguided deed? Alexander Suchanek

frica has received over $1 trillion in Aid since the 1950s, and the major question is whether that huge amount of capital funnelled into Africa has been effective or not at development. Development is the transitions from low wealth economies to high wealth ones through the improvement of the economic, political and social wellbeing of the population. There have been situations where aid has been used effectively to grow a country, and in turn allow development of healthcare and education and other basic infrastructure, which has tremendously improved the lives of millions of Africans. In other situations, aid has been devastatingly mismanaged; used as funds to fund military expenditure, been siphoned off by the government into Swiss bank accounts, while their population has starved, or has been spent on projects which have no economic value whatsoever. Consequently, it seems hard to polarise the debate either way; and instead the approach that must be taken by foreign donors is how their aid can be more effective harnessed. Therefore the argument is this: aid has hampered development not because it is an inherently malign influence, but because it hasn‟t been sent to the places where it is the most effective at economic growth, and consequently development. One of the main arguments against foreign aid, as states by Dambisa Moyo in Dead Aid is that foreign

“ Foreign aid „poisons‟ governments

”

Aid has encouraged a dependency culture in Africa which has stifled entrepreneurship. As resources have been invested in Africa, Africans have been consumers of food, and medicine from foreign NGOs and governments, but have not used resources to invest and grow. Part of the problem is the type of aid foreign donors have been giving. Food and medicine, although vitally important to curb the effects of famine, drought, disease and epidemics will not produce any long term benefit to the country, and only alleviate short term crises. If we look at it in terms of Game The USA has been a huge contributor to global Theory, it is better to be in abaid, especially to Africa. But it appears that solute poverty and get food and instead of supporting development, aid is inducassistance from foreign organiing dependency. Image: PEU Report Blog sations, than investing some of those resources into growing a few information failure. With unfortunate crops, and being relatively less impov- regularity, African governments spend erished, and receiving far less aid from money on grandiose projects, Like abroad. The payoff is much lower. Fur- Omar Bongo of Gabon, who spent thermore, foreign aid severely hampers $250 million on a new presidential domestic producers, because they can- residence. Far too much money has not compete with free food from for- been spent on state run industries usueign companies, and the massively ally owned by a relative of the person subsidised western agricultural produc- in power, which are completely ineffiers. cient – like Nigeria‟s state run oil inAs Andrew Mwenda, a journal- dustry. Thus, foreign aid undoubtedly ist from Tanzania noted at a TED con- raises the spectre of corruption. Govference in 2007, foreign aid “poisons” ernments have no incentive to instigate governments. In most countries, which meaningful democratic or economic do not rely on foreign aid, fiscal integ- reform which could promote developrity is based upon raising revenues ment, as aid money can sustain their through taxation. However, African power by diverting it into paying for countries, who on average receive 13- arms and military hardware. 15% of their GDP as aid, can rely far Foreign aid is only effectively less on their population to generate used when there is a strong, transparent revenue. As a result they have far less and corruption free government. A fiscal integrity and transparency as perfect example of where development they know their spending is being aid has been effectively deployed by backed up by foreign money. There- the government is in Botswana. The fore they are not responsible to the country has managed to achieve propeople for which areas they allocate longed economic growth after indetheir budget to. This can cause an inef- pendence from Britain in 1966, and ficient allocation of resources, due to now boasts one of the highest GDP

17 per capita in the whole of Africa, at around $12,000. She also boasts one of the most diverse financial sectors in the whole of Africa, as well as significant government revenues from diamond mining. Other countries with significant diamond deposits such as Sierra Leone, whose government descended into cronyism, saw aid mismanaged and diamond revenues going into the hands of individuals. Botswana, although running a small budget deficit has set a standard of government fiscal and economic responsibility that most African countries have not yet reached. In effect she used aid to invest in infrastructure to set up diamond mining which would then provide much of the government‟s revenue. As shown by the graph, Botswana used its rising aid allocation effectively at development, whereas Tanzania and Kenya are only starting to move forward. It is also interesting to see the correlation between a functioning government and income as well; Botswana‟s economy has been well run by the government. Tanzania‟s democracy score has improved over the last couple of years and income per person has shot forward. Aid has been a vital part of Botswana‟s current prosperity compared to the rest of Africa, and not hindered development, but rather worked in conjunction with good governance in order to be effective at development. Economic growth is the key to development, and therefore aid cannot solely facilitate development. It needs to be used in conjunction with other tools to promote economic growth and consequently development. Foreign aid can be used to finance other development projects such as microfinance, which aims to deliver small loans to people who can then start Botswana used its rising aid allocation effectively at development, whereas Tanzania and Kenya are only starting to move forward.

up their own businesses. This can greatly improve their incomes, by moving them out of food poverty and allow them to more readily afford healthcare and education. A key problem is the areas which foreign aid has funded have not really contributed to economic growth or development. Foreign NGOS and governments tend to spend money on headline grabbing projects such as new schools, and new clinics. This point has been made by Ngozi OkonjoIweala, the former finance minister of Nigeria, who identifies that development projects are usually inefficient because they are not usually supported by developments in infrastructure. A clinic in a rural area will not provide healthcare at maximum capacity if there is not enough good roads or regular electricity supply. There is a strong correlation between the scale of infrastructure and income per person, as shown by the graph. Foreign aid can also be effective if it is used in conjunction with the private sector. Foreign aid can help the private sector through enterprise funds, equity and technical assistance. Giving equity to small and medium size businesses allow them to expand and benefit from economies of scales, which

can improve their international competitiveness. Giving technical assistance to developing countries increases efficiency and reduces dependence on foreign support, which then reduces dependence on foreign aid. Aid itself is not a panacea of the problems that Africa faces. Aid can only be a small part of a wide range of tools that can bring about development. Aid has to be used in conjunction with private investment, and internal entrepreneurship in the countries where development aid is required. Although there are arguments that aid hinders development, because it encourages corruption or encourages a culture of dependency, they are not really criticisms of aid itself. Humanitarian aid is vital in keeping people alive and keeping order, but it can never solve Africa‟s problems, only the symptoms. Aid itself is not innately harmful to development, but aid has had the picture of being an ineffective tool for development because it has been poorly invested and foreign resources have not been used efficiently. There is not a one dimensional solution to the problems that Africa faces, but aid can play an important role in a far wider framework of development. R

The Perfect State Mankind‟s eternal search for an efficient society Giles Smith

hroughout history there have been countless economic and political theories that have been developed in an attempt to achieve an economic utopia, and to create a society that ensures not only perfect efficiency but also the absolute well-being of its people. However, approaching this target arouses several problems, because nearly everybody has varying beliefs upon what a „perfect state‟ would look like and how it could be achieved. Should it be free market or controlled? Would it even be possible to ensure absolute satisfaction, where everyone enjoyed high living standards, a good health service, and countless opportunities regardless of skill, race or gender? One of the fundamental principles in the creation of our perfect state would undoubtedly be to ensure equality amongst its civilians. However, as aforementioned, people often have vastly different perspectives upon how to achieve and sustain a perfectly equal regime. For example, Karl Marx based the majority of his theories around the need to establish a more equal society,

“

Is it possible to create a government where there is no opportunity for individuals or parties to act within their own interest?

”

to allow everybody the opportunity to utilise their full potential. However, the prospect of a Marxist state is met with extreme apprehension in most Western cultures, as they believe that enhanced equality would ultimately jeopardize their freedom. Of course, people point to the Soviet Union and Stalin‟s purges as the reason for this fear, or to Mao‟s ruthless leadership or even to the rule of Kim Jung Il in North Korea, but the fact is this isn‟t true Marxism. Mass murder was not one of the requirements for Marx‟s ideal of a “perfect state”, so why was it used in an attempt to form one? As these examples demonstrate, a fundamental requirement for an equal society would be a stable, righteous government. Leading on from this initial point, we must recognise that a „perfect state‟ cannot incorporate any form of violence to secure its rule. Instead, there needs to be a way of governing the state without power being invested in one individual or group who may abuse it or try to keep it at all costs. A nationwide government sounds like a good suggestion, as it would grant all citizens the equal right to vote upon any issue affecting the nation. However, the sheer quantity of data would make this a logistical nightmare, and it would also require some sort of authority to determine which suggestions should go to the national vote. This would damage the democratic nature of our state, as it would mean that all suggestions would be judged upon a matter of personal opinion, before they went out to the public. However, one undeniable fact is that in order to maintain control within any successful regime, some sort of government is required. However, History provides us with many examples of this, as past British governments have suffered disagreements and deep political rifts within the party, which have hampered the advancement of the country. Therefore, we can deduce that there needs to be a certain degree of cooperation between all political parties and representatives in our state, so perhaps a national coalition

would offer a fairer representation of views than a single party government. In order to achieve this, we must establish an electoral system that would be likely to yield coalition governments almost every time, such as the Single Transferable Vote system that is used in Northern Ireland. With political ideology sorted, the next matter we must attend to is our perfect states economy. When approaching this, we must consider the fundamental economic problem which states that ―people have unlimited wants and needs yet there are scarce resources.‖ To help solve this problem, we must find a way to evenly allocate these resources, whilst at the same time we must ensure that people have the opportunity to fulfil their potential and excel. So yet again we are faced with two opposite sides of the same coin, two economic philosophies between which governments will have to choose or try and find some sort of middle ground. Do we control the economy or give it over and let the market forces take control? Control markets sound a good idea, but will people want to live and work to their maximum if they are definitely going to receive the same amount as if they did nothing? Adam Smith said in the “Wealth of Nations” about an “invisible hand;” people who work for their own gain are being “led by an invisible hand to promote an end which was no part of his intention”. This shows a free market could provide the equality we require yet still leave space for the most talented people in our nation to excel and perform to the highest possible degree. The control of the market isn‟t the only economic issue we must address however, as industry must also be examined closely if our idea of a perfect state is expected to work. For instance, we must ask ourselves which area should we be specialised in, and would being a primary producer and exporting be the best idea? Or would importing primary goods and manufacturing them for export create a stronger economy? Could relying on importing all the

19 goods we need and investing in our education so we can export our skilled workers and services be a valid option? I believe that neither of these are the correct path to follow, and that in order to achieve a perfect state we must also become entirely self-sufficient. When evaluating this point however, we must recognise that in order for this to work our state must have all the resources it requires from the start, which would be an extremely unlikely possibility. It is only a theory after all! So with the economy and the government roughly explained, it is necessary for us to explore ways that ensure the citizens well-being. To achieve this, we must achieve equal economic advancement. So how do we ensure we can always improve our country when we are only producing enough to allow our people to live in comfort? We must increase our citizens‟ well-being as it will lead to an increase in government

expenditure which will enhance healthcare and education. But this brings back to the basic economic problem; our people‟s wants are unlimited yet our resources will one day run out, then we crash, from boom to bust on an epic scale. The basic economic problem is the main one constraining our state from its existence; it shows maybe perfection isn‟t the best option for a country. Great Britain exploited its resources after the Industrial Revolution, forging an empire that spanned the globe and was the richest country on the planet. But what happened to this state nearing economic perfection? It suffered from over growing itself, it suffered due to its scarce resources no longer meeting its unlimited wants, the world‟s financial focus moved from London across the pond to New York, the role of global lead manufacturer went to the Far East. Britain was left in

terminal decline, trying to settle into a new world order after realising the bubble of perfection is fragile and easy to burst. This brings me to the conclusion. No, you can‟t create a perfect state, which will last indefinitely through the ages and keep on improving and bettering itself, but you can come close. You can create something nearing perfection for a short while, which may last one or two hundred years but no longer. The world works better with cooperation between nations, though some may suffer through trade others will flourish. The tradeoffs end with lots of people being well off and many others being supported by the state and the higher earners. So in that respect Britain is nearing a “perfect state”, just not the original definition of it. R

Most global economies today face a myriad of problems. Can there ever be a state with no problems, no trade offs, no inequitable policies? Perhaps not. Image: Bread for the City Blog

The Price of War Heartless economics: making war markets efficient Akbar Ali

hat really is the price of war? 4744 soldiers and $749 billion dollars to be exact – and that is Iraq alone. By the time Saddam was captured in 2003, casualties among the allies stood at 580. Compared to the amount of Kurds killed by Saddam (100,000) and future projected tyranny this figure is very reasonable yet the financial cost is another matter; what Bush predicted to be a quick and inexpensive war ($50-60 billion prediction in 2003) has ended up costing more than the $489.6 billion, 11 year war in Vietnam. Similarly, the allies are also combating terrorism in Afghanistan the challenges of Afghanistan are well known: harsh weather, mountainous terrain and a brutal army of guerrillas imported from neighbouring Pakistan training camps. It is fundamental to establish a tactic which minimises allied exposure as time goes on. This is due to resentment rising towards coalition forces as the occupiers. Therefore, by training local soldiers, they have a sense of security that they are being protected by their own forces. Consequently, the allies try to train Pakistani soldiers to combat the Taliban and become self-dependant – the USA currently reimburses Pakistan more than $1 billion a year. This is much cheaper than the coalition occupying the Middle East In the long term.

This is particularly significant as the opportunity cost of this war has been phenomenal already, the price tag could have been infinitely better utilised in areas ranging from improving healthcare to education. The cost of the war in Iraq through 2007 would be $756.6 million – this is equivalent to providing health care to 238,693 adults and 339,808 children. Instead of thousands being killed, hundreds of thousands could be saved. This is certainly a more productive use of the money. The alarming fact that militants are better paid and equipped than the Pakistani soldiers quite clearly shows why they are motivated to fight. The alternative to spending outrageous amounts on frontline war could have gone to training local soldiers from the very start - if the US were prepared to spend $100 billion on the war, then a portion of that money could have been spent to better equip the soldiers and boost their salary from the start. Furthermore, the tribal residents are often targeted for recruitment as they have little income and have low levels of education. Therefore, bribing them with relatively small sums would encourage them not to resort to joining the insurgency. However, if war was inevitable, the method in which they fight could be more economical. For example; the cost of manufacturing an M16 Rifle is less than $100 and the bullets cost $0.24 per unit. Just one of these bullets can kill a target, however, simply wounding a target could be more beneficial – considering that the wounded would need to be evacuated, fed and treated. Thereby putting a greater burden on the army than merely creating another martyr. Used effectively, the M16 could be used at $100 plus an additional $0.24 per bullet to render multiple enemy targets useless (if wounded and not killed).

Comparatively, a bomb can cost up to $25,000 to kill multiple targets. Say around 10 militants needed to be neutralised – the cost would be $2500 per kill. Whilst this may make the task simpler – it is not cheaper or more effective. A squadron of 5 soldiers (using an average of 5 bullets each) could do the same task for almost 50 times cheaper at $50.6, if we only consider variable costs, thereby reducing the total cost of the war. The money saved is badly needed to improve the situation at home. The fact that Britain has many unresolved domestic issues yet they are pouring billions into overseas wars begs the question: why did Britain ever get involved with Bush‟s War on Terror? Of course, such a high cost to fight for a cause that does not affect the UK seems ludicrous; however, it is a much deeper reason than just a financial one. By ensuring peace in the Middle East, the long term effects of world peace will pay back the allies in ways more than just financial gain. Foreign intervention is the duty of more developed countries like the USA and the UK, which have greater means by which to combat tyranny and oppression. Therefore, I believe it is our moral duty to help countries from slipping into the claws of dictators in order to prevent future instability. R

Images: pingnews.com (flickr) and The Telegraph

India’s Triumph A brief look at India‟s challenge, adversity and vindication Kamran Toor

ixty-three years ago in 1947 when India gained independence, the question asked was „will India survive?‟ For a country oozing with disease, poverty and disproportionately high national death rate - where every sixth in a hundredth child dies, the bidding for an international event of that calibre was unimaginable. Amidst the stories about horrible toilets, a collapsed bridge, the 2010 Commonwealth games held in Delhi, had been branded as a monumental failure. The games were referred to as; “Common filth” by a British tabloid as a result of such shortcomings. These problems can be stemmed back to the government where, corruption and disorganization will almost always prevail, with a vast population of India living in hardship. These degrading headlines seem to motivate India and it is tipped to become the next superpower over China, who flawlessly hosted the Olympic Games in 2008. Many would argue the ability of a country to carry out big projects which determine the country‟s ability and power; but not in this circumstance. Statistics show the country‟s economy has expanded 8.5% this year. China‟s national is still relatively ahead; averaging 10.7% over the past thirty years; nevertheless experts claim India‟s economy will soar ahead of race by 2013, in which India‟s growth rate will climb to 10% and China‟s will fall to modest 7%, according to leading economic firm, Morgan Stanley. But India must resolve major issues first; the government must realize there is an infrastructure crisis, with many of the country‟s dynamic entrepreneurs wasting hours a day stuck in traffic with atrocious roads and dis-

graceful public transport. But with the government under such mass scrutiny, it is hard to see how India is in contention for the next big superpower, coincidentally, the key lies within the government. China is capping its population, and with an aging workforce its economy will start shrinking, whereas India is blessed with a young and thriving workforce, whose demographic dividend between the young, old and working force is proportionate, so its future is stable. India‟s workforce between the ages 15-64 consisted of 64 % of the population, as oppose to 74% in China, but because of China‟s „one child policy‟, the gap will between the will disappear. India, a democratic country, encourages capitalism, as it acknowledges the fact that its private firms drive its economy. On the other hand, China is a state controlled nation; the government dictates how the people should be run. India‟s democracy certainly has its disadvantages, protests and riots are deemed, and the people can often prolong government actions if they disagree with it. China, on the other hand, can carry out anything it wanted without anything more than compensation being paid to those affected; any protestors might possibly be held at gunpoint. The Chinese State government is stronger, but this doesn‟t necessarily mean better. The private enterprises in India are led by powerful entrepreneurs who invest billions to seek higher profits. The circular flow of income is injected with mass sums, from a free market economy, whereas firms in China rely on the state. India, however, now boasts legions of thriving small businesses and a fair number of worldclass ones whose English speaking bosses, network confidently with the global elite. Innovative ideas include the breakthrough $2,000 dollar car; as well as a life saving ultra cheap heart operation – a tenth of the cost of the cheapest procedures

1960

1965

1970

1975

1980

1985

in the United States! India‟s individualistic brand of capitalism may also be more robust than China‟s State directed sort. China‟s firms prosper under a wise government; however the power of the government can cause its downfall. With a communistic regime still in tact, there is little creativity or motive. Business and the free market thrives on capitalism, to allow firms to invest and seek profits, in the interests of themselves, but, through the invisible hand, boosts the economy as more money is being circulated. China is heavily specialized in labour and manufacturing of goods, and is therefore the largest exporter in the world. They are often the first choice for trade due to their cheap prices, for example the „Apple‟ company design iPod‟s and manufacture their goods in China; however the company is based in the US and they cash in most of the profits. This links to the US being the biggest importer of goods made in China, as a result the US-born recession dominoes through to China, whose government needed to be much more active to replace the lost exports to the U.S. Whereas, India managed to maintain a robust growth without Beijing's hefty stimulus in part, because it is less exposed to the international economy. Furthermore, India‟s gargantuan population of 1.2 billion enables it to expand into new sectors. For example, the last time you called through to an English firm (such as 3, T-mobile, Vir- g i n , etc.) it perhaps came to a India surprise the service opera$1.3 Trillion 2009 tor on the other end of the line, was indeed on the other side of the ocean - India. R

1990

1995

2000

2005

2009

Black Markets And why cutting drugs is so lucrative Kiyan Djalai

t‟s a topic of regular debate throughout the world, involving some of the most dangerous people on the face of the earth, fuelling wars, causing great unrest, and latest figures show the black market has become even more profitable. What exactly is the black market? Simply put, the black market is the trade of all goods and services that are not part of the official economy. These include legal goods and services where taxes are not paid in the production

“ Returns in the re-

gion of at least £80,000 to £90,000 – with the same risk factor

”

process or general taxes are avoided and illegal services such as the drug rings and prostitution conglomerates. The largest of these black markets (Marijuana, prostitution and counterfeit technology products are the top three) are estimated to turnover $350 billion annually. To give you a good idea of how profitable the black market really is, this is almost thirty-five times more profitable than the music industry in the UK. Now this is only possible because the black market can offer prices to consumers which are up to 80% off the marked retail price which unsurprisingly attracts a large market. This is possible because suppliers are not paying for production line or national taxes and are not obliged to offer any form of receipt or guarantee.

In the case of cocaine in particular, the of the cutting market are clear and are estimated market value is $75 billion inversely proportional to the decline of and constantly rising. It is a well the purity of cocaine. This can be atknown fact that street cocaine is no tributed to cutting agents, such as benlonger pure coke, but instead around zocaine and lidocaine, being produced 20% cocaine mixed in with a variety of in China very cheaply. Some have ar“Cutting agents” which range from gued that the demand for these cutting mild anaesthetics to other forms of agents has risen so much that criminal legal drugs. By doing this, dealers can gangs who previously suffered from make triple the profit on the same increasing competition in the illegal amount of illegal substances. drug market have moved to help supply In the UK, the government has these legal cutting agents. Since they seen a significant increase in demand are actually less risky for them to disfor these cutting agents. Undercover tribute and obtain yet, on average, more investigations in London, Liverpool profitable for smaller organizations. and Manchester, have found dealers The market for these cutting importing chemicals in bulk in an ef- agents is expected to rise further in the fort to further maximise their profits next few years as more criminals are without needing to buy or risk import- attracted to this lucrative and less risky ing larger quantities of cocaine. In business, especially since the recent some cases the undercover agents re- economic crisis has encouraged people ported that the mark up for the legal to look for cheaper alternatives to the chemicals being imported was nearly legal goods. It seems the amount of as much as the value of the cocaine it drugs being distributed around the was being mixed with. The market for world is set to increase for the foreseethese cutting agents has grown consid- able future. erably as cutting agents and procedures became common knowledge and the profits more pronounced. For example if you take a kilo of cocaine, pricing around £50,000, and you double that kilo with benzocaine leaving you with two kilos, a dealer could be looking at returns in the region of at least £80,000 to £90,000 – with the same risk factor. In 2005 3.3% of cocaine tested by the police in the UK was less than 9% pure and by 2009 has sky rocketed to 38.9%. The effects and growth Images: Dplanet—Flickr and Getty Images R

Is Quantitative Easing Inflationary? The USA‟s and the UK‟s QE packages have sparked debate among economists and financial policy-makers Giulio Nuccio

ince March 2009 when the Bank of England initiated its Quantitative Easing programme, there has been much debate over whether or not this new monetary policy is inflationary. At present the Bank has injected £200 billion into the economy by buying assets from the private sector and crediting seller‟s bank accounts. This increases the money in the bank account of the sellers and their bank holds a corresponding claim against the Bank of England. It has been said that QE is simply another term for „printing money‟, which would be correct if the money created by QE managed to work its way into the money supply of the country. We have to remember that the objective of QE1 in the UK, and around the world, was to get the banks lending again. During the recession the LIBOR spread increased rapidly (spread reached 1.5% in October 2008) indicating that banks were simply not confident in lending money to each other. QE helped ease this crisis as the LIBOR began to fall and the spread eventually returned to 0 in late September 2009. Therefore, one would assume that QE money had made its way to the public, thereby resulting in inflation. However, this may not have been the case. QE helped restore confidence among banks as they had more money in their accounts but they were reluctant to lend money as it is still difficult to obtain credit today.

ling short of the buffer capital zone could face restrictions on dividend payouts and executive bonuses. For this reason it is clear to see why banks would want to save the money and put it into their „emergency pot‟. But this effect is deflationary, the complete opposite of the widely agreed argument of QE being inflationary, so why is the economic community so paranoid over the prospects of QE2 around the globe? QE1 has caused inflationary pressures in the economy in other ways. The majority of assets bought by the MPC were government bonds (gilts). The increased demand for gilts caused bond prices to rise, resulting in bond yields falling. This forced investors to seek other investments which would return a higher yield, for example, commodities. Commodities are favoured by investors in times of high inflation; the US pumped $1.2 trillion into the economy in 2009 and a further $600 trillion this year which inevitably caused investors to panic about possible high inflation and many decided to hedge against inflation by investing in commodities. Commodity prices soared, over the past year the commodity price in index in sterling has risen by 35% and the index in dollars has risen by 31.1%. This poses huge risks for global cost push inflation which is sour news for the recovery. The UK is already experiencing imported inflation (as are other countries with weak currencies) but the artificial advantage we have from the low value of the pound will be further eroded by significantly higher commodity prices. In this way QE is inflationary, but not in the widely believed sense, however cost push inflation is not exactly what the global economy needs right now when countries are trying to achieve export led growth. QE2 has already been initiated in the US and Japan and this has been factored in by investors around the globe, but if more the MPC increases QE in the UK, we may see another upward shoot in commodity prices.

“Debate over

whether or not this new monetary policy The Basel III Accord is inflationary I strongly believe that the banks have decided to save the money that they received in order to meet new banking regulations proposed in Basel III which stipulates that banks must increase their Tier 1 Capital to a minimum of 4.5% of overall assets by January 1st 2015. At present banks are only required to hold 2%. Under the accord, banks will also have to put aside an additional buffer of 2.5% by January 1st 2019, and this will bring the total of core reserves to 7%. Banks fal-

”

Giulio is interested in the field of corporate finance and hopes to study at the LSE next year. Images: London Evening Standard and Euroshots

The Ignored Holocaust “To spare you is no profit, to destroy you is no loss” - Khmer Rouge 1975 George Taylor

ambodia is a country no less bigger than Scotland, but has been plagued by a devastating holocaust forgotten in the midst of the Vietnamese war of 1955. An unassuming state deep in South East Asia, it found itself rife with disease, starvation and death, under the tyrannous rule of Pol Pot, leader of communist group Khmer Rouge. In the face of war the world was left almost oblivious to the horrific genocide, which killed 2 million in 4 years. Visiting Cambodia this summer, I became all too aware of the devastation of genocide. The site of “killing fields” uncovered the traumatic past of a broken country. Images of babies being swung by their legs with such force that their skulls were smashed to pieces against the trunks of lime trees were truly disturbing. The air was dense with deep emotion as the tour guides communicated their personal testimonies, sinister, haunting and true.

“ Laughing, or even crying were all punishable by execution

”

I began walking though the S21 museum, the torture centre in Phnom Penh where the Khmer Rouge terrorised and murdered their own members. As I examined the remnants of this bleak and foreboding place it was difficult to look at pictures of fathers, mothers, sons and daughters all victims of Cambodia‟s brutal regime. As I began my research I quickly discovered that many powers in the West chose to ignore this great tragedy, none more so then the United

States of America. In 1975 within days of overthrowing the government, Pol Pots and the Khmer Rouge embarked on an organised mission, which brutally imposed an extremist programme to reconstruct Cambodia (now under its Khmer name Kampuchea) on the communist model of Mao‟s China. The effects were instantaneous as political and civil rights were abolished. Children were taken from their parents and placed in separate forced labour camps. Factories, schools, universities and even hospitals were closed. Higher professional workers killed instantly, their family no exception. Religion, debarred with leading Buddhist monks killed and almost all temples destroyed. The behavioural traits of foreign languages, wearing glasses, laughing, or even crying were all punishable by execution. One Khmer slogan ran “to spare you is no profit, to destroy you is no loss.” The Cambodians found hell at home. People who escaped murder became unpaid labourers, working on minimum rations for impossibly long hours. They slept and ate in rough communes deliberately chosen to be as far as possible from their old homes. Personal relationships were discouraged as were expressions of affection. People soon became weak from being overworked and starved. There was little treatment except death. So how was it possible for all this to happen and for the West to ignore brutal and vicious acts? Why was it ignored; political expedience, lack of worthwhile economic returns or just a failure to grasp the pain and suffering that was being inflicted on a beautiful, cultured, trusting people? To understand, like on so many other occasions in one‟s life, one has to know the history. In the 1960s under Prince Sihanouk, Cambodia preserved neutrality

during the Vietnamese civil war by supplying to both counterparts. Vietnamese communists were allowed to use Cambodian ports to ship in supplies, the USA were allowed to bomb – secretly and illegitimately - Viet Cong hideouts in Cambodia. When US backing of Lon Nol took over, US troops felt free to move into Cambodia to continue their struggle with the Viet Cong. Cambodia had become a war zone of the Vietnamese war. During the next four years, American B52 bombers, using napalm and dart cluster bombs, killed up to 750,000 Cambodians in their effort to destroy suspected North Vietnamese supply lines. The Khmer Rouge guerrilla movement in 1970 was relatively small. Their leader, Pol Pot, had been educated in France and was an admirer of Maoist (Chinese) communism; he was also suspicious of Vietnam‟s relations with Cambodia. The heavy American bombardment and Lon Nol‟s collaboration with America drove new recruits to the Khmer Rouge. With the backing of the Chinese and the training supplied by the North Vietnamese, by 1975 Pol Pot‟s force had grown to over 700,000 men. In 1975 North Vietnamese forces seized South Vietnam‟s capital, Saigon. In the same year Prime Minister Lon Nol was defeated by the Khmer Rouge. The now fanatical Khmer Rouge, strengthened by a steady stream of supplies from Hanoi and emboldened by surviving years of sustained US bombardment, made their push into Phnom Penh. As the US embassy was emptied and its occupants flown to safety, Lon Nol declined the offer from the US to evacuate. The letter he wrote reflects a terrible sense of disappointment from a man who knew he was going to die and yet it will resound with many thousands of people around the world for whom the Americans promised so much but delivered so

Victims of the Khmer Rouge, on display in S21 Museum little. “I thank you very sincerely for your letter and for the offer to transport me towards freedom. I cannot alas, leave my country. As for you and in particular for your great country I never believed for a moment that you would have this sentiment of abandoning a people which has chosen liberty..but mark it well, that if I die here on the spot and in the country that I love, it is too bad because …I have only committed the mistake of believing in you, the Americans..my faithful and friendly sentiments. Sirik Matak” Two weeks later he was executed by the Khmer Rouge along with all the other Cambodian officials who had put their trust in the US. The US withdrawal from Cambodia, a far cry from the resolve of the policy makers within the corridors of the US state department, began to embrace what would eventually become known as the „domino theory‟. The theory claimed that weak governments in a given geographical area are easily susceptible to communism once communism has achieved a foothold near by. If a young but powerful communist country could cause one weak nation to fall, others would surely follow. President Truman (1947) said “totalitarian regimes imposed on free peoples, by direct or indirect aggression, under mi-

ne the foundations of international peace”. Yet it would appear this desire “to help free peoples to maintain their free institutions and their national integrity against aggressive movements” only applies when the economic, financial or security of the United States is threatened. Certainly this was evidenced in the US abandonment of Cambodia. And the rest is history. No, in fact the rest resulted in the in an elapsed genocide of over 2 million people, with the US and the United Kingdom concerning itself with the frivolous War on Communism. On December 6, 1975 President Ford told China that they accepted and understood China‟s support for the Khmer Rouge, for the Chinese clearly wanted to use Cambodia to balance off Vietnam as they were concerned about Vietnam becoming too powerful. Even after the Vietnamese spared Cambodia of the perpetrators‟ of the genocide the US attempted to rehabilitate the defeated Khmer Rouge with $12 million worth of food. The US economic rehabilitation attempted to cover up of the Khmer Rouge‟s murder of their own people. Both the US and the Chinese continued to support for Pol Pot long after Hanoi‟s invasion ended the geno-

cide. China openly supported them Washington winked, semi publicly at Chinese and Thai aid for the Khmer Rouge forces. As the war crime trials of the surviving leaders Khmer Rouge take place The US opposed the genocide tribunal and did not support the plea from the Cambodia leadership to the UN in 1997 for additional support to ensure the trials took place. The people of Cambodia are in need of closure. Thierry, a local, who never had the chance to know his father as he was murdered by the Khmer Rouge. Or Raphael, whose father secured his safety after sending him and his two brothers to Paris for protection, his mother was not so fortunate, as she died exhausted in a work camp. Alas, the US‟s naive foreign policy has shown a blind eye on Cambodian society again. Cambodia has advanced in the schemes of imperial elites from Cold War pawn to icon of cultural inferiority. In the real killing fields, genocide perpetrators walk free with Washington averting its gaze. Looking back, this article could easily have been written about Rwanda, Afghanistan, and Iraq as the US fail to avert and realise the real issues. R

Entrepreneurship: small businesses may be the answer to big debt Rayhan Uddin

ecession, unemployment, debt, cuts, budget deficit: words which seem to flow out of people‟s mouths in the current economic climate in the UK. With large scale cuts being implemented by the government, where does that leave economic growth? It is all well and good trying to overcome a deficit, but there must be a factor which goes further than this, and uplifts the economy. Enterprise will be that determining factor to our growth.

Background Aspects

Enterprise

To eliminate the other factors, let us first consider capital. Given that VAT is 20% as of January 2011 and that tight credit conditions mean businesses are still suffering from a scarcity of loans, few are considering capital investments. With regards to land, it‟s a similarly bleak tale. Agricultural taxation; more than half of the North Sea oil reserves having been extracted with the costs of getting the remaining gas rising; and the UK no longer having a mining industry, are three of many reasons the UK is a net importer. We then move on to labour: The UK clearly cannot compete with the likes of China and India, both of whom have used rates of labour to help propel them into high economic growth. Immense population; natural and human resources domestically at their disposal; and the lack of a minimum wage explain this – none of which applies to the UK. Subsequently labour cannot be our initiator. As the economist has worked out by now, this leaves enterprise.

Consider this: you are in Waterloo and you buy some fries from McDonalds which you then take into Starbucks, so you can simultaneously eat, sip coffee and surf the internet on your HP laptop, through the Virgin internet you have on your USB; when you notice a High School Musical background which your little sister uploaded on the desktop; and as you log on to Facebook, Starbucks decide to change their television channel from CNN to Oprah. This sentence would not have been possible had it not been for entrepreneurs: Ray Croc (McDonalds), Howard Schultz (Starbucks), David Packard (Hewlett-Packard), Bill Gates (Microsoft), Richard Branson (Virgin), Walt Disney, Mark Zuckerberg (Facebook), Ted Turner (CNN) and Oprah Winfrey. Closer to home is the example of Levi Roots. Residing in Brixton, Roots was a musician who went on the 2007 edition of Dragons Den to promote his product, Reggae Reggae Sauce. Through market sampling annually at the Notting Hill Carnival, he knew he was onto something. „Dragons‟ Peter Jones and Richard Farleigh invested £50,000 for 40% of his company. Levi Roots is now a multi-millionaire. Proof that you do not need to necessarily come up with something as ground-breaking as Microsoft or Disney; you just need to find something sought after by your target audience – like a simple Caribbean jerk spice. Dragon‟s Den is arguably the X Factor of entrepreneurship, and just as all singers do not need to go through a national search to become successful, nor does an entrepreneur.

Facebook is the world‟s largest social networking site, which was founded in Harvard University by entrepreneur Mark Zuckerberg (left). It started as a networking site for Harvard students only, expanding to Stanford, the Ivy League and soon the rest of the US and the world. It has approximately 600 million users as of 2011 and Mark Zuckerberg has consequently Brian Kolis (flickr) become the world‟s youngest billionaire (Net worth $12.5 billion).

Becoming an entrepreneur

Government While there may be heavy taxation and tight credit conditions which restrict new investment into the economy, the one thing which the government cannot limit, is enterprise. In fact, the government very much encourages it and acknowledges that it could be the generator which drives us out of recession. David Cameron stated last month while addressing European business leaders in Davos that we should focus “not on government spending but on entrepreneurial dynamism”. One example of the governments backing is the New Enterprise Allowance Scheme, to be implemented as of 2011, which gives the unemployed access to mentoring and small loans towards business start-ups. There is also the “Enterprise Finance Guarantee Scheme” in which the government guarantees 75% of an enterprise‟s bank loan, with lenders covering the other 25%. In his first party conference speech as Prime Minister, David Cameron told us, “That business you always dreamed of – start up”. Speaking at the annual CBI conference, Cameron also hoped that the years ahead would be “the most entrepreneurial and dynamic of our country‟s history”. With the spending review and cuts to 500,000 jobs in the public sector, the private sector is being looked upon to prosper the economy, and entrepreneurship is certainly the way in which this can be done. We have been given the entrepreneurial go-ahead to kick start our own future, the onus is now on us. It is time to use our education, expertise and elaborate ideas, and turn the risks into money in our pockets. Richard Branson & Virgin Sir Richard Branson (above) is arguably Britain‟s most famous entrepreneur. The Londoner initially began a chain of record stores, which became Virgin Megastore, expanding to Virgin Atlantic (right) Airways, Virgin Trains, Virgin Media, Virgin Records and many more sects to a multi billion pound franchise. Branson in 2010 was names as the 212th richest person in the world according to Forbes Magazine (Net worth $5 billion).

1.) Generating an idea. Nobody comes up with the greatest idea instantaneously. Bill Gates did not come up with Microsoft overnight, it was the product of trial and improvement repeatedly until the idyllic outcome was achieved. Ideas should not presume impeccability from the onset, it is a process which will require opinions from others and is likely to change drastically from initial plans. 2.) Interacting with other entrepreneurs. Since ideas and opinions will be required from others, why not from the cream of the crop? As sociologist Richard Florida points out: for a modern city to thrive it is not so much remuneration which attracts the creative classes, but more the knowledge that other likeminded people can be found collectively. In the USA, such an area is Silicon Valley in California, where the likes of Facebook and Apple were developed. Spin-offs to this in the UK include Silicon Fen, a region around Cambridge University employing 43,000 people; and Old Street roundabout which has only recently emerged but where o ver o ne hundred co mp anies are b ased. 3.) Abstaining from sale. Somewhere down the line it may be appropriate to sell a person‟s business, but in the early embryonic stages, it certainly is not. A prime example, as told by Sean Parker in The Social Network, is the story of Roy Raymond, the founder of Victoria‟s Secret who committed suicide after selling his company for $4m, which then went on to be a multi-billion dollar outfit. Selling your idea can be tragic, literally. It would be unwise to sell a company, especially with its creators still young. As they develop and grow in expertise and experience, so will their company. It is not the final few minutes on The Apprentice where everything is sold in bulk to an offer which sounds semi good; it is something which has taken time to establish and develop, and should be sold accordingly – if at all.

Brand New World How the Brand eclipsed the Product Adam Salisbury

quick visit to a supermarket reveals the immense influence that branding wields within any corporation. A short walk down the aisle leads to an instant bombardment of shamelessly bold corporate logos, mascots and phrases, all of which are engaged in desperate competition with each other to portray the overall message of their brand, which is to „BUY THIS PRODUCT.‟ The exposure is inescapable, as every turn results in a confrontation with yet another branded good, which demands our attention as it seeks to differentiate itself from other similar goods on the market. A quick look around is all that is required to acknowledge the fact that companies are putting a lot more emphasis upon promoting their brand rather than manufacturing their product. However as recently as 200 years ago, brands were virtually nonexistent; an unthinkable circumstance when you consider the immeasurable impact of branding in our modern day lives. If you were to take a trip to the local shops, everyday goods like flour would be scooped out of barrels and then weighed by the shopkeeper- a quaint contrast to the branded packages of today‟s supermarkets. This comparison leads us to ask the inevitable question: How has the significance of the brand so rapidly eclipsed the significance of the product? To help answer this question, it is necessary for us to explore the very origins of branding itself, which dates back to the industrial revolution. The sudden, exponential growth of factories led to a flood of similarly massproduced products, which were virtually indistinguishable from one another, causing obvious problems for the corporations at the time. When companies were unable to lower their prices to stand out, the executives were left with little alternative but to produce an image-based differentiation; and thus

the brand was born. However, differentiation was not the sole justification behind the idea of branding. The sudden boom of factory-produced goods was overwhelming for everyone, and left many consumers feeling apprehensive towards the unsettling obscurity of packaged goods. Therefore, many corporations introduced the idea of a „personality‟ to accompany the corporate name within the brand, in order to create a sense of familiarity for the consumers, as comforting faces such as Uncle Ben (see Figure 1.1) replaced

Figure 1.1: Uncle Ben‟s welcoming face was used to entice potential customers who were perhaps hesitant towards packaged goods the shopkeeper as the new advocate for their products. Although people did not realise it at the time, the monster of branding had taken its first tentative steps out of the darkness, and had begun its rapid ascent into the forefront of people‟s everyday lives. However, many companies still clung onto the belief that production was their primary concern, whilst the brand was just a necessary evil. It wasn‟t until the 1940‟s that an idea began

to develop in the minds of businessmen: brands could conjure a feeling which their products simply could not, and entire corporations could embody a meaning of their own. This realisation caused a momentous shift in brand

“Brands could

conjure a feeling which their products simply could not

”

advertising in particular; prior to 1940 adverts were extremely modest and formulaic, as their chief function was to narrate the uses of its product. However, gradually the adverts became more and more existential, as they began to symbolise the meaning of their brand rather than advertise their product. The impact of this was phenomenal; corporations were now not only selling their product, but were also selling the lifestyles embodied in their brand. For example, the soft-drink giant Coca-Cola stopped selling mere beverages, and began to sell the idealistic notion of warmth and joy, resoundingly epitomised in their legendary „Father Christmas‟ advertising campaign (see Figure 1.2). Likewise, the corporate giant Marlboro stopped Figure 1.2: Coca -Cola‟s famous ad campaign starring Father Christmas made people associate their product with feelings of happiness and security

‗Brands‘ now mean more than corporate logos. Image: Nevinho (Wikimedia) selling cigarettes, and began selling the much-coveted lifestyle of the emblematic „Marlboro Man‟. In my opinion, the best example to illustrate the emerging significance of branding can be found in Naomi Klein‟s defiant, angst-ridden novel „No Logo‟, as she writes: „GM motors launched a car built not out of steel and rubber but out of New Age spiritualism and post-war feminism‟. This sentence encapsulates the very essence that the importance of branding represents. However, despite this everexpanding awareness of the power of branding, it was not until the late 1980‟s that the brand was finally accepted as more powerful than the product. Naomi Klein argues in „No Logo‟ that the defining moment came in 1988, when the food company Kraft was sold for $12.6 billion, over 6 times what the actual company was worth on paper. She explicates that the monstrous price difference was solely due to the name “Kraft”. This served as the ultimate siren call to every corporation in the world, as for the first time a brand name had been given a mouthwatering price tag. This proved once

and for all that the time and money spent devising the seemingly inane object of the brand name, which in reality was all hypothetical and unquantifiable, could potentially bring some truly astounding returns. The message was bold and clear; the company‟s brand was now not only more important than the company‟s products, but it could potentially sextuple the companies overall worth, an irresistible figure for the corporate executives. For those out there who are still not convinced of the power branding now holds, it is worth considering a modern day example. Ralph Lauren polo shirts are sold at an arduous retail price of £65.00, which seems outrageous when you consider that similar, plain polo shirts are available on the market for as little as £6, less than 10% of the cost of the designer label. However, a whopping $4.9 billion in revenues in 2010 suggests that sales are going remarkable well, but why would anyone buy a £65 product when there are similar ones available for just £6? The answer is simple; Ralph Lauren are not simply selling polo shirts, they are selling the embodiment of their brand,

a carefully personal image created through rigorous ad campaigns and marketing. Their endeavours have been so successful that people are willing to pay almost £60 more for the brand alone, concrete proof that the brand has become more valuable than the product. As we experience the emergence of new economic superpowers such as China, India and Brazil, we can expect the global influence of the brand to increase at a seemingly exponential rate. However, this possibility has been somewhat distorted by several contentious issues aroused by branding, as a combination of more controversial advertising techniques and sheer overexposure has led to many people calling for its death. Could the people really have had enough? Undoubtedly, the future of branding is not as concrete as the companies may wish you to believe, and as the support for the growing anti-corporate movement increases, it will be interesting to see what the future has in store for the branding monster. R

Saving our Skin Encouraging people to save and why saving is good Akash Bhanot

n a society where one is encouraged to consume in order to stimulate the economy, why must we also explore the idea of saving in order to reach the same objective? The ethos of saving first, then spending later is all but a distant memory as subtle marketing techniques has prompted a behavioural change in consumers from the once savings rich Britain to the spend, spend, spend generation. It is therefore no surprise that the household savings rate at present is estimated at 3% when compared to a rate of 12.4% in 1980, according to the ONS. Every day we are saturated with advertising methods designed to influence our spending habits, and the rarity of those promoting the act of saving money outlines the unhealthy levels of „consumerism‟ driving our economy. Savings, the difference between disposable income and consumption, is imperative in maintaining both microeconomic and macroeconomic stability.

Due to the exceptional circumstances at this time, one cannot rely on a tight monetary policy to bolster savings. This is as, in order to escape the looming threat of deflation, the Bank of England introduced a set of policies designed to boost spending in the econo my r ather than save – the „consumption is king‟ rationale; a notion which relies heavily on the good grace of the multiplier effect. With interest rates at 0.5% - a record low – and an asset purchases scheme set up worth £200 billion, saving at such a time seems absurd due to very low returns. The problem is that this recession shows even interest rates of 0.5% can be insufficient to encourage spending when you face a liquidity trap. People hoard cash as they are nervous over the prospect of unemployment. It is this paradox of thrift that requires the MPC to try and encourage spending. While such policies may be successful in boosting GDP and bolstering

Image: Washington Post

confidence in the economy in the short term, the long-term sustainability of our fragile economy looks bleak. The problem with encouraging spending is that debt will inevitably build up as a result. Since the introduc-

“Long-term

strategies will prove more successful than focusing on short-term gain

”

tion of the 0.5% interest rate and stimulus, debt levels have continued to rise. By exacerbating debt levels - which were a key factor in causing the recession in the first place, can there be any real benefit in the long term? All borrowed money has to be returned eventually and this may cause problems as many households suffer by cutting back their expenditure in order to keep up with repayments, or worse – having to default on their loans. However, if the stimulus results in an increase in GDP, through a boosted aggregate demand, then incomes should rise proportionally. Increases in incomes combined with inflation reduce the debt burden in the short run. By encouraging savings to grow, banks will have a larger supply of funds available to lend out. A larger supply of funds is necessary at such a time in order to boost investment, which is crucial in aiding the recovery. If the UK is to maintain its comparative advantage in the financial services industry as well as develop comparative advantages in the quaternary sectors, investment is going to have to increase substantially. Investment in research and development also has a bearing

on growth as it can cause large increases in exports if spent effectively. The UK‟s expenditure on research and development is 1.84% of GDP, according to the World Bank, whereas other developed countries such as Sweden have a figure close to 4%. Another positive from building savings is that the UK will rely less on foreign backing for investment. The pre -recession FDI level was near $198 billion in early 2007. The figure in 2008 was $94 billion. This sharp fall in FDI may have caused a sharp fall in exports in the short term however by reducing these capital inflows, the UK will benefit from a devalued sterling due to falling demand and increased net exports, which translates to increased international competitiveness in the long term. Not only will this increase GDP growth but it will also mean that the UK will strengthen its position in the ongoing „currency war‟. However it is important to note that a devalued currency may not always result in increased net exports. In 2007, the weaker pound did not cause exports to rise because exporters decided to protect their profit margins rather than pass on the lower price to foreign consumers. In order to encourage saving in the economy, interest rates can be increased and taxes can be cut. However, increasing interest rates is not a feasible option currently given that loose monetary policy is required to offset tight fiscal policies which are in place, for instance the increase in VAT which will take effect next January. In order

to make significant structural changes, long-term measures must be undertaken in order to successfully create incentives to save. In ‗Animal Spirits‘, Akerlof and Shiller discuss the power of compound interest rates and how they can be exploited to build relatively large sums of money. One example of this being used to encourage saving is the 401(k) retirement plan which is in use in the US. The scheme allows a worker to save for retirement and have the savings invested and they are not taxed on any capital gains, dividends, or interest until they withdraw their savings. However there are criticisms of the plan. For instance, many people stick to the default level of savings allocated and do not change according to their wage and spending habits. This means that they are not fully utilising the scheme and may lose out on potential savings. After the recession many workers were forced to withdraw money from their retirement plans due to the fall in disposable income. These withdrawals came at a heavy price, as many people had to pay large penalties and were prohibited from making contributions for a certain period of time. The UK could benefit from such a scheme if it were to be improved by setting clear rules, such as encouraging the level of savings to change accordingly to wages and expenditure. Automation is the key solution to procrastination; meaning that if we are to create incentives to save now rather than later, an automatic savings incentive scheme such as the 401(k)

may be ideal. The scheme should also be made compulsory to all workers as in the US not everyone is benefitting from the 401(k) plan and therefore society as a whole is not experiencing the full benefits. Awareness of such schemes should also be taught to young adults. From childhood we are already being influenced to spend money in order to satisfy our needs and wants at that present moment in time. These myopic strategies are unlikely to be of any use when trying to encourage saving. Therefore early financial education would make people aware of the burden of debt and the positives from saving money. It is fair to say that in order to encourage people to save, long-term strategies will prove more successful than focusing on short-term gain. The next generation needs to be more politically and economically educated in order to understand the how to save and, in turn, the benefits one gains from saving. It may not be necessary to revert back to the savings mentality which was rife in the 1980s but there needs to be a significant shift from the underlying social and behavioural patterns which focus on such short-termist ideals. There needs to be more emphasis on planning for the future as well as improving the economy. Despite concerns that saving will hamper the economy‟s recovery at the present time, saving can be viewed as a more long haul method of increased prosperity, which need not require substantial reforms in order to prove successful.

Akash Bhanot is currently in year 13 at Tiffin School. He is representing the school in this year‘s Target 2.0 Interest competition and next year, he hopes to begin studying Economics at Homerton College, Cambridge after recently being offered a place for next year.

Euler Leonard Euler: A Hidden Economist How a mathematician pre-dating Adam Smith unknowingly helped lay the foundations of the economics profession

he work of the Swiss mathematician, Leonard Euler, is perhaps only familiar to those with a distinct interest in the origins of mathematics. Yet the ideas of the „mathematician‟s mathematician‟ as Professor Marcus du Sautoy describes Euler, can be strongly paralleled with the fundamental concerns of the economics profession. A typical dictionary definition of „economics‟ may be something along the lines of „the study of how the forces of supply and demand affect the allocation of scarce and non-scarce resources and the analysis of how economic agents interact.‟ In my view, however, there is a strong argument to suggest that the subject goes far beyond this superficial issue. All economists, philosophers, mathematicians and politicians interpret the primary concept of economics slightly differently, and it is these historic and contemporary ideas

collated, that form the profession of economics as we understand it today. It is here that the importance of Leonard Euler‟s work lies; at the centre of economics. Some see economics as a subject full of misplaced theory, devoid of practical relevance, which has led to the subject‟s significance being brought into question. However, Euler‟s work demonstrated that theoretical postulation was just as effective in problem solving as physical experimentation. In 1727, he was awarded the coveted Paris Academy of Science Prize for his response to the question: „What is the best way to arrange masts on a ship?‟ His faith in mathematical analysis led him to attack the problem without leaving dry land. He felt he did not need to confirm his ideas using direct experimentation, as he was certain that mathematics alone could provide him

The ‗Bridges of Königsberg‘ problem only considered a trivial puzzle, but now it arguably represents the thinking behind globalization. Image: Wikipedia

with the optimal arrangement of masts. Euler not only provided the correct

“ Exact distances are insignificant; what is important is how they are connected

”

solution for ship builders but demonstrated to many academics, in various fields, that implemented theory could prove as useful in finding solutions as practical application. A large part of economics is undoubtedly theoretical and Euler unknowingly reinforced this common usage of theory in economics. A Wider Importance Euler‟s work also has huge importance on the very relevant topic of globalization. Euler‟s solution to the famous „Seven Bridges of Königsberg‟ problem demonstrated the same „interconnectivity‟ principle that globalization is based upon. The problem went as follows: four distinct regions of Prussian land were separated by several branches of the Pregel River. Seven bridges connected each land mass to allow access. It became a Sunday past-time for many Prussians, to see if one could complete a full round trip, crossing each bridge only once and arrive at the same point they started at. Euler became fascinated by this puzzle while he was working in a nearby mathematics school. He found that „neither geometry, nor algebra, nor even the art of counting were sufficient to solve it.‟ Instead of trying to solve the problem practically, he updated

35 New York London

Dubai

China

Canada

Rome

Frankfurt Zurich

Tokyo

Paris

Sydney

Delhi Tokyo

Moscow

Cape town

The thinking behind globalization can be illustrated using a London Underground Map Image: TFL Gottfried Leibniz‟s (another prominent historical mathematician) „geometry of position‘ theory. This theory emulated the ideas that are at the centre of globalization. Neither distance nor angles are important; what matters is how things are connected. Adam Smith argued in the Wealth of Nations that infant, independent economies can grow themselves by mobilizing free trade, which „strengthens the bands of interdependence in society‟ and initiate growth. Although globalization refers to much larger and multiple economies, the concept is the same; by opening lines of interconnectivity between economies, the global economy will strengthen, which will have a huge multiplier effect on specific sectors of the global system. The increased interconnectivity will allow goods and services to be traded from one side of the earth to the other as if it were next door. This is likely to create demand in labour mar-

kets where twenty years ago, there was little hope of finding a job. India and China have been prime examples in the last few Shanghai decades, where increasing demand for the countries‟ exported goods has prompted growth in their manufacturing sectors, providing a greater number of job opportunities as a result. Cairo To demonstrate Euler‟s theory with a proverbial example, take the London Underground Map. It does not depict every individual twist on the track, but it is a clear and easy tool for understanding how to get around London. This is the magnificence of the map and it reiterates Euler‟s point; exact distances are insignificant; what is important is how they are connected. Are they connected by one underground line, or several? How many stations are there in-between? Are there any other ways to get from A to B? This example begins to explain what Euler was thinking and it is also the idea that underpins globalization. Distance becomes irrelevant; trade and the transfer of other resources can now occur between economies through other mediums such as the internet (where distance is uniform between all points), arguably one of the main drivers behind the recent increase in globalization. This method of thinking thus helped Euler solve the „Seven Bridges of Königsberg‟ problem. Ultimately, Euler commented that each bridge in-between the start and the finish, would have to have an even number of paths going in and coming out. As the bridges did not adhere to this theory, Euler concluded that no such route was possible, given the stipulated rules of the problem.

The example of Leonard Euler has illustrated the ways in which many historical figures have similarly contributed to the economics profession without recognition and it provides some support, I would hope, to the argument that economics is a worth-while study as it encompasses the ideas of figures in many different academic fields, which are then used to go some way to solving some of the major issues in our world today. R

Leonard Euler Fact file

Born: 15 April 1707 Died: 18 September 1783 Born in Basel, Euler‟s work is not largely noticed in the economics profession. He mainly contributed to mathematics and physics. He made very important discoveries particularly to calculus and „graph theory.‟ Much of the modern mathematics taught in schools and used by advanced mathematicians and physicists, relies on the historic work of Euler. He is also recognised for his work towards mechanics, fluid dynamics, optics and astronomy.

Sebastian Hicks and Tom Hill have picked out a few of the very best lectures available in the UK over the next few months. Lectures are not just a place where you sit down, listen and take notes. They are simply mechanisms that allow you to become inspired and think deeply.

John Connolly

„One to watch‘

As One - Individual Action, Collective Power In any well-run organisation, it goes without saying that you need a robust business plan, the appropriate resources, and an element of luck or opportunity. “As One - Individual Action, Collective Power”, is a lecture at Oxford University with John Connolly, Senior Partner & CEO of Deloitte UK as guest speaker. He will opine on what makes good leaders successful, and how value is achieved collectively through collaboration and cooperation. Risk, strategy and collective power are surely going to be high on the agenda, and this can only be beneficial for aspiring business leaders or entrepreneurs. This lecture will particularly appeal to anyone looking for an insight into the drivers for commercial success, from a CEO who has clearly demonstrated this in practice. Date: Wednesday 2nd March 2011 Time: 7-8pm Venue: Saïd Business School, Oxford, OX1 1HP Booking Required.

Professor John Van Reenen

‗If anyone knows...‘

Where is future growth going to come from? Winner of the Yrjö Jahnsson Award in Economics in 2009 and Professor at the LSE, Professor John Van Reenen lectures on the future of growth. The LSE stated he will be asking and answering questions such as “Where will the sources of new growth come from in the wake of the financial crisis and recession? What is the role of education, labor markets and government policy in supporting this growth?” His profile from Charles River associates shows why his opinion is one to be listened to: “His major cases include the Microsoft case at the European Commission, the Reed/Harcourt merger and the Compass/Rail Gourmet merger in the UK.”. Reenen‟s experience in the field of corporate finance and productivity alludes to his pessimism about future growth. John Van Reenen recently told The Ricardian that "austerity effects (in the negative) will bite quickly" and that time frame will be a prominent aspect of his lecture.

Date: Thursday 17 February 2011 Time: 6.30-8pm Location: Hong Kong Theatre, Clement House No Booking Required

Matthew Key

‗The mobile phone market and business management‘

The story of O2 O2 was a market laggard, trailing the competition on every indicator. It was given only six months to live. Matthew Key – who was Chief Financial Officer and CEO during this time – will tell the story of how he and the rest of the team turned the business around. The Telegraph credited him for “opening the door to the I-Phone” and The Times complimented his “finely-tuned sense of diplomacy”. This is a businessman everyone can learn from. Date: 8th March 2011 Time: 4.30-6pm Location: University House, Birmingham Business School Booking Required: visit Birmingham University website

Edward Hugh

‗Improve your exam technique‘

The internet changes the practise of macroeconomics This is perhaps the most relevant lecture to A level economics, addressing both Units 2 and 4. The speaker, Edward Hugh, “is an independent macro economist based in Barcelona”. Described by The New York Times as the “blog prophet of Euro-zone doom” his opinions have been largely ignored. However he is not to be overlooked after recently being called to the International Monetary Fund in Madrid to assist the Spanish Government. This event will feature one of the top bloggers on the Euro Crisis who will discuss the role the bloggers have played in our understanding of the current Euro Crisis, and in what ways having more data in our hard drive than the sum total of all previous economists changes our understanding of macroeconomics. Date: Monday 14 February 2011 Time: 6.30-8.15pm Venue: Sheikh Zayed Theatre, New Academic Building No Booking Required

Professor Alastair Fraser

‗A scientific insight‘

Oil Exploration in the Arctic Alastair Fraser asks “are we making the most of a strategic resource through Arctic oil exploration or heading for an environmental and political minefield?” This question is particularly relevant to those in their last year of Sixth Form as it is very relevant to globalization. Harnessing the considerable resources of the „Final Frontier‟ is going to be fraught with many technical, political and environmental challenges that will engage many minds, both scientific and political over the next half century. Date: Tuesday 1 March 2011 Time: 5.30-6.30pm Venue: Lecture Theatre 1.31, Royal School of Mines Booking Required: visit the Imperial University website

What Makes The Perfect Lecture? From the Lecture Editor: Sebastian Hicks

he battle between the enigmatic and the banal, the sequacious and the inquisitive has always been at the forefront of lecturing technique. I have been to many lectures and questioned why I bothered to come; I have been to many more where I have questioned why this is not on television and the internet; broadcast from an amphitheatre with hundreds of avid listeners with queues outside the door. Sadly unless you are Gordon Brown or Mervin King you rarely see such numbers. Lectures can be and should be rivalling the most interesting of documentaries; a dolphin‟s leap can easily be out done by a captivating speaker who can make a crowd gasp. I question why in some cases lectures succeed and have people sitting as if they were in a cinema, and why some cause people to leave or wake up to awkward desultory applause. Hans Rosling, Steven Levitt and Tim Harford have all produced lectures to standing ovations and I believe anyone can receive equal praise. The three features that follow will, I hope, enlighten anyone with the desire to find a good lecture or produce one which is truly memorable. I wonder why some lectures make it to the stage, just because something can be discussed does not mean it should be, „Katie Price: Angel‘ being a prime example. Thus the content and subject is vital to your lecture; numbers will gather if they want to learn about the subject in question and lectures that evoke bold points or revealing facts will leave the audience hanging on your every word. As for an observer; consider the title of the lecture, if it is catchy and less than forty words long then it has the potential to be a memorable event, for example Steven Levitt‟s ‗Freakonomics‘. Even the most interesting lecture can be brought Sebastian Hicks is in year 13 at Tiffin and he has been a part of The Ricardian since it began in June 2010 and he is also part of Tiffin‘s Target 2.0 team. Sebastian has been offered a place at Birmingham University next year to study Economics and International Relations.

down by a dire chronological structure, if the lecture‟s content rivals that of The Da Vinci Code then the audience should be awake throughout. However that is not to say that an incredibly complex set of slides and bullet points keeps them anymore interested. I have myself been forced to take notes, not because I want to remember these juicy notions, but because I am struggling to keep up with such complex and rapidly explained ideas. A lecture can be gripping through its tone of language, pace of speech and the personality of the speaker and these are commonly found in TED lectures. Panache is vital in making a lecture a journey of discovery rather than a saga. A comic quip about the changing nature of global markets would not be unappreciated; if the subject is not of an epic nature, the lecture can still be brilliant. Hans Rosling regularly creates an interest in global statistics during his lectures, and this is because his energy and enthusiasm for the subject imbues and enthusiastic and energetic response within the audience. Lecturers should be eager to pass on their interest and the audience should research a speaker and question if they want to spend the next hour listening to him. Lectures are as much a part of the teaching future as any other medium. Lectures are now more accessible than ever, on the internet (although that is much like watching a play on television) and at institutions such as Eton, the LSE and many other universities for free. Looking forward to a lecture is something of a rarity for most students who anticipate a hugely tiring experience and yet if lecturers could reach out to their audiences then the warm excitement of entering the lecture theatre might not be such a novelty. Thus it is the responsibility of all lecturers to ensure it is quality rather than quantity and the responsibility of the audience to ensure that they want to watch Tim Hartford instead of a dolphin. R

The Economist as a Philosopher Opposite sides of the same coin James Chauncy

n a lecture entitled “The Economist as a Philosopher”, Nicholas Phillipson (Honorary fellow of History at The University of Edinburgh) and Professor Lord Skidelsky (Professor of Political Economy at The University of Warwick) presented and discussed the works of economists Adam Smith and John Maynard Keynes and how the thought-based nature of their works differs so greatly from the economic concepts and practices of today. Since the mathematisation of economics in the mid-19th century, the subject has evolved to revolve quite heavily around statistics and portable models, but, in the days of Adam Smith (1723-1790) and John Maynard Keynes (1883-1946) respectively (more so in Smith‟s), it was far more abstract a topic, relying on expression through language as a central priority; reminiscent of philosophical works. This apparent contrast brings forward an interesting point, and one which Phillipson poignantly raised during the lecture:

“ At their basest level, economies come down to social exchanges

”

“what is the role of creative thinking in economics?” The increasingly “facts and figures” attitude of modern economics gives further rise to a lack of moral concern in the business world. Values such as honesty, sympathy and compassion do not transfer onto a spreadsheet, resulting in little or no presence of these qualities which many regard as vital for any form of human interaction. The relationship between moral-

ity and capitalism is one that has found wide spread significance in society as a whole because there does seem to be a strong case that the two cannot coexist; to be moral, it appears that one must look to help others, and to succeed in a capitalist environment, one must hold an unflinching self-interest. In their capacities as „philosophical economists‟, both Smith and Keynes looked at this and brought forward points in favour of Capitalism. Smith posed that self-interest is an inherent characteristic of man and, through pursuing individual goals, one inadvertently does what is “best” for the economy as a whole (The Hidden Hand). What appears to be a selfish act on the surface produces a widely beneficial outcome. He does also comment, however, that the increasingly materialistic way modern society has developed exacerbates mans‟ selfish instinct, perhaps to the point of dehumanisation of the individual through constant, financially driven, actions. Keynes follows a similar line to Smith‟s “Hidden Hand”, justifying the lack of morality by suggesting that Capitalism, although encouraging “se mi criminal, semipathological” tendencies, is the means to a state of idyllic abundance - the unashamed self-interest currently practiced is necessary to attain this final state. Both men believed that Capitalism is a fundamentally required, rather than benign, aspect of modern

society. These ideas, based on the mindset of individuals, were subjects of considerable focus in the works of Smith and Keynes. Not only do they make for interesting reading, but they have a practical application too. To understand models and statics in economics, it seems important to understand the background in what is actually being studied – this background being human nature, which, in more recent times, provides a vague back drop to a subject where it plays a deceptively vital role. Economics is a man-made practice - to understand the creation, must one not first understand the creator? These questions find further relevance when looking at the study of economics as a classroom subject. It could surely be argued that it is necessary to teach psychology and sociology alongside economics, given that they are, most certainly, essential features in the analysis of many group and individual behaviours used when producing predictive models. Or is this kind of

An illustration of the Adam Smith‘s Invisible Hand. Image: L&S Blog

Adam Smith, known as the ‗father‘ of economics supported the free-market hypothesis, whereas Keynes was critical of it and suggested a more ‗realistic approach.‘ Yet it is unquestionable that both are great men and immensely influential economists consideration to be understood as part of a background study, leaving the cold hard facts of the economic world at the forefront of educational practice? Around this topic, Smith argued that, at their basest level, economies come down to social exchanges. This caused him to factor in aspects such as self-identity and general social experience when considering economics. He was effectively comparing social relationships with business relationships to see how far the same “rules” applied to each situation. This idea is not that farfetched when the number of good business relationships that rest on strong, informal bonds is taken into consideration. To neglect these points in the st-

udy of economics can only be said to further disengage the individual from the human decision-making that causes changes in the economy. A student may look at the market and transmission mechanism, observe and understand how the economy is affected by certain alterations but the realisation that it is ultimately a man-made situation can be easily misplaced due to the manner it is put in front of them; the market theory is certainly present but what seems to be lacking is a context on a more human level. Just as the modern market can be run with a certain detachment from the individual, so does the student detach themselves from the real, anthropomorphic, structure of the economy, so ingrained in the

system it is very often overlooked. Neither Smith nor Keynes formally studied any considerable amount of economics, yet they went on to develop significant works on the topic through a philosophical outlook. In recognition of this it could be worthwhile to view economics partially as a social science, akin to studies such as psychology and sociology, because it is upon practices examined by these topics that an economy is built. To ignore this foundation of economics misplaces the less tangible, but potentially more useful, human aspect of the subject, reducing it to the hard-line shell that has come to encase the true flesh essence within it that is, arguably, philosophy. R

A conversation with James Caan James Caan from the BBC‟s Dragon‟s Den gives his views on entrepreneurs Shahil Thaker and Frazer Carroll

“ “My father never

understood why I didn't join the family business and it was only when I opened the 100th global office of my company he said that it may have been the right thing for me to do.”

”

aving left home at the age of 16, with only £30, James Caan (originally Nazim Khan) has become a leading entrepreneur in the UK and a member of the highly successful television program; Dragon‟s Den. James Caan delivered a very engaging lecture at London School of Economics University (LSE) where he talked at length about his experiences on Dragon‟s Den, his journey from a young boy to a multi-millionaire and the aid he has been trying to deliver for Pakistan. Caan started off selling his father‟s jackets with a small mark up to double his pocket money and now heads several recruitment firms turning over hundreds of millions of pounds every year. Since recruitment is his job you might have thought Caan would naturally suit a role in Dragons Den, joining the BBC investment programme in 2007, instead it baffled him how readily his fellow „Dragons‟ invested in ideas with no real business plan or direction. In his opinion appropriate information to make informed decisions is imperative but he frequently saw very little of it on the show. Eventually, pressured by his daughter to seal a deal, he devised a rather risky plan: to invest in the first pitch of the day. He explained that, to many, it seemed that this gamble slightly backfired as the product he was presented with was his now infamous dog treadmill. Caan however, claims that he saw that woman who presented the, initially questionable, idea displayed the beginnings of a good entrepreneur and has since helped make a success of the product – an achievement surely testament to Caan‟s own business acumen. Caan strongly advises against the decision some would-be entrepren-

eurs make to hide their ideas away from „sticky-fingered‟ investors with a view to retaining all the glory for themselves which would otherwise be stolen. It is in this way, Caan says, that he sees many promising ideas fade away. Caan is opposing the masses and breaking down barriers in the hope of changing people‟s preconceptions of investors as a hindrance rather than a help. Further on Caan described his thoughts on the UK and its general business direction. „Imagine walking down a street called the world and passing America, what would you see? Now walk past China, what would you see? But walking past the UK what would be in the shop window?‟ Caan indicates that the UK should aim to create a „brand‟ image of what we are to stand out for in the world economy; just as the East and USA have got technology and China has manufacturing. Caan suggests that the way to make the most of the UK is to develop it as a service sector base. The country has the means to do so and comparatively there are very few startup costs. Services are a key factor of the developed world so would stand the test of time they are not of the moment. Potentially, with the right connections, the world would be the customer of the UK. It will affect nearly all developed economies as people have the disposable income to spend on wider services other than the essential ones. Caan shows all the key qualities needed to become a successful entrepreneur; having the self- motivation, passion and faith to be able to take the risks involved in ideas without adversely affecting self-confidence. These attributes point to a rare ability which James Caan himself claims is well worth investing in.

Caan’s Top Tips Caan‟s Top Tips for “Getting the job you really want” Be unique “Observe the masses, and do the opposite” – If an advert for a job provides an email address and an address of an office, don‟t be lazy by just sending an email to your potential employer. Think about how many emails they will receive, and therefore, how little time this gives them to read yours. If possible, why not go and hand-deliver your CV to the address, to create a rapport and show your enthusiasm.

Do research Nowadays, information is so readily available on the internet, so before your interview, do some research about the company, before you visit. Background research shows initiative and may help the employer “see” you in a particular role. Entrepreneurship Entrepreneurs explore new business ideas and find new ways to provide goods and services. They may also use their personal money and the money of other investors to buy equity in a business, and in turn they are able to use their skill and experience to allow the company to make a profit. Entrepreneurship is sometimes seen as being very risky, as this profit is never guaranteed and investment may be lost. This is the risktaking part of the role of the entrepreneur; despite having no formal education and having left home at the age of 16, James Caan has managed to become a very successful entrepreneur.

Ask questions Having taken in basic information about the company, consider questions you may want to ask. For example, if you are applying for the post an editor of a magazine, look for the trends in readership for the magazine. Then, in your interview, you could ask why, for example, their readership has declined, or what attempts they have made to increase their readership. This will immediately engage your interviewer into the conversation, showing you have a genuine interest in their company.

What James Caan looks for in an Entrepreneur Passion How much energy, drive and determination do you have for the product? Confidence – the way in which you present your ideas and how persuasive your pitch is.

Research Have well have you analysed the market‟s need for your product? Motivation Can you go the extra mile? For Caan, the most important element of entrepreneurship is not necessarily the product, but the individual behind the product. Without the driving determination, passion and enthusiasm of an entrepreneur, a product will simply not succeed. Contrary to popular belief, just the idea itself matters very little – Caan estimates this to be around 5%. He claimed the other 95% was to be found in the execution, delivery and presentation of the product. By giving equity, people are driven to make their product succeed as they have a share in the profits. Although giving away 50% of a provisional company may sound very high, in essence this is a percentage of potential success of the product. Until the product actually is successful, the equity means nothing. When this product does succeed, a small percentage of a big company still means high return.

23 Things They Don’t Tell Us About Capitalism

23 Things They Don‘t Tell Us About Capitalism

Adam Salisbury

midst the turbulent political times of the 1930‟s, Winston Churchill famously described Communism as a „philosophy of failure, the creed of ignorance, and the gospel of envy‟; resoundingly epitomising the West‟s apprehension towards the prospect of a Communist regime. Of course, when this was uttered, Russia‟s emergence as a left wing superpower had made the threat of Communism reach an all time high, so perhaps the suspicion was somewhat understandable. Yet even today, despite the easing of tension between East and West, our attitude towards left wing economic policies remains one of utmost suspicion and considerable unease. However, as planned economies such as China‟s begin to gain dominance over free market economies such as our own, perhaps it is time to step back and begin to question our own Capitalist ways? In his book ‟23 Things They

Don‟t Tell You About Capitalism‟, HaJoon Chang addresses many of our naïve assumptions, whilst exposing some fundamental flaws in our free market economy. He seeks to break down our false acceptance that Capitalism is the fairest, most efficient Economic system that is possible, and introduces the possibility that perhaps we need to reconsider the effectiveness of our regime. At times, Chang‟s rebellious approach is so strident that his arguments echo those of such revolutionaries as Vladimir Lenin and Karl Marx, as their condemnation of Capitalism is seemingly mutual. Interestingly though, Chang maintains that his book is not an anti-capitalist manifesto, and despite its limitations, Capitalism remains the best economic system that humans have invented. Nevertheless, I still found Chang‟s innovative arguments against Capitalism extremely compelling, and I truly began to ques-

Ha-Joon Chang Allen Lane ISBN: 9781846143281 tion the supposed superiority and stability of the West‟s free market economy. The book is divided into 23 sections, and each section seeks to revoke a commonly accepted theory of Capitalism. For example, in the first chapter, Chang argues that the „free market‟ theory is merely an illusion, and we only consider it free because we accept the legitimacy of certain regulations so totally that we do not see them. To illustrate this point, Chang gives several examples of where the government imposes regulations on what people can buy and sell, highlighting the restricted, formulaic nature of our supposed free market. For instance, he gives obvious examples of restricted goods such as illegal drugs and body organs, but also argues that the immense political influence upon the free market goes seemingly undetected. As an example, if the „free‟ labour market

was left alone, then companies would end up replacing 80-90% of native workers with cheaper and often more productive immigrants. However, the corporations cannot do this, as the government enforces immigration control which vastly restricts the freedom

“Chang‟s simple structure and elegant style does not falter

”

within the labour market, and means that all are wages are, at root, politically determined. I found this section particularly interesting, as it really exposed the limitations within our free market economy, or as Chang puts it, made me „remove those rose-tinted glasses that neo-liberal ideologies like me to wear and stare into the harsh light of reality.‟ After establishing that the term „free‟ market economy is extremely ambiguous, Chang goes on to argue that government interference can wield positive outcomes, despite what the textbooks tell us. In chapter 12, Chang tackles the common misconception that the „government cannot pick winners‟,

which states that government does not have the necessary information or expertise to make informed business decisions, so they should leave the market alone. However, what the textbooks don‟t tell us is there are several examples in recent times where the government has interfered with a certain industry, and has produced some truly spectacular winners. The one Chang picks up on in particular happened in 1968, when the South Korean government defied all Capitalistic theories and began to interfere with the steel industry, by pumping a lot of resources in an attempt to make Korea a big steel producer. This venture was deemed by several Economists as unlikely to succeed, after all the textbooks stated that developing countries ought to stick to areas in which they had a competitive advantage; labour intensive industries were good, capital intensive ones, like steel, were not. Therefore, if the government were to interfere, then Korea would lose its competitive advantage, and its economy would suffer tremendous consequences. However, the plan exceeded all expectations, and today South Korea is the 5th largest steel exporter in the world. This was one of the first times that a right wing government had taken an action which defied all Capitalist theories, and had produced some remarkable results. Chang uses this example as the backbone in

his underlying argument that although Capitalism remains the most effective economic system man has invented, there are some common misconceptions that must be abolished if Capitalist countries are to progress. As the book progresses, Chang‟s simple structure and elegant style does not falter; his voice remains firm but never preachy, his argument detailed but never obscure. By including day-to-day examples and giving basic step-by-step explanations to his arguments, it is obvious that he wants to get his point across to the broadest range of audiences. This intention is confirmed at the very start of his book, as he notes that it is not necessary for people to understand all the technical details in order to understand the underlying flaws in Capitalism. In my opinion, people too often dismiss economic issues as being too complicated and leave it to the „expert‟s, so it is refreshing to see Chang acknowledge that a basic understanding of economics is all that is required to make some pretty robust judgements. Overall I found 23 Things They Don‟t Tell You About Capitalism a truly fascinating read, and would recommend it to anyone who is an interest in the logistics of our Economic system, no matter what their level of understanding may be. R

Double Review: Freakonomics:

Freakonomics, A Rogue Economist Explores the Hidden Side of Everything

Enpu Zhang

reakonomics - The title says it all. If you have picked up this book in the hope of finding a serious discussion on Keynesian Economics, prepare to be disappointed; but if instead, you are looking for a book to entertain, to enlighten, and to leave you with wideeyed surprise, then congratulations: you‟ve found a winner. Freakonomics does exactly what it says on the cover – lead you through a hidden world. A world where teachers cheat more than their students... You might have guessed this already, but Freakonomics doesn‟t conform to authority. Levitt (the economist) known for his work on crime, loves to take seemingly irrelevant topics in the Micro-Economic world and discover astounding conclusions. Freakenomics then is a compilation of all his insights, which are expertly drawn together by the author Dubner. In the foreword, they state that Freakonomics would have no unifying theme, and certainly the authors propose theories on many different topics, although

it might be suggested that the book is focused around debunking some of the „truths‟ of conventional wisdom. In a world of Mystics and Alternative Medicine, Freakonomics provides a bastion of good thinking and rationality. The first chapter „What do Schoolteachers and Sumo Wrestlers Have in Common?‟ sets the benchmark for the rest of the book. Right from the first page, Dubner‟s style is truly captivating, as he reflects the books tonguein-cheek approach by ensuring that the book reads more like a novel than an economic textbook. In the first chapter Levitt talks about incentives and cheating; as we all know, people respond to incentives – however, Levitt goes deeper to explore what incentives work, which fail, and which cause the opposite of the desired effect. He then analyses how and why schoolteachers will cheat, using data garnered from the Chicago Public Schools system, and reveals how teachers will respond to incentives of promotion and bonuses

Steven D. Levitt and Stephen J. Dubner Published by William Morrow ISBN: 9780061234002

by changing the exam answers of his/ her students. So what do Sumo Wrestlers have in common with teachers then? Levitt puts forward that cheating is also a common occurrence in Sumo Wrestling, with proof coming from statistical analysis of 7-7 matches as well as testament from two wrestlers (who coincidently died soon afterwards). However, the charge is denied by the Japanese Sumo Federation. The second chapter focuses on another basic principle of economics asymmetrical information. Levitt dives into the world of estate agents and the KKK, attacking the knowledge of socalled experts by exposing the underlying flaws in their theories. A classic example is of a certain „expert‟ who claimed that 45 homeless people die every second in the USA. Basic mathematical know-how and access to a calculator will reveal that 45 deaths every second will lead to 1.4 billion deaths every year; a humiliating statistic when you consider that the USA‟s population is little more than 300 million. On the

49 back of several embarrassing examples, he then explains how journalists and „experts‟ (here I think they‟re having a little joke– see authors) provide much of what is conventional wisdom, and advises us not to take everything at face value. What makes a good parent? How much do drug dealers really earn? Throughout the remaining chapters, Levitt tackles subjects others may find uncomfortable head on, but does so in such a way that he cannot be accused of being subjective; Freakonomics is not a book which throws accusations without proof. The numbers speak for themselves, because after all, this is a book about Economics (however rogue the economist may be). Levitt may use unusual examples and unconventional

data but he covers some of the key points of Economics 101. Incentives, asymmetrical data, cause and correlation are all talked about. Freakonomics takes the reader from theory to theory, making well reasoned and backed arguments and drawing amazing conclusion after amazing conclusion. Which is more dangerous, a swimming pool, or a gun? Why is Emily classier than Alyssa? Questions are good. Who cheats? When does an honour system for bagels work? What does a „well maintained‟ house actually mean? Although lacking an overall theme, Freakonomics more than compensates by offering episodes of humour and intrigue. For the amateur economist, terms and concepts are explained excellently, so there

is no prerequisite knowledge required in order to understand the theories put forth. For the seasoned veteran, perhaps new inspiration is to be found, but even if not, at least a better understanding of Chicago‟s street gangs can be acquired. After all the probing of established facts, you‟d be forgiven for asking why anyone should believe what they read here. I‟m sure that even Levitt and Dubner wouldn‟t want their reader to blindly believe what they have written. This book isn‟t an encyclopaedia; it is an invitation to a new world, a world of enquiring minds, of challenging convention -The world of Freakonomics. R

FREAKONMICS: THE MOVIE Running time: 89 minutes

Certificate rating: 12

Directors: Various

Tom Hill

Not only a worldwide bestseller in print having sold more than 3 million copies in more than 30 languages, Freakonomics is about to take the movie screen by storm. The film resembles a fanatic concoction of economics and comedy, with social etiquette and moral responsibility thrown in for good measure – all the right ingredients for greatness! Comprising many topics ranging from sumo wrestlers, to housing markets and social class divisions, Freakonomics certainly has the content and scope to create a fascinating yet comical documentary. The film „dissects‟ human behaviour with provocative and sometimes hilarious case studies, whilst managing to succinctly (running time only 89 minutes) explain the cause and effect of many daily problems, and the consequences associated with them. From corruption in Japan, and housing markets in the US, rest assured that the content was thoroughly researched and accurately portrayed. The film‟s main focus is to ana-

lyse to what extent incentives play a part in the actions for many individuals, from 9th Graders to adults. An experiment designed to ascertain the levels of achievement across a sample of high-school students proved to be very successful, with an average increase of 33% in their grades – the reason; $50 per grade above a C each month! One of my favourite quotes from the film has to be by a 9th Grade African-American boy, “They say money doesn‟t make the world go round; wanna‟ bet!”. Although not a star-studded AList spectacle, familiar names such as Morgan Spurlock (Super Size Me) and

“The film resembles a fanatic concoction of economics and comedy

”

Eugene Jarecki (Why We Fight) can be seen in the final credits. And with another four directors from several bestselling works, the film is certainly a collaborative piece. However, as entertaining as the film is, if you‟re looking for an academic documentary, you may choose to search elsewhere. Yes, it is interesting and humorous, but to say it was mentally stimulating and intellectual would be a lie. But credit where credit‟s due, it fulfils its primary focus of highlighting social economics in our everyday lives. So overall, Freakonomics is a light-hearted comical documentary that tries to challenge stereotypical belief in the modern Western world. However, whilst I found it generally quite amusing and entertaining, it did seem a little disjointed at times and I occasionally found my attention waning. Certainly worth taking a look, but sadly, in isolation, it won‟t make you an Economist!

The Undercover Economist

Khalid Hayat

im Harford‟s The Undercover Economist combines a personal and intellectual approach in attempts to describe economic conundrums in the 21st century. This compelling read shows the economic workings behind today‟s simple necessities from computer software to everyone‟s morning Starbucks coffee. If you are not an economic scholar the thought of monetary policies and exchange rates can be incredibly banal. However, Harford is able to entice the reader by giving them a chance to see the exciting fiscal world through the eyes of an undercover economist (So you should probably go find your magnifying glass and trench coat... for good measure). It must be established that Harford isn‟t a mathematician. The economist‟s approach isn‟t to display, but explain. Indeed he does apply examples to help him, but Harford wishes to go

Tim Harford Abacus 2007 ISBN: 978-0-349-11-985-4

deeper than the numbers and dates. Yes Whether the book addresses current the facts and figures are there, but in a topical issues or pioneers of “modern more consequential position. economics” (for instance Ricardo‟s Marginal Land theory), it attempted to Harford doesn‟t claim to successfully establish an ideology of rationality and tackle “large economic problems” but understanding. This idea of “a perfect instead targets issues that concern the economic world” appears more than average consumer. Questions like once, as it persuades the reader to ad“Why does a cup of coffee cost xyz?” dress every situation as if it were in this Provide the reader an opportunity to fantasy driven reality. explore the inner workings of big brand Dropping in clever puns here names like Vodafone and Costa Coffee, and there makes the book easier to and discovering what factors contribute read, and the inclusion of humorous to the final product. Factors of Input and witty commentary makes you feel and “CELL” are just the beginning. as if the piece is just as opinionated as Like the extraordinary hall trick of it is informative. The main focus of the “Scooby Doo”, the reader is left to book is to give life to economics outopen doors, many of which are--n‟t side of the stock market and lecture conventional at all. Not to say that it theatres. For every question he proisn‟t true. To relate cars to “peaches” vides an answer and no stone is left and “lemons” may not exactly be con- unturned. ventional, but its Harford‟s „gifted‟ By presenting different financial mind that helps make sense of scenarios, Harford encourages the “imperfect information”. reader to „Think like an economist.‟

You are given the tools to become an economic mastermind, as you are continuously persuaded to question and resolve issues that may not be typically alluring or interesting. Let‟s take food for example. A delicious topic indeed (no pun intended); Harford wishes to

less price sensitive customer is more likely to buy a cheaper pear if it‟s noticeable. Simple, right? It‟s all about the illusion of Pricing. But then... Is Tesco run by David Blaine...? Probably not, but one has to check, right? Even though he does not wish to tackle the majority of big issues, he still manages to brush over , International Medical Care ,Market Failure, Globalisation, Development Economics, Poverty, and the rise of China as an economic super-power (*Huuuuuuuh* to name but a few). But he brings the topic back home as he tackles domestic issues including the NHS, Property markets and spectrum licensing. Surreal tales of auctions, set to make a few million, later to make £30 billion aren‟t fantasy as Harford brings to life the unpredictable world that is Economics. investigate why organic pears aren‟t One wouldn‟t think that “beers packaged next to non –organic pears. and chips and Globalization” would Don‟t you know? It‟s all down to mix, however Harford wishes to break “Price sensitivity” and how even the the abnormalities and make the strange,

“Focus of the book

is to give life to economics outside of the stock market and lecture theatres

”

the norm. Continuous subtitles acts as small pictures. By the end of it, all the pictures gather into well... a disfigured face. Indeed each concept connects, but not perfectly. The Undercover Economist does not attempt to be another mystical Harry Potter instalment, but it does make for a spellbinding read. Usually monetary guides become dull and droll, as they attempt to reach readers in need for a fiscal fix, but This Times best seller certainly breaks the mould. I cannot perjure myself, and say this is the perfect summer read. The reader must be open to new concepts, and mustn‟t be one to hesitate and reread a page. All in all it can be said that The Undercover Economist is a vital tool to understanding modern economics whether a student or a professional. I can assure you your next trip to the supermarket will never be the same. R

Roxbourne Press 441 Alexandra Avenue, Harrow HA2 9SE 0208 866 2762 0208 868 0996 www.roxbournepress.co.uk

© All Rights Reserved 2011. The Ricardian. All articles are property of the writers. All images belong to their rightful owners. No infringement intended. Magazine for educational and enlightenment purposes only. Any part of this magazine may not be copied without the permission of the editors‟ and the writer‟s permission. All intellectual property and both logos are the property of The Ricardian.