autumn 2014, issue 7

Have The Tables Really Turned in Favour of Emerging Markets?• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

What Free Market Economists can Learn from the Informal Economy• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

How Immigration Has Affected Post Crash Britain• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •INSIDE:

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

CONTENTS

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Global Round UpA look at what's going on in the world ofeconomics

Sti l l Too Big To Fai l?How has the financial crisis changedthe face of economics?

Sticky VelocityAn uneasy quantification of quantitativeeasing

Module ChoicesAn overview from a reluctantveteran

Can the BRICSRemain the

World's EconomicPowerhouse?

Looking Beyond theMainstream

Alternative interpretations of post-crasheconomics

Our BankingWoesHas the banking sector cowed awayfrom its responsibi l ity to help SMEsduring the economic recovery?

Immigration onPost-Crash Britain

Labouring UnderFalse ImpressionsFactors affecting the UK labourmarket

Seeing in More ThanOne DimensionA look at the nuances behind the data

Technocrats orDemocrats?

Who should be trusted to run our economy?

The Irony of theInformal EconomyExamining an oft-overlooked sector

Welcome to theNew Church of Lean

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ECONSOC is proud to present the latestedition of Equilibrium magazine. Our focusin this issue is the world of economicsfollowing the global economic crisis, the so

called ‘Great Recession’. In the following pages wewill be asking, ‘what’s changed, what hasn’t andwhat needs to?’ both in terms of real economicsystems and policies, and economics as a socialscience.

There is no doubt by now that the crisis haschallenged economists and economic policy makersin many ways. In its wake it leaves many questions:why did economists fail to predict such a largecrisis?; what do we need to change about oureconomic systems to ensure it doesn’t happen again?- and do we need a paradigm shift in economicthinking to achieve this?

These will not be easy questions to answer.Addressing them will require significant soulsearching and humility on the part of economists. Itmay even require the abandonment of much of thehard fought consensus regarding economic policymaking and economic methodology that has beenachieved over the last few decades.

It also seems likely that the 'Great Recession' willweaken the idea of economics as a science withwidely applicable ‘laws’. In the debate and discussionneeded to rebuild a consensus there will be manyopinions, many contradictions and many bitterarguments. Economics may once again look morelike a battlefield, as it did in the 70’s, rather than aform of academia with science like qualities, clearlydefined parameters and uncontested truths.

Regardless, failure to have this debate will ultimately

ensure that the next‘Great Recession’awaits us, justround thecorner, andthere is noguaranteethat ourinstitutionsandgovernments,muchbeleagueredand bloated,will be able tocope with round two.

Thus, whilst it is clear that one small studentmagazine cannot possibly resolve this debate, whatwe believe we can do is ensure that York studentsare aware of and talking about it. This debate is notjust the pet project of Oxbridge and Harvardgraduates, nor the uncontested territory ofacademics, locked in their ivory towers, but foreveryone, from first year undergraduates upwards.

We therefore trust you will enjoy reading this editionof Equilibrium, and hope that it will spark anongoing debate about the future of economics hereat the University of York.

Editors Harry Quilter-Pinner & Usama Polani

University ofYork Economics Society Magazine

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EDITORIAL

Sub-editors: Chris Scott & Paul Blower

Copy editingand graphic

design:Lucy

Wheeler

Printed by The MaxDesign & Print

Canada came seemingly unscratchedout of the financial crisis, with nobank bailouts needed and aneconomy which kept on charging

through while other developed nationscollapsed. Although 5 years on from thecrisis and 6 banks dominate the financialsectors with assets worth 5 times the valueof GDP, meanwhile low interest rates since2008 have caused an explosion of householddebt(most of it mortgages which is fosteringa housing bubble) to 93% of GDP.Furthermore investment and exports arestill below pre-2008 levels and the economystill relies on the USA for three-quarters ofgoods exports. Although the government isfinally taking much needed steps like signingup for trade agreements, strengthening itsfinancial regulators and changing the rulesfor mortgages. But if there is a demandshock- before the effects of these policy’smaterialise -reducing consumption in a timewhen the government is in the process ofcutting spending, then let’s just say theperfect child will need rehab. And lots of it.

GlobalRound-UpCurrent affairs in the worldof economicsUsama Polani, 2nd Year Economics

4

No Longer the Perfect Child

Average wages adjustingfor inflation are still4.2% lower than 2010but employment

growth over the last 4 years hasbeen surprisingly robust, mostlyattributed to baby boomersputting of retirement. Due to theflexible nature of the British

labour market even with weaklabour demand it didn’t increaseunemployment much, justlowered wages. The problem withthe lower wages is that it has ledto firms relying on labour to dolow skilled work rather thaninvesting in machines which haveled to a very low productivityrates. Although spending hasstarted to recover which has also

led to increased hiring which ispushing up wages finally. Officialdata also suggests thatInvestment is picking up with theincreased wages incentivizingfirms to invest in labour savingtechnology, boostingproductivity. Because of this foronce real wages are risingwithout interest rates having tofollow, halleluiah!

Sunshine in the GloomyBritish Economy

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The hope that the Russia’simperial appetite wouldbe sated by itsannexation of Crimea

are looking increasingly naïve.Now pro-Russian protestors(many sent in by Russia) arespreading through EasternUkraine, resulting in clashes

between pro- and anti-government protestors on streetsand takeovers of local policestations by protestors; yet thepolice are largely invisible.Ukraine pays its police very little,which does not really incentivisethem to put their lives in dangerto clash with anti-Kiev protestors.The mix of tough language andminimal sanctions from the USA

have been ineffective in haltingRussia. This reluctance to imposeharsh sanctions are also mirroredin the EU, especially Germanywhich trades heavily with Russia.EU companies are even warier ofsanctions, constantly reassuringRussia that they are happy to stilldo business. Russia is acting like apetulant child; the problem is noone is willing to discipline it.

On April 30th Iraqheld its firstelections sinceAmerican forces

left the country in 2011,although peaceful (or fair)might not be the mostsuitable words to describe theprocess. The sectariananimosity between Sunni andShia groups isn’t helped bythe incumbent primeminister Nuri al-Malik. Overthe last 8 years he has takencontrol of the government’ssecurity and intelligence

forces, bullied the courts intosubmission and meddled withthe financial institutions. Yetit speaks to the fracturednature of Iraqi politics thateven with that CV Mr al-Malik is still odds on to win.The winner will have to dealwith the problem of the rebelgroup ISIS which has slowlygained huge territoriesbetween Baghdad and theSyrian border, with thefighting leading over a 1000people a month being killedsince January. Through allthis America has tried to keepaway; for once it doesn’t havetime for the Middle East.

In Southern China tens of thousandsof workers for Yue Yuen-contractedby Nike- have been striking sinceApril 5th. Their anger is fuelled by

the revelation that the company has notbeen paying towards their pensions andthat the local authorities have beenworryingly lax in monitoring if the firmwas keeping up with its obligations Eventhough Yue Yuen has now offered tomake up for the missing social securitycombinations, workers are reluctant totrust them again. The issue of pensions isa growing concern as low skilled migrantworkers realise that labour costs are nowcheaper in places like Vietnam whereproduction is slowly moving, with thischange comes the harsh reality that theyare ill-suited for higher skilled jobs andthat without pensions their life in old agewill be extremely difficult. China hasbanned national media from coveringthis story but that won’t halt the changewhich is taking place or itsconsequences. China is growing up but itmight not be ready for the growing painsof adolescence.

Elections in aBroken State

It won't end with Crimea

Growing Pains in China

SACOM

HongKiong

AT 1:45am on Septemberthe 15th 2008 LehmanBrothers, the fourthlargest US investment

bank, filed for bankruptcy, thelargest in corporate history. As aresult, the already strained globalfinancial system collapsed, withmarket capitalization eroding tothe tune of almost US$10 trillion

in a month. The affect on the realeconomy seen over the followingyears was even more staggering.In 2009 worldwide GDP contractedby 2.6% and by the end of 2009 theInternational Labour Organisationput global joblessness at 205million people, 27 million morethan in 2007. However, whilstbusinesses, livelihoods and in

somecountries,undoubtedlylives, werethe maincasualty ofthe so calledGreatRecession,there wasanothervictim of thecrisis in 2008.Very fewheadlineshave beenwritten aboutit; very few

protests have been made; but it isone of the most interesting andpotentially concerning issuesfacing the post crisis world.

The casualty I am referring to isthat of economics as a socialscience and economists at itspractitioners. Economists havebeen criticised since 2008 because,with a few notable exceptions,they failed to predict theeconomic crisis. Themathematically brilliant, robustlytested and internally consistentmodels used by economists in wellregarded institutions across theworld, from the Bank of Englandto the International Monetaryfund, failed to see it coming.

Ascertaining the reasons for thisfailure is a difficult business.Many have argued that it wasbecause economists got themodels wrong. They contend thatif economists had just calibratedthem differently, added another

STILL "TOO BIG TO FAIL?"

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

Richard Fuld Jr, the last CEO ofLehan Brothers, was arguably

the first ofmany victims of the financial crisis.

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STILL "TOO BIG TO FAIL?" variable, performed a moreperceptive statistical test theywould have predicted the crisis.Robert Shiller of Yale, forexample, would argue that ifeconomic models had factored inhouse price inflationmore explicitly, signsof crisis would havebeen forthcoming.

Other commentatorssuch as RaghuramRajan, former ChiefEconomist at the IMF,have argued that thefault lies elsewhere.The failing of economists topredict the crisis, he argues, wasbecause, ‘like medicine,economics’ became ‘highlycompartmentalised’ andspecialist, at the expense of anunderstanding of the wholesystem. Only an economist withknowledge of all areas ofeconomics – macro, micro,development, financial,behavioural – would have beenable to foresee the crisis.

Whilst both of these explanationsundoubtedly have more than agrain of truth and at first glanceseem to show a reasonable degreeof humility, proffering the illusionof accepting responsibility, theyboth defend the greater statusquo. They make the sameassumption, which is that therewas and is nothing fundamentallywrong with the economicmethods and theories that havebeen used over the last fewdecades. Instead it was simplythat the practitioners weren’tquite good enough at using them.

A more radical and greatercriticism comes from those whoargue that the problem witheconomics wasn’t that the models

were wrong; it was that theydidn’t have the ability to beconclusively ‘right’ in the firstplace. Proponents of this viewwould argue that economistsbecame overconfident in their

own ability to forecast andrecommend the right policies, toocertain that their theories andmodels were entirely applicable tothe real world.

Not so long ago Harry Trumandemanded a ‘one handedeconomist’ by which he meant aneconomist who made a clearrecommendation rather than along list of caveats. Alas, in recenttimes economists became so sureof their solutions, which theyargued they had ‘provedscientifically’, that it seemed hiswish had been granted. ‘Spreadthe truth,’ said Larry Summers,then Chief Economist at the WorldBank, ‘the laws of economics arelike the laws of engineering. Oneset of laws work everywhere’.

These ‘laws’, it can be argued,emerged in part as a response tothe fight against Communismduring the Cold War. Capitalismhad to comprehensively

demonstrate that it offeredindividuals the most prosperousand productive future. Economistsresponded by looking to provetheir capitalist theoriesmathematically and test them

‘scientifically’ usingeconometrics. Doing so ledto ‘conclusive’ and‘definitive’ policyprescriptions used by theIMF and World Bank in the80’s and 90’s which came to

be known, courtesy ofJohn Williamson, as theWashington Consensus.These policy

recommendations were driven byideology as well as research. Thisis something that the IMF hassubsequently admitted. In aninternal investigation followingthe Asian Economic crisis theycomment that ‘it was heresy tosuggest that financial marketswere not distributing worldcapital in a rational and stableway’ even in the face ofsignificant economic instability incountries with reasonably wellbalanced economies.

This same overconfidence fuelledby the idea of economics as ascience, this time in the form of

“”

"Like medicine, economics has become highly

compartmental ised; macro-economists typical ly

do not pay attention to what financial

economists or real estate economists study, and

vice versa."

Raghuram Rajan, former Chief

Economist at the IMF

IMF


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the Scholes-Black Model, led toeconomists arguing thatsecuritization would makefinancial markets safer. In factthese financial tools, subsequentlydescribed as ‘weapons of massdestruction’, played a central roleincreasing structural risk infinancial markets, contributing tothe 2008 crisis.

In 2003 confidence peaked leadingRobert Lucas to declare that the“central problem of depression-prevention has been solved’whilst in the UK Treasury GordonBrown agreed; ‘boom and bust’had been abolished he claimed. In2008 both were provedspectacularly wrong.

The events of the last few yearshave demonstrated that many ofthe theories that were onceconsidered certainties amongstthe economic community are notso clear cut. Policymaking as aresult is at a crossroads with noclear way forward,especially given theunprecedentedchallenges facingGovernments andCentral Banks acrossthe globe. With manyof the old policyprescriptions seen aspart of the cause ofthe crisis, and othersrendered ineffective by thecurrent economic climate,economists have resorted to new,largely unproven tools such asquantitative easing.

The oldpre-crisiseconomics,theeconomicswhichclaimed tobe a

conclusive science, is no longer.This is not to say that economicsas a social science hasn’t got ahuge amount to offer but it mustadapt to this new reality. Greatervalue must be placed on appliedeconomics and economic history –the only example where economicpolicy is really tested. Economicsmust alsobecome morepluralistic andlook to adoptthe best ofother socialsciences toexplain thethings thatremain outsideof itsconventionalmodels andtheories. Insummary, itmust strip away some of theunrealistic assumptions and beunafraid of the messy realities oflife.

This would have been acontroversial statement five yearsago. It would have led to cries ofderision and accusations of

ignorance and ideology from freemarket economists. However,more recently, well regardedinstitutions have come forwardespousing the same conclusions. Acommission, led by the Bank ofEngland and the GovernmentEconomic Service found that a‘greater awareness of economichistory and current real-worldcontext’ and ‘a more pluralisticapproach to economics’ is neededin future economic policy makers.This has also been recognised bythe economic focused press; theFinancial Times argued in a recenteditorial that ‘excessive faith was

invested in abstract mathematicalmodels while insufficient effortwas made to link these to real-lifeexperience’.

These pronouncements are aclear sign of progress. Whatis not yet quite as clear isthe extent to which theseconclusions have beenaccepted by high rankingpolicy makers or byacademics across the UK andUS. If these key groups failto learn the lessons of

history it could be severelydamaging both to economics as asocial science and, throughgovernment policy, to thepopulation at large.

“

“”

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MUCH, but not all, ofwhat can be saidwith confidenceabout the effects of

Quantitative Easing (QE) followsfrom the quantity equation.1 In amonetary economy - and weassuredly live in one of these,nominal income (PY) is equal tothe quantity of money (M) timesthe velocity of circulation (V),hence MV = PY. Crudely, andleaving mechanics aside, QEsimply represents anincrease in M. Whathappens to theeconomy?

1. No inflation,whatsoever.

In the quantitytheory of money V isfixed. If we also addin the classical (andif you like, Austrian)assumption that Y isalso independent,for example decidedonly by factors ofproduction and

whatever is going on in the supplyside of the economy, then for thequantity equation to hold itfollows that any monetaryexpansion must be inflationary.This line of reasoningunderpinned many direpredictions at the outset of QE,notably from the Republicanpresidential candidate Ron Paul.But observe that QE, e.g. in the UK– not unrepresentativeinternationally – manifested(approximately) in a three-foldincrease in the monetary base.The inflation that has transpiredsince 2008 – when QE began – justhas not matched the predictions.

Something is wrong in themultiple set of assumptionsunderpinning this ‘obvious’account.

2. But not a pure liquidity trap.

To cut a long story short,2 in theliquidity trap increases in M areperfectly offset by reductions inV. In this the liquidity trap is thepolar opposite of the quantitytheory – where V is fixed. In theliquidity trap the left side of thequantity equation is unaffected,and hence so is the right.However, note here that in termsof real GDP, Y, there is

equivalence. Bothstories predict noeffect.

But in reality did QEreally have no effecton real output? Hereinference is awkward–from a scientificpoint of view aconcrete answerwould requireknowledge of how theworld would havelooked without QE,and this we do nothave. Nonethelesshistory provides us

Relative assets from January 2008

The figures in grey show the

reserves ($trn) in January 2011

Federal Reserve300

250

200

1 50

1 00

Assets,%

2008 2009 201 0 2011

Year

Bank of England

European Central Bank

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

Dr Andrew Pickering of EconomicsDepartment fame gives us an uneasyquantification of quantitative easing

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with clues. Following the financialcrash in 1929, in the US at least,the line of reasoning underneathpoint 1 above was dominant;monetary expansion must alwaysbe debasing, and can only lead toinflation. Maintenance of the goldstandard implied minimalinterventions in the bond market– at least nothing comparablewith the recent QE programme. Soa major policy difference followedthe two events: a ‘naturalexperiment’. Whatever themechanism (and here things areundeniably murky), 4 years onfrom the outset, real GDP in theUS in 1933 was 30% below trend,whilst ‘only’ 10% below trend in2011.

So if 1929 and 2007/8 arecomparable, then money seems tomatter – a lot, at least inconditions of recession followingmajor financial collapses. How isthis reconciled with the quantityequation? Well if M has risen,causing (somehow) an increase inY (relative to what it wouldotherwise have been) but noconcurrent increase in P, thismust mean that V hasn’t fallen toperfectly offset M. Velocity maynot be fixed – as in the quantity

theory, but neither does it adjustperfectly to offset increased M –as in the pure liquidity trap.Velocity must be ‘sticky’.

3. So all good then?

Not entirely, for two reasons.Firstly we – and I am talking aboutcentral bankers as well asacademic macroeconomists – donot really know how QE works. Interms of the quantity equation itis not known why V (and for thatmatter P) is sticky. Fortunatelypolicymakers learned fromhistory that QE ‘works’, but from ascientific point of view it would bedesirable to know how and why itworks.3 There are of coursecandidate explanations –involving frictions in the financialsector, and perhaps behaviouraleconomics, but this is very muchwork in progress.

Secondly, whilst I believe themacroeconomic case for QE, interms of actual experience if notformal theory, to be strong, apoint that does not get mentionedenough is that there are and havebeen considerable redistributiveconsequences. This is notnecessarily in itself bad (think of

Pareto) but one suchredistribution involved is atransfer from the general publicto the banking sector –traditionally not considered to bean impoverished sector. Recallthat QE was (I argue rightly)initiated very rapidly followingthe collapse of Lehman brothers.One quite possible outcome atthat time was a generalised bankrun. By providing liquidity to therest of the financial system, QEallowed banks to service theirshort-run debts, and continue inbusiness. But this provision wasand is essentially free insurance.QE therefore does nothing todiscourage excessive leverage andirresponsible lending, quiteplausibly the opposite.

But at this point we are doing thesplits. As Charles Goodhartobserves,4 you cannot achieve twopolicy goals – here stability in thefinancial sector and a target levelof GDP – with just one policyinstrument. To my mind the rightpolicy combination would be QEplus appropriate macroprudentialregulation in the financial sector.Though quite what shape thisshould take must be a matter foranother day.

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

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

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an overview from areluctant veteran

YOU might think thisarticle is coming bitlate, since yousubmitted your module

choices long ago and you'realready locked in to doing twoyears of advanced econometrics,but fortunately that’s not thecase. Even though you'vesubmitted your module choicesfor your 2nd and 3rd year you stillhave the opportunity to changeyour choices up to a few weeksafter the module starts (of coursethe later you leave it, the morelikely it is that other modules willbe full). As a 2nd year who hasorganized the Module Choicesevent for the last two years,talked to countless 2nd and 3rd

years about how they chose theirmodules, and frequentlygatecrashes lectures for moduleswhich he is not registered for, Ifeel qualified provide tips on howto choose your modules. Themajor disclaimer is that I could bewrong about all of this - so takemy words with a few tablespoonsof salt.

1) Don’t follow your friends

This sounds harsh but you are notyour friends. You might supportthe same football team, but thatdoesn't mean that you will likethe same areas of economics. Iknow it can be daunting to seeyour friends disappearing offtowards the finance-orientatedmodules when you stay awake atnight thinking about developmenteconomics. But while being

isolated fromyour friends isa grimprospect,choosingmodulesyou're notinterested inwill lead todissatisfactionwith yourcourse and lower marks. It meansyou're not squeezing as muchvalue out of the £9000 you blindlyhand over to the departmentevery year. Furthermore, doing amodule which none of yourfriends take can be a very positiveexperience, as you meet newpeople and will more often thannot build new friendships. Soinvest in your future or, aseconomists would say, be rational(I had to squeeze that insomewhere)!

2) Don't just pick the “easy”modules

I know that it's easy to make allyour decisions based on whichmodule has the highest averagemark. I myself did that during myfirst attempt at picking mymodule choices. But according tomost 2nd and 3rd years I’ve spokento, it isn't a good strategy inhindsight; more often than notyou find yourself choosingmodules which neither interestyou nor suit the skills you excelat. You are more likely to do wellin a module you find engagingthan one as dull as Econ 1, which

means you will probably do wellin a notoriously difficult modulelike Econometric Theory 1 if youfind it interesting (some people do- we tried to start a society butyou need at least five members).The difficulty of a module is asubjective thing, so don’t justbelieve the rumours you hear. Forthose of you with a passion for theintellectual side of study, there'salso a certain thrill in beingchallenged by a module. Alsonothing bonds you more withyour coursemates than an all-nighter in the library, andnothing is more satisfying thangetting the results months laterand knowing the hard work wasworth it.

3) Try to leave with a variety ofskills

I received this advice when I waspicking my modules and it is stillvery helpful to me. Choose yourmodules in a way that providesyou with a set of skills: fromhaving a detailed knowledge ofeconomic theory , to having theskills to apply that theory, and tobe able to reduce complex

Module Choices:This article is primari ly directed at 1 st years, but if you are a 2nd or 3rd year of course you can read the

unadulterated joy which is me rambling for two pages as well - Usama Polani, 2nd year Economics

“”


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economic processes intomathematical equations, as wellas understanding econometrictools - and the statistics whichunderpin them. Every moduleteaches a few of these skills, butfew teach them all. In order tohave a balanced skill set you needto choose a range of modules; thereturn to this investment invariety is that when you finishyour course you are suitable for arange of careers.

4) Quantitative modulesimprove Master's applications

Even thinking about complexmathematics gives most peoplecold shivers but given theincreasingly mathematical natureof economics, Master's coursesvalue quantitative modules veryhighly. Even though thesemodules tend to have loweraverage marks, they are aware ofthat and take a holistic view of theeffect it has on your grades. If youare thinking of doing a Master's inan economics related subject,choosing a module such asEconometric Theory 1 orMathematics for Economists will be aworthwhile investment.

5) Sneak into a few Lectures

Unsure of what a module actuallyentails even though you've lookedat the material the lecturersprovided and have spoken tothem as well as students? Try

popping intoa few lecturesof themodulesyou'recurious aboutto see if you

find thematerialand the

lecturer engaging enough tocommit your precious optionalcredits to it.

6) Finance modules won’t getyou into finance

Many students (including myselflast year) assume that a financemodule willincrease theirchances ofgetting aninternship in thefinancial sector.The truth is thatthe knowledgewhich could berelevant in aninternshipinterview caneasily be pickedup by reading afew books.Corporate awareness is moreuseful in interviews, and can benourished by reading publicationslike The Economist and FT ratherthan taking a financial module. Ofcourse, if you enjoy financialeconomics then take thosemodules, but now if you viewthem as a stepping stone to beinga front desk trader, because theyaren’t. There is also a myth thateconomic history modulesdecrease your chances of getting agood job. This is bogus! Thesefascinating modules enable you toview current problems in thecontext of economic history andmake you a more varied

applicant. To find out how toincrease your chances of gettingan internship come to careerevents hosted by IFS and EconSoc,where representatives fromcompanies such as EY and CitiBank are there to answer anyquestions you might have.

So there's my collection of tips onhow to handle module choices,even if you are a 2nd year stillnervous about the murky watersof the final year. Module choicesare a very important part of yourdegree and there is a lot toconsider so consider this advice,talk to your friends/2nd and 3rdyears/lecturers/the supervisor

you met once at the start of theyear and have never seen since,and make the decisions which feelright to you. This year's ModuleChoices Event, which had minitalks from lecturers and studentsfrom various 2nd and 3rd yearmodules, is available to watchonline and can be accessed via theEconSoc Facebook page. My rantfull of opinions and plug-ins forvarious societies, brieflyinterrupted by useful advice, isfinally over so you can go back toworrying about your upcomingexams or whether World War III isabout to happen due to theUkraine kerfuffle.

If you want to work here doing extra reading will benefit youmore than taking financial modules you're not interested in

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SCOOP: an alternative

business model?

Deep in the bowels ofWentworth, there is asmall office filled notwith books and

paperwork, but shelves of jars,tins and bottles. This is the YorkStudent Co-operative, or SCOOP,one of many organisations acrossthe country which run on the co-operative model.

Co-operatives are certainlynothing new; nor will they ever begame-changers in today'seconomy of big business andbigger profits. But the concept ofshared ownership and not-for-

profit enterprise deservesconsideration nonetheless. Eventhough it is a relatively smallorganisation with just over 60members, SCOOP can compete onprice with supermarkets due to itslow overheads and volunteer-runshop. Its product range is alsomuch more flexible: because it isrun by its members, SCOOP caneasily stock specifically requestedproducts.

SCOOP's primary aim is to provideorganic, fairtrade and ethicallysourced goods at prices studentscan afford, but it also does a lotmore than that. It shows that a

company doesn't have to keystoneto break even. That it only takeseach member to give a smallamount of their time to keep ashop stocked and running. Thatyou really can buy organic pastafor just 14p per 100g.

SCOOP is situated in W/021.It currenly opens from 6:00-8:00 on Mondays, Tuesdays,Thursdays and Fridays, andfrom 1:30-6:30 onWednesdays. If you'd like tofind out more or getinvolved, visit us at the shopor email [email protected].


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Global financial crisisexperience

For emerging market countries,consistent with the ‘this time isdifferent’ phenomenon, therecent global financial crisis wasvery different from their pastexperiences. First, the source ofthe initial disturbance thattriggered the onset of thefinancial crisis –financial excessesin the advanced economies- hadnot been originated in their owneconomies. Secondly, emergingmarket countries had been muchless exposed to the globalfinancial shock. As a result, thesecountries proved much moreresilient than the advancedeconomiessince 2008,particularlyduring thedownturn in2009. Forexample, whilethe advancedeconomiescontracted bymore than 3

per cent in 2009, emerging anddeveloping countries onlyobserved a growth slowdownfrom 8.7 % in 2007 to 2.8 in 2009.Consequently, the share ofemerging economies in the globaloutput went up from twenty fiveper cent in 2007 to 31 per cent in2011 while that of the US ,Eurozone and the UK, went down,respectively, from 27, 24 and 5 to24, 22 and 4 per cent over thesame period. Similarly, the shareof the emerging economies in theglobal distribution of netgovernment debt fell from 17 to14 per cent between 2007 and2011 while those of the US and theUK rose from 27 and 5 percent to31 and 6 percent, respectively.

Why have the tables turned?

The above mentioned figures ledmany observers to refer to suchchanges in the fortunes ofemerging market economies,particularly in comparative termswith those of the advancedeconomies, as ‘the tables haveturned’ . How was this possiblewhen emerging economies haddeep crises of their own only adecade earlier when a series ofcurrency and financial collapsesinflicted serious damage to theeconomies of Mexico, Thailand,South Korea, Russia, Turkey,Brazil and Argentina?

There are three good reasonsunderlying such improvedperformance. First, emergingmarket economies managed tograduate from the ‘original sin’ –inability of a country to borrowfrom foreigners in its owncurrency - by transforming theirliabilities to domestic currency

terms. This clearly has reducedthe costs associated with thechange in the exchange rate.

“”

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

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

before

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REMAIN THE WORLD'SECONOMIC POWERHOUSE?

Secondly, most emergingeconomies now operate flexibleexchange rate regimes that do notsuffer from the vulnerabilities oftheir past currency pegs thatcollapsed one after anotherduring 1990s. Finally, emergingeconomies now enjoy much moresound macroeconomicfundamentals, includingsubstantial holdings of foreigncurrency reserves.

New risks from USmonetary policytapering

It was then perhapssurprising that emergingmarket currenciestumbled against thedollar uponannouncements by theUS Federal Reserve inMay and again inDecember 2013 that the

reversal of US monetary policyexpansion was imminent. Thereason for such responses is thatalthough these economies greatlyreduced theirfragilities theyare still open torisks ofexternal. Bothbond andequity marketsin a number of

these economies still heavily relyon foreign investors. As a result,many central banks have beenintervening in currency marketsaggressively to reduce pressureon the exchange rates and thushave been steadily losing reservessince the May announcement.

It is therefore clear that theunwinding of US lax monetarypolicy will play a litmus test ofstrength for emerging marketeconomies and may reveal newgrouping of those who have reallyemerged.

“

Janet Yellen, the vice chairwoman of the FederalReserve, which carries out Fed taping - a l itmus test for

emerging markets.

Emerging Markets vs Advanced Economies

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

CIA

Factbook,2009|BN

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THE gradual erosion inglobal financial stabilitythat culminated in thefailure of Lehman

Brothers in September 2008triggered possibly the greatestfinancial crisis in history since theGreat Depression of the 1930s. Butnot only was there an economiccrisis, the very failure to predictthe collapse of the financialsystems represented a major crisisin its own right. Both the UnitedStates Federal Reserve Board and

the InternationalMonetary Fund(IMF) did notforesee the riskswithin the globaleconomy and, uptill as late as Spring2007, IMF reportswere stillsuggesting that“global economicrisks [had]declined” sinceSeptember 2006

and that“theoverallU.S.economy[was]holdingup well.”The

failure to predictwas seen as anindicator of short-comings in theneoclassi-caleconomic theory,and provided animpetus forrenewed interestsin alternativeeconomicinterpretations.

Economicapproaches are ways of framingreality, each with its own set ofbiasness and probl-ems. Thestandard macroeconomic modelgenerally referred to as theneoclassical synthesis, the meldingof Keynesian ideas with that of hispredecessors, is merely one ofthem. (It should be noted that

IMF

John Maynard Keynes

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

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many of Keynes’followers would rejectvarious elements of thestandard model as theirown.) Alternativeapproaches exist, butthey have beentraditionally sidelinedfor a variety of reasons.In light of the crisis,considering them willopen up a wide range ofpossibilities for neweconomic thinking,which could betranslated into betterpolicy decisions andimprovements in theway in which economicsis understood. But whatare the questions thatshould be asked andwhat are the issues weshould focus on, as welook beyond theorthodox models?

What may be of interest to us is toexamine the causes of thefinancial crisis. The standardmodel’s failure to anticipate thecalamity drove its proponents toreview its existing models, fromwhich the roles of changingmarket sentiment or ‘animalspirits’, and the breakdown oftrust in the banking industry havebeen widelycited as keyexplanations.1

Despite so,there remainsto be no clearconsensus onwhether theproblemswere causedbyinappropriate policy measuresfollowing the failure ofmainstream economic analysis orinherent flaws in the economic

system. The attempt to capturebehavior and emotions in adeductive mathematical systemhas itself come under attack.While the approach hasadvantages of clarity andconsistency in those aspects ofreality which are madecommensurable, this comes at theexpense of limiting what else canbe considered.2 Arguments based

on the mainstream model aretherefore inevitably partial. Toincrease the weight of theargument would require us to

cross-reference its case against abroader purview of evidencesfrom different methodologicalapproaches.

To this end, a myriad of heterodoxapproaches offers alternativeperspectives. On one hand, thePost Keynesian approach suggestsan understanding of marketsentiment as the normal

mechanism for economicdecisions under uncertainty. Itsproponents argue that,economies seldom behave in alaw- like manner that allowssentiments to be incorporatedinto the quantification of risk.To focus on law-like behavior istherefore to focus on whatappears to be the unique case,leaving little scope to the

application of results of such aninadequate approach. Instead,theories developed to explaintrends in the financial markets

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should includeanalysis ofdecision-making underuncertaintywithoutconstrains ofanalyzingbehavior interms ofrationaloptimization.This suggests contributions frominstitutionalist3 and behavioral4

theories into the Post Keynesianliterature.

Many overlapping viewpoints andshared key concepts exist across anumber of alternativeperspectives and also themainstream approach, but that isnot to say that all theseperspectives come from a singledirection. Heterodox economicapproaches have been found on awide range of positions arisingfrom different, sometimesopposing, economic traditions.Looking at the crisis throughMarx brings us to a very differentinterpretation, where theimmediate goal of remedialpolicies should not be restoringthe financial system but placingpriority on what needs to bedelivered, be it industrialrestructuring, employmentgeneration, or health, educationand welfare. This is an outcomebased on the Marxianunderstanding of the nature ofthe capitalist financial system.Moving from accumulation tofinance to financialization, andfinally to contemporarycapitalism, the approach assertsthat contemporary financialmarkets has created nothing butfictitious value, and oftensacrificed the restructuring of

productive capital for realizationof short-term gains orshareholder value.5

Different ways of theorizing haveled us to different interpretationsand consequently, policymeasures. While the majority oftoday’s economic policies havebeen dominated by themainstream economic approach,it is far from being the onlyoption. For all its appeal, thisapproach has limited the coverageof important issues which mighthave been exposed by the recent

crisis. One canfurther questionwhether themainstreamdeductivemodel, or anyother model,would ever be asufficientargument initself. It may bethat each model

is only able to generate anincomplete analysis that wouldrequire inputs from differentinterpretations, and that the wayahead is for us to advocate someform of methodological pluralismthrough a triangulation ofapproaches. By challengingconventions and consideringalternatives, we have opened upourselves to new possibilities inour understanding, and perhapsthe best criterion for ourjudgment is the ability of anymethod to finally give us a properaccount of reality.

1 ) Greenspan, A. , 201 3. Never Saw It Coming: Why the FinancialCrisis Took Economists By Surprise. Foreign Affairs.http: //fam.ag/1 jLJbzI2) Dow, S. , 201 2. Different Approaches to the Financial Crisis.Economic Thought, 1 , pp.80-93.3) Rutherford, M. , 1 994. Institutions in Economics: the Old and theNew Institutionalism. Cambridge: Cambridge University Press.Hodgson, G.M. , 1 999. Evolution and Institutions: On EvolutionaryEconomics and the Evolution of Institutions. Cheltenham: EdwardElgar.4) Earl, P.E. , ed. 1 989. Behavioural Economics. Aldershot: EdwardElgar.5) Fine, B. , 2009. Looking at the crisis through Marx. InternationalSocial ist Review, 64, March–Apri l , pp.40–47.

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

References

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IT is clear that a vital part ofany sustainable economicrecovery is being supportedby and emerging out of

recession alongside a bankingindustry that is able to provide allareas of the economy withfinancial capital. One mechanismset up by the Bank of England toensure this is done is theFunding for Lending (FLS)scheme, a provision ofsubsidised-rate four yearfunding given to bankslinked to mortgage andbusiness lending. Thiswas intended toencourage them toincrease lending at lowerrates and to open upaccess to credit. We now havedata for the scheme up to thethird quarter of 2013, showing theimpact the scheme has had overthe five quarters it has beenrunning for since it was launchedin mid-2012. The figures show

that £23bn has been drawn out bythe banks through FLS, but thatcumulative net lending toindividuals and businesses has sofar only been £3.6bn. In otherwords, it has taken more than £6of subsidised funding for a bankto increase their lending in theeconomy by £1.

This picture becomes even worsewhen looked at for eachindividual bank, with onlyBarclays and Nationwide having apositive cumulative net impact onlending through FLS – and itshould be noted that Nationwide

participates not in businesslending but only in mortgagelending, something the new Bankgovernor Mark Carney hasdecided FLS will no longer beinvolved in. The two part-nationalised banks, RBS andLloyds, have individually hadnegative cumulative impacts on

the lending marketthrough their FLSprop ups,amounting to£2.2bn and £6.5bnrespectively beingtaken out oflending markets.

Our economicrecovery so far has

not been investment-led, and it isclear that to maintain sustainablegrowth, the economy needs re-balancing towards being fuelledby investment spending, awayfrom consumer debt andunsupported consumption

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has the banking sectorcowed away from its

responsibility to helpSMEs during the

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growth. Although largecorporations currently findthemselves sitting on large pilesof cash with the potential of beingused to invest, small and mediumsized enterprises (SMEs) rely onbank lending to fund theirexpansion, and many have notbeen able to find the funding theyrequire, as shown through theshortcomings of FLS. Poorproductivity growth is one areathat the UK has lagged behindother countries for several yearsrecently, and more businessinvestment would surely make animpact on this.

The conclusion one comes to fromthis is simply that banks have notbeen up to lending to SMEs in theway they should have been. Someform of reform must be soughtout in order to alter this. Ring-fencing banks, that is splittinghigh street banking departmentsfrom supposedly riskierinvestment banking divisions, is

on the brink of beingimplemented, and Ed Milibandhas further chipped into thedebate on banking reformrecently by arguing for caps onmarket share in the bankingsector.

However, though both of thoseoptions might appear to besensible, neither particularly getsto the centre of our banking woes.Separating high street operationsout from their sibling-investmentbanks may only mean an end tofree personal banking, andlimiting market share may notnecessarily induce a morecompetitive market structure.Why would new entrants into thebanking market suddenly feelincentivised to behave differentlyfrom older institutions?

There are certainly other changesthat should be considered.Although non-bank lending in theUK is at its highest level since

2008 (mainlythrough peer-to-peer lending andinvoicefinancing), otherstakeholderowned financials– such as creditunions andcooperativebanks – should beencouraged. Forboth SMEs andindividuals,stakeholder

banks wouldprovide a greaterfocus on their ownneeds, be aimed atcustomers thatcommercial banksneglected to help,and create aparadigm shift in

financial stability expectations,providing higher levels of capitaland lower volatility.

A local focus within our bankingindustry is also practically non-existent at the moment, and localbanks around the world show tobe powerhouses of SME growth.Local cooperative banks haveshown to have a significantlylarger proportion of SME loanscompared to other products, forinstance if you look at marketshare of SME loans compared tooverall market share taken up bylocal banks. In Austria, local bankshold 46% of SME loans comparedto 33% of the overall market, inGermany this is 28% compared to17% and in the Netherlands this is43% compared to 29%. To put theUK into perspective, the amountof banking done with local banksis 67% in Germany and 57% inJapan, compared to just 3% in theUK. The German Mittelstandcompanies (their label for SMEs,of whom 75% use local banks) arewidely acknowledged to be thebackbone of the Germaneconomy, supporting sustainablegrowth and creating a balancedaggregate demand base. If that isthe sort of economic recovery andfuture we are hoping for, perhapsit is time to start thinking morebroadly and seriously about whatto change in our own bankingsector.

Paul Blower1st Year Economics

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The GroßerPreis des Mittelstandes: Germany's support for

small enterprise has accelerated its economic recovery.

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THE recent ending oftransitional controls onBulgarian and Romanianmigrants may have got a

lot of coverage, but debate aboutimmigration in the UK has beenintense ever since the coalitiongovernment came to power. Thetaboo that lasted almost thewhole of the last decade is nowover with the stagnant economyforcing it to the top of thepolitical agenda, where itremains. High levels ofimmigration are seen by many asone cause of the nation'seconomicproblems. TheBritish SocialAttitudes Surveyproduced byNatCenm,revealed that in2013, 77% of thepublic wanted tosee a reduction inimmigration, uptwo percentagepoints from 2011.

Long-terminternational migration, ONSFormer ministers have admittedthe last government made amistake with its failure to

implement transitional controlson migration from the so called‘A8 group’ (Poland, CzechRepublic, Hungary, Lithuania,Latvia, Lithuania, Slovakia andSlovenia) in 2004 like its French,German and other Europeancounterparts. Additionalimmigration was actuallyidentified in 2000 by governmenteconomists as essential to meetunsatisfied demand for both highand low skilled workers but civilservants massivelyunderestimated just how many A8migrants who would arrive.

Conventional theory wouldsuggest that immigration mightlead to lower wages in the short

run particularly in certain lowskill occupations although it alldepends of course on the state ofthe economy and existing supplyof labour. Empirical evidence hasmostly shown little or no negativeeffects of immigration on nativewages and unemployment rates asa result of A8 migration.Anecdotal evidence on the otherhand would suggest there aremany tradesmen who have beenundercut by eastern Europeanrivals and found it more difficultto get work. There is no doubtthat individuals in some

professions havesuffered butprobably not tothe extent peoplethink.

On the other hand,immigration hashelped to holddown prices,which will havebenefitedconsumers at alllevels of theincome

distribution. By reigning ininflation it also helped allow theBank of England to set relativelylow interest rates, which fueled

The effect ofimmigration in

post-crash Britainthe subject of fiercepolitical debate.

What do the factssay?

This graph shows UKmigration between 1964 and 2012. Net migration did not

change significantly between 2000 and 2012.

ONS

|Migra

tionStatisticsQuarterlyReport,2013

UKIP

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the housing boom. Immigrationwill likely have contributeddirectly to rises in house pricesand rental rates as well as thescarcity of social housing withsupply not adequately adjustingbut there is little evidence as towhat extent.

The majority of immigrants are ofworking age, meaning they arelikely to pay more in taxes thanthey receive in benefits. A studyby researches at UCL has foundimmigrants net fiscal contributionto have been some £25 billionbetween 2001 and 2011.

Government policy is focused onreducing net migration from‘hundreds of thousands to tens ofthousands’ but by its verydefinition they can only influencepart of this figure.Unsurprisingly,during a period ofglobal economicuncertaintyBritain’s havebeen less likely toleave the (relative)stability of the UKto either retire orseek workelsewhere, which

has increased net migration.While two fifths of immigrant sideof the balance in fact consistsinternational students, who havean overwhelmingly positive effecton the economy. According to thegovernment’s own figures,International students contributea net £10 billion to the UKeconomy through tuition fees andliving costs that they pay.

It is worth remembering thegovernment migration figurescome from the questionableInternational Passenger Survey(IPS), which surveys 0.2% oftravellers at ports. Despite recentbacking of its robustness in agovernment commissionedreview, the IPS is no substitute fora population register so it isconcerning how much weight is

currently being attached to thesefigures.

Somewhat reassuringly given theevidence, there has been areduction in the proportion ofpeople who think immigration is‘generally bad for the economy’from 52% in 2011 to 47% in 2013.It is wrong to dismiss entirely theconcerns of those at the lower endof the labour market but theproblem could be partiallyresolved as has recently beensuggested by better enforcementof the minimum wage.Immigration policy is not andindeed should not be totally aneconomic decision anyway.However, those of us whoadvocate the overall benefits ofmigration could still do with morerobust evidence from researchabout its economic benefits to winthe argument once and for all.This should focus on both impactson wages and the cost of living tofind what has happened todisposable incomes.

NatCen, 201 4: More than 3 in 4want reduction in immigration:http: //bit. ly/1 dcxJz1

Migration: An Economic and

Social Analysis, October 2000:http: //bit. ly/1 h4frNJDustmann, C. and Frattini , T.The Fiscal Effects of

Immigration to the UK. Centrefor Research and Analysis ofMigration: http: //bit. ly/1 hqcz37HM Government, 201 3.International Education: GlobalGrowth and Prosperity:http: //bit. ly/1 nxI1 hBHM Government, 201 3.Immigration Statistics, April to

June 2013:http: //bit. ly/1 nxHZX3

References

Annual applicants for asylum in the UK, 1 995-2008

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Goodhart’s Law says thatonce you target aneconomic indicator itstarts to misbehave.

This was originally used byProfessor Charles Goodhart (whorecently retired from the LSE) todescribe the behaviour of the M3monetary aggregate which wastargeted by Mrs Thatcher’sgovernment in 1979. Howeversince August, when the MonetaryPolicy Committee set out itsforward interest rate guidance interms of a 7% unemploymentthreshold, unemployment hasstarted to behave very strangely.In August the MPC thought itwould take two years forunemployment to fall to 7%. But itis already down to 7.1% andfalling like a stone.

Normally, aneconomic recoverysees an increase inthe demand forlabour which movesus up the supplycurve and increasesboth real wages andemployment. But thistime we are seeingemployment risestrongly while realwages continue tofall. It is interestingthat CPI inflation hasfallen from 4.7% to 2.0%, but theeffect of this has been blunted bythe fall in earnings inflation, from3.2% to below 1%. It seems thatthe increase in the demand forlabour has been matched by anincrease in supply that has moved

us down thedemand curveas additionalworkers pricedthemselvesinto jobs.Whatever thereason for thissituation, itleaves the MPCwith a big

headache. What are they likely todo?

The labour market isincreasing…

Employment topped 30 millionlast year, showing an increasenearly a million over two years.However, the continuedsubsidence in real wages isproving to be the government'sAchilles’ heel and could indeedprove to be the weak spot in therecovery. Consumers cannotcontinue to drive growth formuch longer without a recoveryin real wages. So far they have

labouring under false impressions


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Peter Spencer, Lecturer in the DERS, takes a look at the factors affecting the UK labourmarket.

been happy to finance theirspending spree by reducing theirsaving rate, which has come downfrom 7.9% in the first half of 2012to 5.4%, but the scope for furtherfalls is limited.

…pushing up employment anddepressing real wages andproductivity

It is hard to find another episodein which employment has beenrising and wages falling for anysignificant period of time. Thisseems to be the result of series ofpositive influences on the supplyof labour which have depressedreal wages as people pricedthemselves into jobs. It is not hardto see the influences that are atwork. Immigration is anotherthorn in the government’s side.Besides its social and politicalimpact, it weakens the bargainingpower of native workers andundermines real wages. Olderworkers are delaying retirement,swelling the workforce andadding to the downward pressureon remuneration. The coalition’scuts have similar effects onemployment and wages.

Immigration is boosting thelabour force…

Let’s take a look at the way theselabour supply influences areevolving. EU immigration is thefirst on the list, with Bulgaria andRomania in theheadlines at themoment. The first chartshows the wave ofimmigration fromPoland and the other 7countries that joinedthe EU in 2004. Thefinancial crisis brokethis wave in 2007, but ithas since picked up

momentum, adding nearly 400thousand to the workforce sincethe end of 2009. So far,immigration from Bulgaria andRomania has been relativelysmall. However, it is interestingthat immigration from the coreEU 14 states has picked up since

the Euro crisis, increasing the UKlabour force by 130 thousand overthe last two years.

…but late retirement andbenefit cuts are more important

Youth unemployment is also highon the political agenda. Actually,it was increasing well before therecession struck. However, thestrength of the demand for labour

is at last making inroads to this.At the other end of the age range,workers faced by a collapse inannuity rates due to longevity andfalling bond yields are remainingin the workforce for much longer.The move towards earlyretirement, which reducedparticipation by the 50-64 yearage group during the 1990s, hasnow been reversed. Despite theburgeoning numbers of olderworkers, the number of 50-64 yearolds that are economicallyinactive due to retirement hasfallen by 232 thousand over thelast two years. Meanwhile, thenumbers of over 65s in work haveincreased by 208 thousands.It seems clear that laterretirement has quietly addedmore to the labour force than EUimmigration over the last twoyears, more than twice as muchon these figures. Moreover, unlikeimmigration, which tends to hurtnative workers at the bottom endof the earnings scale, its effectsare felt right across the board,with prospects for responsibilityand remuneration held backacross a wide range ofoccupations and age groups.

The coalition’s benefit cuts arehaving a similar impact and arelikely to continue well into thenext Parliament if theConservatives will the election.They come hot on the heels of theLabour government’s push to get

off welfare and back intowork. This packageincluded a concerted andremarkably successfulcampaign to get teenagepregnancy rates down.Single parents have allbeen encouraged to findemployment. The numberof lone parent householdshas practically halved,

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from nearly a million in 1997 tojust over half a million currently.The numbers on IncapacityBenefit rose under the firstLabour administration, but hadstabilized by 2003. In October 2008Incapacity Benefit and SevereDisablement Allowance wasreplaced by Employment andSupport Allowance and subject tomore stringent medicalassessments. The numbersreceiving these benefits havesince fallen by 150 thousand, with130 thousand coming off thisbenefit over the last two years.The total number of thosereceiving in work benefits hasfallen by 287 thousand over thelast two years, with most of thesebeing deemed fit rather than unfitfor work.

These trends are likely topersist…

All in all, these calculations wouldsuggest that EU immigration,delayed retirement and benefitreforms increased the potentialUK workforce by around 900thousand (nearly 3%) in twoyears. Adding in the 325 thousandredundancies seen in the publicsector over the last two years,suggests an increase of well over amillion in the numbers available

for employmentin the privatesector. It isremarkable thatthe labourmarket hasaccommodatedthis increasewithout a rise inunemployment.Some of theseindividuals willhave lackedskills andmotivation

initially, but others will be highlyskilled and enthusiastic. Indeed,the biggest area of recruitmenthas been seen in the Professional,Scientific and Technicalindustries, which added 137thousand to payroll in the lastyear and 191 thousands over thelast two years.

…but their effect on theeconomy is hard to predict…

Not all of these people will havefound jobs yet. However, thesefactors have probably increasedthe labour force by around 3%over the last two years. The Cobb-Douglas model would suggest that

with investment fixed, this wouldincrease output by 2% and depressthe marginal product of labourand hence the real wage by 1%. Itwould thus go a long way toexplaining the developments wehave witnessed in output andlabour markets over the lastcouple of years.

...adding to the uncertaintiesfaced by the MPC

So what should the MPC do? Thefall in unemployment is verywelcome and has boostedconsumer confidence andspending because people feelmore secure in their jobs.However, real wages are alsoimportant for confidence andhave not shared in the recovery. Ithink this makes unemployment avery misleading indicator. If theMPC hike interest rates before thelabour market has stabilizedproperly and real wages havebegun to recover this could easilyknock the recovery on the head.Fortunately, now that inflationhas come back in line with thetarget, the MPC will have the timeto wait for a proper recovery toset in.

The current MPC of the Bank of England.

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Economics

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someonewithtw

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A-Levels

Econometrics lecturerMichael Thornton takes a look at the nuances behind the data

seeing inmore thanonedimension

Most people, it seemsfair to assume,conduct someresearch before

making their choices about whatto study. I did once teach a year10 pupil who had chosen GCSEEconomics expecting to learn howto make cakes, but that was sometime in the past and in

Humberside, both of which, by allaccounts, should be consideredanother country1. Beforecommitting three years atUniversity, however, a littlebackground investigation is thenorm. Anyone whose backgroundinvestigation went as far as aquick trawl of the internet2 orattending a presentation here at

the University of York will havecome across the above graph.

The graph shows the earningspremium for graduates, relativeto those with two or more Alevels, by different academicdiscipline. At first sight, thepicture it paints is clear andunambiguous: degrees in general

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improve earning power; the effectis stronger for females more thanmales in all disciplines; and, thepremium is highest for graduatesin Economics. Perhapsunsurprisingly, I quite often findmyself using this graph onpotential applicants, but even as Ido so there is, I must confess, apart of me that feelsuncomfortable with it, for it isriven with subtle deceptions and,even as I am extolling the virtuesof my discipline, I am tempted toexplain how it provides thetraining to examine precisely thiskind of thing more closely.There are a number of issues thatcould be causing me discomfortbut aren’t. One is the veracity ofdata and the size of sample usedto generate it. If this were acomparison of random group offriends, drawn togetherinfrequently to watch one anotherget married, the picture would beunreliable, but thankfully it is not.The data were published by theOffice of NationalStatistics based onthe Labour ForceSurvey, the nationalsurvey thatunderpins theunemploymentstatistics. They arenot as reliable asadministrative data -there is evidence thatpeople are notentirely honest when reportingtheir earnings - but still widelytrusted. Another is the choice ofcategories in the presentation. Ifa category entitled `Medicine andDentistry’ were to be split fromwithin the `Health’ categorywould `Economics’ still come out

on top? Probably not, but no one,I am sure, needs me to tell themthat such professions are wellremunerated. A third is that thepresentation is only averages,behind which lurk a collection ofdistributions. Clearly, there are anumber of fabulously wealthymale arts graduates in thecountry and the oddimpoverished female statistician.

The dubious aspect is that thegraph invites the untrainedindividual to put themselves intothe graph and forecast the impactthat studying Economics will haveon their own earnings. You may,even now, be luxuriating in theclear, positive correlation

between completing a degree inEconomics and earnings. Butother issues, currently hiddenbeneath this excel-generatediceberg tip, might change thatview. Given fuller consideration,a different picture might emerge.The only mitigating feature underconsideration here is gender. It islong established in empiricalwork3 that the longer an

individual has been in post, infact the longer they havebeen in employment, thehigher their wages tend to be.The data in the graph werecollected in surveys between1996 and 2006 and containsgraduates who are atdifferent stages in theircareers. If graduates ofdiscipline A tend to be olderand in work for longer than

those of discipline B thendiscipline A would, other thingsbeing equal, have a higheraverage wage premium thandiscipline B. But what wouldcause a disparity in the seniorityof graduates in a sample? Well ifthe numbers nationally studying

1. L.P. Hartley, The Go-Between: http://bit. ly/1mgedCt

2. http://studyingeconomics.ac.uk/where-next/jobs-and-careers/money-you-could-earn/

3. Mincer, Jacob (1958). "Investment in Human Capital and Personal Income Distribution". Journal ofPolitical Economy 66

(4): 281–302

Financial hubs l ike the London Stock Exchange may be inflating theaverage earnings of Economics graduates.

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discipline A are falling relative tothose studying discipline B, thenthat is exactly what would happento the sample. Failure to controlfor job tenure is a seriousoversight in the analysis: the lesspopular a discipline becomes thebetter it looks.Now we’ve got started, we mightwant to control for other things,such as: attending a Russell groupuniversity; whether the degreewas a BA or a BSc; whether apostgraduate degree was alsotaken; whether employed in thefinancial services industry. Someof these will be of interest in theirown right, many will not, but allwill help to sweep out clutter andprovide a morerefined pictureof the effect ofan Economicsdegree onearnings. But agraph featuringall of thesedimensions, andtheir inter-relations, would be impossible tounderstand. How could we,feasibly, split out that manyeffects? The answer lies inEconometrics.

Econometrics is oftenmisunderstood in a number ofsenses. Many students, I know,feel that the rolling landscape ofGreek letters, subscripts,superscripts and hats represent asecret language through whichthe high priests of the religionexact torture. (A more elegantlanguage is available for thoseprepared to master its grammar.)But anyone wishing to turn theirback has to be prepared to answerthe question: what else would youlike to do with all this data,flooding out of the realm ofeconomics in the form of prices,

quantities,decisionsandactivities?If Economicsis to haveany truckwith thescientific method, that answercannot be to ignore them. Youmay not find the tools easy tomaster, but clearly there is a jobto be done. The job is not justestimating the effect of a degreeon earnings, but assessing howreliable that estimate is: howlikely it is to have been generatedjust by randomness; howconfident can we be?

As in many disciplines, a littlelearning is a dangerous thing andone of the most important thingsto understand is what aneconometric technique cannot tellyou; where it is inappropriate,untrustworthy, and evendeceitful. My argument about theearnings data might make for aclearer and fairer analysisbetween disciplines, but stilldoesn’t quite get to grips with thequestion going through the mindof potential student: what willstudying Economics mean for me?Here the relevant counter-factualis not someone with two or moreA-levels, but you if you chose notto go to University at all.Employers reward a range ofthings in their employees,including self-discipline,

dedication and the intellectualability to absorb and tomanipulate difficult concepts. Butthese are all skills needed tocomplete a degree. Indeed allpotential students have formedsome idea of the extent to whichthey possess, or could develop,these skills before applying tostudy at University. In otherwords, those more likely to want

to go toUniversitywould alsobe morelikely tocommandhigherwagesbecause oftheir innate

abilities. This is a classic sampleselection problem. If we can’tobserve these innate abilities, andtypically we can’t, then we are atrisk of overestimating the wagepremium. There are however, onoccasion, ingenious ways toovercome this problem. Indeedmany academic careers areunderpinned by such ingenuities.For what it’s worth, looking atsome other sources around, myguess is that the wage premiumfor Economics graduate is veryhealthy. For that reason we stilluse the graph. Looking at whichother disciplines also command apremium there is evidence that,not only could Econometrics giveus a better understanding of thepremium for Economicsgraduates, it is probably one ofthe reasons the premium is there.

xkcd.com

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The 20th century is oftenassociated with thegradual spread ofdemocracy in Europe,

culminating in the collapse of theSoviet Union in the 1990s.However in light of the recentfinancial crises people have begunto more openly question whetherdemocrats are the best stewardsfor the economy. In particulartechnocrats, or technical experts,have been cited as a potentialalternative to democrats. Thistrail of thought reached ahighpoint inresponse to theEurozone crisis,where as aresult of marketpressure bothGreece and Italyreplaced theirdemocraticallyelectedgovernmentswith unelectedtechnocraticones.

Proponents of this system citehow monetary policy is often in

the hands of unelectedofficials in many Westerncountries. In countries suchas the UK this involves havingan independent central bank,which is responsible formaintaining price stabilityand preserving confidence inthe financial system. This hashelped it to respondeffectively to changingcircumstances since the financialcrash of 2007, where both theBank of England and other centralbanks have been able to use loosemonetary policy to help sustainthe economy. This has entailedkeeping interest rates close to 0%in an attempt to encouragebusinesses to invest.

Additionally because centralbankers are not directlyaccountable to the electorate,they have had far more scope to

experiment in terms of theirresponse to the crisis. This hasconsisted of unconventionalmonetary policy tools such as‘quantitative easing’, in which thecentral bank purchases bondsfrom private firms such as banks,which in turn can be lent tohouseholds and business. As a

result borrowingcosts have beenlower andconsumerspending higherthan otherwisewould have beenthe case duringthe crisis. Such apolicy is less likelyto have beenpursued by electedofficials, due to

the ambiguous nature of theeffects that it may have, whichcould be to the detriment offuture reelection.

OR

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

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Similarly if technocrats were incharge of fiscal policy this wouldenable them to make decisions onissues such as spending withoutpolitical constraints. This isparticularly important, sincesome democratic governmentshave made promises, perhaps toattract votes, which subsequentlytheir countries were unable toafford, leading to a furtherbuildup of debt.

Perhaps the best modern dayexample of what technocraticgovernments can achieve can befound in Italy. In late 2011 anunelected government led byMario Monti was brought in tomanage Italy’s economy. This wasin light of increasing yields onItalian bonds and a lack ofconfidence in the electedgovernment of Silvio Berlusconito enact the necessary economicreforms that the countryrequired. Although it wasconstrained by the fact it stillrelied upon support from thepolitical parties to pass legislationthrough parliament, thegovernment was able to pass vitalreforms to areas such as the labormarket. Italian government bond

yieldssubsequentlyfell fromover 7% inJanuary 2012to just over4.5% inDecember2012,suggestingthat marketconfidencewas beingrestored.

Howeverwhile Monti’sgovernment

did instigate some reform, itinspired a lot of protests fromItalian civilians. Many wereparticularly alienated by havingpolicies thrust upon them whichhad never been given ademocratic mandate. Similarly iffiscal policy, in addition tomonetary policy, was put into thehands of technical experts thenthe influence they had over ourevery day lives would greatlyincrease. While it is evident thatmany people do not trust thecurrent political class, it is notclear that they would trust anunelected and unaccountableofficial either; especially If theirstandards of living depreciated asa result of their actions.

In response to the financial crisessince 2007 there have been fewradical reforms undertaken bydemocratic governments.However they have previouslyhad far greater success atrevitalizing their economies.During the early 2000s Germanyunderwent radical labour marketreforms, which have since helpedto ensure it has one of the mostflexible labour markets in Europe.More recently this has helped it

perform strongly in spite of therecent Eurozone crisis, since thecompetitiveness of her exportshas enabled her to build upmarkets in developing countriessuch as China. The democraticlegitimacy these governments hadalso made it easier to negotiatewith pressure groups such asunions, eventually reaching aconsensus on issues such as wageexpectations and implementingreforms that survived in thelonger term. It remains perfectlypossible that democraticgovernments will be able to seizethe initiative again ascircumstances require them to.Technocratic governments can beused as a short term measure tostabilize the economy where thepolitical system appears too weakand unstable to achieve this. Thiswas the case in Italy, wherewithout technocratic government

it is still unclear whether Italycould have avoided a bailout.However ultimately their lack ofdemocratic accountability makesreforms they do instigate moredifficult to accept. This ultimatelymakes it more likely that they willbe watered down in the future.Where possible it shouldtherefore remain the role ofgovernments to be responsible forfiscal policy.

Mario Monti served as Prime Minister of I taly from

2011 -201 3, in the wake of the I tal ian debt crisis

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The ArabUprisingswere theresult of ‘the

desire of a vast,underclass of people towork in a legal marketeconomy’, at leastaccording to the freemarket economist,Hernando De Soto ofthe Institute of Libertyand Democracy.Essentially he argues that theinformal economy - those peoplewhose work goes unregulated andunrecorded by the state, such asthe gamut of traders andproducers who fill the souks and

squares across the Middle East –faced an inability to access thebenefits of the free market. Theresult, according to De Soto, waspoverty, neglect and an increasedpropensity to face the kind ofexpropriation experienced byMohammed Bouazizi. An ordinaryfruit stall owner in Tunisia,Bouazizi committed self-immolation: ushering in the firstprotests of the Arab Uprisings,having had his cart and produceconfiscated by the police.

De Soto’s argument has manymerits and some notableweaknesses, but these are not thefocus of this article. Insteadconsider the wider landscape of

economics andthe ironicnature of hisargument. Thatis, economiststhe world overhave largelyignored theexistence of theinformal

economy,despite thefact that it

is worth US$10 trillion across theglobe every year. And yet theinformal economy exhibits manyof the characteristics of the freemarket economists’ panacea,perfect competition.

Defined as much by its inverse, amonopoly of one producer andmany customers, perfectcompetition is a theoreticalmarket in which no participantshave control over price; in whichmany buyers and sellers operate,none of which have a significantmarket share; where firms canenter or leave the market withoutsignificant cost; and where thegoods that are traded are identicalor very similar.

theirony

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economyby Harry Quilter-Pinner

Free market economist Hernando deSoto

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As a result of these characteristicscustomers do not mind wherethey purchase their goods.Instead they are just concernedabout how much they cost. Anyincrease in the price of a good atone supplier leads to a completeloss ofmarketshare ascustomersshift toone of theothersupplierswho offerthe samegood butat a lower price. This competition,economists argue, createsefficient markets where theminimum resources are used toproduce the most goods possibleand therefore costs, and the priceto the consumer, are kept to aminimum.

Now consider the characteristicsof the informal economy, thevillain of the Arab Uprisingsaccording to De Soto. A surveyconducted by the GlobalFairness Initiative (GFI) in thebirth place of the ArabUprisings, Tunisia, finds that ithas startlingly similarcharacteristics to a perfectlycompetitive market. Forexample, the data shows thatthe cost of entering theinformal sector is relativelylow with 56% of businesses inthe informal economy needingless than 1000 Tunisian Dinar,equivalent to approximately100 work hours, in start-upcapital.

The survey also finds thatbusinesses (especially thoseoperating in market places)produce and sell very similar

products, resulting inrespondents to the GFI surveyhighlighting high levels ofcompetition as one of the biggestbarriers to personal incomegrowth. Everything we knowabout the informal economy

suggests that producers cannotset their own price, but have totake the price the market sets.This is a result of the fact thatinformal businesses by their verynature command a small marketshare, something suggested by thesmall size of informal businessesin Tunisia. 47.9% of businessesare made up of just one person,with just 8.7% made up of morethan 4 people.

Studies also find that inflation is akey concern for informalbusinesses, as is the inability ofinformal traders (in some cases)to buy wholesale, forcing them torely on middle man. Theseconcerns occur, in all likeliness,because informal businessmenrealise that these issues lead tovariation in the cost of theirgoods in comparison with theircompetitors, with a resultingdecline in their market share andincome.

Furthermore, the likenesses don’tend there. The informal economyalso demonstrates many of theconditions prized in a perfectlycompetitive labour market. This isthe ideal labour market thateconomists point to whenrecommending that that we makeour labour markets in the Westmore ‘flexible’, by which theymean, make it easier and cheaperfor firms to hire and lay offworkers. They argue that flexiblelabour markets make firms moreprofitable and ensure thatunemployment becomes a shorter

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termphenomenaand affectsless people.

The GFIdataset findsthat theseconditions,so sought after in the West, are infact prevalent in the informaleconomy in developing countries.For example, 92.6% of salariedinformal employees surveyed hadno contract and could thereforebe hired or fired with ease and at

low cost. Furthermore, other‘labour market rigidities’ are alsonot present in the informaleconomy. 99% of those surveyedwere not part of a trade union,and despite Tunisia officiallyhaving a minimum wage theinformal sector has no need tocomply with it; 37% of those inthe informal economy are paidbelow the minimum wage.The result of these conditions, asfree market economists wouldpredict, is an almost limitlessnumber of jobs created in theinformal sector. Indeed,economists at the InternationalLabour Organisation and UN findthat when there is a recession, theinformal economy expands byabsorbing the unemploymentcreated by ‘labour marketrigidities’ in the formal sector.

The irony revealed by De Soto’sarguments is therefore that, giventhe informal economy is the mostclosely applicable example wehave of perfect competition, whyhave mainstream economistsignored if for so long? This is aquestion with many possibleanswers but let me suggest two.

The first is that, as noted in arecent editorial by the FinancialTimes, economists over the lastfew decades have ‘invested inabstract mathematic models,whilst insufficient effort’ has been‘made to link these to real-lifeexperience’. Therefore, a possibleexplanation to this irony is that it

wassimply anoversightofeconomists to notapplyperfectcompetiti

on to real life. They were so busycrafting theories and conclusivelyproving them mathematicallythat applying them to the murkyrealities of the world outsidenever became a priority.There is another, more cynical,alternative. The GFI dataset findsthat the informal economy, aclose proxy of the perfectlycompetitive market, fails toprovide even a basic standard ofliving or any kind of social justice.For example, the averageparticipant in the informal sectorearns what formally employedTunisians made over a decadeago, well below the wagesuggested by Tunisia’s middleincome status. It also shows thatmost informal sector workersdon’t have access to healthcare,social security, overtime pay,holidays, breaks or any form oflabour protection.

The evidence provided by thesurvey weakens the assertionsmade by proponents of the freemarket that perfect competitionis in fact the panacea ofeconomics. It shows that in realityflexible labour markets (at least inthe most extreme form) are mostflexible in terms of standards ofliving and social justice. It is muchbetter, a free market economistmight conclude, that our panacearemains a beacon of hope whichcan be heralded as the solution,rather than attaching it to themessy, imperfect systems ofreality.

Capital: TunisPopulation: 1 0,777,500 (201 2)GDP (PPP): $1 05.347bnGDP (PPP) per capita: $9,774GINI Index: 36.1 (medium)(201 0)HDI: 0.71 2 (ranked 94th) (201 3)Tunisia achieved independencefrom France in 1 956. Thecountry was control led by theConstitutional Democratic Rallyunti l Zine El Abidine Ben Aliassumed the presidency in abloodless coup in 1 987. In 2011 ,a revolution resulted in theoverthrow of President Ben Alifol lowed by the country's firstfree elections. Since then,Tunisia has been consolidatingits young democracy.Tunisia is an export orientatedcountry which has beenexperiencing an average of 5%annual growth since the 1 990's,although its development isseverely constrained bycorruption.


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In a packed out lecture hall inWest London, a colourfulcollection of students havecongregated as if to hear

holy testament. People sit on thestairs and line the walls, leaningforward in eager silence. Theywere promised a scientificmethod.

“What do you think is the numberone reason that startups fail?”comes the question from thespeaker.

“Not enough capital?” “Aninsufficiently detailed businessmodel?” “failure to reach efficientscale fast enough?” come theresponses.

“Almost, not quite, good idea. Butthe number one reason thatbusinesses fail is that they buildproducts that noone wants.”

This is CustomerDevelopment, theLean Startup. This isthe Build MeasureLearn feedback loop.The method ofdiscovering how tofail fast and failpublicly, how to learn who yourcustomers are, what the productthey want looks like: withoutasking them and withouttraditional “Market Research”.The idea is: if you ask a customerif they want a new invention, theyprobably won’t give you a helpfulanswer (they don’t really knowwhat you’re talking about, theywant to stop pestering them orthey want to make you happy).

What you really want is proof thatthey will actually buy. And it is

almost impossible to do thiswithout presenting a product tothem and asking them to actuallybuy it. It is a philosophy like thisthat old school infomercials andshopping channels used. Theyused to have a 4-6 week shippingtime. Often, this was the timerequired to actually produce theproducts.

Similarly: kickstarter proves, tosome extent that people will paymoney to see your product exist.As do pre-ordering, beta modesfor sites and apps, pop-up shops.These are all versions of whatLean Startup methodology calls“Minimum Viable Products”: thevery least amount of work on aproduct that you can get awaywith and still test demand.

For the latter examples, a leanstartup philosophy is arguablydriving the increasing prevalence

leanstartup.com

Dominic Falcao, DERS Alumnus, reports.

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of these types of de-risked pre-sales.

So say I think that I have abrilliant idea. I am going to build awidget that can regulate the heatof an electric blanket and thepower setting on my fan, keepingme in the perfect equilibriumtemperature. I see that themarket for fans is x, the marketfor electric blankets is y, andfigure I will be able to disruptboth. To prove the product, Icould make a video thatdemonstrated how the technologywould work if it existed (withoutbuilding anything) in order togauge interest (as Dropbox did). Imight create a product that doeswhat the final product would do,but not using the final technologythey wanted to use as it would beexpensive, for example havingconsumers test out the product,but manually adjusting theblanket and fan to reach the ideal

temperature (a so called‘concierge MVP’).

Building is the first stage. Next IMeasure. I ought to actually havetwo landing pages, and split test(also known as A/B testing)differences in layout, inmessaging, in the actual product.And the more iterations I canbuild and measure, the better.After every iteration, I take thewinning element and test anotheras soon as I am reasonably sure ofstatistical significance.

Build Measure Learn, repeat, asfast ashumanlypossible.Coupledwith theLeanStartupmethodo-logy is anexhilarating sense ofempowerment. That it is possibleto build a huge customer base onan idea, if you can represent itsufficiently well. If you cannotbuild it in the end, just apologise,refund your customers and tryagain: it was just a prototype, anexperiment, a test, and thesethings are more or less meant tofail. Anyone can do this, fromtheir kitchen, from a laptop inDelhi, riding their giant mountaindog bareback through the

Himalayas.I think you should at least trystarting up before getting washedinto graduate scheme applicationson a tide of panicked peerpressure. You probably have somekind of idea, some passion orhobby you would rather do as ajob. Noone can possibly blame youfor thinking about how tocommercialise it.

The myth is that starting up andgoing into startups isexceptionally risky for youpersonally. Really it is only reallythe business itself which suffersthe risk. But the fact is that thereare vastly more jobs at SMEs andstartups than graduate schemesand the majority of graduates endup in SMEs anyway. Hence, lessrisky.

And in my experience, theprestige from being brave enoughto take an alternative route is justas great as the prestige of workingfor a graduate scheme, though

perhapsdifferent innature. Sothat even ifyou decideyou reallywouldprefer tohave an

accountancy qualification aftereverything, your experiencestrikes you out as an innovativeindividual, rather than as justanother student who freaked outabout the huge undeterminedvoid that awaited them after uniand used that fear to breed falsepassion for auditing someoneelse’s boring business. Becausereally, no-one cares that muchabout auditing.

Amen.

Where possible, we might usecohort analysis. That is, in aparticular time period, wemeasure the group ofindividuals who interacted withour service as a ‘cohort’ , usingpercentages rather thannumbers (volumes can beachieved later, starting up, weonly want to know how effectivecertain elements are). Whatpercentage were newcustomers? How many of themregistered? How many whoregistered referred a friend?How many actual ly bought theproduct? That way, we cut to theconversions straight away, cancompare over time to see if weare getting better at building orrepresenting our product, andfi ltering out artificial bumps inPR, Marketing or exposure.

Cohort Analysis

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autumn 2014, issue 7

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