A New Way to study Economics


September 13, 2017

A New Way to study Economics

by John Cassidy

https://www.newyorker.com

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Dealing with Unemployment,Inequality, and  Poverty

With the new school year starting, there is good news for incoming students of economics—and anybody else who wants to learn about issues like inequality, globalization, and the most efficient ways to tackle climate change. A group of economists from both sides of the Atlantic, part of a project called CORE Econ, has put together a new introductory economics curriculum, one that is modern, comprehensive, and freely available online.

In this country, many colleges encourage Econ 101 students to buy (or rent) expensive textbooks, which can cost up to three hundred dollars, or even more for some hardcover editions. The CORE curriculum includes a lengthy e-book titled “The Economy,” lecture slides, and quizzes to test understanding. Some of the material has already been used successfully at colleges like University College London and Sciences Po, in Paris.

The project is a collaborative effort that emerged after the world financial crisis of 2008–9, and the ensuing Great Recession, when many students (and teachers) complained that existing textbooks didn’t do a good job of explaining what was happening. In many countries, groups of students demanded an overhaul in how economics was taught, with less emphasis on free-market doctrines and more emphasis on real-world problems.

Traditional, wallet-busting introductory textbooks do cover topics like pollution, rising inequality, and speculative busts. But in many cases this material comes after lengthy explanations of more traditional topics: supply-and-demand curves, consumer preferences, the theory of the firm, gains from trade, and the efficiency properties of atomized, competitive markets. In his highly popular “Principles of Economics,” Harvard’s N. Gregory Mankiw begins by listing a set of ten basic principles, which include “Rational people think at the margin,” “Trade can make everybody better off,” and “Markets are usually a good way to organize economic activity.”

The CORE approach isn’t particularly radical. (Students looking for expositions of Marxian economics or Modern Monetary Theory will have to look elsewhere.) But it treats perfectly competitive markets as special cases rather than the norm, trying to incorporate from the very beginning the progress economists have made during the past forty years or so in analyzing more complex situations: when firms have some monopoly power; people aren’t fully rational; a lot of key information is privately held; and the gains generated by trade, innovation, and finance are distributed very unevenly. The CORE curriculum also takes economic history seriously.

The e-book begins with a discussion of inequality. One of first things students learn is that, in 2014, the “90/10 ratio”—the average income of the richest ten per cent of households divided by the average income of the poorest ten per cent—was 5.4 in Norway, sixteen in the United States, and a hundred and forty-five in Botswana. Then comes a discussion of how to measure standards of living, and a section on the famous “hockey stick” graph, which shows how these standards have risen exponentially since the industrial revolution.

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The text stresses that technical progress is the primary force driving economic growth. Citing the Yale economist William Nordhaus’s famous study of the development of electric lighting, it illustrates how standard economic statistics, such as the gross domestic product, sometimes fail to fully account for this progress. Befitting a twenty-first-century text, sections devoted to the causes and consequences of technological innovation recur throughout the e-book, and the information economy receives its own chapter. So do globalization, the environment, and economic cataclysms, such as the Depression and the global financial crisis.

Given the breadth of its coverage, the CORE curriculum may be challenging to some students, but it takes advantage of being a native online product. (In Britain, a paperback version of the e-book is also available.) The presentation features lots of graphs and charts, and, in some cases, students can download data sets to create their own. The quizzes are interactive, and the presentation is enlivened by potted biographies of famous dead economists (Smith, Keynes, etc.) as well as video interviews with eminent living ones, such as Thomas Piketty.

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Unlike most textbooks, the CORE e-book was produced by a large team of collaborators. More than twenty economists from both sides of the Atlantic and from India, Colombia, Chile, and Turkey contributed to it. (Two of them, Suresh Naidu and Rajiv Sethi, teach at Columbia and Barnard, respectively.) The coördinators of the project were Wendy Carlin, of University College London, Sam Bowles, of the Santa Fe Institute, and Margaret Stevens, of Oxford University. The Institute for New Economic Thinking provided some funding to help get things off the ground.

The members of the CORE team deserve credit for responding to the critics of economics without pandering to them. They have produced a careful but engrossing curriculum that will hopefully draw more young people into economics, and encourage them to continue their studies. (At University College London, students who took the CORE course did better in subsequent economics classes than earlier cohorts who took a more traditional introductory course.)

But the CORE material isn’t just for incoming students. It will also reward the attention of general readers and people who think they are already reasonably conversant with economics. (Personal testimony: Having gone through some of the material in detail, I think I might finally understand the Malthusian model and how to calculate bank leverage ratios!) All this, and the price can’t be beat.

 

Malaysia Sdn Berhad: Book Review


August 11, 2017

Malaysia Sdn Berhad: Fox guarding the henhouse?

BOOK REVIEW | Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia. Edmund T Gomez et al. Institute for Democracy and Economic Affairs (IDEAS), Kuala Lumpur.

by Prof. Dr. Jomo Kwame Sundaram

http://www.malaysiakini.com

In the late 1980s, the young Terence Gomez proved himself to be the worthy successor to a Malaysian research tradition begun by James Puthucheary in Singapore’s Changi Prison almost three decades earlier. Gomez single-handedly transformed our understanding of the role of politics in the ownership and control of the Malaysian corporate sector.

Employing novel methods as needed and appropriate, the auto-didact researcher showed how official policies and institutions had enabled an earlier generation of selected Malay business professionals to take over some commanding heights of the Malaysian economy.

Change and continuity

In their new book, Gomez and his team of researchers chart developments over the last three decades since he began his pioneering work, paying particular attention to developments following the 1997-1998 crisis. That crisis exposed the vulnerability of the earlier expansion closely associated with the Umno leadership then.

The corporate restructuring and refinancing institutions and processes that followed were not simply bailouts at the public expense, as alleged by some critics then. Instead, as the book shows, most major assets are now under new management, ultimately controlled by the current prime minister cum finance minister.

The authors focus on seven government-linked investment companies (GLICs), namely Khazanah Nasional, Permodalan Nasional (PNB), both under MoF Inc, Kumpulan Wang Simpanan Pekerja (KWSP or EPF), Kumpulan Wang Persaraan (KWAP), Lembaga Tabung Angkatan Tentera (LTAT) and Tabung Haji.

Malaysians may be comforted to learn that of the seven, only Tabung Haji is run by politicians, and the others by professionals. But after all, 1MDB too has been run by professionals (Jho Low is a Wharton graduate) while Felda Global Venture’s previous boss claimed to have a doctorate. The not-so-magnificent seven covered do not include others, such as those in the Felda group, controlled directly by the PM since 2004.

Most bumiputera entrepreneurs who emerged in the dozen years or so before the 1997 crisis also had impressive professional credentials. The apparently better performance of the more recent crop of professional managers may have less to do with their qualifications, than the ethos, checks and balances of the new institutional arrangements introduced and enforced by some GLICs.

Government control

The range of activities undertaken by government-linked companies (GLCs) overseen by the GLICs includes familiar ones from the 1980s such as utilities, finance, plantations, property and construction. Media, previously controlled by the ruling party and its trustees, are now held by GLCs, while investments in hospitals and other services have also grown. With development finance institutions now under GLCs, their original objectives and rationales have been undermined by commercial considerations.

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The Gomez team has done Malaysians a great service by describing how things have changed, tracing the bewildering variety of new arrangements. However, how to interpret this variety remains moot, and some informed readers will have their own bones to pick with what is considered most significant in their analysis.

Protracted crisis

Two economic developments help us better understand the recent growing unrest, especially among informed Malays. First, the Saudi-initiated oil price collapse in late 2014 precipitated a more general commodity price collapse. Meanwhile, lacklustre growth in Malaysia since 1998 has been exacerbated by premature deindustrialisation unconvincingly presented as inevitable in achieving developed country status.

Second, despite heavy censorship, news has been leaking out of corporate abuses involving not only 1MDB, but also FGV and other corporations associated with the legendary ‘Malaysian Official 1’. Easy money from China may have helped the regime with its immediate financing problems, but a generation familiar with mounting personal debt senses that this is at the public’s, taxpayers’ and future generations’ expense.

This ‘double whammy’ has been reflected in the much-weakened ringgit and by other indicators. Meanwhile, there have been heightened concerns about the recent foreign investor resurgence, especially with official non-disclosure of ownership data since 2008. Recent erosion of public faith in the state and ruling coalition has been accelerated by unprecedented recent abuses for personal gain and nepotism.

Don’t shoot the messenger

Even if successfully challenged on some details, this important book should open an important new debate on how Malaysia is to progress. Gomez offers some proposals, apparently at odds with the book’s sponsor. Others, especially participants in and observers of Malaysia’s corporate sector and political economy, will promote their own alternative purported solutions. The ensuing debate can only benefit the nation, as Gomez’s first decade of publications shaped the earlier debate and reforms, even if most outcomes may have disappointed him.

While this regime is undoubtedly associated with unprecedented abuses, there is little in the study to support the publisher’s faith in leaving things to the market and simplistic insistence on government withdrawal from the economy as a universal panacea to the myriad problems the nation faces. In the face of the wide-ranging and complex issues involved, this would be tantamount to throwing the baby out with the bathwater.

Unsurprisingly, this publication on the regime’s role in ownership and control of contemporary corporate Malaysia is silent on the current political crisis as the nation approaches the next general election. Nevertheless, IDEAs must be congratulated for sponsoring and publishing this important work.

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JOMO KS received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. The views expressed here are entirely his own.

 

 

Capitalism’s excesses belong in the dustbin of history


August 2, 2017

Capitalism’s excesses belong in the dustbin of history.

by Martin Kirk

https://www.theguardian.com/commentisfree/2017/aug/01/capitalism-excesses-dustbin-history

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Back in February, a college sophomore called Trevor Hill stood up during a televised town hall meeting in New York and put a simple question to the House minority leader, Nancy Pelosi.

Citing a study by Harvard University that showed that 51% of Americans between the ages of 18 and 29 no longer support capitalism, Hill asked if the Democratic party would contemplate moving farther left and offering something distinctly different to dominant rightwing economics? Pelosi, visibly taken aback, said: “I thank you for your question,” she said, “but I’m sorry to say we’re capitalists, and that’s just the way it is.”

The footage went viral on both sides of the Atlantic. It was powerful because of the clear contrast: Trevor Hill is no hardened leftwinger. He’s just your average millennial – bright, well-informed, curious about the world and eager to imagine a better one. By contrast, Pelosi, a figurehead of establishment politics, seemed unable to even engage with the notion that capitalism itself might be the problem.

It’s not only young voters who feel this way. A YouGov poll in 2015 found that 64% of Britons believe that capitalism is unfair, that it makes inequality worse. Even in the US it’s as high as 55%, while in Germany a solid 77% are sceptical of capitalism. Meanwhile, a full three-quarters of people in major capitalist economies believe that big businesses are basically corrupt.

May, Brexit and Future of the UK


August 1, 2017

Why you should and shouldn’t worry about Britain leaving the EU

by  Peter Beard @ 29/07/17

https://thestudenteconomist2017.wordpress.com/2017/07/28/the-good-the-bad-and-the-eu/#more-36

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As Clint Eastwood would say: “Nowadays, politically, everybody is promising everything. That’s the only way you can get elected”. As referenced in the title, British politics has stayed true to Eastwood’s quote. “A strong and stable economy” as Theresa May would put it during her electoral campaign… But as Brexit nears the horizon, can we really be sure of what she’s saying?

Over a year ago on June 23rd, Britain made the decision to leave the EU during the Referendum under David Cameron. Who would have thought it was going to happen? I certainly didn’t, probably nor the ‘Brexiteers’ themselves thought it would actually happen.

£9.8 billion – or in other terms, £188 million a week. That is what Britain net financial contribution was to the European Union. Significant as it may seem, the publics’ final vote decision was a mixture of this, but more important apparently is the standing on Jobs and Immigration. Roughly speaking,

Migration from the EU added £160 million in additional costs for the NHS across the UK – this is somewhat considerable. No wonder the older demographic voted to leave. I imagine it’s the waiting they were fed up with at their local clinic or hospital.

But in all seriousness, the likes of immigration were blamed for the causation of job losses in the UK. However, this is simply not true, especially when the economy is at a 25 year low for unemployment (4.5%). The notion of rising immigration and increased job losses being a direct cause and effect is a misconception. Just because X and Y are correlated does NOT mean that X causes Y or vice versa.

Nevertheless, the EU has reaped some benefits for the UK, such as the £3.19bn subsidies received in 2014 for British farmers – of which now accounts for 50% of farmers’ incomes.

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As it stands, Theresa May’s progress has frankly stagnated. To some, slow progress further advocates the pressing issue of uncertainty. Throughout this and last year’s electoral campaigns, the word ‘uncertainty’ has put fear into both the consumer and the firms of our economy… But why? Surely uncertainty is neither good or bad?

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Well, from a Macro-Economists point of view, uncertainty links to the idea of confidence and consumer sentiment; after all, if an economy is not confident in spending its own money, then no one benefits as money is the fuel used to drive economic growth.

So, if the UK spends less, we would expect greater job insecurity from your larger corporations because they are likely to withdraw inward investment from the UK – of which it is currently 3rd in the world for attracting FDI . Moreover, MNC’s  will no longer be part of the single market – a major benefit for firms when trading goods.

Put simply, not only are jobs at risk, but for the firms that stay in the UK, be prepared for every day retail prices to rise as the cost of extra tariffs will be passed down to the consumer.

However, to some the risk of uncertainty does not pose a serious nor long-term threat. Firstly, There’s no evidence of significant capital flight. London will arguably remain a leading financial centre outside the EU and banks will still want to be headquartered in Britain due to its comparatively low direct tax rates.

Secondly, though we expect the value sterling to fall, this does create inventive for manufacturers to export – perhaps this could be critical for reigniting the economy if and when we enter a recession.

Lastly, the removal of unwieldly EU regulations lowers some of the barriers to entry and thus improves competition – a principle that is good for consumer welfare surplus owing to wider choice and theoretically lower prices.

Overall, there is an underlying theme that was hardly mentioned during the debates: Free trade vs. Protectionism – ironic though that implementing protectionist policies is actually endangering more jobs than it is saving from the UK’s sunset industries such as the Steelworks and Car Manufacturing.

*Overall, I feel bad this post was not very helpful coming to a sound judgement, but neither is Parliament, so I don’t as feel bad after all.

Not just Economics, but also Humanomics


July 30, 2017

Not just Economics, but also Humanomics

by Gary Saul Morson*

*Gary Saul Morson, a professor of the arts and humanities at Northwestern University, is co-author of Cents and Sensibility: What Economics Can Learn from the Humanities.

and Morton Schapiro*

*Morton Schapiro, a professor of economics and President of Northwestern University, is co-author of Cents and Sensibility: What Economics Can Learn from the Humanities.

http://www.project_syndicate.org

In a 2006 survey, American university professors were asked whether it was better to possess knowledge from numerous fields of study, or from just one. Among professors of psychology, 79% were enthusiastic about interdisciplinary learning, as were 73% of sociologists and 68% of historians. The least enthusiastic? Economists: only 42% surveyed said they agreed with the need to understand the world through a cross-disciplinary lens. As one observer put it bluntly: “Economists literally think they have nothing to learn from anyone else.”

In fact, economists would benefit greatly if they broadened their focus. Dealing as it does with human beings, economics has much to learn from the humanities. Not only could its models be more realistic and its predictions more accurate, but economic policies could be more effective and more just.

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Whether one considers how to foster economic growth in diverse cultures, the moral questions raised when universities pursue self-interest at the expense of their students, or deeply personal issues concerning health care, marriage, and families, economic insights are necessary but insufficient. If those insights are all we consider, policies flounder and people suffer.

In their passion for mathematically-based explanations, economists have a hard time in at least three areas: accounting for culture, using narrative explanation, and addressing ethical issues that cannot be reduced to economic categories alone.

People are not organisms that are first made and then dipped in some culture, like Achilles in the river Styx. They are cultural beings from the outset. But, because culture cannot be rendered in mathematical terms, economists typically embrace the idea of a pre-cultural humanness.

To understand people as cultural beings, one must tell stories about them. Human lives do not unfold in a predictable fashion the way Mars orbits the sun. Contingency, idiosyncrasy, and unforeseeable choices play an irreducible role. Life displays what might be called “narrativeness,” implying the need for explanation in terms of stories. And the best appreciation of this is to be found in novels, which may be considered not just a literary form, but also a distinct way of understanding the social world. Although the events that novels describe are fictional, the shape, sequence, and ramifications of those events is often the most accurate account we have of how lives unfold.

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Economics inevitably involves ethical questions that are not reducible to Economics itself

Finally, economics inevitably involves ethical questions that are not reducible to economics itself – or, for that matter, to any other social science. Economists often smuggle ethical concerns into their models with concepts like “fair” market price. But there are many ways to make these issues overt and open them to argument.

There is no better source of ethical insight than the novels of Tolstoy, Dostoevsky, George Eliot, Jane Austen, Henry James, and the other great realists. Their works distill the complexity of ethical questions that are too important to be safely entrusted to an overarching theory – questions that call for empathy and good judgment, which are developed through experience and cannot be formalized. To be sure, some theories of ethics may recommend empathy, but reading literature and identifying with characters involves extensive practice in placing oneself in others’ shoes. If one has not identified with Anna Karenina, one has not really read Anna Karenina.

When you read a great novel and identify with its characters, you spend countless hours engaging with them – feeling from within what it is like to be someone else. You see the world from the perspective of a different social class, gender, religion, culture, sexual orientation, moral understanding, or other features that define and differentiate human experience. By living a character’s life vicariously, you not only feel what she feels, but also reflect on those feelings, consider the character of the actions to which they lead, and, with practice, acquire the wisdom to appreciate real people in all their complexity.

The point is not to abandon the great achievements of economics, but to create what we call a “humanomics,” which allows each discipline to keep its own distinctive qualities. Rather than fuse economics and the humanities, humanomics creates a dialogue between them.

Such a conversation would actually bring economics back to its illustrious roots in the thought of Adam Smith, who, in The Theory of Moral Sentiments, explicitly denied that human behavior could be adequately described in terms of people’s “rational choice” to maximize their individual utility. After all, people often behave foolishly. More important for Smith, their care for others is an “original passion” that is not reducible to selfish concerns.

Smith’s writings on economic and ethics share a deep sense of the limits of reason. Central planning is bound to fail, but so are algebraic models of behavior. One needs a subtle appreciation of particulars, the sort of sensitivity that was dramatized, a half-century after Smith’s moral treatise, by Jane Austen and her successors. A great psychologist, Smith knew that we need both cents and sensibility.

Econometric methods and mathematical models teach us much, but only so much. When it comes to human lives, characterized as they are by contingency and narrativeness, stories are an indispensable way of knowing. That is why the quantitative rigor, policy focus, and logic of economics must be supplemented with the empathy, judgment, and wisdom that defines the humanities at their best. Economists must speak to other disciplines – and let them speak back.

Trump and the Truth About Climate Change


July 22, 2017

Trump and the Truth About Climate Change

by Joseph E. Stiglitz

http://www.project-syndicate.com

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Under President Donald Trump’s leadership, the United States took another major step toward establishing itself as a rogue state on June 1, when it withdrew from the Paris climate agreement. For years, Trump has indulged the strange conspiracy theory that, as he put it in 2012, “The concept of global warming was created by and for the Chinese in order to make US manufacturing non-competitive.” But this was not the reason Trump advanced for withdrawing the US from the Paris accord. Rather, the agreement, he alleged, was bad for the US and implicitly unfair to it.

While fairness, like beauty, is in the eye of the beholder, Trump’s claim is difficult to justify. On the contrary, the Paris accord is very good for America, and it is the US that continues to impose an unfair burden on others.

Historically, the US has added disproportionately to the rising concentration of greenhouse gases in the atmosphere, and among large countries it remains the biggest per capita emitter of carbon dioxide by far – more than twice China’s rate and nearly 2.5 times more than Europe in 2013 (the latest year for which the World Bank has reported complete data). With its high income, the US is in a far better position to adapt to the challenges of climate change than poor countries like India and China, let alone a low-income country in Africa.

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After 6 months in office, Trump has shown that he is incapable of getting his agenda going. He cannot get at the issues which require his leadership.

In fact, the major flaw in Trump’s reasoning is that combating climate change would strengthen the US, not weaken it. Trump is looking toward the past – a past that, ironically, was not that great. His promise to restore coal-mining jobs (which now number 51,000, less than 0.04% of the country’s non-farm employment) overlooks the harsh conditions and health risks endemic in that industry, not to mention the technological advances that would continue to reduce employment in the industry even if coal production were revived.

In fact, far more jobs are being created in solar panel installation than are being lost in coal. More generally, moving to a green economy would increase US income today and economic growth in the future. In this, as in so many things, Trump is hopelessly mired in the past.

Just a few weeks before Trump’s decision to withdraw from the Paris accord, the global High-Level Commission on Carbon Prices, which I co-chaired with Nicholas Stern, highlighted the potential of a green transition. The Commission’s report, released at the end of May, argues that reducing CO2 emissions could result in an even stronger economy.

The logic is straightforward. A key problem holding back the global economy today is deficient aggregate demand. At the same time, many countries’ governments face revenue shortfalls. But we can address both issues simultaneously and reduce emissions by imposing a charge (a tax) for CO2 emissions.

It is always better to tax bad things than good things. By taxing CO2, firms and households would have an incentive to retrofit for the world of the future. The tax would also provide firms with incentives to innovate in ways that reduce energy usage and emissions – giving them a dynamic competitive advantage.

The Commission analyzed the level of carbon price that would be required to achieve the goals set forth in the Paris climate agreement – a far higher price than in most of Europe today, but still manageable. The commissioners pointed out that the appropriate price may differ across countries. In particular, they noted, a better regulatory system – one that restrains coal-fired power generation, for example – reduces the burden that must be placed on the tax system.

Interestingly, one of the world’s best-performing economies, Sweden, has already adopted a carbon tax at a rate substantially higher than that discussed in our report. And the Swedes have simultaneously sustained their strong growth without US-level emissions.

America under Trump has gone from being a world leader to an object of derision. In the aftermath of Trump’s withdrawal of the US from the Paris accord, a large sign was hung over Rome’s city hall: “The Planet First.” Likewise, France’s new president, Emmanuel Macron, poked fun at Trump’s campaign slogan, declaring “Make Our Planet Great Again.”

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But the consequences of Trump’s actions are no laughing matter. If the US continues to emit as it has, it will continue to impose enormous costs on the rest of the world, including on much poorer countries. Those who are being harmed by America’s recklessness are justifiably angry.

Fortunately, large parts of the US, including the most economically dynamic regions, have shown that Trump is, if not irrelevant, at least less relevant than he would like to believe. Large numbers of states and corporations have announced that they will proceed with their commitments – and perhaps go even further, offsetting the failures of other parts of the US.

In the meantime, the world must protect itself against rogue states. Climate change poses an existential threat to the planet that is no less dire than that posed by North Korea’s nuclear ambitions. In both cases, the world cannot escape the inevitable question: what is to be done about countries that refuse to do their part in preserving our planet?