Why Development Economics Should Be More Heavily Weighted In The A-Level Syllabus

The science of Economics is at its truest sense when its theories are used to help improve and sustain quality of life. To me therefore, the study of Development Economics is the single most important area of economics, that deserves more weighting in the A-Level syllabus. Currently, only the surface of Development Economics is scratched during A-Level, as development is either paired with globalisation, or “Ways of Measuring Development”. Neither of these provide sufficient depth to understand the essence and importance of Development Economics, as a vehicle to reduce international inequality and poverty within developing countries.

Over the last 30 years, there has been an unprecedented high level of growth within developing nations. Nations such as Botswana, China, and Brazil have seen their GDP per capita’s increase vastly, to the point where they have become self-sufficient, and not reliant on developed countries’ aid. These are the developing countries, but are not the countries that deserve the most attention in Development Economics. In Paul Collier’s “The Bottom Billion,” international economies are split into three categories : developed, developing, and the bottom billion. He argues that currently, there are a selection of economies that are stagnating, caught in a cycle of conflict, myopic policies, and resource deprivation. These “Bottom Billion” countries are in need of the most research and study to escape their vicious cycle; and in order to encourage the new generation of economists to develop theories on how to help these countries, it is vital that Development Economics is given increased significance on the A-Level syllabus.

Development EconomicsIndeed, as well as teaching Development Economics as a separate element to the course, it would also be important to implement aspects of Development Economics into pre-existing sections of the course. For instance, currently a great deal of the macro-economic section of the A-Level course focuses on different policy tools, and their usage and effectiveness. Perhaps when evaluating the effectiveness of said policy, the syllabus should also discuss its relative success when implemented in a developing economy, and the factors necessary for its potential benefit. This would allow the syllabus to become multidimensional, as students would learn about the necessary conditions for policy success through the lens of various economies and their various levels of development.

Therefore, the promotion of Development Economics is imperative to encouraging sustainable growth within the “bottom billion” countries, and thereby reducing international inequality and poverty. In order to encourage the next generation of economists to further deepen our understanding of Development Economics, it is vital that students are made aware of the challenges that developing countries face, as well as being receptive to discussion on how different economies may develop given their circumstance. If syllabi do not encourage this research, then the science of Economics will be poorly positioned to provide sufficient intellectual aid to developing countries, which may be detrimental to global efforts to help developing economies escape social stagnation.

Do Politicians Learn Anything From History?- 3/3 : “The Danger of “Learning” Lessons” – ECONOMICS HISTORY

After analysing both crises individually, it is now important to compare their similarities in terms of causation, effects and response, and therefore conclude whether or not the crises are comparable. This will allow us to hence understand to what extent policy makers were justified in their response to 2007/8, and whether or not they actually learnt from the failures and successes of the response to the Great Depression.  

1929 car

The causation for both crises shares many similarities. For instance, the policy climate created in the 1920s were meant to encourage people to take out loans to fund stock investment, through maintaining low interest rates, and providing the ability to ‘Buy on the Margin’, which allowed the general public to access the overvalued blue chip stocks. This is similar to the situation in 2008. Throughout the 1990s, the Bush administration had been pushing home ownership through ‘help to buy’ schemes. The combination of this as well as cheap mortgages meant that people were easily able to gain credit to buy homes and fuel the bubble.

Both crises are also similar in terms of the overconfidence and over speculation placed in asset values. Namely, the 1920s Stock Market, and the 2000’s housing market. Both markets had been growing in value exponentially over the prior decade, and market speculation from investors suggested that the rise would not stop. Consequently, both the housing market and the stock market became overvalued, which contributed to the extent of effect for the crash.

The economics responses to the crash also share similarities. Namely, both Presidents initiated expansionary fiscal policy to boost growth. Hoover commenced the “Hoover Reconstruction Finance Corp” which allowed him to bail out the stock brokers and collapsing banks, so that they were able to provide necessary credit to cater for loans to encourage growth. This led to an increase in national debt, but an expansion in AD. Obama similarly initiated his “Jobs Bill”, which was intended to alleviate unemployment and therefore encourage consumption to kickstart short term economic growth.Obama and a table

Indeed, both responses were similar also in their shortcomings. Unemployment under Roosevelt rose to 21%, which lead Henry Morgentyav to argue “we are spending more than we have ever spent before, and it does not work.” This is simultaneous to Obama’s policies, which saw unemployment rise from 8%-10%, despite his stimulus packages.

What is also clear is that increasing taxation paid for both eras’ stimulus packages. To pay for Roosevelt “New Deal”, the top marginal income tax rate reached 94% for those earning over $200,000 a year, which leads to large disincentives for companies to expand, and workers to earn more. Obama similarly raised taxes, but he instead levied the taxes on demerit goods, for instance increasing taxes on cigarettes and liquor, in order to reduce over consumption, and raise necessary revenue for his Jobs Bills.

In essence, it becomes clear that both economic situations leading up to the 1929 crash and 2008 crash were similar. They were both consequences of overconfidence and speculation in an accessible market, which resulted in said market becoming overvalued, and prior investments being lost as soon as the market turned. This in turn led to the collapse of banks, a reduction in economic growth, and subsequent derived unemployment. Both era’s responses were equally similar, in their initiation of Keynesian policies to increase government intervention and boost growth through injections. However, the extent to which an economist would judge that policy makers learnt the lessons of the past depends on whether or not you believe Roosevelt and Hoover’s policies were successful. William Hazlitt criticised Roosevelt by saying that for each dollar of tax spent, it must first be raised, and increasing taxes contributes towards worsening Keynesian “animal spirits” through dis-incentivising the labour force, which can be more harmful towards economic growth.

In my judgement, 2008 policy makers did learn the lessons of the past, through their effective implementation of expansionary fiscal policy, which ultimately reduced unemployment and boosted growth. However, this is not to say that policy makers should always fall back on preconceived methods of escaping economic crises. One crash in one époque will never be a carbon copy of a previous crisis, as there will always exist some kind of individuality about every crash, either in terms of causation or effect. Hence, policy makers should not become complacent and presume that just because expansionary fiscal policy helped to resolve the 1929 crash, it will do the same in 2008. To this extent, policy makers must always develop and evolve their theories to fit with that period’s idiosyncrasies, as over-reliance on previously successful policies and falling back on the notion of “learning from history” to then apply history step by step in an incompatible era, is a sure recipe for disaster.

Do Politicians Learn Anything From History?- 1 : “The Great Depression vs 2008 Crash” – ECONOMICS HISTORY

Could politicians have looked to the past to predict the 2008 Financial Crash?

Philosopher George Santayana famously quipped that “Those who cannot learn from history are doomed to repeat it.” In many ways, this is a motto adopted by politicians and investors alike world wide. If an institution is about to invest in capital or start a new scheme, surely it makes sense to look to the past and gain foresight through reflection.  Often, politicians can learn a great deal from the mistakes made by their predecessors, and act to not repeat them. Here, I will try to draw parallels between the causes of the Great Depression of 1929, and the causes of the Financial Crash of 2008, and therefore answer the question as to whether or not politicians did indeed learn from the past.

The Great Depression of the 1930s began on the 24th October 1929, when the American Stock Market crashed. However, this collapse did not come from nowhere; rather it was the inevitable consequence of decreased market regulation, investor over speculation, and overconfidence within the stock market. During the 1920s, wartime technologies (such as the radio and hoover) were seen as necessities rather than luxuries, hence increased output resulted in short run economic growth within America. This translated to the increase in value of share prices, averaging an increase of 20% per year in the 1920s. Banks were eager to lend out credit to potential investors because as long as the money was invested in the Dow Jones, investors would see their asset prices rocket, and therefore encourage investors and consumers alike to borrow even more credit from banks (40% of bank loans during the 20s were used to fund investment). This level of borrowing to fund investment meant that stock prices soon became overvalued, as investors would pump money into shares, which would in turn increase their value, and therefore encourage even more people to invest in these blue-chip stocks (ie General Motors). As credit was near limitless due to the lax monetary policy of the Federal Reserve, this process was able to repeat, leading to the creation of a stock market “bubble”.

Indeed, this bubble was able to develop due to the “Buy on the margin” scheme, which meant that that investors would only have to pay upfront 10-20% of a transaction in order to buy the shares, as the rest could be borrowed from a broker. This meant that only a small amount of “real” credit was used in stock transactions, meaning that for the first time the stock markets became accessible to the general public, rather than just the extremely wealthy. This in turn made the effects of the crash more widely encompassing.

Indeed, the growing bubble was further fuelled by a lack of government regulation within stock markets. Republican Presidents Warren Harding, Calvin Coolidge, and Herbert Hoover were great believers in Laissez-Faire economics, (the belief the Adam Smith’s invisible hand behind market forces will ultimately result in the optimum allocation of resources, and any government interference prevents this action). However, this interpretation of the Austrian School of Economics allowed for the forming of monopolies, as wealth inequality reached record levels. The reduced levels of regulation allowed for the stock markets to go unmonitored, allowing small elite firms such as JP Morgan to control vast amounts of the stock exchange, and manipulate share prices.

However by October 1929, investors began to realise the expanding difference between share price and actual share value. It became clear that stocks had become overvalued, hence, on October 24th 1929, share prices began to fall. Immediately, investors and the general public alike rushed to sell their stocks, resulting in 16,410,310 shares being sold on Black Thursday, to the tune of $40 billion, a fall of 12%.

The Dow Jones continued to decrease in value for another 3 years. Labour demand is derived from RNO, hence as output shrunk unemployment grew to 25%. The decrease in demand for labour meant that workers lost their bargaining power, so wages fell by 42%, which lead to a regressive decrease in living standards, hence inequality grew (show in the creation of “Hooverville” slums for the unemployed).

Black Thursday Newspaper
London Herald Friday 25th October – The effects of the Crash were felt worldwide.

Therefore, the Great Depression came from a culmination of overconfidence, the public’s newly found hobby of investment in shares, and a seemingly endless supply of credit from banks and brokers alike. These ultimately fuelled the bubble that would eventually collapse to cripple the worldwide economy (international trade fell by 65%). In my next blog on ECONOMIC HISTORY, I will analyse the causation of the 2008 Financial Crisis, and then draw parallels between the two events, to conclusively decide whether or not the politicians of 2008 did learn the lessons of history.

The Snapped Election- What The Election Results Mean For The British Economy – CURRENT AFFAIRS

Theresa May’s gamble may have backfired, but where does this leave the British economy?

On the 18th April 2017, Theresa May called for a “snap election”, with the aim of shoring up her own Conservative support within the electorate, in order to allow her to move forward in Brexit negotiations without the hindrance of a high number of Labour seats within government. The Conservative’s original 20% security lead in the polls further gave May the necessary excuse to call this election. A Daily Mail headline quipped that she would be able to “Crush the Saboteurs,” referring to the pro-EU obstacle that Jeremy Corbyn and his party represented.

However, a poor Conservative campaign combined with a lacklustre set of policies, allowed a newly rejuvenated Jeremy Corbyn to target the young pro-EU demographic, ultimately steering Labour to take 12 seats from the Conservatives, and prompting a “hung Parliament” to develop.

A hung parliament screams uncertainty. During the last 12 months, British investor confidence has been shrouded by uncertainty. Uncertainty over whether or not Britain will vote to leave the EU. Uncertainty over whether or not Britain will actually trigger article 50. And now, uncertainty over whether or not Conservatives will be able to negotiate a successful Brexit, after losing their majority. This level of skepticism has meant that Britain has become the slowest growing economy of the G7 since Brexit.

This reduction in short-term growth can be explained by the reduction in investment, as a result of a fall in consumer and investor confidence. Theoretically (assuming ceteris paribus), a decrease in Investment (being a component of AD) will lower the rate of growth of AD, hence relative to other countries, British growth in RNO will be comparatively smaller, which is symbolic of a reduction in short term economic growth.

Within minutes of the exit poll being announced, Sterling value dropped by 2%. This can be explained as the election results represented one step closer to Downing Street for Jeremy Corbyn. Labours policy to increase corporation taxes from 19%-26%, would naturally deter many potential firms from moving their business to Britain, hence demand for the pound shifts inwards, and its price decreases.

These election results represented a growing sense of opposition within the general public against Conservative austerity. David Cameron’s policy of reducing the government debt by cutting government expenditure has taken its toll on the NHS. The public is therefore calling for an expansionary fiscal policy, in terms of increasing Government Spending, yet this represents a policy conflict with Cameron’s aim of reducing the budget deficit. Ultimately however, the disappointing growth results since Brexit call for both expansionary monetary and fiscal policy, in an attempt to kickstart the economy, even at the trade off cost of increased levels of inflation, and a worsening budget deficit.

If Keynes were here today, I think that he would argue that due to the poor levels of consumer and investor confidence (animal spirits), government expenditure can not be fully utilised, as the multiplier effect would have little effect if the economy’s propensity to withdraw was too great. Therefore, at the root of kickstarting the post-Brexit economy, is kickstarting British consumer and investor confidence in our own economic and political institutions. Unfortunately, the surprise result of the snap election has only acted to exacerbate the looming sense of uncertainty that clouds post-Brexit Britain.

The Reason for Inequality- Debunking Flawed Economic Theories – ESSAY BLOG

Inequality exists, but not because of these reasons…

There are numerous economic theories as to why certain countries are richer than others. At the forefront, there exists three predominant ideas. The “Geographical” Hypothesis, the “Cultural” Theory, and the “Ignorance” idea. To me, none of these seemed to provide the complete answer to why one country can have a greater economy than its neighbour. This short essay blog will describe each theory, and then systematically attempt to debunk each of them.

The “Geographical” hypothesis of the cause of inequality is the idea that one country is richer than another, because it may have a certain geographic advantage over another country. For instance, it may have more fertile soil for agriculture, and a climate more suited to encourage productive work. Economists such as Jeffrey Sachs argue that richer countries tend to have more “temperate latitudes” (such as Japan and USA), whereas poorer countries tend to be focused around the Tropics and Equator. Logistically, he argued that tropical climates tend to have greater susceptibility to labour-productivity curtailing diseases, such as malaria, as well as the fact that tropical soils are less adapted to productive agriculture, due to the daily nutrient rainfalls that wash away necessary nutrients. However, there is clear evidence to suggest the flaws in the Geographical Theory. For instance, the huge difference in wealth between North-Korea and South-Korea cannot be explained merely by rainfall. Rather, the two country have entirely different economic systems. Indeed, the productivity of a country may be enhanced if its population was able to grow without the threat of drought or disease, but this factor alone cannot explain how Australia faces similar geographical variables to Botswana, yet the GDP per capita is $7,000 vs $54,000. Therefore, the myth that a country is poor purely down to its geographic situation cannot be regarded as the true reason for the growing levels of international wealth inequality.

The “Cultural” theory, suggests that certain countries are wealthier than others due to their cultural strong work ethic, or certain religious ethos that encourages hard work. German Sociologist Max Weber argued that the 16th Century Protestant Reformation throughout Western European society contributed greatly to the encouraging of industrial evolution (productivity enhancing measures) to push for higher levels of economic growth in Europe. However, the culture hypothesis fails to account for large fluctuations in economic growth, despite the maintenance of a cultural identity. For instance, Chinese culture and individual identity did not change drastically from 1990-2010. However, before the reformation of China’s economy by Deng Xiaoping, Mao’s absolutist, non-incentivising policies had lead to crippling widespread poverty and famine. However, as China has transformed its political institutions to be more inclusive and capitalist, it has seen vast economic growth, averaging 12% per year from 1993-2008. This economic growth has not been the result of a shift in culture, but rather a shift in institutional power, from extractive to inclusive.

Finally, we must debunk the “Ignorance” theory. Favoured by many economists, this hypothesis states that certain economies are currently poorer than others, because the leaders of the poor countries are not skilled or able enough to lift their economies out of stagnation. However, in my opinion, it is too simple to state that a country is poor only because their leader is foolish, but rather their leader may be incentivised to make decisions that benefit them self or a close circle of political elite, rather than make decisions that benefit the welfare of their people. In other words, in modern democracies, seldomly is an economic policy passed which has not faced tough opposition and compromises from different political opinions, such that in theory, social welfare and consumer utility is maximised. Of course, there exists government failure through unintended consequences, but to ensure re-election, politicians will often draft policies that garner the most support and therefore maximise utility, so to encourage economic growth and prosperity. However, in autocratic societies, extractive policies can be passed unopposed, hence although the leader may seem “ignorant” through not promoting economic growth, in actual fact they may be working to promote their own best interests, even if it means preventing economic growth. Hence, political leaders may not be “ignorant”, but rather driven by self-interest to create extractive political and economic institutions that prevent their power being diluted into the public sphere, at the cost of curtailing economic growth.

Hence, in my opinion, the “Geographical”, “Cultural”, and “Ignorance” theories are not able to fully explain the reason for international inequality. There exists too many individual examples of countries that defy the hypotheses, as well as additional reasons why each theory may not be the sole reason for economic inequality. Daron Acemoglu and James A.Robinson’s book “Why Nations Fail,” is a compelling read that I would highly recommend to anyone interested in the root of historical economic inequality. The book argues that it is the design of a country’s economic and political institutions that determines productivity and incentive, and it is these factors that predominantly determine that country’s prosperity. In my next “essay-blog”, I will be outlining their argument, and discussing why I believe that this is the strongest theory for explaining why certain countries are richer than others.

The Cost of Economic Growth- Trump’s Environmental Legacy- CURRENT AFFAIRS

It seems that environmental protection is not part of the recipe for Making America Great Again. 

The Environmental Protection Agency. Established in 1970, the EPA was born out of the wake of growing concern for the ever worsening impact of the United States on the environment. From banning DDT, to limiting SO2 pollution in factories meaning reduce acidity in rain by 89%, the ecological fragility of the Land of the Free would be in a much more dire state if it weren’t for this organisation’s hard approach to reducing the negative impacts of economic development. 

However, President Trump seems to disagree. To him, the regulatory measures of the EPA are “clogging up the veins of the country with the environmental impact statements and all of the rules and regulations.” According to the President, a new man must head-up EPA “Trump-style”. Someone who can restrict this heinous abusive agency from their commie prevention of good old American industry. Trump’s man? Scott Pruitt. Ex-attorney-general of Oklahoma- he has sued the EPA 14 times before for their “abuses”…  Indeed, the new head man for environmental protection said that “we don’t know” how much of an impact that humans had on climate change, and is likely to replace Obama’s Clean Power Plan (which reduces greenhouse gas emissions from thermal power stations), with a new plan that works in accordance to Trump’s plan to revive the coal industry. It seems that for the new head of the Environmental Protection Agency, the protection of the environment does not seem to be too much of an issue. 

What does this means for America economics wise? With reduced taxation and increased subsidies towards polluting industries, the cost of production of these goods will fall. This will cause an extension in demand, which will cause an increase in real GDP, hence an increase in short-run economic growth. 

However on the other hand, for a good such as coal, it is overproduced such that its Marginal Private Cost > Marginal Social Cost, meaning that the cost of cleaning up emissions, purchasing air filters etc, is greater than the private cost to the firm. If the firm is therefore able to produce coal at a reduced cost, it will increase the distance between the MPC and the MSC curves, hence overall welfare loss will increase. This translates into a worsening negative production externality, which will lead to further damaging of environmental welfare as the market failure worsens. 

Effectively, there is a policy conflict between economic growth and environmental protection. It is pretty much impossible to maintain strong economic growth in a capitalist system without subsequent environmental damage. A trade off must be made, as an administration must choose to sacrifice a proportion of their real GDP growth, if they are to encourage environmental protection. The Obama administration chose to make this sacrifice, epitomised by Obama’s 2015 rejection of a 1,200 mile Keystone XL oil pipeline from Canada to Texas, which may well have increased production capabilities/RNO, but also would have encouraged use of non-renewable oil over clean energy sources. The Trump administration has been clear with their intentions, and has already green-lit the Dakota pipeline and the Keystone XL Pipeline. Within one month, Trump has showcased a clear prioritisation of economic growth over environmental protection- ultimately a decision that will cause worsening market failures and increased negative externalities, as society must adapt to absorb the burden of increasing environmental deterioration. It seems that environmental protection is not part of the recipe in Making America Great Again.