In the back of my aunt's personal library I found a funny little book rotting away. Practical Economics by G.D.H Cole. The book first published in 1937 details the state of economic planning in Britain, the United States, the Soviet Union and Fascist Italy and Germany. Reading this book provides a disturbing insight into the state of economic thought and the degree to which economists at the time had abandoned the idea of competitive markets and the price system.
While Practical Economics is a particularly socialist book, the general theme of the book extended beyond what socialist economists were thinking and and reflected the views of many economists at that time. This affected the advice those economists gave the newly independent nations of the third world in the post war period. Instead of liberalising markets, governments were advised to plan their economies and to close themselves off from trade, expanding their own production capabilities.
Prior to the 1970s and the Asian economic miracle no nation had significantly developed since Australia, New Zealand, Canada and the United States had developed a century before. At the time the Soviet Union was thought to be a great success with its political prisoner slave labour and brutality hidden from the world.
In the final paragraph of the book Cole writes, "My final moral, then, is that unless we want to convert the world into armed camps of impoverished peoples, we must plan for plenty - that is, for increased consumption - in ways which are quite inconsistent with the retention of the capitalist system."
While many economists at the time may have wanted to retain aspects of the capitalist system, many shared Cole's general assessment that planning was required and that markets led to waste and inefficiency. Of course not everyone agreed, with F.A. Hayek writing the Road to Serfdom as a response to common view that planning was the way ahead.
Of course, today you don't have to look hard to find people making the same arguments about the inefficiency/waste of markets. Take for example the proposed response to global warming. Many commentators aren't satisfied with a pigovian tax or emission trading scheme, they want revenue raised by such schemes to be invested in "green technologies'. Ignoring the fact that schemes themselves would lead to reduced emissions and more efficient technologies. For the free market economist the lure of economic planning is always present ready to seduce those people impatient for progress with the hope of better outcomes. History says those outcomes almost never eventuate.
Tuesday, May 29, 2012
Where I study.
A little while ago UNE had a competition called, 'where I study'. Students sent in photos of their office, at the time my "office" was the dinning table and the lounge chair. Since then I have dramatically moved around the furniture in the room where I use to dump crap and turned it into an office. I can say from personal experience my productivity has dramatically increased and by simply entering the room I switch into study mode. Of course sometimes study means reading blogs and news article rather than actually working but this is still more productive then watching television. My advice if you can clear out a space and make a proper office.
Sunday, May 27, 2012
Why Jessica Irvine is wrong about unions.
In a recent blog post Jessica Irvine (Economics writer for the Sydney Morning Herald) wrote the following:
"In a perfectly competitive market, there'd would be no point in unions because employers wouldn't underpay workers. They couldn't. Competition would drive them to pay workers a wage representing the value of their marginal product. If a company failed to, there would be no shortage of other firms willing to pay more. Wages would equilibrate.
In such a model, companies are price-takers, not price-makers. But, unfortunately, this is far from the reality in which many industries are dominated by one or a handful of sellers. And because workers take time to train, many are, in the short term at least, limited to a particular industry, or set of industries, to which they can sell their labour.
The result is that it is possible for certain companies to underpay their workers - that is, pay them less than the value they have created, plus compensation for inflation."
Link: http://www.smh.com.au/opinion/politics/workers-still-unite-and-it-flags-economic-sense-20120525-1zaal.html#ixzz1w3OUECpM
"In a perfectly competitive market, there'd would be no point in unions because employers wouldn't underpay workers. They couldn't. Competition would drive them to pay workers a wage representing the value of their marginal product. If a company failed to, there would be no shortage of other firms willing to pay more. Wages would equilibrate.
In such a model, companies are price-takers, not price-makers. But, unfortunately, this is far from the reality in which many industries are dominated by one or a handful of sellers. And because workers take time to train, many are, in the short term at least, limited to a particular industry, or set of industries, to which they can sell their labour.
The result is that it is possible for certain companies to underpay their workers - that is, pay them less than the value they have created, plus compensation for inflation."
While this is certainly the public imagine the unions like to foster using examples such as, "workers that empty bedpans." The reality is organised labour is far more likely to be skilled workers who are in a position to seek economic rents for their labour by withholding it. The union member is far more likely to be a public servant, teacher, skilled tradesman or a member of a professional association such as doctors.
Where Irvine's analysis is largely wrong is that the less skilled the labour the more competitive the labour market. Take for example workers in disability support work (an industry I use to work in), new workers regularly enter and exit the industry. After receiving their induction and shadow shifts the new worker is fully productive within a week. Of course the worker continues to learn after a week, but largely they are able to perform their duties after a week of training. If they feel they are not able to earn the income they wish or do not enjoy their work their labour is highly substitutable to other industries. The worker can switch to childcare work, retail or hospitality ect.. So regardless of whether the industry is dominated by a handful of employers the worker has little fixed costs preventing them from retraining and enter another industry. Equally the employer is able to find other workers with no previous experience in the industry and within a week have a productive worker. It is precisely the competitive nature of the labour market in such industries that keeps the price of labour low. I would argue the monopsony market Irvine describes largely doesn't exist.
Compare this with the situation for doctors or registered nurses. Both roles take years of training, employers can only hire from a labour market of trained professionals. The barriers to entry are high to these labour markets as the worker has to undertake years of study and professional bodies keep the supply of workers artificially low by controlling who can and cannot enter the profession. For example, in both medicine and nursing the professional bodies have been successful in reducing competition from foreign trained professionals. Such bodies have also been successful in reducing the supply of substitutes for their service by lobby government to control who provides their services. For example, many medications require a doctor's prescription where a pharmacist could make this determination without requiring a doctor. This conditions make it possible for organised labour to gain economic rents which increase the cost of goods and services reducing the real income of many of the low skilled workers union claim to represent. Here in this example it's the fact the labour market is uncompetitive that allows workers to earn economic rents through unionisation.
Where organised labour can help low skilled workers is through negotiating terms of work. The hiring and firing of low skilled workers tends to be more transactional and people are hired under standard terms. This is due to the high transaction costs involved. It would be very costly in time and effort for a director of nursing of an aged care home to negotiate conditions with individual workers. In most cases it would be very difficult for an individual worker to negotiate an early start time and roster days off. By organising workers can negotiate collectively with the employer lower the transaction cost of working conditions. Compare this with a doctor who could negotiate their own hours of work with the head of medical centre. So yes there are some benefits of unions for low skill workers, however those benefits could be achieved through workers councils or company unions such as exist in Germany and Japan. The reason why such arrangements tend not exist in this country is most likely because of the political situation. One side of politics is hostile to any organised labour and the other actively promotes industrial trade unions.
Saturday, May 26, 2012
The Commanding Heights
I first saw this series when I was studying economics in high school. If you're interested in the history of modern economics than you need to watch this series. The first episode covers the battle of ideas between Keynes and Hayek, the second covers the fall of communism and the reform of centrally planned economies in the 80s/90s and the third episode deals with globalisation and the Latin American/Asian Finacial crisis with hints of the kinds of problems that caused the global financial crisis.
Monday, May 21, 2012
Qantas announcement a case study in rising inequity
Today Qantas announced that 500 of it's heavy maintenance technicians will go from it's Melbourne Heavy maintenance facility.http://www.news.com.au/business/companies/qantas-axes-500-heavy-maintenance-jobs/story-fnda1bsz-1226362229977 Naturally, the relevant unions protested saying that Australia would be losing vital skills essential to it's natural security and so on. Moving beyond the merits of arguments both parties this decision is an excellent example of broader changes in western economies that have led to greater inequity.
For most of the post-war period getting a job at a unionised company like Qantas was hitting the jackpot for working class young men. Getting into such roles usually required both luck and nepotism. However, the workers who worked for such companies were a sort of aristocracy of the working class. Well trained and highly skilled by the standard of high school leavers such workers and the public servants were an income class between the common labourer and the university education professional.
Economists have long known that a major predictor of income is a 'college degree'. The difference in income between people who have a university education and a high school education is called the college premium. Despite the fact that the percent of the population with a university education has been rising this premium has been increasing. http://gregmankiw.blogspot.com.au/2007/04/college-premium.html
The high paid blue collar worker has been hit over the last 30 years with a triple whammy of microeconomic deregulation opening up competition in industries wiping out economic rents that paid for high wages, global trade that lead to outsourcing of many industries and technological change. Qantas and it's workers has been victim to all three of these changes, this time the culprit is technological change.
As Qantas retires many of its older jets it is replacing them with newer models that require far less heavy maintenance. According to one report on ABC radio many of the components are plug and play, indicating that the level of skill need for this maintenance is decreased and requires less labour hours. However, the design and development of these new components requires a class of high educated engineers with skills that are expensive to obtain. So while the demand for mechanical technicians decreases the demand for university educated engineers has likely increased. The outcome at Qantas and companies throughout the world has been, hundreds of well paid workers roles have been made redundant and replaced with a few extremely well paid university educated professional.
As roles such as the technician roles at Qantas disappear they are replaced with less secure, less well paid roles in the service sector. Australian's mining boom and housing boom in the 2000s has shielded many blue collar workers from the worst of a trend that has occurred throughout the western world but the question remains for how long?
For most of the post-war period getting a job at a unionised company like Qantas was hitting the jackpot for working class young men. Getting into such roles usually required both luck and nepotism. However, the workers who worked for such companies were a sort of aristocracy of the working class. Well trained and highly skilled by the standard of high school leavers such workers and the public servants were an income class between the common labourer and the university education professional.
Economists have long known that a major predictor of income is a 'college degree'. The difference in income between people who have a university education and a high school education is called the college premium. Despite the fact that the percent of the population with a university education has been rising this premium has been increasing. http://gregmankiw.blogspot.com.au/2007/04/college-premium.html
The high paid blue collar worker has been hit over the last 30 years with a triple whammy of microeconomic deregulation opening up competition in industries wiping out economic rents that paid for high wages, global trade that lead to outsourcing of many industries and technological change. Qantas and it's workers has been victim to all three of these changes, this time the culprit is technological change.
As Qantas retires many of its older jets it is replacing them with newer models that require far less heavy maintenance. According to one report on ABC radio many of the components are plug and play, indicating that the level of skill need for this maintenance is decreased and requires less labour hours. However, the design and development of these new components requires a class of high educated engineers with skills that are expensive to obtain. So while the demand for mechanical technicians decreases the demand for university educated engineers has likely increased. The outcome at Qantas and companies throughout the world has been, hundreds of well paid workers roles have been made redundant and replaced with a few extremely well paid university educated professional.
As roles such as the technician roles at Qantas disappear they are replaced with less secure, less well paid roles in the service sector. Australian's mining boom and housing boom in the 2000s has shielded many blue collar workers from the worst of a trend that has occurred throughout the western world but the question remains for how long?
Saturday, May 19, 2012
Iceland is recovering. Told you so.
A few months ago I wrote an article, Iceland the forgotten country. The Wallstreet Journal has decided to jump on the bandwagon with this article. http://online.wsj.com/article/SB10001424052702304203604577396171007652042.html?mod=WSJASIA_hpp_MIDDLEFourthNews
Friday, May 18, 2012
Why economics isn't accounting for countries.
Reading blogs and news stories about the economy I constantly get annoyed by the way economics gets reported. In the introduction to Robert Barro's intermediate macroeconomics text he argues that alot of the misconceptions about how the economy works stem from the way macroeconomics is taught at the introductory level. I tend to agree I often meet business majors who have studied basic economics in their business degree and have misconceptions about how the economy works.
Even greater than this though is the lack of understanding of what the subject of economics is about. Economics is not finance or accounting. It is the study of how scarce resources are allocated, in other words, it's a way of studying the way people interact with each other. This basic lesson is quickly forgotten in principle of economics courses, while basic ideas like GDP and supply and demand are taught.
Until very recently I did not know the history of these economic theories. I was unaware that what we now call microeconomics predates macroeconomics and what we call macroeconomics was developed by John Maynard Keynes in his work the General Theory. His work has allowed us to analyse the economy on an aggregate level giving us a birds eye view of a nation's economy. However, the economy is not an actual thing, it's not a machine it's an eco-system of millions of decisions between individuals. Unfortunately, for many commentators and even economists this basic fact has been lossed.
Take for example, the claim that stimulus prevented a recession, yes if you define a recession as two quarters of negative economic growth than stimulus may prevent a recession. By borrowing and spending increasing gross domestic production a technical recession may well be prevented. Does this spending actually stimulate private expenditure that would not have offer wise have happened? This issue is hotly debated. Assuming that the only effect of stimulus is the money being spent, than only those who directly benefit from that money are better off. While the individuals who did not directly benefit will have to pay for the stimulus in the future through higher taxes or reduced services.
To use another example, Australia's mining boom has kept it's economy growing while manufacturing, retail and other service industries are suffering. Does the fact the mining sector is growing provide any comfort to individuals engaging in manufacturing or retail? These sectors are very much in a recession.
While looking at the economy in an aggregate sense is helpful and can give us an idea of how we are going as a whole, too often are theories and ideas spouted based on the this view of the economy. Ultimately the strength or weakness of the economy will depend on having productive and competitive markets resulting in increased production which in turn increases real income. So next time someone talks about the economy as if it was a machine, remember the economy is just the aggregate of people like you and me making decisions about how to spend our income.
Even greater than this though is the lack of understanding of what the subject of economics is about. Economics is not finance or accounting. It is the study of how scarce resources are allocated, in other words, it's a way of studying the way people interact with each other. This basic lesson is quickly forgotten in principle of economics courses, while basic ideas like GDP and supply and demand are taught.
Until very recently I did not know the history of these economic theories. I was unaware that what we now call microeconomics predates macroeconomics and what we call macroeconomics was developed by John Maynard Keynes in his work the General Theory. His work has allowed us to analyse the economy on an aggregate level giving us a birds eye view of a nation's economy. However, the economy is not an actual thing, it's not a machine it's an eco-system of millions of decisions between individuals. Unfortunately, for many commentators and even economists this basic fact has been lossed.
Take for example, the claim that stimulus prevented a recession, yes if you define a recession as two quarters of negative economic growth than stimulus may prevent a recession. By borrowing and spending increasing gross domestic production a technical recession may well be prevented. Does this spending actually stimulate private expenditure that would not have offer wise have happened? This issue is hotly debated. Assuming that the only effect of stimulus is the money being spent, than only those who directly benefit from that money are better off. While the individuals who did not directly benefit will have to pay for the stimulus in the future through higher taxes or reduced services.
To use another example, Australia's mining boom has kept it's economy growing while manufacturing, retail and other service industries are suffering. Does the fact the mining sector is growing provide any comfort to individuals engaging in manufacturing or retail? These sectors are very much in a recession.
While looking at the economy in an aggregate sense is helpful and can give us an idea of how we are going as a whole, too often are theories and ideas spouted based on the this view of the economy. Ultimately the strength or weakness of the economy will depend on having productive and competitive markets resulting in increased production which in turn increases real income. So next time someone talks about the economy as if it was a machine, remember the economy is just the aggregate of people like you and me making decisions about how to spend our income.
Saturday, May 12, 2012
A Mathematical Treatment of economics
While in Armidale I ventured into the campuses secondhand bookstore. Being the bargain hunter that I am I had a look in the economics section and luckily the mathematics section. I found a little book called A Mathematical treatment of economics written by G.C Archibald and Richard G Lipsey. The book was only $8 so I bought it. The second edition of the book was published in 1973 so the book is nearly 40 years old, yet it is just as relevant for today students.
The book is written for students in the English education system who did not do mathematics in their equivalent of senior. Having only completed Maths A in High School I have struggled with maths at university and only just passed Quantitative Methods A by focusing on geometric sequences and algebra. The text for that subject was the traditional maths for business text focusing on mathematical rigor and using the occasional business example.
Committing mathematical education heresy this book and Alpha Chiang's Fundamentals of Mathematical Economics turn the tables around putting the economics first and maths second sacrificing mathematical rigor for understanding. Teaching the student the Maths he/she needs to know to analyse a particular problem. I have started to chapter 4 Introduction to calculus: differentiation and already a whole new world is opening up to me.
I am considering graduating next term with a Masters of Economics Studies depending on whether I secure a graduate position. I intend over the next term while I am only doing one last subject to attempt to read this book. At 500 pages including answers in the back this is achievable. I am currently at a point where further more sophisticated economic analysis will require some calculus, while I'm sure it is possible to complete a degree in economics and have a successful career never using calculus, I will always feel a bit of fraud without it. In the real world things are never linear and linear analysis can only take one so far.
Unfortunately, this text is out of print but you can purchase the odd copy on www.betterworldbooks.com. If you struggle with maths and couldn't apply what you learned in your maths subject/s than do yourself a favour and buy a copy of this book and Alpha Chiang's Fundamentals of Mathematical Economics.
The book is written for students in the English education system who did not do mathematics in their equivalent of senior. Having only completed Maths A in High School I have struggled with maths at university and only just passed Quantitative Methods A by focusing on geometric sequences and algebra. The text for that subject was the traditional maths for business text focusing on mathematical rigor and using the occasional business example.
Committing mathematical education heresy this book and Alpha Chiang's Fundamentals of Mathematical Economics turn the tables around putting the economics first and maths second sacrificing mathematical rigor for understanding. Teaching the student the Maths he/she needs to know to analyse a particular problem. I have started to chapter 4 Introduction to calculus: differentiation and already a whole new world is opening up to me.
I am considering graduating next term with a Masters of Economics Studies depending on whether I secure a graduate position. I intend over the next term while I am only doing one last subject to attempt to read this book. At 500 pages including answers in the back this is achievable. I am currently at a point where further more sophisticated economic analysis will require some calculus, while I'm sure it is possible to complete a degree in economics and have a successful career never using calculus, I will always feel a bit of fraud without it. In the real world things are never linear and linear analysis can only take one so far.
Unfortunately, this text is out of print but you can purchase the odd copy on www.betterworldbooks.com. If you struggle with maths and couldn't apply what you learned in your maths subject/s than do yourself a favour and buy a copy of this book and Alpha Chiang's Fundamentals of Mathematical Economics.
Saturday, May 5, 2012
Behavioral Economics and the Music Industry
This link was originally shared by Jodi Beggs - Economists do it with models, I thought it was pretty interesting and a good examination of some of complicated issues involved with pricing goods that goes beyond economics 101. http://www.thembj.org/2012/05/starbucks-or-pennies-a-musicians-dilemma-2/
Doing Research
I'm currently under a lot of pressure. I am in the process of developing my research proposal as well as insuring I get at least a credit in intermediate microeconomics. The research proposal is a 4500 word document that outlines what I intend to do for my dissertation and who I intend to do it. I have chosen to my dissertation on the decision by companies whether they should opt into carbon trading. At the moment I am developing a traditional positivist research proposal that focuses on the quantifiable issue of measuring transaction costs. However, I am considering moving to a mixed methodology using some interpretative techniques to determine if there are other motivations for opting in carbon trading.
The current carbon tax will be imposed on transport fuels through changes to the fuel excise tax credit system, meaning companies will pay an effective tax of $23 a tonne. Major fuel uses such as the airlines lobbied the government to allow them to opt into carbon trading allowing them to reduce this liability. Other companies with significantly less fuel usage will need to determine the transaction costs involved in participation weighing this against potential cost savings. I discovered this was an issue after a discussion with an economist at Economic Societies President's Drinks demonstrating the importance of networking and being involved in your professional associations even while a student.
I will be measuring this by developing a survey to measure companies transaction costs as well as their expected carbon tax liability. I will then use benefit cost analysis techniques to perform scenario testing, comparing discount methods to determine if the effort is worthwhile. The research will also factor in sunk costs expecting that companies with significant pre-existing environmental reporting requirements will be more likely to opt in as most of the transaction costs are sunk costs being used for other reporting obligations.
I will keep you all posted on my progress and please forgive me this month if I don't blog as often as I would like.
The current carbon tax will be imposed on transport fuels through changes to the fuel excise tax credit system, meaning companies will pay an effective tax of $23 a tonne. Major fuel uses such as the airlines lobbied the government to allow them to opt into carbon trading allowing them to reduce this liability. Other companies with significantly less fuel usage will need to determine the transaction costs involved in participation weighing this against potential cost savings. I discovered this was an issue after a discussion with an economist at Economic Societies President's Drinks demonstrating the importance of networking and being involved in your professional associations even while a student.
I will be measuring this by developing a survey to measure companies transaction costs as well as their expected carbon tax liability. I will then use benefit cost analysis techniques to perform scenario testing, comparing discount methods to determine if the effort is worthwhile. The research will also factor in sunk costs expecting that companies with significant pre-existing environmental reporting requirements will be more likely to opt in as most of the transaction costs are sunk costs being used for other reporting obligations.
I will keep you all posted on my progress and please forgive me this month if I don't blog as often as I would like.
Tuesday, May 1, 2012
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