Ideology or economics?

I blogged yesterday about a post on Liberal Conspiracy (LC) which I decried for being too ideologically motivated rather than motivated by scientific investigation. As I said, I file LC under politics in my Google Reader. However, I do file Marginal Revolution (MR) under economics - along with a number of other blogs written by economists of a libertarian persuasion - however, I'm wondering whether I should reconsider.

There's a constant, ongoing debate between libertarian economists, and non-libertarians of various stripes; the latest instalment is summarised in the post that has motivated this post by Tyler Cowen at MR. It appears a few non-libertarians have challenged libertarians on a point I consistently think about libertarians - they are a little loose in how strictly they apply the need for liberty amongst all members of society, ignoring the cases where the price mechanism will not operate to yield liberty to all but will in fact restrict liberties to many.

While I don't agree with everything the critics (at Crooked Timber, another interesting if politically slanted blog) have to say, I find Cowen's response striking. He basically says two things:

1) Show me some data.
2) Employees behave just as badly as employers so let's shine the light on them.

I find response (1) a little weak - it's the kind of response one says when one can't think of a good solid, analytical response. I mean, for sure, it would be great if we had empirical studies on all these things, yet it hasn't stopped economists debating for years and years and years. The appeal to empirical work is all the more ironic because many of the more staunch libertarians tend to ignore all economic data and attempts to use it as useless since the world is so complicated and it's hard to control for all possible causal factors involved.

There is probably a 1(b) here too - Tyler says essentially "are you sure workers want this, or is it just the bloggers that want it?". For me this has to count as the most stupid question ever. If you approach workers and say "would you like some more rights and representation?", I don't think that many will say "no thanks!".

But on to (2), this is the biggest point of contention for me. Apparently, two wrongs make a right, to use common parlance. But more importantly from the perspective of being an economist, the question is the following: Which way is the causality? For sure, workers will steal in the workplace if they can get away with it, and for sure, firms will try and shirk their responsibilities to their workers also, if they can get away with it.

But why doesn't Tyler consider the idea it might be that workers steal from work because they feel they get ripped off daily, paid way beneath what they are worth to the company, etc?  Could it not be the case that a firm that makes all its workers feel like they are part of the company, valued, paid their worth, included in decision making etc., sees less workplace theft?

The causality could, of course, be entirely the other way - it could be that workers are just thieves, and hence firms respond by being nasty to their workers. I'd love to see an empirical study on this!

But why doesn't Tyler explore this? My sense is it's because of the libertarian leanings in him, rather than anything else. The economist should be asking this question, and an economist of Tyler's calibre could analyse these things infinitely better than I ever could, and hence should be asking this question instead of mouthing off in the way he does - invoking personal experience, another common trait of the libertarian.

So I'd file this post from Marginal Revolution, often a great economics blog, more under the "politics/ideology" section of my Google Reader, if I could.

Read with Scepticism

If you're studying economics, one important aspect of your education will be to enable you to be discerning. It's particularly important I think in economics because the subject, especially at the macroeconomics level, is so infused with politics.

In my Google Reader, I have a blog called Liberal Conspiracy listed under politics and not economics, and this post about Tony Blair, not to mention this one about the supposed banking commission to be set up in the light of the Barclays fiasco, reveal precisely why.

On the Blair post, the writer criticises Blair for saying we should not “deny the financial sector a say in putting it [the financial system] right”.


The writer suffers from something many suffer from when they aren't students of economics, notably that of an over-confidence in their own ability and information.


How, exactly, does the reader know sufficient amounts about the financial sector such that he is able to tell what the right level of regulation is without even consulting those in the financial sector?


For example, why would it be so horrendous if we said to the financial sector "we plan on these regulations; what are the easy ways in which you would get around them?", in order to get some idea how good/bad any planned regulations might be?


Too many in government, and advising government, believe government has the kinds of information required to step in an regulate a market appropriately. This, generally, is not the case. Many economic studies, including some of my own, have established that information is disaggregated amongst market participants, those actually trading, buying and selling. To simply disregard all of this information is patently absurd and self-defeating - it just means the regulations that are set up will be totally ineffective at best, and harmful to the economy at worst.


And of course, this links us on to the second post, a supposed scoop on Andrew Tyrie, the Tory MP heading up the planned banking inquiry.  Shock, horror, he isn't a big fan of regulation, apparently. It's a bit of a "is the Pope really Catholic?" moment, really.


But moreover, the kinds of quotes in the article from Tyrie are actually simply questions that ought to be asked. We should not be willing to simply accept, as it seems the author of the post (Sunny Hundal) is, that regulation is always and everywhere a good thing. We should be inquisitive, asking why it is necessary and when. This is what economists do, and if as you read this, you're inclined to side with Sunny, and if you also so happen to be entering your second year next year at Birmingham, let me encourage you to take econ217.


In that module, we spend a lot of time looking at things like banking, the financial crisis, and more generally government intervention in markets. I hope to see some of you there!

When is competition a bad thing?

Over the years, various aspects of the UK economy have been privatised - taken out of the hands of the government, and their operations have been handed to private operators. The widespread perception of this is negative - it leads to higher prices and poorer service. Yet economists are unremittingly positive about competition - which kind of requires privatisation since if a government is the only provider of a service, by definition there's no competition. Why the contradiction?

One area in which it's generally perceived competition has been bad is in education - to be specific, in examining bodies, the companies that set exam papers at GCSE (and A-) level. Today apparently the government will announce an overhaul of this system. Apparently there's been a "race to the bottom" with having exam bodies competing with each other, and this should thus be changed, and the resulting system will have just one body providing exams - removing competition.

But why has competition between examining bodies led to this supposed race to the bottom, and reduction in standards that everyone believes has happened? What is distinct about the market for exams (particularly at GCSE - it seems A-levels are less susceptible to this criticism) that means competition is not helpful? Why do exam providers feel they have to make exams easier and easier, and provide greater proportions of A-Cs in order to look good?

What is acting in the market to prevent firms competing on how well their exams assess the ability levels of students (essentially the purpose of examinations)? Are there restrictions on new entrants to the market? Given the current climate, it strikes me if new bodies could set up to provide exams, a body that set up proposing to provide not the highest possible proportion of A-Cs but the most accurate assessments of students, that would be popular, at least amongst the popular press? I suspect there are many regulatory hurdles a new entrant would have to jump through - get certified by many bodies, checked over by other regulatory entities and so on. I doubt it's particularly easy to set up.

My sense is the race to the bottom is not caused by competition amongst exam bodies, but more the clamour of schools to be able to show an ever increasing percentage of A-C GCSEs, meaning that they want the exam bodies that provides them with that. And is that clamour just because of competition - competition to attract the best students?

Fundamentally, is there something wrong with competition in education? Again, I wonder whether this need actually be the case. Can new schools open up to provide a better service than the current lot? The answer is starting to change here - free schools are an example of this. Fundamentally, markets work because they provide incentives to others to provide a better service, and clearly if a school sets up and provides a high standard of education that employers (and society at large - schools needn't just be worker producers) values, then in a marketplace it would attract custom.

Now as I finish, of course there are difficulties with markets in education - information is a tricky thing and the consumer (the student) isn't necessarily fully informed about the value of what they are consuming. Nonetheless, that doesn't mean that competition won't work. Nor does examples of failed "competition" measures that have existed over the years. As a student of economics, it's important you realise that such examples are merely observations, and rather distorted ones for the reasons outlined in this post.

Summer activity

It's summer and although not formally term time, I tend to keep posting on here regardless with hopefully interesting stuff in case former students are still tuning in, so to speak.

Of interest yesterday, alongside the injustice handed out to Ukraine by human error (and some economics - why did UEFA really think adding more scope for human error was better than goal line technology?), was inflation falling to 2.8%, its lowest level for quite a while. Importantly, firmly back within the target range.

How is that possible, given all this quantitative easing and continued budget deficits? You'll recall the former adds liquid assets to the economy in place of illiquid ones hence should see more spending. The latter also adds more money into the economy by putting unearned money in the hands of unemployed people and such, and via spending projects for example related to the Olympics.

The answer is that this extra money, for now, isn't being spent. You'll also recall the aggregate demand (AD) aggregate supply explanation for price level determination and hence inflation. If AD stays in the same place since we don't spend then we won't get inflation despite supposedly inflationary policies.

End of term - congratulations or otherwise...

Today is the last day of the academic year here in Birmingham - results day.  Well done to all of those that got the results they were hoping for, commiserations to those who didn't.

Hope to see those of you continuing students next year, and to those leaving us, all the best in the future - do keep in touch!

Eurozone Madness

The news seems ever ongoing and ever worsening from the eurozone, and perhaps more than any other subject area at the moment, attracts comments that are disingenuous - folk that are anti-EU make suggestions that they know will lead to only one thing - the break up of the eurozone and maybe even the EU.

One common suggestion is that Greece should leave the euro, and many suggest Greece would even be better off if it did.

Such statements are very simplistic readings of the situation, and I wonder if they are deliberately so because the people making them are ideologically predisposed against the euro.

Allowing countries to leave the euro would signal the end of the euro because of the precedent it would set - that countries can be forced out. When would it stop? Would even France be safe? The eurozone functioned pre-crisis very well because it was seen to be irrevocable, and credibly so. That meant an absence of speculation, something that has returned en masse now that the crisis has arrived.

Second, would Greece be better off outside? Its debt would be transferred into its new currency which would immediately depreciate, increasing the size of its debts significantly. That isn't going to help solve its problems any time soon...

Economists?

It's hard for me to know exactly what the readership of this blog is, but at least notionally it's students of econ101ab, which recently had its final examination for 2011-12. Hopefully those who sat the exam and read the blog will carry on, and those who are more casual readers of this blog will also carry on - I'll keep posting sporadically over the summer, and of course pick up again in the Autumn and Winter when econ101ab comes around again.

In the meantime I thought I'd point out a blog post which suggests that "economists tell the EU" that "austerity isn't working".

This blog post is a great example of where you, as first year undergraduates, have already surpassed the understanding of many people in the blogosphere who claim to be qualified enough to talk about the economy. Generally also of the left or right, what they exemplify is an inability to make a coherent, logical argument, and also an inability to distinguish causality from correlation.

The main reason I highlight this is that these are two common failings of many arguments put forward by well meaning folk, undergraduate students included - I'd like to encourage you in your essays as you move through your degree to try and ensure you do none of these things!

The headline says "austerity isn't working", yet no attempt is made to actually establish that fact. It's assumed - like we're having a chat over a pint in the pub. Unemployment is cited as an important factor we need to be concerned about. For sure it is, but how does the blog article, or the pamphlet it is based on, establish that unemployment is caused by austerity? It points out that unemployment is up "since 2008", as if that is the clincher. That is a correlation. We cannot run the UK economy (or the EU one for that matter) since 2008 without the two large policy measures that took place - the stimulus packages of 2008 and the austerity that followed. So it's impossible to know; how do we know the stimulus package didn't set in motion the causal events that led to the increased unemployment?

Now the intent here is not to be deconstructive. What have we learnt in econ101b about the macroeconomy, and hence unemployment? A number of things; early in the course we talked about labour demand and labour supply; we can have cyclical bouts of unemployment, caused generally because real wages don't fall far enough to clear the market, as we would have in a normal demand-supply diagram for a market.

We also learnt about aggregate demand (AD) - the total level of demand in the economy is the sum of a number of things: private consumption (C), investment (I), government spending (G) and net exports (NX). We usually jump from there and say "look, increase G and we increase AD and everything is plain sailing!".

However, we do also discuss factors that help determine, for example, investment - it's a function of business confidence (b), interest rates (r) and potentially also of government spending (either as firms invest to meet demands of government or as they are crowded out - call it g).  So I is a function of confidence, interest rates and government spending in potentially unknown ways: I=f(b,r,g).

The large logical jump the blog article makes is that increasing (or not decreasing) G will solve all the problems in our macroeconomy. Now regardless of what you feel about austerity, and I am personally not particularly keen on it, a case has to be made for why it is bad, and unfortunately the blog article cited above doesn't do that (and neither does this, for space reasons!).

You have to make a number of assumptions about investment behaviour, about consumption behaviour and about the behaviour of the rest of the world in order to arrive at the conclusion that austerity is harmful and that instead we should be stimulating the economy. I'll try and set them out in separate blog posts over the coming days. All assumptions ought to be testable, meaning that it is not inconceivable that real world data could be brought to bear on this issue - which would be a refreshing change from much of the loud voices out there at the moment.