Scottish Independence Poll


POLL RESULTS: Should Scotland be an independent country?

We all know that the majority of Scots voted 'No', but how were our poll's results? 'No' was the most popular choice among our readers, with 47% of our poll's participants deciding against independence. 35% voted 'Yes' and 17% were undecided.

Thank you to everyone who took part!

Post Slider

Sunday, 2 November 2014

John Nash: Game Theory and the Equilibrium

By Calvin Price

In 1950, John Forbes Nash Jr. earned a doctorate for his work on game theory.  His dissertation focused on what players do in non-cooperative strategic games.  Since his original work, game theory has been hailed as one of the greatest intellectual advances in economics and has had applications on a vast range of fields.  It was truly a worthy cause for Nash to win the Nobel Prize in 1994.

Game theory can be summed up in a disarmingly simple question: what will the other guy do?  It focuses on what a person will do when confronted with the move of another person.  This is called game theory because that’s where it can be most obviously applied.  While it’s unnecessary in games such as rock-paper-scissors or tic-tac-toe, game theory becomes much more useful for something like chess.  This has clear implications as a mental construct for thinking about complex games, but it otherwise seems like an exercise in mathematical thinking.  What about real-life situations?

The most famous of game theory applications is called the prisoners’ dilemma:
Two men have been arrested.  The police have them on minor charges, but suspect a larger crime.  If they get the testimony from one of the men, he will be freed and the other will be locked up for 10 years.  If neither man betrays the other, they both get 1 year imprisonment.  If both men talk, then they each get 5 years.




So, what do you do?

Friday, 31 October 2014

A Golden Opportunity

By Daniel Longenecker

Market analysts would love know the future. The problem is—they can’t. So how can a prospective investor know what to expect in the coming years? I believe that investors should investigate proven market factors like supply and demand. In the gold market, several factors have surfaced that indicate shifts in the supply curve and demand curve for gold. Market forces of supply and demand can be trusted to accurately predict prices in a free enterprise system. Thus, decreases in gold supply, increases in gold demand, and the history of demand spikes all suggest that the price of the precious metal will rise in coming years.

How could gold supply decrease when gold mines operate around the clock? The answer lies in the decreasing available supply. China recently has bought up billions of dollars worth of gold from the west. One estimate states that China has increased its gold holdings by more than 1,600 metric tons in the past five years, a change worth more than 77 billion dollars [1]. Instead of allowing gold price to rise, gold ETFs (commercial commodity hoards, often comprised of natural resources, which trade ownership similarly to corporate stocks) have exported heaps of gold to the Far East, to meet their demand. But since gold is a scarce good, the ETFs are depleting irreversibly [2]. Thus, this supply shifter, the move from commercial ownership of gold to governmental ownership of gold, indicates that available supply is decreasing dramatically, and when supply decreases, price rises (Figure 1).


Figure 1. Supply Decrease Curve [3]

Thursday, 30 October 2014

Pareto Optimal and Perfectly Disgusting

By Daniel Gurevich

One of the fundamental measures of efficiency in economics is Pareto efficiency (or Pareto optimality). A society is called Pareto efficient if resources have been allocated in such a way that it is impossible to redistribute them so that at least one person is better off and nobody is worse off. In other words, Pareto efficiency implies that any “improvement” requires a value judgment. One could argue that any Pareto efficient distribution could be considered optimal by some definition.

In 1951, Nobel Prize-winning economists Kenneth Arrow and Gerard Debreu published a mathematical proof that a perfectly competitive free market results in Pareto efficiency in the long run. So there is proof that free markets really do work! But not so fast – according to 1998 Nobel Prize winner Amartya Sen, Pareto efficiency is not all it is chalked up to be. In his 1970 magnum opus, 'Collective Choice and Social Welfare', Sen writes, “An economy can be optimal in this sense even when some people are rolling in luxury and others are near starvation as long as the starvers cannot be made better off without cutting into the pleasures of the rich. . . . In short, a society or an economy can be Pareto-optimal and still be perfectly disgusting.” Sen asserts that freedom and equality are far more important than Pareto efficiency, and he is right.

Consider Qatar. With the world’s highest GDP per capita (over $100,000), an official unemployment rate of 0.1%, and no residents below the poverty line, it could pass for a Pareto efficient paradise. Pareto efficient it might be, but a paradise Qatar is not. The restrictions on freedom in Qatar, especially for non-citizens, are appalling. According to the United States Department of State’s Trafficking in Persons Report (TIP) for 2014, immigrants who come seeking unskilled work live in conditions of effective slavery:

Wednesday, 22 October 2014

The Old Lady of Threadneedle Street

By Deepa Mathew

She is comfortable in her position in Threadneedle Street, having been there since 1734. Walking up from the depths of Bank Underground Station one quickly makes her acquaintance. Her nickname came to be only in 1797, created from the creative mind of the cartoonist James Gillray. Yet there is much more to the Bank of England...


Her birth came in 1694 in order to help the government with raising funds during King William III’s war with France. This was achieved by collecting money raised from private investors. She has evolved over the years to give many more uses; issuing bank notes, storing gold and protecting the economy from shocks – as befits her job as a central bank.


Bank of England


Minimum Wage Raise: Hurt or Help?

By Caroline Kimbro

An overview of the minimum wage rates across the US.
(Click to enlarge image.)

As the possibility of raising the minimum wage from $7.25 to $10.10 an hour is discussed by US government officials, we hear much about the extra money it will provide for households all over America and the ways it will strengthen the economy. However, we know that most changes come with an opportunity cost and this change in wages is no exception. If businesses are required to pay their workers $2.85 more than they currently do, most will reconsider who they’re hiring. Since they have to spend extra money on employees, many businesses will want workers they think are worth this higher wage: in effect, a raise in the minimum wage will cause a shortage of jobs, particularly for the average American teenager, unskilled worker, and minority worker.

Tuesday, 21 October 2014

The Evolution of the Capital Asset Pricing Model: How an Economic Model Evolves and Improves

by Calvin Price

In 1964, William Sharpe and John Lintner developed a formula called the Capital Asset Pricing Model (CAPM) for predicting the pricing of stocks. It was mathematically simplistic and intuitive; it asked the right questions; it was an immediate success in the economic community. It was taught in virtually all business schools as the stand-alone method for pricing stocks. There was just one problem with the model: it didn't work. 

Models attempt to simplify the real world, find a rule, and then apply that rule in reality. Through this stringent means of testing and retesting, hypothesizing and theorizing – applying the scientific method - researchers can find rules that govern economics. To reduce the complex system of variables that apply in any situation into a linear formula is no easy task – but it is especially difficult, and probably impossible to do so for the stock market. The stock market is subject to a complex scheme of crowd psychology, moods, global affairs, and seemingly unrelated topics all have the potential to shift prices. It is highly doubtful that any theory would be able to accurately measure these effects and create a theory from that.

In 1994, a famous investment company called Long-Term Capital Management (LTCM) was founded and was praised as being the largest gathering of academic and practical knowledge on the stock market in existence. It had several Nobel Prize winners, professors from prestigious academic institutions, and weathered pit traders and quantitative analysts from Wall Street. They enjoyed risk-free borrowing from banks and had access to the latest technology. Within three years they were hailed as possibly being the greatest investment company ever founded having made unheard of returns on investments. In 1998, the company flamed out of existence in a period of less than a month in a relatively non-volatile market. They are one of the most well known examples of trading errors, are frequently examined in case studies, have been the subject of a book and numerous academic articles, and relied heavily on the CAPM.


Monday, 20 October 2014

Friedman & Health Care: A Modern Look

By Sarah Becker 

Milton Friedman
Milton Friedman
In 1996, when Milton Friedman wrote an article for the Wall Street Journal entitled "A Way Out of Soviet-Style Health Care," Milton very well describes America's current state of affairs when it comes to health care. How did he perform this feat? Did Milton know that recent legislation such as "Obamacare" would be passed or that we'd currently be facing a shortage of physicians? Probably not, but it seems that Milton saw America walking down a healthcare path that we have only continued on.

In this article, Milton argues that employers should no longer provide health insurance plans of the type that are currently being offered. In the current model, resources from the employer, or part of an employee's salary, is used to pay for a health insurance plan. Because a worker is enrolled in the plan through their employer, taxes on this money are able to be avoided. Americans, myself included, always want to evade the notorious and always-prowling tax man!

Sunday, 19 October 2014

Vietnam over China?

By Dennis Fisher 


Image Credits: english.vietnamnet.vn
Where do most of your goods come from? If you asked anyone this question a typical response would probably be China. It feels like every time you look at a tag on a piece of clothing, shoe, toy, car part, or even furniture it will simply state “Made in China”, and in fact, the US spends about $29 Billion dollars on imports from China (1). Most big name companies will have at least some of their goods produced in China. Corporations such as AT&T, American Eagle, Coca-Cola, Dell, Gerber Foods, Hershey Foods, Honda Motor, Huggies, Ikea, and LG produce in China (2). The list goes on and on. The benefits of producing in China have been cheap labor on large scale orders, but recently another Asian nation has been attracting business away from China.


Monday, 22 September 2014

Quantum Fluctuations and Cosmic Inflation

By Maharshi Chakravortee

Let me ask you a question. Has it ever struck your curious mind as to how all these incredibly beautiful structures - these planets, stars, galaxies - came from a mere singularity, or in simple words the ‘Big Bang’? Since the Big Bang was hypothesised, all theoretical, experimental and astronomical physicists went bonkers to find out exactly how ‘inflation’ (I will come to that) can be proved to cement the Big Bang Theory, or if the Big Bang Theory is just a crazy idea to satisfy our minds temporarily about the origins of the universe. Are we all in a state of oblivion, or does science actually play God in this?

Look at this image for starters:


                     

This is a baby photo of our universe, from when the universe was about 380 thousand years old. Now if you’re thinking that 380 thousand years doesn’t sound that young and asking yourself why we can’t get an image of the universe before that, this is because at that time the universe was so hot, that all matter, including protons and electrons, were in a state of plasma, a sort of jumbled mess. Any light that passed through it would be scattered or absorbed. This made the universe opaque, until 380 thousand years ago when the universe was cool enough to make these protons and electrons, allowing the formation of Hydrogen atoms and allowing light, or photons rather, to spread out. So from the 380 thousandth year to the present day, roughly 13 billion years, these photons would travel through the space-time continuum until it hit our detectors, which made us this image.


Sunday, 21 September 2014

The Legacy of The Worldly Philosophers

By Viva Avasthi

In the wake of Scotland's historic referendum on whether it should become an independent country, and the many discussions of Scotland's important contributions to the United Kingdom, now is a great time to consider the history of economic thought, which began with a Scot, Adam Smith. (Incidentally, how would Adam Smith have voted, if he were alive today? It is most likely that he would have chosen "No".)

Despite being a relatively young subject, economics has an extremely rich history of thought, and Robert Heilbroner's The Worldly Philosophers is an excellent read for anybody interested in it. It serves not only as an accessible introduction to some of the most influential economists' most important theories, but also as a fascinating and sometimes entertaining insight into their characters and the context of the formulation of their ideas.

The "worldly philosophers" were the great economists of the past who, united by their curiosity of human interaction and the complexity of the world around them, sought to understand mankind's drive for wealth. It is worth noting that the last economist the book covers (it works through them in chronological order) is Joseph Schumpeter, who died in 1950. Notably, the book does not mention Friedrich Hayek and is of no use for those interested in learning about the work of contemporary economists such as Daniel Kahneman. For such readers, I believe that Phil Thornton's The Great Economists: Ten Economists Whose Thinking Changed the Way We Live would be more helpful, though I have not read the book myself.

This article is less of a book review and more of a reflection on my part of a few of the ideas of the great economists and their implications and relevance today. For this reason, this article may be of greater interest to those readers of this blog who have already read the book or have some understanding of the great economists' ideas.

Monday, 8 September 2014

Will Scotland make history?

By Magdalena Paczocha



On 18 September, voters in Scotland will be asked in a referendum whether they want the nation to become independent from the rest of the United Kingdom. The reason behind the willingness to take Scotland's destiny into Scottish hands was the landslide victory of The Scottish National Party in the 2011 Scottish Parliament election. Independence is a main goal of this party. An agreement was signed on 15 October 2012 by the Prime Minister of the United Kingdom, David Cameron, and the First Minister of Scotland, Alex Salmond, which provides a legal framework for the referendum to be held. The referendum question will say: "Should Scotland be an independent country?"  The principal issues in the referendum are the economic strength of Scotland, defence arrangements, continued relations with the UK, and membership of supranational organisations, particularly the European Union and NATO.


Thursday, 21 August 2014

What is Quantum Tunneling?

Erwin Schrodinger
Source: http://fineartamerica.com/
by Sparshita Dey 

Quantum Tunneling is a quantum phenomenon where particles with less energy than that of a potential barrier can still cross the energy barrier, by “tunneling” through. This means that the particle, which according to classical mechanics, cannot possibly end up on the other side of the barrier, has a chance of being found within or on the other side of the barrier – corresponding to a finite probability of being found in these “classically forbidden regions”. This will be explained in a more simplistic manner later on. 

In this article, I will aim to explain how some concepts in quantum mechanics means that tunneling is possible. This will involve having a look at various examples of tunneling phenomena, what wave functions are and also the time-independent Schrodinger Equation.


Wednesday, 20 August 2014

Are the advanced economies in for a long period of economic stagnation?

Royal Economic Societyby Viva Avasthi

Last month, I submitted this essay as my entry for the Royal Economic Society's Young Economist of the Year essay competition. I was delighted that the judges (a panel of teachers initially, and then Sir Charles Bean, RES President; Stephanie Flanders from JP Morgan; and Professor Tim Besley of the London School of Economics) thought it deserving of joint third place. I am now sharing it with you and hope that you enjoy reading it. Clicking on each graph will allow you to see it more clearly.

Since submitting the essay, reading this and this provided me with further insights into the 'secular stagnation' argument and other ways in which it might potentially be flawed. Please refer back to this when you reach the relevant point in the essay. I have marked that point with **
In hindsight, perhaps I didn't give enough credit to the ability of technological developments to boost growth, particularly considering how badly the impacts of growth in that sector are reflected in GDP... Unfortunately, the word limit (and the limited amount of time I had to write the essay after exams had finished!) prevented me from exploring a lot of ideas in as great a depth as I would have liked.


-----------

31/07/14


The future: a murky blur of possibilities, problems, and potential shifts in paradigms. Attempting to make sense of our collective experiences in the past and present to make informed predictions about the future is one of the difficult tasks faced by economists across the world. At present the key question haunting economists and leaders of the advanced economies is the one which this essay attempts to answer.


Setting the stage for analysis


Since we are constrained by the word limit, let’s consider the advanced economies to be the US, UK and European economies. Most notably, Japan has been omitted. Several key reasons for this must be condensed into the following: Japan is structurally quite different from the other economies since it has a far stronger manufacturing sector, far better standards of education, and a greater social cohesion. Its prospects seem much brighter than the rest of the advanced economies’ for these reasons. Thus (perhaps rather controversially!) it was felt that there was no need for it to be included in this analysis.

Traditionally, economic stagnation is considered a prolonged period of little or no growth in the economy, often with annual GDP growth of less than 2-3%. High unemployment is generally perceived to accompany this low growth. However, perhaps such GDP growth benchmarks become redundant when one considers that ‘normal’ growth might not actually be normal at all. Pre-crisis levels of GDP growth can be described as being not normal for the entire period between today and the 1980s because of the existence of various bubbles providing artificial boosts and drags on GDP. Even before then, we were living in a world boosted by the massive demand created in the aftermath of the world wars, and so it would be irrelevant to compare the growth levels of today to those of that time. So perhaps measuring economic stagnation by looking at GDP growth alone doesn’t make much sense.

To measure economic stagnation we must consider what we value as important for an economy: growth levels in themselves, or standards of living, equality and sustainability of growth? A better measure of economic stagnation than GDP growth may be real median income levels. With 95% of the increase in American income since 2009 having gone to the top 1% (Saez and Piketty, 2012), it is clear that just looking at GDP growth can cause issues, since the sort of growth occurring does not benefit the economy as a whole. More suitable measures, perhaps, are unemployment levels (accounting for those who have given up actively seeking work), investment levels and productivity levels.
 

Saturday, 5 April 2014

MPC: Success or Stalemate?

By Shivani Maru

Mark Carney with prominent members of the UK's Monetary Policy Committee.
Image credit: cityam.com

The MPC is short for the Monetary Policy Committee; a committee in the Bank of England that controls the base interest rate in the UK. They meet every month in order to discuss what they believe the interest rate should be.
 
The main aim of the MPC is to alter the rate of interest in order to meet the inflation target. In the UK, the inflation target is 2% CPI, which has been set by the government.  Although this may seem like a simple task, it actually is quite daunting.
 

Saturday, 22 February 2014

Masdar City: The Answer To Sustainable Economic Growth?

By Shivani Maru




Masdar City: the future of sustainable living. Initiated back in 2006, Masdar City (located in Abu Dhabi) is a city that will only run on renewable resources. Although some may argue that this initiative will be ineffective as it is surrounded by ‘some of the world’s most unsustainable developments,’ Masdar City is helping to correct this. Masdar City is another way of raising awareness to residents of the UAE and the world about green technology.

Sustainability is very important for the economy, especially for the future. What’s the use of producing goods from natural resources that will eventually run out? Especially, when natural resources are being consumed faster than they are being produced. They are going to run out, and also considering that Abu Dhabi is a net exporter of oil, this raises questions as to the sustainability of the country. Often, governments use higher taxes on petrol as a way of becoming more sustainable. However, the truth is is that we need these resources regardless. Therefore, it’s better to look at renewable resources as an alternative.

Saturday, 8 February 2014

The Shifts and the Shocks: Lessons of the Global Financial Crisis

"In economic terms, the only other disaster that matches this is a world war. [...] This wasn't some minor event. We will be living with the consequences of this possibly forever."



The quote above is from Martin Wolf, the associate editor and chief economics commentator at the Financial Times, specifically from the highly passionate and immensely thought-provoking lecture he delivered at the University of Birmingham on Wednesday (5th October). Mr Wolf is, as his Wikipedia page puts it, 'widely considered to be one of the world's most influential writers on economics' and so it was with great excitement that I came to listen to him speak on what he is most passionate about: the financial crisis of 2008. I was not disappointed.

In outlining the key arguments which shaped his lecture, I will follow the same structure which he did by looking first at where we are post-crash, then how we got here, and finally what we should learn. Along the way I will insert my own comments and also some references to books, videos and ideas which I feel have already contributed well to the existing debate and which you readers may want to look into. In an effort to keep this article of a moderate rather than excessively long length, I have taken the liberty to condense Mr Wolf's arguments as much as possible, so please do forgive any ambiguity present. Comments are, as always, very welcome and I will be delighted if you make the effort to share your thoughts with me.


Wednesday, 5 February 2014

Why is Venezuela Running Out of Toilet Paper?

By Shannon Wade



My friend and I used to play an “impromptu-speaking” game where we would switch turns throwing out a word and having the other person speak for a minute on that topic. One night when I was having a sleep-over at my friend’s house, we decided to play this game. It was about 12 am at night so we were both in that goofy, sleep-deprived, second-wind stage. My friend decided to give me the word – toilet-paper. Really? I have to speak for one entire minute on toilet-paper?!! My response went something like: “Well, toilet-paper is thin white bathroom tissue, sometimes with little designs on it, used by individuals in bathrooms to…um…wipe…It is a very good thing to have!! If you didn’t have toilet-paper, you would have to… *ahem, let’s skip that part*…Anyways, it is useful and found in sanitary countries…hopefully…” I then proceeded to ramble on for about 40 more seconds about things only vaguely reminiscent of toilet-paper. The one description of this product that did not enter my speech was the fact that some wealthy countries don’t have enough toilet-paper. Like Venezuela. It was something I never even thought possible. Until now.

Friday, 24 January 2014

Fiscal Responsibility in the UK and the Role of the OBR

by Viva Avasthi

Why is it in all governments' interests to ensure that they and their policies are seen as credible? How is it that the British government manages to maintain a relatively high level of credibility?


These were the main questions raised and addressed by Professor Stephen Nickell at the lecture I attended on Wednesday which was organised by and held at the University of Birmingham.

Professor Nickell, who is a member of the UK Budget Responsibility Committee (find out more about him here) started his lecture by answering the first of the two key questions. He explained that if a government plans to spend only as much as it plans to tax, and it is believed to follow its plans fairly stringently, people will be willing to lend to that government (by purchasing its bonds, known as gilts). However, if the credibility of the government is weak, people will want to be compensated through higher interest rates for the risks they are taking in lending to that government.