When does it take a socialdemocrat to call for the army?

On December 4th, Spanish Prime Minister Mr Jose Luis Rodriguez Zapatero called for a national state of emergency in order to dismantle the strike mounted thet weekend by the air controllers. The air controllers were protesting against their working conditions and the proposal to cut their wages. They had held a low-intensity protest for a long time and finally decided to escalate to a strike in order to make their demands heard. The center-left wing government of Mr Zapatero, afraid of a collapse in all Spanish airports, and following a quite "Thatcherite" approach to labor negotiations, decided to call for the army. The Ministry of Defense took control of the Spanish aerial space and all air controllers (civilians) were threatened with a court martial if they failed to report to their posts. Leaving aside issues such as whether the air controllers' demands were fair or whether the strike was legal, many commentators were surprised to see a socialdemocrat government to make use of the army in a country were the military has been an instrument of the political right from the early XIX century to the (failed) military coup of 1981.

The truth is that this event can be seen as part of a long list of situations in which some policies were implemented by very "unlikely" political parties. For instance, France privatized its public sector under socialist Mitterand, Israelies conceded the Sinai peninsula to Egypt under hawkish Prime Minister Begin, and it was the blatant anti-communist Richard Nixon who first opened the US to trade with the Republic of China.

More than ten years ago, professors Alex Cukierman and Mariano Tommasi wrote a very nice paper entitled When does it take a Nixon to go to China? (American Economic Review, 1998) in which they gave an explanation to this phenomenon of "policy reversals": When voters do not know exactly what is the best policy to be followed and they do not know either whether a party takes a stand because it is in the citizens' interest or just because ideology, "unlikely" parties have an advantage in signalling credibly. If a hawkish israely government negotiates with Egypt or if a republican visits China, voters can be reasonably sure that it is because these are the best policies for the majority of the populations and not just because they are what politicians would prefer to do themselves. A socialdemocrat government thus signal more credibly than a rightist government that being hard on strikers and (perhaps) calling the army is the best strategy. Voters have less reasons to suspect that such a policy is proposed solely because of the ideological tendency of the party in office. This also explains why previous center-right governments in Spain failed to take a hard stand in previous conflicts with the air controllers.

And this also explains why, if the UK ever adopts the euro, it will be probably under a tory government.

Quantitative Easing Explained by Teddy Bears

Two cartoons on quantitative easing. The second one is funnier but more wrong.

Sumner Re-Spins Quantitative Easing

Quantitative Easing Explained by Cartoon Characters

Balmoral Asset Management Prizes

Balmoral Asset Management came to the School of Economics recently to award prizes to last year's students.


Pictured from the left: Caroline Rae, General Manager, Balmoral Asset Management, First Prize winner: Silviya Foteva (Economics), Second prize: Tom Harwood (Economics), Third prize: Lesley Clark (Economics and Accounting), Chris Hendry, Financial Advisor, Balmoral Asset Management (Graduate of University of Edinburgh, School of Economics)

Well done everyone!

Tram fiasco: an incomplete tale

http://thescotsman.scotsman.com/12445/What-went-wrong-39It39s-hell.6610706.jp

It's a spectacular failure of contracting (the picture is an Edinburgh tram that did run on on Princes Street). But what's wrong? Is that because the Germans are 'delinquent'? Well, maybe, maybe not, but in any case a good contract should take into account the incentive to go delinquent, but this contract hasn't, apparently.

We economists are fully aware that most contracts are incomplete: we cannot possibly specify every future contingency on a contract, so there must be circumstances where the contract does not say what to be done and contracting parties disagree on it. But in standard models of incomplete contracts (such as the famous Grossman-Hart-Moore model, yes Moore is our Prof Moore) we don't see such a prolonged dispute or lawsuit as we see now, because if the players are rational and there is no asymmetric information, they renegotiate efficiently (and any delay or lawsuit is inefficient so they shouldn't occur!).

This means there must be an assumption(s) that does not hold in reality. Asymmetric information about the the other party's outside option, i.e. what happens to the opponent if they never reach an agreement, could explain an aspect of the dispute (my colleague Santi has a very nice paper about a related theme, though in the context of war http://www.voxeu.eu/index.php?q=node%2F5551), but I am inclined to think more about rationality and the very basic assumption in game theory (and contract theory) that all players fully understand and agree on the rule of the game (i.e. what exactly the contract means), not least because it may also give an insight into how we could have avoided such inefficiency by designing the initial contract in a cleverer (and perhaps less incomplete) way.

But then there are so many ways in which people can be irrational and disagree on the rule (contract) they should abide by. So we would need to think carefully and precisely about how they have been irrational and/or what's each party's understanding of the contract like.

Anyway, I think there's a good undergraduate dissertation to be written on this subject... I'm really curious what exactly the actual contract says, and how that can be interpreted and analysed both from legal and economic viewpoint.

Cuts and Economics

Maybe because I'm from a country that has a debt GDP ratio of 200%, George Osborne insisting Britain (the ratio is a little above 70%) is at "the brink of bankruptcy" has always sounded a bit funny. Anyway, as everyone knows, he announced big budget cuts today. (by the way the chap is the Scottish Danny, Treasury secretary, not George)

I don't have a strong opinion about the likely consequences of the cuts (sorry!). But I find it amusing that what those Tory/LibDem politicians say sounds exactly like what a good third year economics undergrad would say about fiscal policy in his/her homework essay. It strikes me that those politicians do believe strongly in textbook economics and actually use it as THE justification for the cuts. I think, the politicians are, or must have been, good economics students (e.g. Danny and David were indeed PPEists: I don't know whether they did economics in their second and third years though).

On the other hand, I guess their teachers (we academic economists) have been less enthusiastic, perhaps because we tend to believe that the actual fiscal policy doesn't actually work like that. At least I used to think that, in any country, even when a big spending cut is deemed appropriate in theory, politicians favour tax increase or do nothing in practice. For instance, a large decrease in "G" seemed to me like a mere intellectual exercise, rather than anything practical.

So, to me, what the UK government is trying to do is a big policy experiment to test whether undergrad macroeconomics actually works in reality. The point is that, rather surprisingly, it doesn't seem to have been tested before. If it works, then I'll definitely have more faith in what I teach.

Are apes the real Homo Economicus?

A new academic year has started and it's about time for the Edinburgh Economics Blog to become active again. But first of all, we in the School of Economic would like to thank you readers for all your feedback and suggestions during last year.

And now, a brand new entry.

A good friend recently sent me a reference to a scientific article saying "Santi, I am sure you will like this". The featured article was a work by a team of three US anthropologists who have studied during 10 years the aggressive behaviour of chimpanzees at Kibale National Park in Uganda. In the paper they published this year in Current Biology John Mithani and co-authors describe how these chimpanzees formed coalitions in order to attack others chimpanzees, killing around 20 rivals in the process, and then seized and occupied the territory of the vanquished. Chimpanzees have been long suspected to display this very human type of behaviour and this study seems to provide definitive evidence of it. The authors attribute these aggressions to the desire of extending territories and obtain resources that winners later distribute rather cooperatively among them.

A second study, this one published in 2007 in Science, shows another instance of selfish and materialistic behaviour in chimpanzees. In a paper authored by Keith Jensen, Josep Call and Michael Tomasello, the authors show that, contrary to humans, these apes behave rationally in the Ultimatum Game. Rather than rejecting them, chimpanzees accept low offers, somehow demonstrating that fairness concerns and other-regarding preferences are what distinguish us humans from our primate cousins.

In recent times, the behavioural revolution within Economics has enriched our models of human preferences by incorporating inequality aversion, reciprocity and efficiency concerns. In the end, it seems, apes and not homo sapiens were the true homo economicus.

Economic thinking and political radio shows

Our main objective when teaching Economics is that students become capable of using economic thinking to analyze problems. Unfortunately many still believe that Economics is about regurgitating ideas (imperfectly) learned by heart or just knowing where to invest. Economics changes your way of thinking and will help tremendously in your understanding of the world. Moreover, this "economic mindset" is not that difficult to grasp and once you start using it you will be able to apply it to many aspects of your everyday life. Take for instance this fragment from Consider the lobster (2005), a book by late David Foster Wallace (in the photo), one of the greatest modern american writers and, also, an economic thinker. He uses the basic ideas of public good provision to analyze the rather conservative leaning of political radio shows in the US.

It is a fallacy that political talk radio is motivated by ideology

"The persistence of this fallacy among left-wing opponents of talk radio is extraordinary (...) the usual claim here is that right-wing radio is "owned by large, profit-hungry corporations of wealthy, profit-driven individuals, who use their companies to push a conservative, pro-capitalist agenda." This analysis also identifies the gross economic illogic of this claim. Suppose that I am the conservative and rabidly capitalist owner of a radio company. I believe that the free-market conservatism is Truth and that the US would be better off in every way if everybody were conservative. This, for me, makes conservatism a "public good" in the Intro Econ sense of the term - i.e., a conservative electorate is a public good in the same way that a clean environment or a healthy populace is a public good. And the same basic economics that explains corporate contributions to air pollution and obesity explains why my radio company has zero incentive to promote the public good of conservatism. Because the time and money my one company would spend trying to spread the Truth would yield (at best) only a tiny increase in the conservatism of the whole country - and yet the advantages of that increased conservatism would be shared by everyone, including my radio competitors, even though they wouldn't have put themselves out one bit to help shift public opinion. In other words, I alone would have paid for a benefit that my competition could also enjoy, free. All of which plainly would not be good business... which is why it is actually in my company's best interests to "under-invest" in promulgating ideology."

Impressive, don´t you think?

General Election Hustings

Monday 26 April, 6.30 p.m. - 8 p.m.
George Square Lecture Theatre, George Square, Edinburgh, EH8 9LK

Do you have a burning question to ask Edinburgh's parliamentary candidates for the Westminster General Election? Come along to this event and hear first-hand from Edinburgh South candidates why they believe their parties have the best policies. Find out what their priorities are for higher education and for students, and ask them questions about key issues that are important to you.

Panel members are:
Neil Hudson (Conservatives)
Ian Murray (Labour)
Fred MacKintosh (Liberal Democrats)
Sandy Howat (SNP)
Robin Harper (Green candidate for Edinburgh East)
Chair: Dr Mark Aspinwall, Senior Lecturer in Politics and International Relations, School of Social and Political Science, Edinburgh University

There will be questions from the audience on the night but if you would like to submit a question to the panel in advance please email it to anna.maciulewicz@eusa.ed.ac.uk

Prof. Jeffrey Sachs: Live Video-Seminar Mon 26th April

(Photo courtesy of psdblog.worldbank.org)

Organised by the University of Edinburgh Economics Society

Professor Jeffrey Sachs is one of the worlds most prominent development economists. Author of The End of Poverty, his books have twice been New York Times bestsellers. He is Special Advisor to the UN Secretary-General Ban Ki-Moon and was also the director of the Millennium Development Goals. He is an important figure in the world of development economics.
Event Details:
Date: Mon 26th April
Time: 18.20 19.20
Location: TBC
(Registration required)
This event is free, but registration is necessary. To register please send your name, email and student number (where applicable) to ed.econsoc@gmail.com subject: Jeffrey Sachs. Registration will close on the 18th April.

This seminar may be of particular interest to studying Economics of Developing Countries, as Jeffrey Sachs is the author of one of the key texts.

If you have any questions or for further information please email ed.econsoc@gmail.com.
Hope to see you there,
Robbie Marwick
Co-President
The University of Edinburgh Economics Society

Teaching Economics with GIFs

The GIF above is constructed from figures in “Culture and institutions: economic development in the regions of Europe,” a paper by Guido Tabellini, forthcoming in the Journal of the European Economic Association. One of the images shows the per capita income across regions of western Europe (higher the more blue-ish) whereas the other image shows a measure of cultural values (self reported measures of trust and respect; again, higher if more blue-ish). I use it in my class to illustrate the new theories that link economic outcomes with culture. But it also illustrates (I hope) that little visual tricks can be very effective in visualizing ideas.

What economics would I like to be taught?

The Edinburgh Economics Blog is open to contributions from our students. The first student to do so is Peng Shao, who reflects upon the famous LSE public debate on what kind of Economics should be taught. If you would like to contribute to the blog, send your texts to ssanchez@staffmail.ed.ac.uk

The set of answers to this question seemed all quite clear when I listened to LSE’s “What kind of economics should we teach?” podcast. However, it seems quite daunting when, with some afterthoughts, I have to put them as written on the blog. But with three guiding issues being mathematics, what models & scepticism and purpose of economics, the question seem much easier to handle. So I have decided to make them as my outline.

Since our first online test in Economics 1 A, we all became aware that Economics has normative and positive aspects. I thought to focus on the positive aspect will be easier to handle so I have decided to write only on that instead. After reading Freakonomics and some papers, many would realise that defining economics’ purpose is really difficult. But a central piece that is common to all is its attempt to describe phenomena through its “economic reasoning sense”.

Being an attempt, it is clear there is no absolute certainty to its accuracy and there should be always room for improvement. And luckily, we have had no lecturers trying to convince us with model’s truth above reality when the two clearly don’t meet. However, this attempt, as a 2^nd year undergraduate, is largely restricted to the emotionless and perfect calculating pleasure machines.

So are real economic agents really that mechanical? Having studied Economics for only two years, I have no doubt that rational models shed interesting explanation. But as we have two spheres in our brain, it seems we have left out a bit on the other side of economic behaviour.

Let it be market discipline or any other mechanisms to discipline us to be logical. We will still remain human and commit errors that may lead to a bubble or a recession. As Einstein had once said “Two things are infinite: the universe and human stupidity…”; I think we will be just doomed to be silly for some parts. No doubt again, in the long run, all this just get weeded out due to the size of data set and may become part of a learning curve.

But looking only at the long run can seem quite similar as looking through a window filled with many small chips - eventually we will miss something interesting and important due to the distortions of our sight. This possibility makes field like behavioural economics quite relevant to be part of this attempt, even in undergraduate level.

Now comes the part you won’t stop hearing criticism about it in economics from outside the circle, employing mathematics. Mathematics does simplify paragraphs or pages into one or few equations. Its makes an argument clearer than any words can describe intuitively and deduce useful conclusions without writing a thesis or two. I am not fussed about its use. But its justification to its use is, from what I recall, rarely talked about.

Why must we be wannabe physicist is an important issue to be discussed and taught on. Other than its usefulness for precision on analysing economic outcomes, early on courses discussing the troubles which non-mathematical economic approach faced can be a good motivator to students to overcome and prepare for the “mathematic nightmare” in Economics.

By now, I have realised that no existing word constraint has left me to ramble on a bit too much. I am sure I may take some risk to comment on things I may be quite ignorant about. But I guess being a student allows me to do so but I still beg your pardons.

Two heroes of the match?

It's been suggested that Colin should also get a mention as Hero of the Match - it was his spectacular dive to save the ball that caused his injury! What do you think? Watch the video.

Students beat injury stricken staff team 4-2

The injuries started before the game even started with Santi pulling a calf muscle doing stretching exercises. Then 5 minutes in, fate intervened again to trip and injure Colin. Following another staff injury, there were some heroic performances from the staff team with Andy playing the entire game with a very bad back, Ed playing the entire game with a very bad cold and Santi making some fantastic saves in goal with his very bad calf injury.

This should not be taken as an excuse for losing. With Gavin Alston the Rock in defence and Umair Aleem's silky skills, this was always going to be one-way traffic. However, there remains a challenge for the student team to rise to next year - nobody has ever scored against Colin the Cat!!!

Man of the Match - Gavin Alston
Hero of the Match - Santi

Staff v Students Football 2010

It was victory for the students this year - they won 4-2. Congratulations to the winning team, pictured above. More photos and videos will be added soon.

General Election Party Political Debate: Economic Policies

In the run up to the General Election it is important to know what the Parties really stand for. And in the current financial climate, their economic polices are of particular significance.

Desperate for the student vote in this swing seat, the four main parties have come together for a debate to be hosted at the University of Edinburgh, in our grandest building, the McEwan Hall.

Date: Thursday 11th March 2010
Time: 19.00-20.30
Location: McEwan Hall (Edinburgh University)
Host: The University of Edinburgh Economics Society
Chair: Bill Jamieson, Executive Editor of The Scotsman
Panellists:
Labour Finance Spokesman – Andy Kerr MSP
Conservative Finance Spokesman – Derek Brownlee MSP
Liberal Democrats Finance Spokesman – Jeremy Purvis MSP
SNP Treasury Spokesman – Stewart Hosie MP

Followed by wine reception.

*FREE ENTRY for students, non-students: donations welcome*

This is a great opportunity to question and pick apart the policies of these competing parties. Please email any issues you would like raised to ed.econsoc@gmail.com.
To guarantee a seat please register your interest, including name & student no. (where applicable), by emailing ed.econsoc@gmail.com.

Congratulations to the Economics Society!

Our very own Economics Society were runners up in the Edinburgh University Student Association's recent Society Oscars. They were just pipped to the post by the History Society.

The Economics Society is very active, and with a UK general election not far off they have organised a debate on economic policy to be held on Thursday March 11th 2010 in the McEwan Hall.

Good advice from the School of Economics

Football: Senior Honours v Econ Academics

The staff have started training for the this year's Academics v Senior Honours football match so I thought I would re-post the photos and video of the March 2009 match.



Everyone enjoyed themselves and the staff upheld the reputation of the School by winning 2-0. Santi and Ahmed were the goal-scorers.

Here's a short video of the game:

This year, we're going to draw the SH team members' names out of a hat during the coming SH party (Thursday 4th March - in the coffee room, 1st floor, 31 BP, 4pm) and the game itself will be towards the end of March. If you want to put your name forward for the team, just email Karen or Christina on Economics.SSO@ed.ac.uk and we'll put you on the list.

Economics needs you!

We are currently looking for participants to take part in our focus groups. Would you like to help shape the future of the Economics student experience at Edinburgh? If so, we would love to hear your positives and negatives of studying here!

If you are willing to spare 50 minutes of your time next week (w/c 15 February 2010) please contact us at:

Economics.SSO@ed.ac.uk
Tea and coffee will be provided, and all participants will be rewarded with a University of Edinburgh Economics mug.

Poster Sessions

The poster sessions are coming up soon and we thought we'd post a video of the November session so you can get an idea of what it'll be like.

Keynes, Hayek, Booms and Busts

This morning a friend of mine sent me this link:

http://www.youtube.com/watch?v=d0nERTFo-Sk

It's a video. A rap music video. With economic theory in it! Keynes and Hayek return to life to attend the "World Economic Summit". Keynes suggests that he and Hayek go out for a night on the town, during which they each outline their theory of booms and busts, all in the company of pretty ladies and ample amounts of alcohol (and a barman who is eager to serve).

It was a good start to my day. The video is really well done, and there are so many well thought-of details; even the barman serving the shots looks a bit like Bernanke (and his name is Ben)! Kudos to John Papola and Russ Roberts, and to the main actors, Billy Scafuri (John Maynard Keynes) and Adam Lustick (F. A. Hayek).

If you like their project, go to their website at http://www.econstories.tv to read more about the project and those behind it, and to donate for what's coming next. May there be lots more!!

On why killing three billion people may not be such a bad idea

During a recent coffee conversation, members of the faculty were discussing on the difficulties of establishing Pareto optimality in situations with an infinite horizon. In cases like those, it is complex to ascertain what schedule of taxes and transfers from one generation to another can make all generations better off. At some point the conversation arrived at an extreme example: Suppose we kill half the population of the planet, that is, three billion people. That will ensure that global warming will not take place, that valuable resources will remain unexploited and that pollution will not ruin the environment forever. That is, the potential gains for future generations from an exercise like that are huge. The next step would be to compensate the three billion people we are about to kill in order to ensure a Pareto improvement. We could throw them a party wild and big enough to leave them indifferent between dying just after it ends or continue living. That is reminiscent of that old sci-fi film called Logan’s Run (in the photo) in which people in a dystopian society were “renewed” when they turned 30 in the middle of a ceremony with great celebration and joy. The incredible welfare gains derived from having half the population of the planet exterminated should be enough to compensate those who are killed and that would ensure Pareto optimality. There is however an obvious problem with this scheme: Those gains will take place in the future. Only after the three billion people are dead the rivers and the air will become clean, the level of the sea will stop threatening millions of people living in the coast and humans will avoid extinction. Unfortunately, those large welfare gains cannot be transferred from the future.

At this point you may be horrified. Morally, the idea of killing half of the Earth’s population seems repulsive at first glance. But what if it ensures the survival of the human race? Let’s put in a different way. Suppose now that people care about the welfare of their children and of their grandchildren. In that case, the transfer necessary to leave them indifferent between dying or not (the size of the party) may not be that big if by leaving things as they are their descendants will face extinction or, even worse, a miserable life. Maybe, just maybe, the total amount needed to compensate those three billion people is not that big and it can be generated by the current generation...

... This is what happens when you take economic reasoning to its last consequences.

Are economists cheapskates?

Happy new year to everybody!

Economists are widely regarded as heartless bastards. It is assumed that we only care about money and profits and that we disregard ethics and morals. That, as with all clichés, contains a small element of truth. Surveys and experiments have shown that it is not that economists are bad people, it is just that they care more about efficiency. Given that, as you should know, efficiency and equity are frequently in conflict with each other, economists may look stingy and cold. Economic training is to "blame" for this. Economics students learn concepts like opportunity cost or learn to think strategically by studying game theory. When taken seriously and when applied to everyday life, these ideas can make a person behave in apparently bizarre and cheap ways.

This is the topic of this very nice article, kindly contributed by our student Ankita Patnaik. It is a comprehensive overview of the reasons behind our apparent coldness. To some extent it is true that we are less averse to put a price to things like time. But on the other hand, as we have argued elsewhere in this blog, being a "bastard", that is, caring about efficiency and being realistic about people's motivations can often be the best way to improve their welfare and make the world a better place.

A final question for you students: Do you feel that your "dark side" is growing as as your economic studies progress?