Tuesday, September 27, 2011

BAE Systems and Welcome!

Welcome to Birmingham! Term has just started in earnest, and if you've just arrived to start your first year here, a particular welcome! Come second term, after Christmas, you'll have me lecturing you on macroeconomics for econ101b, while currently you have Martin Jensen for econ101a, Principles of Microeconomics.

Both terms we'll be teaching the basics of economics and attempting to apply them to events happening in the world around us. One such event that is happening today is that BAE Systems is announcing the shedding of a large number of jobs. This is being billed as very bad news for the economy, and undoubtedly it is not great news since it is people losing jobs, losing incomes, at a not particularly bright time economically.

However, such a superficial analysis is bad, and has potentially troubling implications. The analysis is very short term in nature, and implies that perhaps governments should be doing more about things like this. It's short term because BAE is acting now to keep itself in good business shape moving towards the future - it will be more profitable as a result, and will exist longer into the future, providing jobs throughout the UK for longer.

It's also a partial analysis in that it considers just one firm in just one industry - and also makes the suggestion that we should be protecting this particular industry since it is a UK based exporter. But should we? You will learn (or be reminded) about perfect competition this term, notably the idea that in an ideal situation, firms will expand until all profit opportunities are exhausted, and also will exit markets for which profit opportunities have turned into loss-making enterprises. Clearly, in its current shape, BAE is not profitable, and if it is to be supported in that shape, it will become bloated and uncompetitive on a global stage - exactly what we apparently most want in the UK economy.

Instead, these skilled workers should be allowed to move to other companies or industries, allowing them to grow where there are profitable opportunities - and such growing industries will almost certainly export, and even if not, they will be producing what people want (since they are profitable).

There is no reason for government to get in the way of this and thankfully the signs are good. By not getting in the way will the government achieve this aim of "rebalancing" the economy - they will allow, if red tape is cut, businesses to grow in areas where there is demand, as opposed to offering tax breaks to any particular industry - such favourable treatment for any industry will only result in more of the same.

So: I hope you're looking forward to studying here at Birmingham and challenging your perceptions about real world events using the tools of economists. See you next term!

Wednesday, September 14, 2011

John Redwood and His Blue Tinted Glasses

A little too often I end up reading (and often) linking up to stuff written by US economists about the US economy. It often has a lot of relevance for the UK economy. I do now read a few UK economics blogs, and highly recommend some of them.

Towards the left of centre, and inherently sensible, is Duncan's Economics Blog. You may want to rule out the blog's writer, Duncan Weldon, because he was involved with advising the previous Labour government. I'd urge you to get past that, and remember that more often than not, politicians ignore the best advice of economists. Duncan is highly knowledgeable, and engages with those on both sides of the debates that rage within the discipline of economics. I'd recommend this perhaps most highly of the UK economics blogs I read - the only downside is that he doesn't post quite as frequently as some.

Another blog in the left-of-centre realm is Stumbling and Mumbling; while this guy (Chris Dillow) claims not to be an economist, he is very familiar with a lot of economics, and hence his blog is hugely interesting. In general its microeconomic, but it does step out into the macroeconomic, and this recent post on the 50p tax rate is, as usual, excellent. Of course, it should be pointed out, Dillow is a self-proclaimed Marxist.

Then, of course, there is the other side of the spectrum. There's David Smith's Economics Blog, written by a Sunday Times economics correspondent. Even if you are more persuaded by those who lean left, I'd strongly encourage you to be reading what those you disagree with say, and respond to it. That's one of the reasons I read these blogs. Smith is scathing at times about the previous government and the current opposition (I think unreasonably so), but is constructive in what he suggests, and his recent post on the possibility of future Quantitative Easing and other monetary measures is worth reading.

If you want to read someone that right wingers champion as a great economist, but who is actually a politician and hence anything he writes should be taken with a large pinch of salt, try out John Redwood (if you can get past that picture at the top!). Redwood is apparently a trained economist, yet he is clearly a politician first, economist second, if his recent post on immigration is anything to go by. You can try very hard, but you'll be hard pressed to find an economist who believes blocking immigration (particularly at some arbitrarily set cap) is a good thing, yet Redwood's constituents want this, and hence so does he, and he makes all sorts of contortions to justify why he opposes immigration. He is also unashamedly partisan, as this post about the banks shows. He can't resist a pop at the last government in his closing paragraph - choosing to ignore all the financial big bang legislation of the Conservatives in the 1980s and 1990s, instead trying in true politician style to lay all the blame for the size of the financial sector at Labour's door.

It's nonetheless good to read the blogs of people like Redwood, and if you're more of a right-wing disposition, Weldon and Dillow. You'll disagree with them undoubtedly, but it will help you greatly as you develop at university as an economist to think about why you disagree, and why you think they are wrong; are your arguments really up to scratch?

Monday, September 5, 2011

Keynes, Hayek and Economics

The new academic year is about to start, and hence you may be about to make the journey to Birmingham to begin your undergraduate degree in economics, and may have somehow stumbled across this blog - if so, welcome! If not, welcome still. The point of this blog is to help those studying econ101ab at Birmingham to see that what they are studying is important and topical, and can help you think more clearly about all the major topics on any given day....

You'll hopefully learn, if you haven't already, about something called Keynesian economics, named after John Maynard Keynes, a British economist who wrote most famously between the two World Wars. His ideas were controversial as they went again the grain of classical economic thinking, the thinking most prevalent at the time; that of balanced budgets, and allowing the forces of the market to do their work, waiting for the long run to see that all was well.

Keynes made a fairly simple point, notably that there may just be situations where the economy doesn't just pick up. Recall, he wrote his most famous contribution, his General Theory, during the Great Depression when the economy failed to pick up and things didn't seem at any point soon to be getting better. Classical economists would say that in the long run, the depressed demand in many markets would lead to the necessary re-adjustments (falling real wages) such that eventually, things would pick up again - in the long run. Keynes's retort, famously, was that "in the long run we're all dead".

Keynesian thought led to demand management, where governments use fiscal and monetary policy to engineer stability: To remedy the downturns and temper the boom times. It hasn't always been the flavour of the month however, and the strong monetarist counter-revolution of the late 1960s and 1970s appeared to have destroyed Keynesianism. However, a certain group of economists, of the Austrian variety aligning themselves behind Friedrich von Hayek have persistently argued against Keynes and Keynesianism. Hayek's main thesis was that man isn't capable on his own of understanding the market, nor is any government, and hence should refrain from attempting to set up mechanisms in the face of the market; such attempts are doomed to fail.

Such Austrian economists are prolific bloggers, and hence you can read their thoughts at Cafe Hayek and EconLog perhaps most vociferously. Today in the US (and Canada) it's Labour Day, and hence it was predictable that at these blogs, something would be posted in the ilk of responding to Keynesian economics, which is percieved by Austrians to have been particularly sympathetic to workers.

Hence, Don Boudreaux, who has a habit of posting the letters he's written to just about everyone who happened to utter anything he disagreed with, writes and posts on Cafe Hayek, his letter regarding what good Keynes apparently brough humanity. It's an interesting read, and I would encourage you to read the blogs of Austrians because they will challenge you to substantiate the things you believe and are taught in what is a Keynes dominated profession, much to the dislike of Austrians.

What you will find as you study economics is that views you previously held that were away from the centre ground, so to speak, will be challenged, and I doubt you'll be able to keep to them. For example, strong views regarding minimum wages I doubt you'll keep once you're done your degree. Equally, if you enter with strong right-wing views which may border on the Austrian, I think you'll also be challenged away from them.

The fundamental assertion of Austrians is that the market knows best, the market does best. You'll learn about the Fundamental Theorems of Welfare Economics, and hence you will learn that the market is an effective tool for communicating the most information to the most people - provided a set of assumptions hold.

Now, the last bit is important, because it's something that the writers at EconLog and Cafe Hayek choose to ignore because it doesn't suit their prior dispositions regarding the economy. Boudreaux has at times compared the healthcare and education markets to the market for buying pet food, for example. However, as you will learn if you study Contemporary Issues in the UK Economy in your second year, and also via microeconomics, the market is only effective if the price mechanism works. It breaks down when information is imperfect.

The important thing though again that you will learn when studying economics is that the knee-jerk reaction towards governments running everything where the market fails is another mistake to make - it's one made by thost on the left usually. It may well be the case that a failure in the market due to imperfect information of some sort or another cannot be remedied by government, and the government will only make the situation worse. The market for rail travel may be an example; all the assumptions of perfectly functioning markets are not upheld, but it doesn't mean that the government will run the railways better than the private sector.

However, health is dramatically different to pet food. Buying the wrong pet food may lead to an unhappy dog for a day or so; the mistake is easily rectified. Buying the wrong healthcare treatment from the wrong healthcare provider may well not be so easy to rectify. Information is not so readily available to all market participants, and hence you see that working from principles of information we can conclude that healthcare is not likely a market best left to market forces - regardless of your prior prejudices in this area. Now, the solution will not necessarily be a full blown NHS, but it also won't be a fully free market.

The bottom line to this post is this: Boudreaux, the writer of the blog post linked up earlier, takes a position on the fringes of the economics profession, and in order to do that, he has to ignore much evidence contrary to what he originally believes. He has to ignore all the above regarding information in health markets and other such markets. But on the other hand, he's just as wrong as the person who believes only the government should be running most (if not all) things - both must ignore basic economic theory to justify their position. Hopefully by the end of your three years, you'll take neither position, and you'll be able to reason and justify all the things you believe about the economy, hence when you read people like Boudreaux, you can understand why he's wrong.