On microcredit (IB econ syllabus topic)

I was checking out this morning the Bedeutung blog (maintained by our graduate Alexandros Stavrakas) when I came across this post: 'Loans to the Poorest: Where Does the Money Really Go''.

It is related to microcredit / microfinance (a concept figuring in our syllabus). Read it!

Rap me, Mankiw...

From our very own Athinagoras!

http://www.imeem.com/educationalrap/music/xY4REVq-/rhythm-rhyme-results-demand-supply/

Mankiw's '10 Economic Principles'.....

More on Elinor Ostrom

This is another very easy to read piece on Elinor Ostrom's work that was written by Kevin Gallagher (professor of International Relations at Boston University and a research fellow at the Global Development and Environment Institute) for his Guardian column.

The title is 'Elinor Ostrom breaks the Nobel mould'.

In a nutshell, Ostrom won the Nobel prize for showing that privatising natural resources is not the route to halting environmental degradation.

In most economics classes the environment is usually taught as being the victim of the "tragedy of the commons". If one assumes, like many economists do, that individuals are ruthlessly selfish individuals, and you put those individuals onto a commonly owned resource, the resource will eventually be destroyed. The solution: privatise the commons. Everyone will have ownership of small parcels and treat that parcel better than when they shared it.

Many environmental experts also reject the tragedy of the commons argument and say the government should step in.

Ostrom says the government may not be the best allocator of public resources either. Often governments are seen as illegitimate, or their rules cannot be enforced. Indeed, Ostrom's life work looking at forests, lakes, groundwater basins and fisheries shows that the commons can be an opportunity for communities themselves to manage a resource.

In her classic work Governing the Commons: The Evolution of Institutions for Collective Action, Ostrom shows that under certain conditions, when communities are given the right to self-organise they can democratically govern themselves to preserve the environment.

We will be discussing these issues in a few weeks when we start to focus on so-called market failures and, as I mentioned in one of my two sections, her work will help me provide a basis for evaluating the typical conclusions derived from analyzing the 'tragedy of the commons'.

The whole Guardian article is found here. Enjoy.

PS: An interesting account of her work is found here.

5 Easy Steps to Stay Safe (and Private!) on Facebook

5 συμβουλές για να προστατευτεί κανείς από τη φόρα φιγούρα στο facebook.

Εδώ!

At last, some Economics...

First of all, apologies to those who have complained that nothing has been posted for quite a while. I am embarassed to say that the only reason was summer inertia. But, there is no better way to start the fall semester at school (and it is fallish today, even in Athens!) than to make a short post on the 2009 Nobel Prize in Economics.

Two economists shared the prize, Oliver E. Williamson and Elinor Ostrom. BTW, 'Elinor Ostrom is the first woman to have been awarded the Prize in Economic Sciences in its forty year history'. (look at her CV here - it makes you dizzy..)

I am familiar with Williamson's work but I have to confess that I was not familiar with Ostrom's (I felt much better when I found out that Krugman wasn't either!)

You will get a first idea on why these economists deserved the prize by reading this.

An interesting piece on their work was written by another Nobel prize winner Michael Spence (Markets Aren't Everything) (which I became aware of through Greg Mankiw's blog).

Paul Krugman's piece 'An institutional economics prize' is also worth reading.

I promised my Tuesday class I would do some reading especially on Ostrom's work as it will be great when we discuss a bit later the Tragedy of the Commons.

This is from her Indiana University page:

Research Interests

How do we integrate the research findings in cognitive science into a workable set of models for exploring and explaining human choices in various institutional settings, including: social dilemmas, collective choice arenas, bureaucracies, and complex multitiered public economies?

How do institutions generate the information that individuals need to make decisions?

What biases or lack of biases are built into various ways of making collective decisions?

How are diverse preferences exaggerated or modified by interaction within diverse institutional structures?

For any ambitious IB Economics students around there, this is her paper :'Institutions and the Environment' (worth looking at to get a flavor).

Also, check out this 'supercourse': 'Beyond the Tragedy of the Commons'

Still not IB Higher Level Economics....

What can I say, school year has started but I guess I'm still in 'summer mode'. So, neither is this (directly...) related to our course but I think it's worth posting as I just found out (thanks to my old student and friend Konstantinos L. and FB) that U2 have Athens in their plans. I've seen them many years ago in the Boston area and they do put on a good show, worth watching. Here's a clip:

IB Higher Economics Class of 2011!!

Welcome, sweethearts!

We've already had a few classes and I think we'll have a good time together doing Economics (but, not only).

I mentioned today in class the TED site.

This is the Ken Robinon talk on creativity:


...and this one is the 'sixth sense' MIT Media Lab (Pattie Maes and Pranav Mistry) presentation:


...and this Barry Schwartz on the Paradox of Choice:


Enjoy!

I guess the next post should be on IB Economics (or, should it?)

On externalities

Try correcting this one:

Kids' lower IQ scores linked to prenatal pollution

Researchers for the first time have linked air pollution exposure before birth with lower IQ scores in childhood, bolstering evidence that smog may harm the developing brain. The results are in a study of 249 children of New York City women who wore backpack air monitors for 48 hours during the last few months of pregnancy. They lived in mostly low-income neighborhoods in northern Manhattan and the South Bronx. They had varying levels of exposure to typical kinds of urban air pollution, mostly from car, bus and truck exhaust.

At age 5, before starting school, the children were given IQ tests. Those exposed to the most pollution before birth scored on average four to five points lower than children with less exposure.
....................

And along with other environmental harms and disadvantages low-income children are exposed to, it could help explain why they often do worse academically than children from wealthier families, Breysse said.

On Joseph Stiglitz

Read this interesting Newsweek article on Joseph Stiglitz (which I noticed at free exchange, the economist.com blog):The Most Misunderstood Man in America.
Just to get an idea:

...Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. Since the days of Adam Smith, classical economic theory has held that free markets are always efficient, with rare exceptions. Stiglitz is the leader of a school of economics that, for the past 30 years, has developed complex mathematical models to disprove that idea. The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say. The work that won Stiglitz the Nobel in 2001 showed how "imperfect" information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party. The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information, like global investors who bought up subprime- mortgage-backed securities. As Stiglitz puts it: "Globalization opened up opportunities to find new people to exploit their ignorance. And we found them."

Stiglitz's empathy for the little guy—and economically backward nations—comes to him naturally. The son of a schoolteacher and an insurance salesman, he grew up in one of America's grittiest industrial cities—Gary, Ind.—and was shaped by the social inequalities and labor strife he observed there. Stiglitz remembers realizing as a small boy that something was wrong with our system. The Stiglitzes, like many middle-class families, had an African-American maid. She was from the South and had little education. "I remember thinking, why do we still have people in America who have a sixth-grade education?" he says.

Those early experiences in Gary gave Stiglitz a social conscience—as a college student, he attended Martin Luther King's "I Have a Dream" speech—and led him to probe the reasons why markets failed. While studying at MIT, he says he realized that if Smith's "invisible hand" always guided behavior correctly, the kind of unemployment and poverty he had witnessed in Gary shouldn't exist. "I was struck by the incongruity between the models that I was taught and the world that I had seen growing up," Stiglitz said in his Nobel Prize lecture in 2001. In the same speech he declared that the invisible hand "might not exist at all." The solution, Stiglitz says, is to move beyond ideology and to develop a balance between market-driven economies—which he favors—and government oversight....

The State of Economics

Must reading for IB1 to IB2 students of Economics as well as for any of my recent graduates (if you are ever checking out this blog...-I know that you are, Dimitri K.!!). A-level Economics candidates will also greatly benefit from reading it.

Reproducing from The Economist:

...Nor can economists now agree on the best way to resolve the crisis. They mostly overestimated the power of routine monetary policy (ie, central-bank purchases of government bills) to restore prosperity. Some now dismiss the power of fiscal policy (ie, government sales of its securities) to do the same. Others advocate it with passionate intensity.

Among the passionate are Mr DeLong and Mr Krugman. They turn for inspiration to Depression-era texts, especially the writings of John Maynard Keynes, and forgotten mavericks, such as Hyman Minsky. In the humanities this would count as routine scholarship. But to many high-tech economists it is a bit undignified. Real scientists, after all, do not leaf through Newton’s “Principia Mathematica” to solve contemporary problems in physics.

They accuse economists like Mr DeLong and Mr Krugman of falling back on antiquated Keynesian doctrines—as if nothing had been learned in the past 70 years. Messrs DeLong and Krugman, in turn, accuse economists like Mr Lucas of not falling back on Keynesian economics—as if everything had been forgotten over the past 70 years. For Mr Krugman, we are living through a “Dark Age of macroeconomics”, in which the wisdom of the ancients has been lost.

What was this wisdom, and how was it forgotten? The history of macroeconomics begins in intellectual struggle. Keynes wrote the “General Theory of Employment, Interest and Money”, which was published in 1936, in an “unnecessarily controversial tone”, according to some readers. But it was a controversy the author had waged in his own mind. He saw the book as a “struggle of escape from habitual modes of thought” he had inherited from his classical predecessors.

That classical mode of thought held that full employment would prevail, because supply created its own demand. In a classical economy, whatever people earn is either spent or saved; and whatever is saved is invested in capital projects. Nothing is hoarded, nothing lies idle.

Keynes appreciated the classical model’s elegance and consistency, virtues economists still crave. But that did not stop him demolishing it. In his scheme, investment was governed by the animal spirits of entrepreneurs, facing an imponderable future. The same uncertainty gave savers a reason to hoard their wealth in liquid assets, like money, rather than committing it to new capital projects. This liquidity-preference, as Keynes called it, governed the price of financial securities and hence the rate of interest. If animal spirits flagged or liquidity-preference surged, the pace of investment would falter, with no obvious market force to restore it. Demand would fall short of supply, leaving willing workers on the shelf. It fell to governments to revive demand, by cutting interest rates if possible or by public works if necessary.

The Keynesian task of “demand management” outlived the Depression, becoming a routine duty of governments. They were aided by economic advisers, who built working models of the economy, quantifying the key relationships. For almost three decades after the second world war these advisers seemed to know what they were doing, guided by an apparent trade-off between inflation and unemployment. But their credibility did not survive the oil-price shocks of the 1970s. These condemned Western economies to “stagflation”, a baffling combination of unemployment and inflation, which the Keynesian consensus grasped poorly and failed to prevent.
................................
................................

...and:

In the first months of the crisis, macroeconomists reposed great faith in the powers of the Fed and other central banks. In the summer of 2007, a few weeks after the August liquidity crisis began, Frederic Mishkin, a distinguished academic economist and then a governor of the Fed, gave a reassuring talk at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming. He presented the results of simulations from the Fed’s FRB/US model. Even if house prices fell by a fifth in the next two years, the slump would knock only 0.25% off GDP, according to his benchmark model, and add only a tenth of a percentage point to the unemployment rate. The reason was that the Fed would respond “aggressively”, by which he meant a cut in the federal funds rate of just one percentage point. He concluded that the central bank had the tools to contain the damage at a “manageable level”.

Since his presentation, the Fed has cut its key rate by five percentage points to a mere 0-0.25%. Its conventional weapons have proved insufficient to the task. This has shaken economists’ faith in monetary policy. Unfortunately, they are also horribly divided about what comes next.

Mr Krugman and others advocate a bold fiscal expansion, borrowing their logic from Keynes and his contemporary, Richard Kahn. Kahn pointed out that a dollar spent on public works might generate more than a dollar of output if the spending circulated repeatedly through the economy, stimulating resources that might otherwise have lain idle.

Today’s economists disagree over the size of this multiplier. Mr Barro thinks the estimates of Barack Obama’s Council of Economic Advisors are absurdly large. Mr Lucas calls them “schlock economics”, contrived to justify Mr Obama’s projections for the budget deficit. But economists are not exactly drowning in research on this question. Mr Krugman calculates that of the 7,000 or so papers published by the National Bureau of Economic Research between 1985 and 2000, only five mentioned fiscal policy in their title or abstract

Read the whole article here.

I just happenned to check out this and it's a bit shocking vis a vis Greece. Number 18? Above Italy, the UK, Germany? There's something very wrong with the HDI... It's not only the averages issue but also the question of data quality and reliability.

Human Development Indices: A statistical update 2008 - HDI rankings

1.Iceland
2.Norway
3.Canada
4.Australia
5.Ireland
6.Netherlands
7.Sweden
8.Japan
9.Luxembourg
10.Switzerland
11.France
12.Finland
13.Denmark
14.Austria
15.United States
16.Spain
17.Belgium
18.Greece
19.Italy
20.New Zealand
21.United Kingdom
22.Hong Kong, China (SAR)
23.Germany
24.Israel
25.Korea, Rep. of
26.Slovenia
27.Brunei Darussalam
28.Singapore
29.Kuwait
30.Cyprus
31.United Arab Emirates
32.Bahrain
33.Portugal

A July post - will any IB students read it?

Well, tomorrow is the big day - the day results are out for all May candidates. Less than 24 hours away for my kids at 0346. So, what am doing with a 4th of July IB economics post? I just started reading the Economist debate on 'Sustainable development'. The motion: 'this house believes that sustainable development is unsustainable'. Defending the motion is David G. Victor, Law Professor at Stanford & Prof. of International Relations, University of California at San Diego. Against the motion is Dr. Peter Courtland Agre, M.D., University Professor and Director, Duke University (2003 Nobel prize in Chemistry).

You will find this most interesting discussion here.

I will only copy one paragraph from Dr Agre's opening remarks:

Our situation is indeed exceedingly grim—increasing release of toxins into the environment, energy gluttony and the appearance of epidemic obesity. Compounding these problems is the nearly total lack of thrift among Americans whose uncontrollable consumerism is sufficient to support multiple shopping channels on the television 24 x 7 x 365 at a time of unprecedented debt.

To have the world's biggest economy is irrelevant if we squander our wealth on fluff. Popular television advertising revenues alone could sustain significant educational reform in the US. Consider for example that one second of advertising during the Super Bowl retails for $100,000—twice the annual salary of a beginning schoolteacher. The wisdom behind the rising economy in China must be questioned, since they now have 3% of the world's paved roadways but 21% of the world's highway fatalities. If this truly reflects giving the public what it wants, we are most certainly doomed.

And, also:

Achievement of sustainability can only occur if the public demands it. My view is that a populist revolt for sustainability must be initiated, and it must include the young. Jefferson claimed that "Every generation needs a new revolution," and Franklin that "Many people die at 25 but are not buried until they are 75." Our younger generation will determine if the right decisions are undertaken by becoming engaged in the most important issue of our time.

Any questions, IB graduating class of 2009?

Income distribution and the level playing field

Priviledge and a level playing field...

In America poor women are given subsidies for child care in order to allow them to work. But the study notes that women who go from welfare to work are more likely to have obese children. So subsidies that encourage employment may have the perverse effect of creating obese children.

Much depends on what type of care parents choose (care by relatives, school-based programmes, centre-base care, etc). Many poor women depend on centre-based care and the authors note evidence that "many child care centers in the U.S. fail to provide children with healthy foods and sufficient opportunities for physical activity." But there are often no other viable options. So in order to reduce obesity, perhaps additional subsidies need to go towards improving the quality of child care provided to struggling moms.

If you are thinking 'so what?', then check this one out:

It is extraordinary that there exists such a strong negative correlation between obesity and income. Fat was once a symbol of wealth. As David Leonhardt points out, fattening food tends to be cheaper. That makes taxing unhealthy food difficult because it can be a regressive tax.

The above are found at Free exchange, the Economist.com blog (my home page on my browser)

The first one is How child care makes children fat and the second one is The biggest Loser. Click, enjoy (even if you are sipping your caipirinha at Anse Source d'Argent) and remember, income distribution matters in more ways than we can often imagine......

In defense of deficit spending

Richard Lipsey (and James W Dean) defend in simple terms (easily understood by IB students of Higher and Standard Level Economics) the fiscal stimulus packages put together in the US and elsewhere and try to explain why conservative critics who claim that private spending will be crowded out or that these packages will prove inflationary may be wrong.

'The first is that spending will either be hurried and wasteful, or that it won’t come on stream until employment has recovered, and will therefore be inflationary.

The second is that deficit-financed government spending merely replaces spending by consumers and firms dollar for dollar; so-called 100 per cent ‘crowding out’. Critics often fail to point out that these two arguments cannot both be true. If government spending merely replaces private spending dollar for dollar, it does not affect total demand. As a result, it cannot be inflationary.

If “crowding out” is significantly less than 100 per cent, new spending will employ labour and capital that is now idle, and the earnings of workers and investors will re-ignite both consumer and investment spending. To be sure, stimulus programmes should target projects with productive potential. Economies from the US to China are in dire need of new physical and social infrastructure. But even “unproductive” projects are better than none at all if the alternative is to leave labour and capital unemployed.

And if stimulus spending for infrastructure comes into effect after the end of recession, when real resources and financial markets are re-employed, there are adequate monetary tools to contain such pressures. In other words, long-term plans for infrastructure planning can stand on their own merit.

So the key question is whether government spending that comes into action during recession is likely to crowd out new private spending, dollar for dollar. The answer depends on the extent to which real and financial resources are currently under-utilised.

“Real” crowding out occurs when labour and capital are already fully employed so that further spending exceeds capacity and leads to inflation. The logic of the harm done by inflation is well understood. But the logic of “financial” crowding out is less intuitive and more complex.

Simply put, financial crowding out results from rising interest rates when government deficits put pressure on bond markets. This kind of crowding out is most plausible in the US, which began the recession with the biggest deficit in world history. However, relative to national income, it is not nearly as large as that which Britain ran after the Napoleonic wars. And currently, the biggest as a percentage of national income is Japan’s: almost 200 per cent of its gross domestic product. It doesn’t seem to be crowding out private spending as the Japanese long-term interest rate is still only 1.5 per cent.

Nevertheless, skeptics argue that dramatic doubling of US deficits this year and beyond could leave little room for private sector borrowing. If the US deficit stifles rather than stimulates recovery of its private sector, prolonged worldwide recession is inevitable.'

The rest is here. BTW, Lipsey has written one of the all time best intro econ textbooks. A newer version is here.

The Crisis and How to Deal with It

This is great stuff to read for IB1 Economics students (higher and even standard level) who have just finished their macro. You'll see how different perspectives arise and I think you will be able to understand what makes sense and what pretty much is driven by ideology and wishful thinking.

It's

'...excerpts from a symposium on the economic crisis presented by The New York Review of Books and PEN World Voices at the Metropolitan Museum of Art on April 30. The participants were former senator Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, and Robin Wells, with Jeff Madrick as moderator'

Here is the link.

Krugman on China and pollution

The article is titled 'Empire of Carbon'. What I realize is that the Stiglitz idea which I had mentioned in class (and which I even think is written in that little purple book) that the rest of the world imposes a tariff on the US to force it to do something for the climate is picked up by Krugman. He proposes 'shoppers who buy Chinese products should pay a “carbon tariff” that reflects the emissions associated with those goods’ production'.

The article is here.

PS: Just checked that little book and here is what is written in one of those 'tips' boxes':

An interesting solution proposed by Nobel laureate Joseph Stiglitz is to consider the firms of such nations (as the US) as recipients of state subsidies. Not paying the full costs of production is equivalent to receiving a state subsidy. Since subsidies within the WTO trade system are illegal, other nations would have the right to impose trade sanctions on these nations, forcing them to cooperate and reduce emissions.

Lunch or dinner anyone?

Hi dorks! (I'm addressing my Econ Higher level Candidates 2009 of 0346...)

Our Chicago boy had a very good idea: lunch or dinner together soon!

I'm in. Anyone else?

xxx,

C.

0 Days, 0 Hours, 0 Minutes

Now, that looks weird!

You were a great class, my little dorks!

I hope I helped you a little bit to understand some basic Econ.

I hope I helped you understand the importance of trust.

I hope we stay in touch.

My best,

C.

OMG, 15 hours left!

Show time, guys!

Wish you all the best!

Stay calm and focused, make the right choices, and do what you got to do as best as you can. Make sure you read your work before putting down your pen....

This guy did it - so can you!

Filakia!

Stand by me!

Hope all you May kids are doing alright!

This was sent to me by my friend Yiannis A. and it's well worth a 5 minutes break.