Let’s briefly examine crowding out in the context of the aggregate demand component of the aggregate demand–aggregate supply (AD-AS model) of the economy. Aggregate demand is, put simply, the summation of demand in the economy, and when it increases it encourages economic growth. The formula for aggregate demand is AD = C + I + G + NX. In this formula, C is consumption spending by individuals and firms, I is investment spending, G is government spending, and NX is net exports. If any one of these components changes, ceteris paribus, the AD curve will shift. For more on aggregate demand and its components, read the linked article. Students familiar with this concept may be confused by crowding out at first. G in the above formula is related positively to aggregate demand. In other words, when G increases, it should increase AD, too. And since AD can be thought of as overall demand in the economy, increasing AD should encourage economic growth, and thus be a good thing. How, then, does crowding out work? How could increased government spending be a bad thing for the economy? The mechanics of crowding out There are two main ways that increased government spending can reduce, or “crowd-out”, private and investment spending. These take place when the government either raises taxes or takes on debt to pay for increased government spending G. In the former case, raising taxes reduces C and I by some amount that may or may not be larger than the increase in government spending G, because when consumers and firms pay higher taxes, they have less money of their own to spend. In other words, if increasing G means that C or I must decrease, it’s mathematically clear that the increase in G might be completely offset by reductions in C or I. This would lower AD and depress the economy. Without more specifics, we can’t say for certain if aggregate demand increases or decreases overall. One prominent theory among economists is that when the economy is depressed or in recession, it’s performing below its potential, so an increase in government spending increases G more than it reduces C or I. This increases AD; thus, increased government spending is good in times of recession. This is the view taken in particular by many Keynesian economists. Further, in these times households and businesses typically have a lower marginal propensity to consume, instead choosing to save more. So, government spending funded by taxes can help shift the balance of income towards more consumption spending, boosting the economy (in the Keynesian view, at least). The second way that crowding out can work is as follows. When the government borrows money, it affects interest rates through the loanable funds market, depressing investment spending and encouraging saving. In short: increasing government debt increases the interest rate, which makes it more expensive for everyone else to borrow, disincentivizing firms from making economy-growing investments. This “crowding out” of firms’ investment is either net-neutral or negative for the economy’s growth. To see how government debt increases the interest rate, consider the following. When the government takes out debt, it is essentially acting as a large consumer in the market for loanable funds. Thus, the demand for loanable funds increases; and what happens when demand increases for a specific product or service? The price increases, too, to maintain equilibrium. In this case, the price of borrowing funds is the interest rate. So, increasing government debt drives up the interest rate and therefore disincentivizes firms from making costly but economy-growing investment spending. Over the long term, this can reduce the economy’s competitiveness in a global market, slow down the pace of innovation, and ultimately reduce the economy’s long-term growth potential. In summary, then: crowding out can occur when increased government spending G is funded by higher taxes (which reduces the amount of money that individuals and firms have to spend), or by increased government debt (which increases the interest rate, reducing investment spending by individuals and firms in the economy). Further details on how crowding out works As an aside, astute readers may wonder how government spending changes interest rates when the central bank exists. After all, doesn’t the central bank set interest rates? The article monetary policy dives into this further; essentially, the central bank is (normally) a separate entity from the federal government and is (in most cases) not beholden to political whims. It sets an interest rate target and uses monetary policy to achieve that goal. But the federal government may have its own aims with its fiscal policy, and so may choose to increase spending – possibly putting upward pressure on the interest rate regardless of the central bank’s policy. Conversely, it’s also possible for fiscal and monetary policy work in tandem if the central bank and federal government share the same goal, like helping the economy recover from a recession. It may be unclear to some readers why exactly an increased interest rate discourages investment spending. Recall that the interest rate represents the cost of borrowing money. At a low interest rate, it’s cheaper to take out loans that can be used to pay for big, important purchases like a house, an advanced degree, or building a factory. Typically, when making investments into growing the business, a firm needs to raise a lot of money – and borrowing money is a common tactic to do so (and an important function that banks provide to the economy). So, at a lower interest rate, borrowing is cheaper and many such investment projects would be profitable, growing the economy. But, a higher interest rate means that more investment projects become too expensive to be worth it, so fewer firms will borrow money to build new factories (for example). Thus the economy grows more slowly than if interest rates had been lower. In summary then: crowding out can occur if increased government debt drives up the interest rate even despite the central bank’s monetary policy goals, thereby reducing investment spending in the economy by other actors. Crowding out in economic thought and modern political discourse Classical economists believe that markets are always efficient, guided by Adam Smith’s invisible hand. Because of this, they believe that government spending is at best net-neutral in the economy, and often has a net-negative effect on economic growth. Thus, classical economists often support a minimalist fiscal policy. This reasoning follows from the above discussion, but it goes further. Government spending must be funded either by taxes taken from consumers and firms, or from government debt. Both of these actions, in the classical view, ultimately harm the economy. In the former case, individuals and firms are made worse off because they must pay higher taxes, so they cut back on spending – this reduces economic activity. We’ve already discussed the interest rate implications of increased government debt. But classical theory provides another reason why this debt might hurt the economy. In the classical view, this debt can cause consumers and firms to cut back on spending because they need to save for increased future tax expenses. This is because consumers and firms expect that the government will raise taxes in the future to pay off their debt, so firms and consumers decide to reduce their spending and save more instead. This eliminates any positive benefit that increased government spending may have had. Crowding out in modern discourse Although classical ideas have come in and out of style over the course of history, they remain influential in economic discourse. In fact, in the modern age, many centrist or right-leaning politicians tend to disapprove of government spending, because they believe it crowds out private sector spending and investment – even if they don’t use the term directly – and that this will ultimately harm the economy. In this way, they tend to agree with the classical economists. The line of reasoning is thus: government spending must be funded by higher taxes, which discourages consumer and investment spending, and slows down the economy. And of course, this article hasn’t yet touched on how the government spends its money! If the government is wasteful, or spends its money on goods or services that do not improve the economy (think of wasteful luxury spending for government officials), then negative effects on the economy are more likely. Essentially, the funds the government borrowed are not used for productive purposes in such a case, but they could still increase the interest rate and risk crowding out private investment. This is another idea that many modern political commentators may use to argue that government spending is wasteful. Students of economics can likely find plenty of examples of arguments against crowding out (and conversely, arguments for government spending) in the news today. Good to Know Curious readers may ask: who does the government borrow money from? The answer may not be initially obvious, since governments don’t go to the bank to borrow money like most other firms and consumers do. One of the major ways that governments borrow money is by issuing financial securities such as bonds. A bond is a financial asset that anyone can purchase. When a consumer or firm buys a government bond, they pay the government money for the asset. Each bond has a maturity date and an interest rate attached to it, and represents a promise of repayment later. For example, let’s say that the French government wants to raise money, so they issue bonds to do so. French investors buy all of the bonds. The sum total of all the money the French government sold the bonds for is essentially the amount of a loan that the French government has taken out. Instead of a bank, the loan issuer in this case is the French population. The interest rate on the bonds issued is the interest rate that the French government must pay back to the public upon reaching the maturity date when the debt payment is due. Of course, in the modern age banks and investment funds tend to buy bonds in great quantities as well, not just individuals. Note that individuals or institutions outside of France could have potentially bought some of the French bonds too, meaning that France would owe some money to foreign entities as well. This is one of the ways you may hear about governments owing money to other countries in the news.
The phrase “crowding out” in economics refers to a situation where government spending (which is part of fiscal policy) discourages (private) investment spending in the economy. This is considered a bad thing, since investment spending is one of the key drivers of economic growth.
Public Economics & Economic Policy (JEL H)
Macroeconomics and Monetary Economics (JEL E)
Professional Trainings as a Means of Increasing Your Employability
Naturally then, you might wonder how you can further your skills beyond just graduating with your latest degree. Or, you may have encountered situations or job opportunities where you wish you’d had more time to study a particular topic. Professional development courses or skills training are one great method to do so. What is a professional skills training for economists? Professional trainings for economists may be offered by a university or by other organizations, including private companies. Usually for a modest tuition fee, you can take a class that lasts anywhere from a single day to a few weeks. Some of these economics trainings are only offered in person and on-site, but many course providers are increasingly offering online courses so that anyone around the world can join in. These trainings are usually focused around a particular topic, and are designed to give either an introduction to a specific area of economics (for example, macroeconomic forecasting), a useful tool for economists (such as R or Python), or a related field (like data science). Because these courses are designed to help economists advance their skills, some knowledge of economics is usually required. Many courses require participants to already have an advanced degree in economics, or some related field. This is important as the learning environment can be fast-paced, offering an introduction or advanced training in a complicated topic in as little as one week. Common topic areas for trainings There are a number of areas in which economists (particularly fresh Master’s or PhD graduates) can further hone their skillset through these types of opportunities. The following are a few major areas you may consider taking a training course in after your degree: Advanced micro- or macroeconomics: Although every economics degree comes with introductory and advanced micro- and macroeconomics coursework, it’s easy to forget much of this knowledge once you pick a major or specialization within your degree. Advanced microeconomic or macroeconomic courses help reinforce the fundamentals of economics, or can even inspire your research by reminding you how macroeconomists (for example) tackle some problems that you and your microeconomics-focused colleagues don’t think about as often. But it’s not just for refreshing: some of these courses can delve deep into newly emerging research methods, or explain niche economic models that semester courses don’t have time to introduce. Econometrics and statistics: This is an important area containing many critical skills for economists. Additional coursework in econometrics or statistics can be massively helpful in your career and improve your career opportunities, since every economist benefits from a deeper understanding of the models, methods, and theories that power economic thought. Consider taking professional training courses in econometric methods to sharpen your skills. This can include topics on statistics, time series analysis, managing panel data, niche regression models (or advanced, like gravity models), etc. Software tools: R, Stata, Python, SAS, SPSS, Eviews and dozens more: the statistical software tool options for economists are as myriad as they are complex. It’s likely that as an economist, you will need to learn at least one of these tools well in order to conduct data analysis. Multiple proficiencies will be a plus as different employers or universities may utilize different tools. Professional training courses that help you become more savvy with one or more of these tools can therefore improve the quality of your work and potentially save you thousands of hours of troubleshooting over the course of your career. Data Science topics: Economists will find many topics in data science interesting and helpful for their research, and more widely for their career. Courses in data science can help economists work more effectively and conscientiously with large datasets. Further, these courses can also help prepare economists for the cutting-edge technology and research methods that will impact how economics is researched in the future. For example, economists and data scientists are already using machine learning algorithms to forecast, and may increasingly be using large-language models (LLMs) to analyze economic data. Other elements of data science (such as bootstrapping and decision tree models) have already made their way into the field, so it can be helpful to become familiar with them. Broadening your horizons: Did you finish an economics degree, and wish you had time to take more courses? Maybe you did your Master’s of Economics and specialized in quantitative macroeconomics, but wish you had time to take that cool class on energy economics. Professional training courses are a great way to do just that. Specific areas of focus like behavioral economics, accounting, applied economics, or real estate can all provide helpful knowledge and context for economists who work in related fields. Interested in some opportunities? Check out further professional training listings on our website. Header image credit: Rawpixel.com via Shutterstock (licensed image - copyright)
Economics is a massive field with many sub-disciplines, and it’s impossible to master the whole lot of it from just one Master’s degree or even a PhD.
Climate change is at the centre of public discourse, and a degree in economics can equip graduates with tools to analyse the challenges it presents and to find effective solutions and policies in response. In this article, building on the Royal Economic Society’s climate summit, we share a few thoughts on how to embed discussion of climate change and environmental sustainability into economics pedagogy. Climate change can sit at the heart of the economics curriculum Many economists see the environment as an essential part of the economic system. Indeed, CORE Econ defines the discipline⁠ “as the study of how people interact with each other and with their natural environment in producing and acquiring their livelihoods, and how this may change over time and differs across societies”. Considering the central role of the environment within real-world economies, the study of climate change and sustainability should be integrated throughout the economics curriculum and not relegated to optional units in the final year. This approach can embed the pressing societal issues our world faces within the subject, helping to motivate students and support their learning. Students studying CORE Econ are regularly asked at the beginning of their programme about what they believe are the most pressing problems that economists today should be addressing. In 2021, climate change and resource challenges featured strongly in answers from students across the world. We also need to consider how to embed climate change in students’ studies. Indeed, some of the work in environmental economics is technical and advanced – think for example of integrated assessment models or the valuation literature. Nevertheless, the research often has very straightforward intuition. For example in microeconomics, public goods, externalities, co-ordination problems, prisoners’ dilemmas and the tragedy of the commons can all be introduced through the lens of climate change. Similarly, in macroeconomics, we can discuss policies such as green new deals and stimulus packages that are becoming increasingly common in political discourse. While the models that students see as first year undergraduates are often simple, they offer students the chance to gain deeper insights, and ask important questions. These could include: what is the optimal level of pollution? Or what determines the optimal carbon price? Once students have developed sufficient empirical and theoretical foundations through their degrees, these ideas can be revisited in more depth in later years. Using real-world examples as a launchpad for learning is not new. Case studies and problem-based learning underline the pedagogical value of starting with a particular scenario (a case) and then thinking about how discipline methods can help to understand it (see for example Volpe, 2002). This approach can be applied to climate change and environmental sustainability, whereby students would learn micro and macro-economics through the lens of environmental challenges. This pedagogical method engages students and can facilitate deep learning (see for example Basu, 2021). For example, economics has a lot to say about the most efficient ways to reduce emissions, mitigate the costs of climate damages, the economic impact of strategies used to reduce emissions and lower risks from climate emergencies, and more. Consider using a real-world example from your area, such as imposing a carbon tax or building clean energy sources (such as windmills or nuclear power facilities) to host a classroom discussion (or assign empirical work – more on that in the following section). A chapter in the newly published Sustainability Handbook by the Economics Network shares various ideas and examples of how to motivate teaching through environmental challenges. Empirical units can be enhanced by discussions of climate change Using real-world data relating to environmental sustainability and climate change is another way in which these issues can be embedded in economics programmes. This approach can motivate students, help to develop empirical techniques and employability skills and provide framing opportunities to help students to apply economic reasoning. There are a range of data sources that can be linked to climate change: Basic climate relationships such as the link between CO2 emissions and the rise in average global temperatures (global warming) can be identified using data from OECD, Our World in Data, United Nations and NASA Global Climate Change. Climate attitudes and perceptions are captured in large scale surveys such as Eurobarometer and the British Social Attitude Survey. This can aid discussions in the classroom about the socially optimal amounts of intervention or discussing the challenges of intervention. Household datasets in most countries have information on spending, work, and health, which can be linked to the environment and climate change (see for example the OECD Household Surveys, EPIC). The CORE project has prepared tasks on measuring climate change and the willingness to pay for climate change mitigation using real world data. Instructors could, of course, construct their own examples for students based on the technicalities they would like to focus on. Assessment can be authentic, and focused around climate change Climate change offers an opportunity to embed authentic assessment into the curriculum –encouraging students apply the economics they have learned in various contexts. For example, assessments could include: Coursework policy reports to inform, for example, local or national governments on an environmental question. This could include an economic evaluation of the expansion of fisheries, increasing on- and off-shore wind-energy, introducing a ‘meat tax’ to reduce carbon emissions, etc. An empirical project set around environmental data sets. For example, finding the impact of a carbon tax in a specific market using OECD data. Exam-style short answer questions where students interpret research findings for a given scenario. Students sometimes struggle with making new connections between economic ideas and real-world applications, so it is important that scaffolding is provided. Educators should ensure constructive alignment between the learning outcomes, the assessment, and what happens in the classroom. Challenges to embedding climate change There are a number of challenges to embedding climate change and sustainability within an economics curriculum that need to be considered. 1. Climate change deniers may challenge the classroom experience Just as in any area of life, there are some individuals who challenge the dominant paradigm, and climate change is not immune to this. As such, instructors may encounter climate scepticism of both the extent of the problem, and the possible solutions. Scepticism and pluralism of ideas in higher education provide lots of opportunities for exploring issues in more depth. For instance, they provide an opportunity to discuss empirical evidence and explore causality of relationships. They also offer opportunities to discuss opposing normative views, and analyse important questions such as whether developed countries, or developing countries, or all countries, should seek to de-carbonise, and the costs associated with that. 2. Be aware of climate anxiety As with any topic that has the potential of having negative impacts in years to come, there is a chance that teaching climate change may provoke anxiety in students. Climate anxiety is the fear that people experience about the climate crisis, and it is soaring. Research suggests that climate anxiety can affect mental, emotional and physical health. But at the same time, it is associated with guilt and feeling responsible for climate change, which increases interest in studying and discussing the topic (see for example Hickman et al, 2021). While novel for some economics instructors, dealing with sensitive topics that students may have personal associations with is not new in higher education. Economists can learn techniques for holding classroom discussions on such topics from other disciplines such as psychology, gender studies, medicine, education, or creative arts. The creation of an inclusive learning environment, feedback mechanisms, and clear guidelines on how to communicate and debate become important when planning lessons about sensitive topics. The evidence on content warnings is mixed, but instructors may want to consider the use of them, as well consider providing flexibility and options around assessments as a way of mitigating the risk of anxiety. Summary Teaching about climate change economics and environmental sustainability within the economics curriculum is arguably a civic duty in a discipline that engages with major societal challenges. Economics has a lot to offer both in terms of analysing the past and present, and proposing effective solutions for the future. Educating students to help them develop the hard and soft skills that they need to shape the debate around environmental sustainability does not only foster employability, but is also likely to increase students’ engagement in their learning. This article was produced in cooperation with the Economics Network, the largest and longest-established academic organisation devoted to improving the teaching and learning of economics in higher education. Learn more about the Economics Network here. Header image credit: Pixabay.
In 2019, the University of Bristol became the first UK university to formally declare a climate emergency. In the following year, a further 36 institutions in the UK followed suit. Beyond their own climate research and agendas to achieve carbon neutrality, universities play a key role in educating their students and the public about the climate crisis.
Agricultural and Environmental Economics (JEL Q)
The Author Irving Fisher is a revered mathematical economist and is considered by some to be "the greatest economist the United States has ever produced" (Schumpeter, 1997), despite his record of promoting harmful ideas (Fisher was known to be a proponent of eugenics, and endorsed racist ideas). Nevertheless, his books and reports in economics have been praised for their clarity and ease of understanding. Known in economics for his inveterate outlook, Fisher is credited with championing a range of reforms to the monetary system, including the compensated dollar, price level stability rule, 100% Money, Stamped Money Prohibition, and government-funded medical care, among others. Fisher’s inspiration for writing the book: losing in stocks In the 1920s, Fisher computed a stock market index that was regularly reported and published in reputed papers. On October 15, 1929, the New York Times quoted Fisher's statement at a meeting of the Purchasing Agent Association. The Times believed that Fisher's attitude "fell into almost unqualified optimism". A few days later on October 24, also known as Black Thursday, the stock market crash of 1929 (Bordo & Rockoff, 2011) proved the Times right and Fisher very wrong. The Great Depression had begun. Fisher's wrong prediction has become legendary. But rather than let it keep him down, the debacle influenced Fisher to reflect on his predictions and to write the book "Booms and Depressions". It went on to become the holy grail for research into business cycle fluctuations, debt cycles, and economic downturns. Book Overview In the book "Booms and Depressions", Fisher compiles nine main factors that caused the depression and accelerated its adverse effects, with over-indebtedness as the first main factor. The other factors include volume of currency, price level, net worth, profits, production, trade and employment, and optimism and pessimism. Over-indebtedness is when outstanding debts (whether they are individual, corporate, or national) are sizable relative to other economic factors such as assets, income, gold, and liquidities. In his book, Fisher affirms that all other factors play an auxiliary role compared with two dominant factors: "over-indebtedness to start with and deflation following soon after". Though other factors may be more evident in specific episodes, their role is often subservient to over-indebtedness and deflation, acting as effects or symptoms of debt vulnerability. Debt also amplifies the deleterious effects of overinvestment, overconfidence, and over-speculation. Fisher also states that the money market and debt market are closely tied. The volume of currency is measured not only in the deposits sense, but also as credit currency created by “the pen and ink of the banker”. This currency originates and terminates in the banking entries, which is balanced out in regular times by an alternate entry, but gets wiped out in recessions as people and firms struggle to repay their debts. Due to this tendency, the adage "one man's debt is another asset," as advocated by (Krugman, 2011) does not always hold up. Moreover, Fisher provides a general understanding of the relation between real debt and the price level which is crucial to gauge the economy's direction. In simple words, if the price level doubles, the real value of debt halves and if the price level halves, the real value of the debt doubles. Inflation and deflation thus have a contrasting effect on the real debt and its subsequent impact on the real economy. While one may argue that deflation will increase the value of money, it also increases the value of debt. This makes paying off debt difficult, and decreases spending and investment at the same time. A similar indication is given by (Minsky, 1992) who argues that “distress selling” affects the economy by reducing asset prices. In the absence of refinancing opportunities and impaired cash flow from operations during a recession, firms are forced to sell assets (sometimes at large discounts) to pay their obligations. Distress selling and assets falling in value recursively feed on each other, exasperating the initial shock of deflation. Fisher deduced the following chain of consequences in how the nine factors interact. It starts with shock to the system affecting either the interest rates or the productive or earning capacity. The after-effect of the shock forces a company into debt liquidation and distress selling, which results in contraction of deposit currency as bank loans get paid off. This consequently slows down the velocity of circulation. What follows is a fall in the level of prices, which results in a fall in the net worth of business. This hastens bankruptcies and results in falling profits, reduced output, and declines in trade and employment. All these factors usher in a pessimistic sentiment and loss of confidence, which leads individuals and firms to favor hoarding money. This results in a further reduction in the velocity of circulation. The market forces attempt to rebalance the money demand with the supply by shifting the interest rate. In major instances, we notice a fall in the nominal, or money, rates and a rise in the real, or commodity, interest rates (Fisher, 1933). The book’s reception among economists Fisher’s observations in the book have been supported by the likes of many well-known economists over the years. These include Ben Bernanke, John Kenneth Galbraith, Charles Kindleberger, Milton Friedman, Hyman Minsky, Paul Samuelson and Christina Romer, all of whom have commented on the work in their books, papers or speeches. The admirable quality of the book lies not only in its vivid explanation of the Great Depression but in providing a framework for analysis of future crises. This wisdom of this book is invoked time and again as new financial and economic crises emerge. Since its publishing the book has been cited by highly influential papers, reports and other books on investment management and the financial crisis. In that spirit, we can compare the recent economic downturn to the Great Depression to show that many economic factors identified by Fisher are moving in the same manner as before and after the Great Depression. The first significant factor is the debt. Reports from the Institute of International Finance show that the global level of debt hit an all-time high record in 2023, with roughly 80% of that debt buildup coming from mature markets such as the US and France. This is echoed by reports from the World Bank, showing that the world has been in a “fourth wave” of increasing debt, warning that it could end in crisis. While the role of deflation is debatable (it prevailed in the starting months of 2020 only to be taken over by inflationary pressures), this appears to be a time where deflation would have devastating consequences and likely lead the world into another debt crisis. Among the other factors, the interest rate seems to be the defining variable for future recovery. A rise in the interest rate will shift the dynamics of the price levels. Economists are divided on whether the stimulus and accommodative monetary policy that was used to deter the COVID crisis will result in inflationary or deflationary trends in the long term. The presence of inflation and low-interest rates has stabilized the financial environment, but the trend may soon reverse as central banks raise interest rates. Other factors such as the volume of currency, corporate profits, and velocity of circulation have also moved in the same direction as Fisher predicted, though with less intensity. That’s due to the unprecedented government and central bank support which has prevented debt liquidation and distress selling thus far. The vital question to ask here is, “for how long?”. Despite the apparent recovery, evidence from past recessionary episodes provides a sense that the prosperity may be short-lived. Fisher’s chain of events may have been postponed, but its possibility not annulled. Book Details Booms and Depressions: Some First Principles Publisher: Adelphi Company, New York ISBN 1453697640, 9781453697641 Buy on Alibris (US) Buy on Amazon (international) References Fisher, I. (1933). Debt-Deflation Theory of Great Depressions. Econometrica, 337–357. https://doi.org/10.2307/1907327 Krugman, P. (2011). Debt Is (Mostly) Money We Owe to Ourselves. The New York Times. https://krugman.blogs.nytimes.com/2011/12/28/debt-is-mostly-money-we-owe-to-ourselves/ Minsky, H. P. (1992). The Financial Instability Hypothesis. The Financial Instability Hypothesis, 74, 1–10. https://doi.org/10.1117/12.774256 Schumpeter, J. A. (1997). Ten Great Economists. Ten Great Economists. https://doi.org/10.4324/9780203202371 Header image credit: Sweetaholic on Pixabay.
The 1932 book "Booms and Depressions" by Irving Fisher, along with his 1933 Econometrica paper "The Debt-Deflation theory of Great Depression" earmarked the start of a new era for modern macroeconomics and financial literature. This article reviews the book in light of the current economic and financial scenario.
This basic concept is applicable across all of economics, but is still mainly presented in a microeconomics sense. When studying the supply curve in microeconomics courses, students will learn that the supply curve for an item (i.e. batteries) shows how much of that item will be available for sale at any given price. At higher prices, more firms will seek to sell the item, and existing firms will seek to expand their production of the item. In a similar vein, macroeconomics courses will eventually ask, what happens if we sum all supply for all goods in the economy? The resulting curve contains information about the general amount of all goods and services in the economy ready to be sold at various price levels, and is called aggregate supply. Short-run vs. long-run aggregate supply Unlike with its counterpart aggregate demand, aggregate supply can’t easily be represented by a single curve. To analyze aggregate supply, it’s important to distinguish the time period considered. This leads us to have two main aggregate supply curves: “short-run aggregate supply”, or SRAS, and “Long-run aggregate supply” or LRAS. Figure 1: example aggregate supply curves Figure 1 shows an example. In the figure, P represents the overall price level in the economy, and Y shows total output (often measured by GDP). Meanwhile, AD and SRAS stand for “aggregate demand” and “short-run aggregate supply”, respectively. SRAS is upward-sloping and can be thought of similarly to a traditional supply curve considered from a microeconomics sense, though there are important differences. It is upward-sloping because firms are willing to sell higher quantities of goods when those goods can be sold at a higher price. Meanwhile, AD is downward-sloping like an individual’s demand curve, though it is distinct. See the aggregate demand article for more detail. Finally, LRAS in Figure 1 stands for “long-run aggregate supply”. Unlike supply curves students first encounter, this one is vertical. In other words, for all values of the price level P, the output Y is not changed. In the short run, prices matter SRAS may be easier to understand at first than LRAS, for the simple reason that it behaves much like a typical individual’s supply curve that students usually already know. When prices in the economy rise, producers believe that they can make more profit if they increase production, so they do. When prices fall, producers can’t sell as many units profitably. Consider that producers sell units up to the point where marginal cost equals marginal benefit. When price falls, it lowers marginal benefit (in this case marginal revenue), so producers must sell fewer units or make losses. At this point, classical economists would argue that changing prices do not affect firm decisions, or any real variables such as the profit-maximizing unit. In the classical view of the economy, price changes are instantly spread throughout the economy and accounted for by everyone, and so do not affect these decisions. So, in a classical model, the SRAS curve would not be upward-sloping (in fact, it would be vertical just as the LRAS curve is). One argument levied against this classical view is that real-world experience shows that some prices and costs, especially wages, are often sticky. That is, firms don’t – and often legally can’t – change wages at a whim. These “sticky wages” support the idea that in the short term, price changes do have an effect on firm decisions. Remember that wages are paid to labor, which is an important factor of production, and represents a large proportion of most production costs. Consider a fall in prices. This reduces the profit, ceteris paribus, of the firm (in a perfectly competitive market, the fall in prices means the firm must produce fewer units or lose money, for the reasons discussed above). It would be optimal for the firm to reduce some of its production costs if it can, to offset the lower sales price and regain some of that lost profitability. However, wages are often set by contracts and cannot be easily reduced – not to mention that trying to reduce wages is a great way to dismay valuable employees and ruin morale. Therefore, firms cannot reduce their costs enough to make up for the reduced price of their goods. Thus, they end up cutting some production to prevent losses. Conversely, because wages are hard to lower and firms don’t want to unnecessarily raise their costs, firms may hold off on increasing wages when prices rise. Menu costs are another reason that price changes may not adjust immediately, and therefore can cause short-term fluctuations in economic activity. Consider a traditional sit-down restaurant that wishes to change prices. In order to change prices, the restaurant will have to re-print the paper or plastic menus that it hands to its customers. This costs money, so it’s only worth doing once the benefits from updating the menu prices outweigh the costs of printing new menus – meaning prices may take some time to adjust. Menu costs can apply to other things as well – such as updating software to include new prices, or conducting market research to find the best new prices before changing them. Menu costs and sticky wages are easily observable in most economies today. But this does not disprove classical economic theory. Neoclassical economists have updated classical economic models to account for modern concepts like sticky wages and menu costs – economists are always learning! Regardless, in the long term prices are considered fully flexible no matter which school of thought an economist might subscribe to. Wages will be renegotiated, menus will have been updated, and economic agents will adjust to the new prices. Therefore, as the classical economists posit, economists tend to agree that eventually the price change no longer affects economic output or profitability. Shifts in short-run aggregate supply As usual, changes in the price level do not move the SRAS curve; they represent movements along the curve, not of it. The factors that shift SRAS are economic events that change the firm’s production decisions for any price level. In other words, SRAS shifts when a new economic situation changes the optimal production level regardless of the price level. This can be the case when the economy becomes more or less productive, when the prices of factor inputs change, and other events that change the profit per unit for producers. Consider advancing technology, usually represented by A in the classic Cobb-Douglas production function. As technological progress continues, eventually there is an invention or an improvement that increases productivity. For example, the invention of the printing press greatly increased the economy’s ability to produce books. This invention led to a decrease in the overall cost of producing a book and increased literacy as reading became more important. These factors in turn increased productivity even more. Incidentally, the printing press also led to the obsolescence of scribe work. Becoming a professional scribe is no longer a valid career option for the majority of people, since we can easily create and print written works without the need for handwriting or physical labor. This process of technology and productivity growth eliminating some jobs (while creating others) is known as creative destruction in economics. While some jobs are lost due to creative destruction, overall this phenomenon leads to a more productive economy and an overall better standard of living for everyone. Such an increase in productivity – even if it results in the loss of some jobs or even entire industries – causes the SRAS curve to shift to the right. Likewise, a reduction in productivity will cause SRAS to shift to the left. Because the economy has become more productive, firms are generally able to produce “more with less”. Profit per unit increases, causing firms to want to produce more at any price level. One important point to note before moving on is that changes in the prices of intermediate goods are not considered to be changes in the overall price level. The reason for this is similar to the reason economists don’t include intermediate goods in the calculation of GDP; the prices of intermediate goods are factored into the final output that firms produce. So, to avoid double-counting them, the overall price level represents only the prices of final goods (just as GDP calculations only consider the value of final goods). Therefore, changes in the prices of factor inputs – such as wages, or factor input commodities like oil – will cause changes in the profit per unit calculation that employers make, but won’t change P. This changes the profitability per unit and shifts firms’ preferred production at any given price level. Finally, this results in a shift of the SRAS curve. Conversely, a change in the sales price of the firm’s output will cause a change in P. This then requires the firm to find the newly optimal production mix at the intersection of SRAS and AD. Shifts in long-run aggregate supply The LRAS curve can shift, too. Recall that LRAS is the long-run output of the economy and is not affected by the price level. How, then, does it shift? Anything that affects the economy’s total potential output Y will shift the LRAS curve, since LRAS = Y for any P. One common reason for this is a change in the business cycle – “booms” shift the LRAS curve to the right, increasing potential output Y. Meanwhile, “busts” or recessions shift the LRAS curve to the left, decreasing potential output. Because LRAS = Y for any P, changes in the price level do not have an effect on potential output. This makes sense, as the prices of items in the economy are essentially arbitrary numbers. Prices have meaning only in the context of other prices. Therefore, tripling all prices in the economy, while at the same time tripling the amount of money everyone has, will (theoretically) have zero effect on economic activity. One way to think about this: people ultimately exchange real economic value (the product of their labor, paid in wages) for real economic goods. Money is simply acting as a medium of exchange during that process, and so the money supply does not itself affect real economic variables. The theory of monetary neutrality explores this idea in greater detail. It’s possible for both SRAS and LRAS to shift from the same economic shock. An improvement in technology that increases economic efficiency has the potential to increase both curves. Firms can be positively impacted by this technological change in the short run, increasing output to take advantage of the increased productivity (shifting SRAS to the right). Meanwhile, the increased efficiency the technology introduces permanently increases the potential output of the economy, shifting LRAS to the right. SRAS and LRAS lead the economy to a stable equilibrium over time It’s possible for the economy to be at an equilibrium where AD and SRAS intersect, but not LRAS. If this equilibrium output is below LRAS, this situation is a recession. If it’s above LRAS, it’s a potentially inflationary expansion. This process is described by the AD-AS model in macroeconomics. Further Reading The aggregate demand curve and aggregate supply curves form the basis of the AD-AS model in macroeconomics. The model marries together both concepts to describe a working model of the economy. Many of these concepts also appear in the IS-LM model, another major model that students of macroeconomics will need to learn. Both AD-AS and IS-LM describe how the economy reaches macroeconomic equilibrium. Good to Know The LRAS line also represents the economy’s potential output, often denoted YP. This is the potential output of the economy under a scenario of “full employment”, where all resources (including labor) are being used in an economically efficient manner. This means that the LRAS curve also represents a point that lies on the economy’s production possibilities frontier. Recall that in the PPF, each point on the curve represents a point where the economy is functioning in a Pareto efficient manner, where all resources are being utilized productively to their fullest potential.
New students of economics quickly learn about supply and demand. These are foundational concepts in economics. Individuals prefer to buy goods at lower prices, and demand more of a good the cheaper it gets. Firms prefer to sell goods at higher prices, and supply more goods the higher the price for those goods get.
Economic Development, Innovation and Growth (JEL O)
This basic concept is applicable across all of economics, but is still mainly presented in a microeconomics sense. When deriving the demand curve in more advanced microeconomics courses, students will learn that the demand curve for an item (i.e., batteries) represents the summation of all individuals’ demand for that item in the economy. In a similar vein, macroeconomics courses will eventually ask what happens if we sum all demand for all goods in the economy – by individuals, firms and the government? The resulting demand schedule (often represented by a curve) contains information about the general demand for all goods and services in the economy at various price levels, and is called aggregate demand. Aggregate demand can be represented by a simple curve that looks just like an individual’s demand curve. Figure 1 shows an example. In the figure, AD and SRAS stand for “aggregate demand” and “short-run aggregate supply”, respectively. The short-run aggregate supply curve is the counterpart to aggregate demand, and is covered in its own article. Meanwhile, P represents the overall price level in the economy, and Y shows overall economic output. Figure 1: Example aggregate demand curve Just as with the individual demand curve, the aggregate demand curve is downward-sloping. This is because economic agents (whether they are individuals, firms or the government) demand higher quantities of goods when those goods are cheaper. The components of aggregate demand Aggregate demand is defined mathematically as AD = C + I + G + NX. Here, C represents consumption spending by individuals and firms, I is investment spending, G shows government spending, and NX represents net exports. If any one of these components changes, ceteris paribus, the AD curve will shift. C, consumption spending, may seem straightforward but is still worth examining. C includes all consumer spending in the domestic economy, as well as demand from firms for goods and services that do not constitute investment spending. When people buy household supplies, food, and movie tickets – or spend money on important services like healthcare and transportation – it’s counted towards C. When firms buy things like fuel, rented office space, or office supplies, it’s counted in C as well. I stands for investment spending. Investment in this case refers to money used to purchase “capital goods”, which can include machinery, equipment, etc., forming one of the major factors of production. In other words, this is spending that will increase production, which increases Y – the economy’s potential output. Most of the time, this spending is conducted by firms that are seeking to expand operations. When an auto maker in Stuttgart, Germany decides to build a new factory, it’s counted in I, not C, in Germany’s aggregate demand. Other examples of I spending include land, machinery, infrastructure spending by the government, real estate purchases by rental companies, and more. Another important component of I is research and development spending (R&D). This represents important research that can improve society, such as medical research, the development of advanced AI models, improved telecommunications technology, etc. R&D has more recently been recognized as part of I by many developed nations. G shows spending by the government, which constitutes fiscal policy. This includes purchases such as infrastructure spending, hiring contractors for government jobs, education spending, etc. Government spending may be controversial. Classical economists view government spending as most likely harmful since it will disrupt and distort markets through taxation, creating deadweight loss. Meanwhile, Keynesian economists believe that government spending can be key to bringing economies out of recession. This controversy is illustrated in more detail in the following section. Furthermore, government spending may cause crowding out; this is when government influence on the economy (whether via taxes or increasing demand) reduces private-sector investment spending. The last term, NX, stands for net exports and may also be written as (X - M). In this case X represents exports and M represents imports (note that NX can be positive or negative depending on the trade balance). Notice what this implies about how aggregate demand accounts for foreign trade: AD includes foreign demand for domestic goods, but not domestic demand for foreign goods. This makes sense. Consider Japan as the domestic country, which uses yen as its currency. When foreigners buy domestic goods from Japan, they spend money to acquire yen (probably in the foreign exchange market) and then buy Japanese goods. This increases demand for Japanese goods, boosts the Japanese economy, and strengthens Japan’s currency compared to others (increasing the exchange rate). However, when residents of Japan buy foreign goods, they spend Japanese yen to acquire foreign currency and foreign goods. This weakens the yen compared to other currencies, and causes Japanese money to leave the country. Japan’s GDP would have been higher, ceteris paribus, had that money been spent in Japan and stayed within the country. If imports outweigh exports like this, NX will be negative in the equation above. Shifts of the aggregate demand curve The aggregate demand curve can shift, just like the demand curve can. The reasons why tend to be similar, but not exactly the same, because the aggregate demand curve measures demand in the entire economy. Demand shocks which affect one good may not affect the economy as a whole. What does shift the AD curve, then? Changes in economic factors that affect one of the components of aggregate demand – C, I, G, or NX – will affect aggregate demand and shift the curve. Some common instigating factors include changes in wealth (for example, a fall in taxes increases wealth), the interest rate, and changes in business or economic expectations (also sometimes referred to as consumer confidence). For example, if people become more pessimistic about the economy’s future – expecting a recession to hit – they will begin to prepare by saving more and spending less. This reduces C. Because C falls, the AD curve shifts inward and to the left in Figure 1. This lowers overall output Y, and can lead to deflation as the price level P falls. Ironically, people’s increasing pessimism becomes a self-fulfilling prophecy; aggregate demand continues to shift to the left as people cut back spending, which continually reduces output and thereby GDP, potentially leading to or worsening a recession. Some economists (particularly the Keynesians) believe that an increase in G can help offset this negative feedback loop as it increases aggregate demand, potentially averting a recession by preventing AD from falling. Then, consumer expectations will reset, and the economy will remain at a healthy level of output. This scenario is one of the key arguments that economists may make in favor of an active fiscal policy. However, astute readers may note that G must be funded by tax income. If consumers realize this, they may expect an increase in G to be accompanied by an increase in taxes, which may cause them to cut back spending even further. In fact, this is one argument often levied against employing an active fiscal policy. Macroeconomists, naturally, may debate whether a given fiscal policy is the right choice depending on the economic circumstances, political environment, sustainability concerns, or other factors. Similarly to C, changes in I, G, or NX can shift the AD curve as well, and similarly may call for government intervention, a change in monetary policy, or nothing at all. One thing that does not shift the AD curve, though, is a change in prices. Remember that both the demand curve and the aggregate demand show quantity demanded at any given price level; so, when the price level changes, one simply finds the corresponding quantity demanded on the original aggregate demand line. Further Reading Aggregate demand and aggregate supply form the basis of the AD-AS model in macroeconomics. This model marries together both concepts to describe a working model of the economy, and is used as an input to the more involved IS-LM model. Good to Know The price level, P, changes when the aggregate demand (or short-run aggregate supply) curve shifts. When there are positive shocks to aggregate demand, the curve shifts up and to the right, increasing Y. This is economic growth. However, there may be a catch. When AD and Y increase, P increases as well! This causes inflation, and as we all know, too much inflation can be a bad thing for the economy. This is part of why economists may recommend increasing the interest rate to slow down the economy when there is an economic boom. It’s also a main reason why most economists consider pursuing expansionary monetary policy to be a mistake when the economy is doing well, as inflation will be pushed higher, which can be hard to bring down later without increasing the unemployment rate – even before accounting for the fact that policy often lags behind the true state of the economy, because it takes time to measure economic indicators and implement a policy.
New students of economics quickly learn about supply and demand. These are foundational concepts in economics. Individuals prefer to buy goods at lower prices, and demand more of a good the cheaper it gets. Firms prefer to sell goods at higher prices, and supply more goods the higher the price for those goods.
Economists Have a Sense of Humor Too: Economics Memes That Will Make You “LOL”
Now, let's dive into some of the funniest economics memes from the past. These memes have achieved viral status and have been shared and enjoyed by economists and non-economists alike. From witty one-liners to clever visual puns, these memes are guaranteed to make you burst out laughing, or at least chuckle quietly to yourself. So, sit back, relax, and get ready to laugh at the lighter side of economics. 1. For all Adam Smith critics, this one’s for you! The critics and supporters of Adam Smith’s theories have been debating each other for years. However, by using only one meme, critics of the invisible hand have managed to make quite the comeback! Image credit: https://www.instagram.com/economist_memes/ & Image copyright: @the_economy_stupid 2. The importance of keeping up with the latest data For an economist, anything concerning data is no laughing matter. Our data is the air we breathe, it is all we need, and yes, we would even come back to life for the sake of our data. Image credit: https://www.instagram.com/economist_memes/ 3. Turns out the 2008 Financial crisis was not the only major Economic downturn this generation has seen. We all had high hopes of economic recovery after COVID-19, but it seems that Simon had a different opinion… Image credit: Sara Taha 4. Flashbacks of the 2008 Financial Crisis and the good old days. After a first-hand experience of the impacts of the COVID 19 pandemic, Russia-Ukraine war, and world-record global warming…it seems easy to look back at 2008 and laugh. Image credit: https://www.facebook.com/elasticeconmemes 5. A traumatic experience for business majors Business students all around the world today are still trying to recover from the damage done by economics courses. Not only did these students suffer personally, but their GPAs took a bad hit too. Image credit: https://www.instagram.com/economist_memes/ 6. Economists’ predictions and forecasts Yes, as economists, we are usually very proud when we make predictions that are on point. And yes, we told you so. Image credit: Sara Taha 7. Econometrics: quite a shocking experience for many We all remember our first time being introduced to the beast they call econometrics. Our lives were never the same again. Image credit: https://www.instagram.com/thepotatoeconomist/ 8. Trickle down economics Well…we’re not so sure if everyone’s going to get this one. Image credit: https://imgflip.com/m/political_jokes/tag/economics 9. An alternate way to test your econ knowledge Image credit: https://twitter.com/econ_memess/status/1275002305113460736 At the end of the day, economist jokes bring a much-needed dose of humor to the world of economics. They remind us that even the most serious subjects can be approached with a light-hearted attitude. Whether you're an economist looking for a good laugh or someone curious about economics, these memes offer a fun and accessible way to engage with the field. So, the next time you come across an economics meme, don't hesitate to share it and spread the laughter! In fact, why not share your own favorite economics joke in the comments below? Header image credit: benzoix on Freepik.de
Economists are often immersed in the serious and complex world of numbers, charts, and theories. But contrary to popular belief, economists do have a sense of humor too! In fact, there is a whole subculture of economics memes that bring a lighthearted and comical perspective to the field.
The values of money Particularly philosophical readers may wonder why money is important at all. After all, most money is simply a piece of paper, a small bit of metal, or a number on a computer screen. We could easily decide that something else – say, seashells – was really money, and ignore the silly bits of colored paper. Or, we could do away with the paper and the seashells entirely, and just trade real goods with one another. So why do people use money? The immediate answer is that money has value and is useful because people believe it has value. We all recognize that money is a valid and useful way to pay for goods and services, which makes it worthwhile to have. Going further, there are three main helpful qualities that make money useful for us. First, money is a medium of exchange. This means that any person is able to exchange money for any good or service, because everyone recognizes that money has value. For example, a barber does not need to provide a haircut to a butcher in order to buy some raw beef (which would be bartering). Instead, the barber can receive money from any of their customers, and use that money to purchase the beef they want from the butcher. This purpose of money serves as a massive boon of convenience for all individuals. It allows trade to happen between individuals even when one person is not providing a good or service for the other. Second, money is also a store of value. The value of money (usually) can be relied upon because it does not rapidly decay and is not easily destroyed. For example, ice cream would be a poor store of value because it would only last for a few minutes before melting away. In contrast, paper or coin money is normally, but not always, a good store of value. In cases of hyperinflation, money makes a poor store of value because runaway inflation erodes its worth faster than people can spend it, leading to economic hardship. See the linked articles, particularly hyperinflation, for examples of how improperly managed currencies can become poor stores of value. The third useful property of money is that it is a unit of account. It is the same everywhere (that uses the same currency, at least). When someone walks into a store and sees a menu of prices, it’s very clear how much each item is worth and how much each will cost to purchase. Without a consistently defined system of money, judging how much things cost might be very confusing. Of course, even with these three useful characteristics, money itself does not create productivity or grow the economy. Having more money doesn’t necessarily mean the economy is growing or doing better. For example, consider a bicycle. Suppose the bike costs £15. It’s pink, and it is a good quality bicycle. Then, suppose that all prices in the economy double, so the pink bicycle now costs £30. Although the price has changed, in this case the actual number value is meaningless – the bicycle is still the same, good quality, pink bicycle. Its true usefulness has not changed, even though the price doubled. Having more bits of paper and coin to pay for a bicycle doesn’t make the bicycle worth more; it just increases the otherwise arbitrary number value we assign to it in monetary terms. Of course, in this case, the value of the bicycle didn’t change because all other prices doubled as well. But if the price rises or falls for just one good but not others, the relative values will change. How the money supply is measured: M1 and M2 Defining money more formally will help us to analyze it further. Money is an asset that individuals can use to trade for goods and services that they desire. As an asset, it is very liquid – liquidity measures how easily an asset can be converted into cash. Highly liquid assets can thus easily be traded for goods and services. When you say “money”, most people think of cash. But cash isn’t the only form of money. Economists generally track money using two different categories. These “monetary aggregates” are called M1 and M2, and they contain different forms of assets at varying levels of liquidity. In other words, M1 and M2 are two different measures of the money supply. M1 is the most liquid measurement of the money supply; it is composed of assets that can very quickly be used to make purchases. This includes cash, of course. It also includes liquid assets like debit cards linked to your bank account, traveler’s checks, and other checkable deposits. Essentially, all of the money in M1 consists of assets that could be used as payment very quickly – within hours or even seconds. Thus, M1 is the most direct sense of the amount of money or currency in circulation. M2 consists of assets that are relatively liquid, but less liquid than M1. These assets can still be used to pay for things in the short term, though. M2 includes money deposited into assets such as savings accounts, money market accounts, and certificates of deposit. Generally, the assets can’t be used to pay for something directly. But, these assets can quickly be converted into M1. For example, you don’t hand over your savings account to buy a new car. But you can withdraw several thousand dollars from that savings account (turning it into cash, part of M1) to pay for the new car relatively quickly. M1 and M2 help economists analyze the health of the economy in a number of ways. For example, if there’s too much money in circulation, the economy is at risk of high inflation. By carefully analyzing the supply of money in the economy, central banks can implement different monetary policy strategies that are best for the economic situation. The Monetary Policy article details the various considerations that central banks must make when examining the economy, and is worth a read. Further details on M1 and M2 Readers may wonder how M1 and M2 are controlled. After all, the government prints money, and the central bank conducts monetary policy. Therefore, one may expect that the money supply is directly controlled by one or both of these institutions. This is not the case, however. In some countries, the government controls the printing of money directly; in others, the central bank – which in many countries is not a government institution – determines how much money is printed, even if the government does the printing. The central bank is also usually responsible for conducting monetary policy; it may conduct strategies like “open market operations” to influence the money supply. But even the central bank does not completely control the supply of money. This is because the money supply is also influenced by the actions of banks. Banks can choose to hold excess money as reserves with the central bank, which effectively removes that money from circulation. Reserves can’t be used for transactions until the bank takes it out again. This lowers the money supply. The central bank does, however, directly control the monetary base. This consists of the total amount of cash in circulation plus the total amount of reserves that banks hold with the central bank. Further Reading Even though M1 and M2 are useful definitions for the money supply, different countries may define the aggregates differently. For example, some countries may consider certain savings accounts to be part of M1 while others would place it in M2. There is no strict rule. In actuality, most countries have very similar definitions for M1, but varying definitions for M2. For more information about the precise differences in how countries track money supply, this linked page from the US Federal Reserve will prove instructive. Although out of date, the page clearly shows how countries can measure monetary aggregates differently around the world. Good to Know Money being used in most economies today is known as “fiat money”. This means that the value of the money stems entirely from its officially recognized role as currency. Fiat money is controlled by a central bank, and this bank has tools to help stabilize the currency (and potentially exchange rates) to avoid currency crises. In the past, though, countries have relied on commodity money – such as gold and silver – that are considered to have value in themselves. Some countries have also relied on money backed by commodities. Using this system of money gives their currency value by promising that a certain amount of a commodity – usually a precious metal like gold – was represented by that paper money. Theoretically, people could trade in their paper notes for a certain amount of that commodity if they so wished. Commodity money and money that is tied to the value of commodities face issues that fiat money does not. For this reason, fiat money is generally considered superior. For instance, countries that tied their currency to a commodity needed to hoard that commodity in order to have a stable money supply. Moreover, commodities like gold exist in limited quantities, which imposes very real limits on how much money can be in circulation. And, the fluctuating value of the commodities themselves could pose problems. But commodity money hasn’t entirely disappeared from our economies. Digital or cryptocurrencies represent a recent, new form of commodity money that many investors have eagerly participated in (Bitcoin, for example). These currencies tout additional benefits such as speed, security, global reach, and decentralization that older commodity monies did not have. However, they may still face some challenges that older commodity currencies did, too; for example, the supply of many cryptocurrencies is fixed, similar to how the supply of gold is fixed, and no central bank is able to control the value of a cryptocurrency.
Money is an important facet of our daily lives. We use money to conduct transactions for just about everything – haircuts, bananas, trips abroad, fertilizer, shares of public companies, and much more can all be purchased with money. In fact, money is usually the only realistic way to acquire something. It’s very difficult to get goods or services in a modern economy without it.
Adam Smith is arguably the most famous economist. His name is almost inevitably thrown around within the first few minutes of every introduction to economics course, and of course his famous book An Inquiry into the Nature and Causes of the Wealth of Nations is oft-discussed. But neither Adam Smith nor his contemporaries would have described him as an economist for most of his life. Instead, Smith was a philosopher, professor of logic, and sociologist. Today, he is often credited with launching the field of economics. Some even call him the “father of capitalism”, although Smith himself never used that word. So who was Adam Smith really, and why did he become so famous in economics? The life of Adam Smith Smith was born in Scotland in 1723 and lived until 1790. He was a philosopher as well as economist – indeed, economics as a field didn’t really exist until after Adam’s transformational The Wealth of Nations had been published. In 1737, Adam Smith matriculated at the University of Glasgow, graduating in 1740 at the age of 17. He then undertook graduate studies at Oxford, leaving there in 1746. In 1751, Smith was appointed professor of logic at the University of Glasgow, and a year later he was appointed the Chair of Moral Philosophy at the same institution. He was a fully participating member of university society, giving lectures daily and being elected the dean of the faculty in 1758. Adam Smith published his first book, The Theory of Moral Sentiments, in 1759. In it, he theorized on human nature, which laid a foundation for his later assertions about economic behavior. The work is primarily concerned with the moral character of humans and how reason interacts with selfish passion. It’s worth noting that even in this book Smith had stated that some “invisible hand” compelled the self-seeking rich to improve society, leading to benefits for everyone, although it would not be until Smith’s later writings that the phrase gained more recognition. Smith was offered a lucrative job as tutor for a duke’s son, so he left his professorship in 1763 and traveled to France. From there, he had the opportunity to meet other luminaries such as Voltaire, a major figure in the French Enlightenment. Scholars debate how much his conversations with the French Enlightenment figures influenced his work. Adam Smith later moved to London and was inducted into the Royal Society in 1767. Ten years later, the work that has made him so famous in economics – An Inquiry into the Nature and Causes of the Wealth of Nations, more commonly known as The Wealth of Nations, was published in 1776. Adam Smith was no stranger to success. He garnered a reputation for himself during his life; according to the Encyclopedia Britannica, Smith “enjoyed a high measure of contemporary fame”, and his later works were lauded by contemporaries and recognized as important by “British governing circles”. This latter part was no doubt due to how The Wealth of Nations gave rise to classical economic theory, which provided defensible, reasonable alternatives to the prevailing mercantilist ideas of the time. How Wealth of Nations advanced economic thought The Wealth of Nations has five main sections. First, it describes self-interest and the division of human laborers. Next, it discusses the roles of stock and capital in a “commercial society”. The third section describes the formation of then-modern society, and of commercial markets, throughout history. It examines the origins of commerce from hunting and gathering up through agriculture, feudalism and finally an unconstrained market economy. Then, the book turns to how economic growth, as a force that is driven by human nature, results from the interaction of different parts of the economy. And finally, it examines the role of the government, particularly examining the limits of government power to positively influence markets. Smith posits that economic growth would result as long as governments didn’t stifle competition in markets. And of course, within his most famous book is Adam Smith’s famous hypothesis: that the self-interested actions of individual people, summed together, actually create economic activity that is in the benefit of society overall. Following from Smith’s earlier work The Theory of Moral Sentiments, he posits that those self-interested actions arise from the emotional and rational states of man. In The Wealth of Nations, Smith famously writes: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest.” Following from this line of thinking, Smith argued that – led by an invisible hand – markets are self-correcting. In this view, the ubiquitous “invisible hand” represents the unseen market forces that compel selfish individuals to act in a way that happens to be in society’s best interest. And a crucial component of these market forces is competition, which The Wealth of Nations describes fastidiously. By pitting one person’s desire for self-betterment against another’s, competition produces (economically) productive outcomes. This idea greatly influenced economic theories of the time (and continue to do so today); the classical economists believed that any intervention in the markets was doomed to make things worse, as all markets would self-correct eventually. As he was an ardent supporter of free market competition, Smith was critical of monopolies and of then-popular government policies that supported them. In fact, rather than acting as one might expect of a non-interventionist, pro-capitalist thinker, Adam Smith wrote at great length about morality, and saw great value in supporting all members of a “commercial society”. Smith believed that the natural growth of competitive, unregulated markets should be used to better everyone. In The Wealth of Nations he writes, “But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” Smith’s legacy in economics Adam Smith’s ideas were lauded and embraced within his lifetime. They went on to form the basis of the classical school of economics, and indeed kicked off economics as a serious field of study. Of course, earlier philosophers and political theorists had contributed to discussions that led to the rise of ideas like Smith’s, yet his famous The Wealth of Nations is often considered the beginning of economics as its own, separate field of thought and study. Classical economists began to influence economic policy greatly, shifting much of the world away from mercantilist practices (hoarding gold and silver, increasing exports) towards laissez-faire economic policies that served to promote market competition. This included de-emphasizing having a trade imbalance in favor of the home country, and promoting free trade (the value of free trade was further supported by David Ricardo’s economic theories, which came after Smith’s work). Part of the prevailing mercantilist ideal of the time was that acquiring more assets and keeping them within a country would lead to growth and wealth for that nation. Mercantilists supported trade restrictions partly for this reason. Smith countered this idea with the theory that it was the product of labor (in other words, productivity) that determined a nation’s wealth, irrespective of their balance of trade. Labor that produced goods resulted in economic output, and increasing that would increase a nation’s wealth, allowing them to purchase more goods from home or abroad. Whether or not exports were larger than imports becomes a relatively superfluous question in this case, which was news to the mercantilists. In fact, Smith argued that free trade can increase a nation’s wealth by opening up more opportunities for labor to work. The larger the market, the more opportunity for productive labor to supply the markets, and the more economic growth. David Ricardo later expanded on this line of thought with the theory of comparative advantage. Adam Smith’s ideas and the classical school of economic thought it launched became the prevailing advice for governments managing their economies. These views weren’t seriously challenged until the Great Depression in the late 1920s, which saw a period of several years of high unemployment and low output, in many parts of the world, that classical economic models couldn’t explain. This left room for John Maynard Keynes to expand economic theory, giving rise to the golden age of Keynesianism. That’s not to say that Adam Smith’s work has become obsolete. Classical economists have continued to build off of Smith’s original ideas while responding to criticism of their theories, eventually giving rise to the neoclassical school of thought. And regardless of their particular ideological leanings, economists today all owe a debt to Adam Smith and his famous book, which is considered the start of the modern field of economics. References https://www.britannica.com/biography/Adam-Smith/Legacy https://iep.utm.edu/smith/#H3 https://www.econlib.org/library/Enc/bios/Smith.html Header Image Credit: scotlandstudycentre via Pixabay
Students often learn about important figures in economics only briefly and in passing, yet the content taught in economics courses often comes from brilliant economists such as these.
An Inquiry into the Nature and Causes of the Wealth of
Encouraging collaboration in teaching data analysis skills
We propose three tips on how to successfully encourage collaboration between students in learning data analysis for applied courses: (i) design engaging teaching materials, (ii) get students to work in pairs during classes, (iii) use peer feedback for formative assessments. How to prepare: Engaging teaching materials Figure 1: Cheat sheet used in a session on data analysis and visualisations in Python for complete beginners (Image Credit: Author Generated / Economics Network) First, when choosing the materials, it is key to use real world datasets that are relevant for your students and that they will be interested in exploring further. In this way, even the process of data cleaning, which is quite feared by many students, can turn into a more engaging exercise. Second, during the applied classes (or labs), ask students to solve new exercises that they haven’t seen beforehand. Third, it is important to design cheat sheets that students can use in class, to enhance autonomy during the sessions. This enables students to develop their technical skills and focus on the exercise, rather than spend the session struggling to discover basic commands they need to employ. A cheat sheet also acts as a revision aid for students later. Thus, these cheat sheets should include the key commands (or functions) needed to tackle the exercises. Rather than making this a long list of commands, set up examples that students can follow easily. Then, it is up to them to find the commands from the cheat sheet that are relevant to each exercise. We have included an example of a cheat sheet used during a session on data analysis and visualisations in Python for complete beginners (Figure 1). Students were provided the cheat sheet and given a set of exercises, using a completely different dataset. How to deliver: Work in pairs in classes To facilitate the use of cheat sheets, get students to work in pairs. Pair programming is widely used by data scientists in industry for coding tasks: two people use one computer, where the “driver” controls the keyboard, and the “navigator” observes and supports (Williams, 2001). The driver and navigator swap roles regularly, and discuss their work throughout (Demir and Seferoglu, 2021; Hannay et al, 2009). Using this technique for data analysis encourages cooperation between students in the classroom, enhances learning by doing, and builds relationships between students. The teams can be set for the term, or they can change every class. What is important is that students work together and do not feel overwhelmed by the task at hand. How to assess: Peer feedback formative assessments Finally, use formative assessments (i.e., assessments that do not count towards the final course mark). These have been shown as central in promoting students’ learning and understanding (Wu and Jessop, 2018; Black and William, 2019; McMallum and Milner, 2021). The challenge with these assessments is that many students do not engage with them and even if they do, many do not collect or incorporate the provided feedback in future assessments (Duncan, 2007). But evidence suggests that students find assessing the work of their peers quite motivating, enhancing their learning and development (Ballantyne et al, 2002; Vickerman, 2009). Short regular formative assessments where students can offer peer feedback can be very easily incorporated into a course with a learning outcome of developing data analysis skills. First, students attempt the questions; next they submit their answers; finally, each student reviews another student’s attempt and provides written feedback. In this way, students get to see how other students have solved the questions, learning different ways to approach the exercises, while also checking the validity of the solution given by their peer and reflecting on the validity of their own proposed solution. It is up to each teacher to provide guidelines for feedback, but we have found that it is best to initially give some guidance on what was well done and what could be improved, and to release the full solutions after the students have given feedback to each other. In this way students get to review the feedback received one more time after the answers have been made available, and reflect more when providing feedback to their peers. Conclusion While the task of working with and analysing data can be daunting for students at first, educators can make the learning engaging and more approachable for students by rethinking the design of the material, the delivery, and the assessments. Our tips get students to learn-by-doing and encourage them to be very active in classes, as well as outside the classroom when working on their assessments. References Ballantyne, R., K. Hughes, and A. Mylonas, (2002). “Developing Procedures for Implementing Peer Assessment in Large Classes Using an Action Research Process.”, Assessment and Evaluation in Higher Education, 27(5), 427–41. Black, P., and D. Wiliam, (2009). “Developing the Theory of Formative Assessment.”, Educational Assessment, Evaluation and Accountability 21 (1), 5–31. Demir, Ö., and S.S. Seferoglu, (2021). “A Comparison of Solo and Pair Programming in Terms of Flow Experience, Coding Quality, and Coding Achievement.”, Journal of Educational Computing Research, 58(8), 1448-1466. Duncan, N., (2007). “‘Feed-forward’: improving students' use of tutors' comments.”, Assessment and Evaluation in Higher Education, 32(3), 271-283. Hannay, J. E., T. Dyba, E. Arisholm, and D.I. Sjøberg, (2009). “The Effectiveness of Pair Programming: A meta-analysis.”, Information and software technology, 51(7), 1110-1122. McMallum, S., and M.M. Milner, (2021). “The Effectiveness of Formative Assessment: Student Views and Staff Reflections.”, Assessment and Evaluation in Higher Education, 46(1), 1–16. Vickerman, P., (2009). “Student Perspectives on Formative Peer Assessment: An Attempt to Deepen Learning?”, Assessment and Evaluation in Higher Education, 34(2), 221-230. Williams, L. (2001). “Integrating Pair Programming into a Software Development Process.”, Proceedings 14th Conference on Software Engineering Education and Training. 'In search of a software engineering profession' (Cat. No. PR01059), 27-36. Wu, Q., and T. Jessop, (2018). “Formative Assessment: Missing in Action in Both Research-Intensive and Teaching Focused Universities?”, Assessment and Evaluation in Higher Education, 43 (7), 1019–1031. This article was produced in cooperation with the Economics Network, the largest and longest-established academic organisation devoted to improving the teaching and learning of economics in higher education. Learn more about the Economics Network here. Header image credit: StockSnap onPixabay.com (free for use under the Pixabay Content License) Additional image credit: Image Credit: Author Generated / Economics Network
Given the increase in data availability worldwide and the surge in demand for data literacy in the labour market, more and more economics courses are including data analysis skills in their intended learning outcomes. As a result, helping students to develop these skills in the classroom is increasingly important for economics educators.
Sometimes, but not always, this involves making a Pareto improvement. For example, consider a market that under-produces a good or service that does not exhibit any externalities. If production was increased, overall social welfare would increase with no negative consequences. Market failure signifies that the sum of individuals’ self-interested actions have caused the market to reach an outcome that is not in the best interest of everyone involved. This is called market “failure” because typically, Adam Smith’s “invisible hand” does lead individuals’ self-interested actions to reach the socially optimal outcome in a market, as Smith famously observed. Paul Krugman and Robin Wells put it this way in their seminal text Macroeconomics: “...market failure […] happens when the individual pursuit of oneʼs own interest, instead of promoting the interests of society as a whole, actually makes society worse off.” It’s important to note that in the cases of both market failure and market efficiency, individuals are assumed to be rational. In other words, market failure does not result from individuals acting “incorrectly”, but rather from the best privately optimal decision(s) becoming misaligned with the best choice(s) for overall societal well-being. There are many potential causes of market failure. These include the presence of externalities, asymmetric information, market power (like monopoly or oligopoly), government overreach, recessionary pressures, and more. Most of these causes have something in common (with the exception of macroeconomic phenomena like recessions and bad government): they cause individual’s incentives to become misaligned with the socially optimal outcome. Market failure in economic theory Although it is widely agreed in the modern era that markets do fail, the reasons they fail and the strategies to correct them are important sources of ideological differentiation between economic schools of thought. In classical economic theory, market failure is seen as either not realistic, or is viewed as a situation that cannot be improved by any intervention strategy. Many classical economists promoted a “laissez faire” approach to the economy as a result. However, these views were challenged by historical events, like the Great Depression, that pure classical theory could not adequately explain (but that’s not to say classical ideas have disappeared: some contemporary economists still hold to updated and modernized theories that a laissez faire approach is best in most cases). In fact, this is one of the key criticisms of classical economic theory and eventually gave rise to John Maynard Keynes’ new economic school of thought, which was introduced towards the end of the Great Depression and dominated economic policy until the 1970s. Named Keynesianism after him, this school leans heavily into prescribing government intervention as one possible solution to many different forms of market failure. Of course, classical economic theories have been adapted and updated to better explain our world, resulting in the Neoclassical school. In much the same way, the Keynesian ideas have been criticized and reformulated, giving rise to New Keynesian economics. Regardless of which school of thought an economist belongs to, most modern economists agree that market interventions can be utilized in market failure situations. The goal of these interventions is to induce the socially optimal equilibrium that maximizes overall social benefit (as measured by utility). Private market solutions and occasionally charitable activity can sometimes be proposed as alternatives to government intervention. For instance, litter can be viewed as a failure in the “market” for waste disposal services. A community might introduce a volunteer cleanup program or a community watch program to reduce litter. Put another way, littering creates a negative externality for others who use common spaces like public parks; littering thus reveals the under-provision of cleanup services, a common problem with public goods. Mitigating market failure with government intervention However, government intervention is the most common means of mitigating the effects of externalities. It can take the form of taxes, subsidies, regulations such as price ceilings or floors, or even tariffs or trade restrictions. However, even if the optimal equilibrium is known and the intervention works flawlessly, the process is not without drawbacks. Deadweight loss is created whenever governments intervene in markets. For example, the market for cigarettes produces a negative externality, as it forces non-smokers to deal with secondhand smoke. Further, the health problems caused by smoking increase healthcare costs. In a country with a healthcare system funded by taxpayers, this increases every taxpayers’ expenses to support individuals who wish to smoke. The market failure from the negative externalities of smoking cause this market to over-produce cigarettes (as compared to quantity that would produce the optimal social benefit), since the private costs to market participants fail to include the full social costs. By taxing the market, the government can (theoretically) induce the socially optimal amount of cigarette sales, which will be lower than the amount of sales from the unregulated market. This improves overall social welfare by reducing the negative externality by more than the amount of the deadweight loss in the market for cigarettes. However, deadweight loss is still created; buyers and sellers of cigarettes must contend with the new tax, which reduces their welfare from the cigarette market (and possibly lowers the welfare of suppliers of intermediary goods used in the production, distribution, and selling of cigarettes). However, all of these stakeholders still benefit from lower healthcare costs and cleaner air caused by reducing the negative externalities. Market failure with positive externalities Market failure also often occurs when there are positive externalities. In this case, private producer and consumer surplus is typically already maximized by the market. But, in this case the market produces some benefit for people who aren’t participating in the market. Because the benefits to these non-participants aren’t factored into private decisions, consumers and producers don’t supply and demand the socially-optimal quantity in the market. This is often the case with public goods and common resources. An example of this is the market for education. Education is greatly beneficial for society overall; when more people are better educated, the economy benefits from more innovation and research and higher levels of human capital. But, education is expensive; even without considering possible tuition costs, education greatly reduces the student’s income during their years of study by preventing them from working full time (which is a major opportunity cost of schooling). This can be a difficult or financially painful period for the individual, before they’re able to make use of their education to command a higher salary. Therefore, some individuals choose not to pursue higher education even when they’re capable of doing so. Thus, subsidizing education can help a society to realize the benefits of improved human capital. This would increase the amount of degrees being granted (or professional skills training courses completed) compared to the privately optimal market equilibrium. However, this too introduces deadweight loss: in order to subsidize education, the government must charge higher taxes in some other area of society. Market failure as a macroeconomic concept Many of the examples shared in this article come from a microeconomic perspective. But market failure can be viewed on a macroeconomic level as well. Consider one of the most important topics in macroeconomics: (un)employment. Employment is a result of laborers selling (and employers demanding) work hours from qualified workers in the labor market. There is a natural rate of unemployment that is (usually) deemed unavoidable as the force of creative destruction operates in the economy. However, times of recession or depression are usually accompanied by excessive unemployment that causes economic hardship for many people. This is a very undesirable outcome, as it reduces social welfare and indirectly reduces consumer demand, which can create a negative feedback loop. In this way, excessive unemployment can be viewed as a market failure in the market for labor. Government policies during times of recession often include attempts to correct this failure by increasing employment. For example, the US granted so-called “Paycheck Protection Program (PPP)” loans to businesses during the COVID-19 pandemic, intending to help businesses retain workers rather than cut staff. Good to Know Market failure isn’t limited to private markets for goods and services. This term describes any market that is operating inefficiently, producing sub-optimal outcomes for society. Government actions are typically mentioned as examples of how to correct market failure, but in some cases, they can become a source of market failure. Corruption is a good example of how a government’s operations can create market failure. Corrupt governments fail to operate in society’s best interests, instead serving the private interests of corrupt officials. This may take the form of bribes or kickbacks, the granting of monopolies when they shouldn’t be formed, and excessive printing of money that can lead to inflation or hyperinflation. These scenarios cause excessive expenses for taxpayers. These taxpayers lose money to activities that don’t benefit them and can even lower their utility, as they face higher prices due to additional monopolies, or an erosion of the value of their wealth from hyperinflation.
“Market failure” is a term that economists use to describe a market that is not functioning optimally. This is typically measured in terms of social welfare. Market failure in economics means that there’s a better outcome the market could achieve, one that would lead to an increase in social welfare.
Private goods in economics are goods that are both excludable and rivalrous. This means that if one person uses the good, it reduces others’ ability to enjoy the good. And, consumers can be prevented from accessing the good if they don’t pay for it. This is the most common type of good, and often what most people think of when they think about goods in economics. Private goods include most goods and services that one can purchase: new shoes, a house, a pretzel, a concert ticket, and a beach towel are all examples of pure private goods. When you buy one of these items, you can use it, but others can’t (unless you let them, or they steal it). And, if you don’t pay for them, you’ll be prevented from using them. Note that the distinction “private good” has to do with the rival and excludable characteristics of the good or service, not the actual ownership or use of the item. If you buy a gift for someone – say a new headset – the headset is still considered a private good, because the gift recipient owns the headset (after you give it to them), multiple people cannot use it, and others can be easily excluded from using it. Likewise, if a family purchases a new microwave or TV, the good is still a private good even if multiple household members might make frequent use of it. Out of all the four categories of goods determined by rival and excludable characteristics, private goods are the only ones that markets can typically provide efficiently without much – or any – intervention. The cost of private goods is accounted for by the firms that produce them, and consumers buy private goods up to the point where the marginal benefit is equal to the marginal cost. This results in a combination of producer and consumer surplus that is efficient and maximizes overall welfare. Of course, many things besides characteristics of goods can prevent markets from efficiently providing private goods: monopoly or oligopoly, externalities, government intervention, imperfect information, and more. However, not every private good is provided by a private corporation. Post offices and mail services are private goods that are often provided by the government. Schools for children are another example. In both cases, private options may additionally be available, but the government typically funds or operates these goods or services for the betterment of the region or country. This is often the case for useful goods or services that have positive externalities (for example, an education) and so may be under-provided by a private market. Good to Know The reason that the other types of goods (club goods, common resources, and public goods) cannot be efficiently provided by unregulated markets is that they introduce certain characteristics into the market that prevent efficiency. For example, public goods and common resources are more commonly subject to externality issues and the free-rider problem. They often require government intervention to induce market participants to provide the socially optimal level. Club goods, meanwhile, operate by charging consumers a fee to access the goods or services within the club. For example, specific TV shows or movies, gym machines, or courses at a golf club are all specific goods or services that an individual consumer may want to utilize on their own. But, to use them they must purchase a full membership that includes additional goods and services they don’t want. Private goods, by contrast, are more often goods that do not introduce externalities, don’t suffer from free-rider or public goods problems, don’t introduce other market distortions, and can be efficiently provided by private, profit-seeking corporations. In this case, a perfectly competitive market will produce the socially optimal level of the private good without intervention, just as Adam Smith posited.
There are many different ways that economists classify the different types of goods and services sold in the economy. The characteristics of goods – for instance, whether they are rivalrous or excludable – help economists classify goods into one of four categories. These are club goods, private goods, public goods, and common resources.
How (and why) can we embed employability within economics degrees?
Introduction: The motivation for embedding employability skills Undergraduate economics degrees have traditionally been designed to develop a range of analytical skills, including solving economic problems using simple (mathematical) models, evaluating causal relationships via quantitative analysis of (complex) data sets, and the holistic combination of theory and empirics to communicate results to politicians, decision-makers, and the general public. Many of the skills that we think good economists should develop during their undergraduate studies are valued by employers. For instance, the 2019 employers survey from the Economics Network identified that employers value skills such as abstraction; analysis of economic, business and social issues; presenting quantitative ideas; and communicating economic ideas. However, the survey also shows that economics graduates often enter the workplace with gaps in skills that are sought. For example, while economics graduates are likely to have very high proficiency for analysing quantitative data, other key skills – such as the ability to apply economic concepts to a wider context – are scored poorly by employers of economics graduates. Employers also see gaps within economics degrees, suggesting that courses need to improve training in areas such as communication of economic ideas. Another example: while most economics degrees provide students with opportunities to develop skills using software packages such as Stata and R, employers also highlighted that this was still an area that required improvement. Employers emphasised a need for greater understanding of programming, through languages such as Python. Image credit: Pixabay.com. In addition, throughout their careers, graduates will need to develop new skills and learn to adapt in a rapidly changing world. This has led to an increasing demand for graduates who can demonstrate an awareness of key environmental issues, such as sustainability. Further, students will be expected to respond to new technologies and tools, such as artificial intelligence – the use of which has expanded significantly in recent years. This will require universities to strengthen the delivery of innovative pedagogical methods, including assessments, to better reflect the complex trade-offs and decision-making processes that graduates will face throughout their careers to meet increasingly complicated challenges. Embedding employability The employers’ survey identified key skills that students need to develop within undergraduate economics degrees, but a key question that remains is how these should be embedded in the classroom. 1. Application of concepts to the real world The typical economics graduate shows strong abstraction skills. But, their ability to apply economic models developed in one area to another area of the real world was a weakness identified by employers. One reason for this may be biological – parts of the brain that allow students to make connections between existing knowledge and new concepts may develop more slowly (e.g. Howard-Jones et al, 2018). This highlights the important role that a teacher can play in providing the scaffolding to allow students to develop these connections. Assessments can be designed to encourage students to use a more holistic approach to learning, understand the big picture, and find innovative solutions to real-world problems through rigorous analysis. For example, some innovative pedagogies such as Core-Econ start with problems faced by society (such as climate change and inequality) and use economics to explain these key challenges. This immediately allows students to think about the application of (often abstract) economic models to real-world issues. Research-based assignments can additionally provide the opportunity for students to explore how concepts can be applied in different environments. For example, educators might provide a scenario of how competition between healthcare providers affects quality of the care provided, and ask students to build on this to evaluate the impact of competition in a different scenario. The assessment could be a traditional essay, or to build in other “soft” employability skills, educators could have students create presentations, blogs, videos, or other types of media. These alternative formats can help develop students’ ability to communicate the key concepts to different audiences, and think about how they have been adapted from another area. The climate emergency is also transforming universities with concepts such as living labs, where students engage in projects with external stakeholders (e.g., local councils and charities) to apply theoretical models to real-life issues related to sustainability. 2. Communicating ideas and economic concepts A key element within an economist’s toolkit is the ability to communicate (sometimes complicated) ideas in a way that is understandable to policy-makers and the general public, as well as other professional economists. Economics as a discipline has a lot of great ideas to share with the public, but even academics may not always succeed in communicating them effectively. Image credit: Pixabay.com. Communication is not just limited to written formats, and well-rounded students will need to be able to communicate across a range of media, including through data, presentations, videos and podcasts. Providing students with authentic opportunities to communicate in safe spaces in class is a great way to prepare them for communicating in their careers. For instance, you could ask students to prepare the same “economics content” in several different ways; ask them to explain (for example) adverse selection firstly in a newspaper article, secondly in a policy brief for ministers, and finally to an expert audience. Consider having different small groups of students complete and present each one of these to the class, and discuss how each different group of stakeholders might respond. For more, see the Economics Network videos that touch on this topic: Clear communication is vital in economics How can economists better engage with the public? Further, the Economics Network has produced a range of advice for economists to help them communicate their ideas. These tools can also be adapted when designing assessments for students. 3. Beyond data analysis Aside from real-world application and communication skills, economics degrees should help students to develop research skills, quantitative skills, and data-based and IT skills. Quantitative (or numeracy) skills include the ability to gather, interpret, analyse and communicate mathematical information to solve real-world problems. Of particular importance are data analysis skills, including the ability to manipulate spreadsheets and visualise data. This involves acquiring, cleaning and collating data, creating descriptive statistics, and analysing broad outcomes. These core competencies are typically covered in economics curricula already. Strong numeracy skills, coupled with subject knowledge and analytical thinking, signal that a student can readily translate knowledge in a way that is useful to employers. Yet as identified by the Economics Network employers’ survey, these skills are not the only ones graduates should possess. In an economics course, research skills involve gathering information from various sources and analysing, interpreting, and evaluating the information/data, and then communicating the results to others. This hones students’ ability to generate innovative ideas and research new concepts, products, and ways of working. Students develop these competencies by solving complex problems. Assessments that might help develop these skills include problem sets and individual or group research projects. These should be designed to test fundamental and more advanced numeracy skills in quantitative modules. Students should be asked to solve complex mathematical and analytical problems and interpret the results to apply to real-world scenarios. Emphasising software programs such as R and Stata (or even Microsoft Excel) are a must, and these can be easily incorporated into these types of assignments. Educators can require students to use these or similar programmes to conduct their data analysis. Consider providing more time than usual for students to complete projects assigned in this way if your students are still new to the software. It may also be worth spending some lecture time working through a simple example and providing base code or “cheat sheets” for students to work with, or directing them to an appropriate resource to learn themselves. This will go a long way towards developing students’ software and programming skills to a level that employers are looking for. Summary In this article, we have made the case for embedding employability skills within economics degrees, and provided some motivation. Authentic assessment used across economics degree courses can help further embed employability within the curriculum for students. This article was produced in cooperation with the Economics Network, the largest and longest-established academic organisation devoted to improving the teaching and learning of economics in higher education. Learn more about the Economics Network here. Header image credit: standret on Freepik.de / Magnific (free license). Other Images: This_is_Engineering on Pixabay (free for use under the Pixabay Content License) Crystal710 on Pixabay (free for use under the Pixabay Content License)
The higher education (HE) sector is under increasing pressure to embed employability skills within the curriculum to prepare students for the real world and create responsible graduates and citizens. This article reflects on how (and why) we, as educators, can better incorporate highly-demanded employability skills into the economics curriculum.
Free riding occurs when individuals lack proper incentives to contribute, or cannot be stopped from benefiting from others’ actions. If you maintain a garden and you live close to a bee farm, you will very likely benefit from extra pollination in your garden as a result of the farm’s bee stock. But, you won’t have to pay for this service, you probably won’t stop the bees from pollinating your garden, and you’re very unlikely to offer to pay for the free pollination you receive. In this scenario, you would be free riding. This is because you’d be enjoying the benefits of a positive externality (pollination) without contributing to the market for beekeeping services. The garden example is fairly innocuous. However, free riding can be an issue in certain situations, particularly with public property or common resources. In other words, contributing to a public good can often leave incentives to free ride. For example, consider a shared apartment with multiple roommates and a shared kitchen. The kitchen is used by everyone, but nobody “owns” the kitchen; everyone can use it freely. <11an>limit:3;categories:Bachelor's Programs;disciplines:Economics</11an> As many have experienced, over time the kitchen is likely to degrade significantly. In the absence of any interventions, it will become overused, dirty, and under-cleaned. Dishes will probably pile up in the sink. This is another example of free riding. The roommates are all incentivized to provide as little cleaning service as possible, and hope that another roommate will do the work for them, saving them time and effort. In this case, cleaning provides a positive externality, and is being under-provided due to free riding behavior. There are methods to solve the roommate’s kitchen sink problem, and others like it (such as slacking off during a group project, or littering). These include negotiating to create some sort of contract, or building and enforcing social norms. For example, if the roommates agree to a cleaning schedule, social norms are put into place. A roommate who shirks from then on is likely to receive the ire of their roommates, and will suffer socially for their lack of contributions. Free riding can occur on a larger scale too. An important characteristic of public goods like roads, public transit, national defense, and similar goods and services is that they are non-excludable. This means individuals can’t be easily prevented from using them. These goods and services provide positive externalities but, in a private market, they would be under-provided because individuals would hope that others would pay for it and they could free ride. Just as with other markets that feature externalities, government intervention is one solution to the problem. Through taxes, governments can pay for public infrastructure, provide national defense, etc. However, it’s not easy for the government to know the optimal amount of each good to be provided, and taxes introduce deadweight loss, so this solution may not be perfect in practice. Good to Know The provision of public goods with positive externalities often creates free riding incentives. This scenario can be represented by the Prisoner’s Dilemma. Imagine a scenario where the dilemma being fought over is not freedom from prison, but cleaning the kitchen, or contributing to a group project. In both cases, an individual’s utility is maximized when the service is provided without them exerting any effort. Thus, everyone’s preferred outcome is one where they defect. Likewise, free riding when overuse creates a negative externality can be seen in the Tragedy of the Commons scenario. Consider pollution. A factory that pollutes the air or the water in a community creates a negative externality. Without a government to regulate, it’s likely that cleanup operations will be left to the community members or a non-profit volunteer organization. In this case, the polluting corporation free rides on the cleanup efforts of the community.
The free rider problem in economics is a situation where certain individuals benefit from others’ actions for free, and so “free ride” by taking advantage of the situation. This is (usually) fully rational behavior from an economic standpoint. Often, when free riding occurs in a market, it signifies the presence of externalities and means that the good or service is being under-provided or overused. Free riding in economic theory can thus be a symptom of market failure.
Working in the USA: How to apply for a work visa after graduation
First of all, congratulations! You’re on your way to becoming a full-fledged economist. But, if you want to transition from student to economist in the “land of the free and the home of the brave”, you’ll need to prepare to apply for your US work visa. We’re here to help you begin tackling the process. Read on for information about getting your United States work visa, and our tips for making the entire affair go smoothly. From student to job seeker: the H-1B visa program If you’re not from the US but completed your economics studies in the US, you probably had to get a Type F student visa. The process for attaining this visa is explained in the linked article. The US student visa does not authorize working in the country long-term. Once you complete your studies, you have a 60-day grace period where you’re allowed to remain in the US, and then you must leave the country. But fear not: if you successfully received a Type F visa and studied in the US, you’ll be eligible to apply for a change of status from non-working student to an employed worker. There are two ways to do this: either apply for a non-immigrant H-1B visa that allows working in the US, which is the most common and straightforward method, or apply for an immigrant visa. This latter visa type means you intend to live in the US long-term. However, if you plan to settle in the US long term, it’s entirely possible to apply for the H-1B visa and then later apply for permanent residence. In fact, this is one of the most common methods used by international students who plan to stay in the US after graduating. This method is typically recommended even if you want to live in the US permanently; directly applying for a permanent stay visa is more difficult than receiving an H-1B first. To apply for an H-1B visa, you must find a job in the US. Then, the employer can sponsor your application for the H-1B, which is necessary for your visa application to be processed. Because of the need for an employer sponsor, it pays to take full advantage of the career services, job fairs, and other employment events at your US university campus. This can help you network and find a full-time job that suits you quickly after you graduate. Be sure to check with university officials for more information on these events! Working before you find your employer sponsor: OPT and CPT But if you don’t have access to career services, or can’t find a job before you graduate, fret not – you don’t need to have a job lined up immediately to stay in the US. You can apply for temporary work authorization first, and work for up to one year before you find a job with an employer who can sponsor your H-1B. If you work in a STEM field, you may have up to three years. This work authorization is known as Optional Practical Training (OPT). The OPT period lasts for up to a year after graduation. Again, if you’re working in a STEM field, you can extend the period for another 17 months on top of the initial year. To apply, you must be a student on an F-1 student visa studying in the US and planning to work in the US after you graduate, in the same field you’re studying. You must apply using Form I-20, which must be signed by the designated university official (DSO) who handles immigration and foreign student affairs. If successful, you’ll then receive your Employment Authorization Document (EAD). Each university may have a varying process for assisting their students with this application. If you plan to pursue an OPT, find your DSO beforehand and be sure to communicate with them before getting started. Remember, you do need an employer sponsor in order to eventually apply for an H-1B – which you’ll need to do during your OPT period if you plan to stay in the US. So, during your OPT period, make sure you’re still looking for a job that will sponsor your H-1B application after your work authorization period. How the H-1B visa system works Whether you apply for an OPT period or not, the formal requirements to qualify for an H-1B visa are as follows: A valid job offer from a U.S. employer for a role that “requires specialty knowledge”; this requirement typically means you need at least a university degree to reasonably work the job Proof of a bachelor’s degree or equivalent experience in the field you’ll be employed in, i.e., economics A $10 application fee (accurate as of this writing, but the fees are subject to increase) Your employer must show that there is a lack of qualified U.S. applicants for the role If your application is selected for further processing, your employer will need to pay the government a fee and submit a Form I-129 The US typically has many applicants apply for immigration each year, but the government only allows new visas up to a certain quota. Thus, valid H-1B visas are awarded via a lottery system. Extra lottery slots are reserved for applicants who have a Master’s degree or higher. Further, the visa cap is ignored for applicants who are sponsored by a university, a university-affiliated non-profit, or a government research organization. Thus, if your employer matches one of these categories, you have better-than-usual chances of receiving an H-1B. Unfortunately, the fact that H-1B visas are awarded via lottery means that even if you do everything right, you might be unlucky and not be drawn from the lottery. On the bright side, though, this means that your school performance doesn’t matter when you’re considered for the visa. You still need a company to sponsor you, but once you have a valid and complete H-1B visa application, your name will be entered in the lottery and your chances will be the same as everyone else. Thus, it’s wise to prepare a backup plan in case you don’t win the lottery the first time around. Will you have enough time remaining on your existing visa to stay and try again next year (such as if you have a three-year work authorization in a STEM field), or should you make contingency plans? Remember that you can always re-enter the lottery later, provided you still have an employer sponsoring you. Failing to receive an H-1B from the lottery is not the same as your visa application being rejected; it simply means the immigration quota was full and you’ll need to try again next year. A quick tip about switching jobs on the H-1B Because the H-1B is tied to employment, it will be more difficult than usual to switch jobs or employers while you’re in the US on this visa. It is possible through a process known as the H-1B transfer; this is done by first accepting a job offer from the new employer, and then applying for a transfer. However, this is a cumbersome process and could put you at a disadvantage on the job market. Thus, if you have options, you should consider carefully the first job that you decide to take on when applying for the visa. Staying longer: applying for permanent status after your H-1B visa Your H-1B visa can be extended and allow you to stay in the US for up to six years. If you intend to settle in the US permanently, this gives you plenty of time to begin applying for a more permanent stay visa if you so wish. After receiving your H-1B, you’ll be able to apply for a change of status to US permanent resident and receive the “green card” if you’re successful. This will grant you the ability to stay in the US permanently and change jobs as much as you want, although it is not considered citizenship. For more on the green card and citizenship, be sure to check out the US Department of State’s and the US Citizenship and Immigration Service’s websites. Hopefully, this article will help you get started on launching your career in the US. Remember that many people have completed the process before you; don’t get discouraged if it takes some time. Best of luck! References https://www.uscis.gov/working-in-the-united-states https://hbr.org/2022/08/a-guide-to-u-s-work-visas-for-international-students https://internationaloffice.berkeley.edu/students/employment/opt Header image credit: Image by YOONHEECHO from Pixabay
So, you’re studying for your economics degree in the United States of America. It's going well, and you’re enjoying life in the USA, so much that you’re thinking about staying longer and looking for a job in the US.
Studying in the USA: How to apply for a student visa
Applying for the US student visa might seem to be a daunting process, but we’re here to help make sense of it. The process is relatively straightforward, although it has many pieces. Read on to learn about how to apply for the student visa for the USA and our tips for making the application process easier for you. Note that this information is accurate as of the publish date above. Some of these requirements could be changed by the US authorities over time, however. Be sure to double check with the appropriate US government authority. Note that this article only covers studying in the United States; it does not cover work visa requirements for the US. But fear not – we have another article for just that! First step: Entering the US To enter the US, many travelers will need a Type B tourist visa. This is a nonimmigrant visa that allows someone to stay in the US temporarily, but does not allow long-term stay. If a prospective student wishes to travel in the US – perhaps to explore university campuses – before they acquire their student visa and start university, this is the visa to apply for. Details on applying for the Type B visa can be found at the US Department of State’s website. Then, a prospective student with a Type B visa can apply for a Type F visa to allow long-term stay for studies with a proper application supplemented by Form I-539. However, this strategy is not guaranteed and so is not recommended. Rather, it’s more secure to apply for a Type F visa from the get-go – but this requires acceptance to a university program in the US. Some travelers will be able to enter the US without an official visa at all. However, these travelers must still fill out the Electronic System for Travel Authorization form (available here) as part of the US’s Visa Waiver program. As of this writing, the list of eligible nationalities includes 40 countries that can be found here, including most of Europe, Japan, South Korea, New Zealand, Australia, Singapore, and Taiwan. These travelers can stay for up to 90 days without needing a visa, but must be careful not to overstay. Requirements for a student “Type F” visa To study in an accredited university program in the US – whether for undergraduate or graduate studies – you’ll need a Type F visa. One important fact to note before getting started is that you cannot apply for a visa without proof of acceptance to a US university, and you can’t apply more than 365 days in advance of your program’s start date. Besides this, the exact requirements for this visa are subject to vary depending on the specific embassy or consulate you apply in, as well as the country you come from. Nevertheless, we’ve compiled a general overview of the requirements so you can begin to prepare. Visa application form After being accepted to a US university, you’ll be eligible to apply for the Type F visa. One of the first steps is to fill out Form DS-160, print it out, and take it to the visa interview with you. This form requires including a picture. According to the Department of State’s website, among other requirements this picture must be: Sized such that the head is large and visible and the full face is visible without any shadow being cast on it Taken within the last 6 months (ensuring it accurately reflects your current appearance), in front of a plain white or off-white background, taken in full-face view directly facing the camera, with a neutral facial expression and both eyes open Taken in non-uniform clothing that you normally wear on a daily basis (normal wear includes religious clothing that is worn daily) Lacking any obscuring headwear (unless worn daily for a religious purpose), but including a hearing device or similar articles if you normally wear them. Further and more specific requirements can be found at the US Department of State’s website. In practice, reputable photo shops and studios should be aware of the requirements for visa application photos for all major countries, and will be able to take your photo with the appropriate specifications. Schedule a visa interview Find the US embassy or consulate nearest to you, and apply for an interview. Applying early is recommended; depending on the city, the earliest available interview slot may not be available for thirty days or more. Note that you’ll be required to pay a non-refundable fee to apply for the interview. Documents typically required for a US student visa A number of documents are typically required for the visa application and interview, though again, this may vary by the specific embassy or consulate that you apply to. Be sure to check with your local embassy before applying. Nonetheless, the documents that are typically required include: A valid passport that remains valid for at least six months after the planned end of your stay in the US The aforementioned DS-160 visa application form At least two copies of your photo as detailed above A filled out form I-20 (provided by your school after you are accepted) Consular officers may request additional documents during your visa process, including: Proof of academic qualifications such as transcripts or standardized test scores Proof of sufficient funds to live on during your stay Once you have successfully received your visa, you’ll be ready to plan your trip into the US. Restrictions on entering the US with a Type F student visa To enter the US after receiving your student visa, you’ll need to bring your copies of forms I-20 and DS-160 as well as your valid passport to the port-of-entry where you intend to enter the country. Then, it’s just a matter of settling into your new home and beginning your studies. Officially, you are not required to show proof of accommodation to receive your visa. However, when entering the US, you may be required to show proof of accommodation or proof of financial means. If you can’t provide any proof that you have a place to stay, you may not be allowed to enter even if you have the proper visa type. Further, universities themselves may request such information when processing your application, and in order to receive a Type F visa you’ll need proof of acceptance to a US university. Therefore, you should start finding a place to stay or gathering financial records early on in the process to make the process easier for yourself. Working while studying in the US Students on a Type F visa are allowed to work on-campus in their first year of studies, but not elsewhere. After the first year, they are allowed to work in the same or a related field as their course of study, subject to approval by school and immigration officials. Questions about this should be directed to the Designated School Official, the employee of the university who manages Student and Exchange Visitor Information System (SEVIS) requests for their institution. Studying in the US, as with studying abroad in general, can be a rewarding and valuable experience. We at INOMICS encourage anyone interested to give it a shot – hopefully, this article has helped you to realize that the student visa process is entirely doable. We wish you the best of luck as you get started on your educational journey in the “land of the free and home of the brave”! References https://travel.state.gov/content/travel/en/us-visas/study/student-visa.html Header image credit: Hyein Nam from Pixabay (Free for use under the Pixabay Content License)
So you want to study abroad in the United States of America, the largest economy in the world. In keeping with its “melting pot” reputation, the US has been an education destination for many over the years, and is filled with many high-quality, internationally competitive universities. Of course, if you’re an international student, you’ll probably need to get a visa before you can go.
Public goods in economics are goods that are both non-excludable and non-rivalrous. These characteristics of public goods mean that if one person uses the good, it does not reduce others’ potential enjoyment of the good, and further that people cannot be prevented from accessing the good. It’s easiest to illustrate the concept by using an example. A lighthouse provides a service that’s considered a public good. Lighthouses help guide ships by providing a signal that land is nearby, and warn against potential dangers in the water. The signal sent by lighthouses cannot be given to some ships but prevented from reaching others – it simply gets emitted. This makes the service non-excludable. Similarly, the signal put out by a lighthouse doesn’t diminish in usefulness as more ships receive it. Thus, a lighthouse’s service is also non-rival. Another example of a public good is the air we breathe. People can’t be stopped from using air, nor does breathing limit someone else’s ability to breathe. Yet more examples of public goods are disease prevention and national defense. Both of these services benefit everyone, and when one person benefits from them, others aren’t prevented from benefitting either. Because they are both non-excludable and non-rival, public goods are often subject to the free rider problem in economics. This problem arises when people can freely access a good or service, and as such are not incentivized to help pay for it or maintain it – in other words, they “free ride”. Free riders benefit from the work of others at no cost to themselves, and they refuse to pay if they have a choice. Because of this behavior, public goods that aren’t naturally occurring (like breathable air) are often provided by a government via taxation, as the private market will almost always under-provide them. In fact, public goods usually have large positive externalities, for instance: national defense makes everyone safer, parks improve neighborhoods (note these can also be classified as a common resource; more on that in the Good to Know section), disease prevention improves public health, etc. Goods with positive externalities are usually under-provided by the market, which is one form of market failure. The government usually taxes the citizenry to provide these services themselves and mitigate that market failure, improving society’s overall welfare. Therefore, public goods are typically either provided by a government, or are naturally occurring. The non-rival and non-excludable nature of public goods make them virtually impossible to sell for a profit. However, radio programs are one example of a public good that have been provided privately by companies operating in a market – although even this required some regulation to allow the market to operate. Radio stations buy the right to use specific radio frequencies from the relevant authority (usually a governmental body) and are then allowed to broadcast their signal via radio waves. Radio is a public good. Radio waves are freely available for any citizen with a radio to tune in to, and listening to the radio program does not prevent others from doing so. Further, anyone with a radio can’t be stopped from listening to any radio station. So, how do radio stations make money? Advertising; advertisers seeking new audiences support the radio station by purchasing time on the station’s program. Of course, this means that the cost for radio listeners isn’t entirely free after all: they must pay the cost of their time listening to ads instead of their favorite program when they use their radio. Good to Know Certain public goods, due to their non-excludable nature, are subject to the Tragedy of the Commons problem. Although air is non-excludable and non-rival, it can be degraded by pollution. Indeed, this degradation – in other words, air becoming less enjoyable as others pollute it – is characteristic of a common resource. Economists will often classify air as both a public good and a common resource, depending on the context. If air is plentiful, and the analysis is limited to a specific area where pollution is not a concern, then fresh air exhibits qualities of a public good. Otherwise, especially if pollution is a concern, fresh air is better classified as a common resource. This example shows how the line between public goods and common resources can be blurred sometimes. Examples of pure public goods that are always fully non-excludable and fully non-rival are hard to come by, but the categorization is still quite useful for economic analysis.
2023 Nobel Prize in Economics - The Winner
Receiving this prize makes Claudia Goldin only the third woman to win the Nobel Prize in Economic Sciences (following Elinor Ostrom in 2009 and Esther Duflo in 2019), and makes her the first to do so alone, i.e. without sharing the prize with another economist. The research that awarded the prize The research that won Dr. Goldin the Nobel Prize examines the gender pay gap between men and women through the centuries. To start, Dr. Goldin gathered U.S. data across the past 200 years. She analyzed this data to look for trends in employment and earnings for both men and women to study how the gender pay gap evolved – and to explain why it still exists today. Part of the reason for her Prize is that this information can help society to fight the gender pay gap, ensuring that equally qualified men and women are paid the same amount. According to the Royal Swedish Academy’s press release1, Chair of the Committee for the Prize in Economic Sciences Jakob Svensson had this to say about Dr. Goldin’s research: “Understanding women’s role in the labour market is important for society. Thanks to Claudia Goldin’s groundbreaking research we now know much more about the underlying factors and which barriers may need to be addressed in the future.” A few of Dr. Goldin’s findings stand out. First, the participation of women in the workforce has evolved over time in a roughly U-shaped pattern (see Figure 1, which was illustrated by Johan Jarnestad for the Nobel Prize organization). A few centuries ago, before the Industrial Revolution – when society was more agrarian – women participated in the labor force at a rate of almost 60%. During the decades from the late eighteenth century through the start of the twentieth, women’s workforce participation steadily declined as society industrialized. Then, in the early twentieth century, it started to rise again. Dr. Goldin postulates that several factors gave rise to this resurging increase in women’s workforce participation. First, educational attainment for women began to climb in the twentieth century. That trend in particular has continued; in the present day, the majority of college degrees are now earned by women rather than men in most western nations, including the U.S3. Changing social expectations aided the increase in workforce participation, too. Around the 1960s, cultural expectations about a woman’s role in the family became less strictly about motherhood and child-rearing5. Dr. Goldin theorizes that younger women began to expect less and less that they needed to devote their lives to managing a household and raising a family first, as their mothers did. This enabled women to tackle their career without as much stigma (although that’s not to say these expectations have ceased to be an issue for women in the workforce in many countries today). Another factor that enabled women’s participation in the post-industrial workforce to rise again was better access to contraceptives, particularly “the pill”. This gave women more power to choose when and if to become mothers, which can potentially put their careers on hold, traditionally significantly more so than for men. Detailing the gender pay gap Yet, despite increasing educational attainment and workforce participation, men still earn more than women on average, even when they are of the same skill and experience level as their female counterparts. Dr. Goldin finds that although the pay gap for men and women can be explained to a large extent (at least historically) by educational attainment and career choice, the modern gap is more complicated. Even between men and women in the same career field, the pay gap widens significantly once a woman has her first child. From that point on, the earnings gap between men and women remains throughout the rest of their careers. The Pew Research Center additionally finds that the gender pay gap in the US has remained mostly unchanged for the past twenty years. The data shows that in the US, women earn roughly 82% of what an experience-equivalent man would earn on average. Last year, INOMICS Salary Survey data showed that on average in economics careers, male economists are paid 23.1% more than female economists. This figure remained remarkably stable at roughly 20% for men and women with a Master’s degree, and also men and women with a PhD. The pay gap varies significantly by employer type within economics, however; the worst offenders according to the 2022 data are private employers, with an average pay gap of 35%. Universities and governments exhibited a gender pay gap of again roughly 20%. Dr. Claudia Goldin: Bio Labor economist and economic historian Dr. Claudia Goldin was born in 1946 in New York, NY, USA. She received her BA in economics from Cornell University, after originally intending to study microbiology. She received her PhD in economics from the University of Chicago in 1972. After receiving her PhD, Dr. Goldin began to teach; she taught at various universities including Princeton before being offered tenure at Harvard in 1990. Another first: she was the first woman to be offered tenure in Harvard’s economics department. She became an editor for the Journal of Economic History from 1984 until 1988. She served as the president of the Economic History Association and the American Economic Association in 1999 to 2000 and 2013 to 2014, respectively. She is a member of the National Academy of Sciences and the American Philosophical Society, and was elected a fellow of the American Academy of Political and Social Science, the Society of Labor Economists, the Cliometric Society, the Econometric Society, and the American Academy of Arts and Sciences. Dr. Goldin is also the author of many successful books, including Understanding the Gender Gap: An Economic History of American Women, a book that details some of her research on the topic that won her the Nobel Prize. She has supplemented this book with further research on topics like the impact of the contraceptive pill on women’s career decisions, the usage of woman’s surnames after marriage, and the fact that women have become the majority of undergraduate degree earners. Previous to her Nobel Prize award, Dr. Goldin has been the recipient of many awards and accolades, including (but not limited to): the Richard A. Lester Award for the Outstanding Book in Industrial Relations and Labor Economics in 1990, 2008, and 2021 the American Economic Association’s Carolyn Shaw Bell Award in 2005 the 2009 Mincer Prize for her labor economics contributions the IZA Prize in Labor Economics in 2016 the 2019 BBVA Frontiers in Knowledge award in economics the 2020 Nemmers award in economics You can read the full Nobel Prize in Economic Sciences press release at the Royal Swedish Academy of Sciences’ webpage. References 1: https://www.nobelprize.org/prizes/economic-sciences/2023/press-release/ 2: https://scholar.harvard.edu/goldin/biocv 3: https://www.kva.se/en/news/the-prize-in-economic-sciences-2023/ 4: https://www.richmondfed.org/publications/research/econ_focus/2014/q4/interview 5: https://www.usnews.com/news/articles/2010/03/12/the-1960s-a-decade-of-change-for-women Header image credit: fill via Pixabay.
The famous 2023 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, colloquially known as the Nobel Prize in Economics, has been awarded to a Harvard University economist this year: Dr. Claudia Goldin. The prize – worth 11 million Swedish crowns, or about $1 million or roughly €949.000 – was awarded to her by the Royal Swedish Academy of Sciences “for having advanced our understanding of women’s labour market outcomes…Her research reveals the causes of change, as well as the main sources of the remaining gender gap.”1
Common resources in economics are goods that are rival, but non-excludable. This means that if one person uses the good, it reduces others’ ability to enjoy the good. But, people cannot be prevented from accessing the good. This unique blend of characteristics can cause problems with the usage of common resources. For example, a public park is considered a common resource. Public parks are freely available to anyone who wishes to go to them. But at the same time, if one person goes to the park, it means there’s less space left for others to enjoy. Park area is not infinite; if everyone tried to go at the same time, it would be far too crowded and noisy to be enjoyable. Moreover, because a public park is free and non-excludable, individuals’ incentives to keep the park clean and tidy are very low. It’s quite easy for people to use the park, litter, and go home without cleaning up after themselves, which is often privately optimal (at least from a purely rational standpoint, economically speaking). Over time, this degrades the space. In economics, this situation is known as the free-rider problem. In order to keep the park clean and usable, a government authority or the charity of kind citizens is needed. Some natural resources are also considered common resources. An example is the amount of fish in the ocean. The ocean is a vast resource that every coastal nation in the world can utilize. It holds an abundant (and regenerating), but at any one time finite supply of fish. Crucially, nobody owns the ocean, and while it is very difficult for one nation to prevent another one from fishing (non-excludable), fishing the ocean leaves fewer fish for others to find (rival). Each (coastal) nation tends to maximize their own private utility functions from ocean fishing; they choose to fish at a privately optimal level. On its own, this amount will not deplete the oceans, because the ocean is so large compared to just one country. But, if every nation chooses to fish its own privately optimal amount of fish, the supply of fish in the ocean will be reduced below the replacement level (the point at which the supply in the ocean will naturally replenish itself). This leaves fewer and fewer fish left in the ocean each year, degrading the space, making everyone worse off over time. Incidentally, pollution in the ocean is another way – similar to the public park example discussed above – that this common resource can be degraded. Without cooperating to produce and enforce international law that protects the ocean, each nation is incentivized to over-pollute. These problems might sound familiar; they are the Tragedy of the Commons. Common resources can exhibit both free-rider and Tragedy of the Commons problems because the incentives in place often encourage participants to act in their own private interest, which in most cases is not aligned with society’s best interests overall. Rivalrous goods inherently demand that each selfish individual take as much as possible as fast as possible, while non-excludability means everyone can rush to do so. Overcoming this issue and maintaining the common resource can be very difficult, as it requires independent economic agents to negotiate and cooperate. Good to Know Common resources are related to externalities as well, as they often allow negative externalities to occur. Being non-excludable but rival, these goods incentivize over-use, which is itself a negative externality. Another way to conceptualize this: with common resources, “market” participants do not consider the cost of their actions on others in the “price” of their “purchase” decision. For example, when one nation overfishes, they’re fishing a privately optimal amount without considering the negative impacts on other countries from their overfishing. This constitutes a negative externality and contributes to the Tragedy of the Commons problem.
Insights into Central Banking Careers with Dr. Gómez-Pineda
This includes advice about which skills aspiring economists should learn, the differences between research and policy economists, topics that prospective central bankers should focus on in their studies, and more. Any serious student of economics – and indeed, many curious economists – will benefit from hearing Dr. Gómez-Pineda’s advice. Javier G. Gómez Pineda is Senior Economist (Investigador Principal) at Banco de la República (the central bank of Colombia). He also teaches Monetary Economics at Universidad del Rosario in Bogotá. His research interests are in Monetary Economics and International Economics; he is author of the textbook Dinero, banca y mercados emergentes, los países emergentes en la economía global, 2010, Ed. Alfaomega; and he holds a PhD in Economics from the University of Chicago. Are you an economist already working in the field? You, like Dr. Gómez-Pineda, have a chance to assist INOMICS’ economist job market research. Simply fill out our anonymous, 3-5 minute Salary Survey and help us research the state of the economics job market in 2023. Without further ado, read on for the interview! Sean McClung: How did you become an economist – was it always your plan? Javier G. Gómez-Pineda: Choosing a career can be challenging. In the beginning I was not very sure about my career choice, I considered at least two alternatives, but in the end I decided to study economics. I think what ultimately led me to this choice was perhaps the idea that what is important in choosing a career is not how you earn an income, but how you will spend the rest of your life in a way that contributes and serves others. Later, you discover that in order to serve others, you need to know how to be useful, to have a good command of your field, your techniques and your work. At the end of my undergraduate studies, I worked as a research assistant (RA) for Professor Lauchlin Currie. It was he who encouraged me: “if you want to be a good economist, you have to study abroad.” At that time, there were no graduate programs in Colombia, but there were scholarships for graduate studies abroad, provided that the studies were made at a top university. These Central Bank scholarships were named after Professor Lauchlin Currie. My main challenge was the English language; not so much the reading, because I had studied English reading in my undergraduate studies; but more the listening and writing. So, I did some English work before I applied to graduate school. I studied American English at an institute and learned some grammar. At the same time, I studied British English at another institute and learned some conversation skills. I also traveled to the United States for a short time to study English and to expand my vocabulary a little. In the end, I passed the English exam and got a place on a graduate program. However, at the beginning of my first year of graduate studies, I struggled with listening comprehension. By the middle of the first year, it was not the language that was the problem, but the math. I overcame the “math scare” by putting more emphasis on economic intuition. I think in the process I managed to learn some English, get over the math scare, and study abroad, but I still strive to become a better economist and write more in English. SM: What part of your educational background would you say is most valuable to your current work? JGP: I think a valuable part was my thesis work during my graduate studies; this was due to my empirical thesis. It was this work that got me into running regressions. Since then, I have done more empirical work than theoretical work. I think another part of the training that I found valuable was the macro problem sets. In one or two of them, I had to learn how to run macro models on the computer as well as get familiar with some of the software packages. Of course, the most valuable part of the educational background were the courses themselves, especially in macroeconomics, international economics and econometrics. However, education does not stop when you graduate. Theory evolves, better techniques become available, new software packages are developed. As research economists, our job is to contribute to these developments, and so we must continue to educate ourselves by at least reading the most relevant authors in our field and attending conferences. As policy economists, our job is to incorporate these developments into our analysis so that our work is based on the most appropriate methods. SM: How has your day-to-day as a central banker been different than you expected (if at all)? JGP: I expected that my work would involve running regressions, as I had done in my thesis work, and that turned out to be true. In contrast, I did not expect that my work would involve DSGE models, Kalman filtering, and Bayesian estimation, which I had learned in the university, but that turned out to be part of my work. SM: What is/are the most rewarding part(s) of the job for you? JGP: The contribution of an economist is sometimes less tangible than that of other professions. Unlike economists, a doctor can have a big impact on a person’s life in a very concrete way, and the medical profession can contribute to the health of the people in a country or even in the world. I think the work of a macroeconomist should have a small impact on the country while the economics profession should have an impact on the economic well-being of the people in the country. For me, the most rewarding part of the job has been to see that the inflation model is used by the Central Bank as an input in the interest rate policy decision, to know that our monetary policy report is valued by the interest-rate-setting committee, and to see that our policy working papers are used as a reference point for understanding monetary and macroprudential policy in Colombia. At the end of the day the expectation is that this work will hopefully have some impact in the country. It is also rewarding to be able to share this knowledge with students at the university. SM: As a central banker, do you get to research? What is your favorite part of that research? How is it different from academic research? JGP: Central banks typically have two types of economists: research economists and policy economists. Research economists write papers that are published as central bank working papers and in academic journals. Policy economists work on the periodic inflation forecasts, the Inflation Report (IR); and the periodic financial stability assessments, the Financial Stability Report (FSR). The IR supports interest rate policy decisions and the FSR supports macroprudential policy decisions. I work about 80 percent of the time as a research economist and 20 percent as a policy economist. Since I work on monetary economics in both roles, my work as a research economist and as a policy economist overlap. In Colombia, the central bank has a committee of research economists that prepares a quarterly monetary policy note to the central bank’s interest-rate-setting committee. I am a member of this three-person research economists committee, and this work represents about 20 percent of my work as a policy economist. The time devoted to research may vary across economists. For instance, in Colombia the central bank has research economists that devote 100 percent of their time to research. Conversely, some policy economists do not have time left for research and some might work about 20 percent of the time as research economists. They publish this research as technical notes in the IR and FSR, as working papers and sometimes in journals. Academic research covers a wide range of topics, while central bank research tends to focus on monetary and financial stability. Academic research tends to produce sophisticated analytical and algebraic results; however, at times the quantitative dimension of academic research is not as sophisticated as that sought for by central bank economists. Academic research tends to emphasize the sign and significance of estimated coefficients, while central bank research tends to emphasize the quantitative performance of the models, issues such as the impact of interest rate decisions on inflation over time, in exact percentage points, also quantifying the amount of uncertainty involved in the transmission. While there are differences between academic and central bank research, there are also similarities. Both academic and central bank research share the current paradigm of the New Neoclassical Synthesis, see Goodfriend and King (1997) and Woodford (2009). Some academic economists sometimes hold policy positions in central banks, and some central bank economists also teach at the university. SM: In your experience, what would you say is the best type of experience for prospective central bank hires to have? JGP: For me, a sufficient condition is a strong interest and vocation in monetary economics or macroeconomics. A thesis in monetary economics or in international economics is a clear sign of this interest. Beyond the thesis, a working paper or article in monetary economics is also a good signal. Other skills are very welcome, but not strictly necessary, as they can be acquired on the job. These include familiarity with software packages such as R, Python and Matlab and a good command of the English language. SM: What other tips, advice, or insights do you have for younger economists interested in monetary policy or central banking? JGP: My advice would be: read the literature and get into the habit of reading the papers. In addition, keep in mind that what you sow is what you shall reap, so read the literature and also get familiar with the software packages used to build your estimations and models; get those skills. Finally, for those who are not native English speakers, it is important to learn how to write papers. There are several books and articles available on this subject. One starting point is McClosky (2000) and also Banco Central de Chile (2017). It is a good idea to go through this literature and try to learn how to write papers. If possible, get help from an English editor at your institution or on your own. SM: What else (if anything) do you think should be shared about your career path or current role? JGP: Central banks face issues that are common to the central banking community as a whole. So try to make your research relevant not only to your central bank, but if possible to the central banking community; if possible, work with a global approach. And finally, group research is better than individual research. So, it is important to work in groups and write papers with others. References Banco Central de Chile, “Guía de Estilo en Inglés” (Accessed Sep. 19, 2023), 2017. Goodfriend, Marvin, and King Robert. “The new neoclassical synthesis and the role of monetary policy.” NBER Macroeconomics Annual 12 (1997): 231-283. McClosly, Deidre, Economical Writing, 2nd Ed. Waveland Press Inc, 2000. Woodford, Michael. “Convergence in macroeconomics: Elements of the new synthesis.” American Economic Journal: Macroeconomics 1, nº 1 (2009): 267-279. Header image credit: Dr. Javier G. Gómez-Pineda.
Dr. Javier G. Gómez-Pineda, our interview guest for the 2023 INOMICS Handbook, graciously agreed to return for a second interview. This time, the INOMICS team prepared some career-related questions for the central banker. With his answers, Dr. Gómez-Pineda shares his wisdom about central banking and economist careers in general with you, our readers.