How to research and publish in economics education
A recent article introduced a range of publications and conferences focused on teaching, assessment and pedagogy in both economics and more widely. This article may help motivate you to adopt a more innovative approach to teaching, and may also spark the desire to share your work in pedagogy. Just as with research in economics, there are a wide range of areas within pedagogy that you could focus research in, and the skills developed as an academic economist are often transferrable when thinking about teaching and learning more generally. In this article, we will discuss some of the key elements needed to publish research relating to economics education. 1. Develop teaching innovations A first step towards developing research in pedagogy might be to explore new teaching innovations. These don’t need to be radical innovations, but just need to be novel. For example, you might introduce a game within a principles of economics lecture to illustrate marginal productivity through active learning. A good understanding of what has been developed and evaluated previously is important here. Economics journals such as the International Review of Economics Education, the Journal of Economic Education and the Journal of Economic Teaching may provide you with inspiration. They can also help identify what has worked, and what has not. Some journals will publish work introducing an innovation, but for most journals it will also be important to evaluate the teaching innovation. 2. Evaluate economics teaching innovations Having introduced a new teaching innovation, it is usually important to evaluate the innovation. Economists have significant training in evaluation, and this can build upon the applied economics you have learned during your PhD, or earlier. The principal reason for evaluating the innovation may be to check that it is having the desired effect, and is not having any deleterious effect on student outcomes. Of course, the act of evaluating the innovation may also mean that you have the opportunity to share it, and your skills as an economist will be beneficial when evaluating the quantitative or qualitative impact of the study. If you are submitting an evaluation of a teaching innovation, editors in the review process will be looking to see that you have connected your research with the existing literature, and that the empirical evaluations are sound. For instance, if you claim the innovation is having a causal effect on grades, they will want to check that your identification strategy is sound. Similarly, they will want to check details such as that you have a suitable sample size to evaluate the effect, whether you are using the correct econometric tests, and whether your control group is sound as well. For publication, editors will usually be looking for research which will be of interest to the general readership. If your innovation is too niche, or is only applicable to a very small group of economics educators (e.g. if the innovation would only be relevant to the structures in your own institution), then editors may reject the research. However, you should also be careful not to claim too much. If there are limitations to your evaluation, you should make these clear to the reader. 3. Review the existing literature Of course, you don’t have to be developing brand new ideas yourself in order to carry out research and publish in the area of economics pedagogy. Often reviews of the existing literature, drawing upon evidence from a range of fields, can be very beneficial, and can be highly cited pieces of work. For example, Julien Picault’s recent paper “The economics instructor’s toolbox” provides an excellent overview of the development of pedagogies across economics. Many subjects can become stuck in silos when it comes to thinking about the best methods for education. Economics is a subject that, because of its nature - combining mathematical technicality, statistical tools, and the ability to explain and argue concepts - means that there are real benefits to drawing together evidence from a range of disciplines including both sciences such as mathematics and physics, and the humanities. 4. Develop new curricula Whilst “developing a new curriculum” may sound like a Herculean task, there is constant debate in a range of journals about what should go into an undergraduate economics curriculum. Economics is a constantly developing field, and as such, curricula also need to change over time. One area in which there is much work is developing the debates about what should go into curricula, including what is important and what should be left out. As higher education has become more market-based (particularly in the UK and US), the role of an undergraduate degree has been shifting as well. In many institutions, it is no longer seen as sufficient for a degree to merely teach students more about a subject, but other skills need to be embedded visibly within the curriculum. For example, employability skills are often seen as an important element to be embedded within courses. Research on embedding these skills could be based on empirical evidence of efficacy, or could involve qualitative studies about students’ wants and reactions to these innovations. 5. Innovative assessment The type and format of assessment is just as important as the pedagogies being used, and the curriculum being followed. All three should be constructively aligned. While closed-book exams do constitute a large proportion of assessment in economics, there are opportunities for evaluating and investigating these methods, many of which will follow a mixed-methods approach. If you are writing about an innovation in assessment, it’s important to think about what the assessment looks like and what its outcomes are. These can be in terms of the observed skills that students develop, or their progress in subsequent years of study. But it’s also important to note how the assessment ties in with the curriculum and teaching. On its own, an innovative assessment may be of interest, but it is unlikely to generate good outcomes for students unless appropriate changes are made to the pedagogy as well. At its most extreme, if you ask students to write a policy report (say) as the assessment for your unit, but all of the preparation is mathematical problem solving, it is unlikely that the assessment will gain good results. And, it will be unlikely that a journal would be interested in publishing your research! Summary If you are innovating in your teaching, or are reading widely about novel pedagogies, you can also add depth to your academic CV by writing for publication. However, as with your research in economics, for work to be published, it needs to be innovative, rigorous, and provide a wide interest to the readership! 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.
As you develop your career in higher education economics, you will likely be carrying out research within a field in economics. But you will also likely be involved in delivering and developing teaching within your department. As a result, you may be interested in developing and disseminating an understanding of what students should learn and how they learn.
Top YouTube Channels to Learn Econometrics and Economics
So, are you looking for resources to learn economics online? INOMICS has got you covered, whatever your reason. We’ve published various articles that aim to help our readers make the most of online resources already out there. Some of the most popular thus far have included free and paid for online courses in econometrics, lessons in mathematics and statistics, and a list of the best (in our humble opinion) economics podcasts. Continuing in this vein, we would now like to share with you a list of the best YouTube channels we could find, updated for 2022 and useful for any student of economics. For more online learning opportunities click here INOMICS We’re big readers here at INOMICS, but did you know that you can watch our content, too? Aimed at young economists, our Youtube channel’s fun, short, and informative videos help explain all those economics terms you should know, but often don't...Need a quick definition of the prisoner's dilemma? INOMICS has just the video for you. New Economic Thinking It’s important to question conventional understandings of economics, especially when they may uphold systems of oppression or hide ideological assumptions that need unpacking, debating and challenging. The Institute for New Economic Thinking’s channel does an excellent job of this, featuring regular interviews with economists at the front-line who are moving the discipline forward. Marginal Revolution University Marginal Revolution University believes that economics has the power to change the way you see the world. Their mission is to help you discover your inner economist, one video at a time. With full courses like the principles of micro and macroeconomics, mastering econometrics and series like everyday economics, checking out MRU really is a must for any budding economics student. <11an>limit:2;categories:jobs|courses|conferences|Professor;disciplines:Econometrics, Statistics and Quantitative Methods (JEL C)|General Economics (JEL A)</11an> EconplusDal Next up is EconplusDal. Frustrated by the lack of economics help available when studying economics himself, EconplusDal is trying to right that wrong. Now as a fully trained economics teacher, he makes videos especially for economics students to help them pass their exams. If you are an International Baccalaureate student or studying for an A Level exam in the UK, his specialized exam content makes this the channel for you. Jacob Clifford Meanwhile, if you’re a student in the United States Jacob Clifford has specialized exam content just for you. With over 500,000 subscribers, he's definitely doing something right. Khan Academy Khan Academy is a non-profit organization with the mission of providing a free, world-class education for anyone, anywhere. With over five million subscribers, they cover a lot more than just economics topics, but their economics content is really great. If you need to understand a particular theory, the chances are they’ve covered it. One Minute Economics All of One Minute Economics videos are lovingly animated and narrated by Andrei Polgar who has a passion for teaching people economics. No long introductions, or unnecessary fluff, Polgar gets straight to the point and therefore well worth a look. Economics Explained In the video essay genre, Economics Explained takes a wide-ranging look at a whole host of economics topics. They are particularly well-known for their deep dives on the economy of a particular country. It can be a fun break from all the lesson-style economics content available. Ben Lambert Ben Lambert's videos provide detailed commentaries on the main undergraduate and graduate courses most universities offer in economics. They are taught through a series of lectures given on an animated chalkboard. Watching his videos, you get an impression of exactly what an economics degree will be like - without having to pay the admission fee! Ashley Hodgson An associate professor of economics at St. Olaf College, Ashley Hodgson has been busy making lots of videos on her channel. Her favorite topics include behavioral economics, blockchain, health care, game theory and microeconomic theory. These videos are great for university level students! She also includes videos on fun and interesting behavioral economics topics, like love and kindness. The Economist First up, you really can’t go wrong with a quick follow of The Economist’s YouTube channel. Every Thursday they post a video that highlights the best of its reporting from its print and digital edition. This is also a good way to stay on top of current events relevant for economists. The Financial Times The Financial Times’ YouTube channel showcases some of the best of their journalism in visual form. With the stated aim to inform and inspire you, a quick follow can add color to the latest economics stories of the day. If this list still has not quenched your appetite for economics content, you can check out our own Economics Terms A-Z or our Blog to see what our economist contributors are writing about!
Online learning is not a novelty anymore. During the coronavirus pandemic and subsequent lockdown, many institutions were forced to invest in their online program offerings - or simply adjust their courses to be online-friendly. But sometimes it’s nice to learn without having to fully commit to a long program. Other times, learning from a different source can help new concepts make sense, or can refresh the memory.
Econometrics, Statistics and Quantitative Methods (JEL C)
Journals specialising in economics education 1. The Journal of Economic Education is one of the longest standing journals, dedicated to economics education. The journal is based in the United States, with articles from across the world, and provides original articles on teaching economics. In it, leading academics evaluate the latest teaching techniques, such as using technology or games to teach economics, and course programmes. 2. The International Review of Economics Education is a UK-based journal, with articles from across the world, providing a forum for high quality research in the areas of pedagogy, assessment, teaching methods and course structure. Recent issues delve into the use of technologies and new media to teach economics, as well as what we can learn from international economics education practices. 3. Journal of Economics Teaching is a journal focussed on the more practical elements of teaching. The articles are peer reviewed, but the aim of this journal is much more on providing ideas and case studies that others can adopt, with less of a focus on the evaluation of the innovations than the previous two journals. Of course, research in economics education is not confined to specialist journals. Applied economists are always interested in evaluating innovations, and there are often good papers focussed on education in economics subject journals, including the Journal of Economic Perspectives, the Journal of Labor Economics, the Journal of the European Economic Association and many more. Journals specialising in higher education pedagogy more generally The journals focusing on economics education are just a small subset of a much larger literature about pedagogy in higher education. A good educator will often have an appreciation of the debates, not just within the pedagogy of their own field, but more generally. 4. With the growth in online provision, particularly following the onset of the Covid-19 pandemic, understanding the challenges and opportunities for online teaching is increasingly important. The Internet and Higher Education is a highly ranked and cited journal, focussing on the challenges (and opportunities) of online teaching. 5. Similarly, Computers and Education examines the use of, and the evaluation of, digital technology within teaching. 6. Studies in Higher Education is an international, general interest journal, based in the UK. It looks at methods to measure and solve emerging issues within higher education. The journal welcomes contributions that seek to enhance understanding of higher education policy, institutional management and performance, teaching and learning, and the contribution of higher education to society and the economy. 7. Many institutions are engaged in reviews of assessment practice, so it is important to have a good appreciation of what makes good and effective assessment. A useful place to start is with Assessment & Evaluation in Higher Education, a journal that reports on all aspects of assessment in higher education. The goal is to improve understanding of assessment practices, and their contribution to student learning, satisfaction, and engagement with their course. 8. The British Educational Research Journal covers multiple disciplines as well as the higher education experience in the UK overall, particularly for minorities, and how this can be improved. The findings of the papers look to challenge assumptions of how we teach and assess, and aim to make the culture of British universities more inclusive. Conferences in economics education For a more interactive approach to economics education, there are a wide range of conferences that provide insights into the development of pedagogy, including Advance HE, and others. Similarly, several general interest economics conferences (such as the European Economic Association, Royal Economic Society and Scottish Economic Society conferences) often have sessions dedicated to economics education. However, there are also a growing number of dedicated conferences to attend either virtually or in person for the latest innovations in teaching. 1. Developments in Economics Education (DEE) – The Economics Network The Developments in Economics Education conference showcases the latest research, innovation, and best practice in economics teaching. This biennial event is Europe's leading conference on economics in higher education. 2. Conference on Teaching and Research in Economic Education (CTREE) – American Economic Association A three-day event, usually in person, with a mixture of panels, workshops, and presentations. Last year included sessions about teaching with experiments, using social media to have a broader reach, the benefits of group learning, and adapting for the pandemic. 3. TeachECONference - UCL Centre for Teaching and Learning Economics This is an annual virtual conference organised by UCL and Cornell University. It includes three days of panels, presentations, and networking mixers. Last year, they covered teaching in a pandemic, improving economists’ writing, new practices to teaching, and inspiring success for economics students. 4. International Conference on Economics Education and Training (ICEET) – World Academy A two-day conference dedicated to bringing together a significant number of diverse scholarly events for presentation within the conference programme. The London-based event provides great value to students, academics, and industry researchers too. 5. Chartered Association of Business Schools' LTSE Conference The Chartered Association of Business Schools' Learning, Teaching, and Student Experience conference is a two-day annual conference, with a more diverse group of presenters. It provides the opportunities to see how economics pedagogy research aligns with natural peers, such as management, accounting, finance, and business more generally. 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.
As an academic economist, it is likely that you will be engaged in both research and teaching. As you develop your skills, it will be important to think about what makes good teaching, and how the discussion about pedagogy in economics education develops over time. Knowledge and appreciation of the debates in pedagogy may also be important as you apply for external certification, such as an Advance HE fellowship. You may even want to develop and write for publication about economics pedagogy. There are a range of journals and conferences for those interested in higher education pedagogy.
The insight gained from these studies is increasingly informing macroeconomic models of the labor market, inflation, industries, and how the economy works. However, historically macroeconomic models have been ad-hoc simulations of how the real economy works, aiming to describe these large-scale phenomena. This is one of the key differences between micro- and macroeconomics. The fundamentals of microeconomics are generally agreed upon by modern economists. The field is used to examine supply and demand in specific markets to find if they are perfectly competitive or not, describe how monopolies behave, determine socially optimal outcomes and what may prevent them, examine individuals’ optimal strategies in theory, outline costs and benefits of certain actions, and much more. Often in microeconomic models, certain assumptions are made to deliberately simplify reality so it can be studied. This produces a tractable mathematical model of human (or firm, or market) behavior, which is the bread and butter of many microeconomists' work. With a model’s help, they can perform hypothesis testing on ideas, just like a scientist would do in a field like physics. Then, it's possible to learn how to best allocate resources, restore market equilibrium, predict behavior, and more. But, that does not mean the field is already “solved”. Classic microeconomic assumptions usually include the idea that humans are fully rational, utility maximizing, and have perfect information to make optimal decisions. This “rational economic man” can be distilled into a formula of behavior, using math to build a model. Sadly, these classic assumptions are often not realistic. People almost never have perfect information. And, they have many subconscious biases that could prevent them from making an optimal choice. Moreover, sometimes people just make mistakes! If these assumptions are not realistic, where did they come from, and why were they widely used? The answer requires a very brief history lesson. First, Adam Smith’s classic Wealth of Nations was published in 1776. It introduced some key concepts, many of which became foundational to microeconomics. An example is the idea that individuals seeking their own self-interest allowed markets to function efficiently via the “invisible hand”. A century later, three important figures built on Smith’s and other’s work, leading to what we call the “Marginal Revolution”. These economists were William Jevons, Leon Walras, and Carl Menger. Their works introduced the concepts of general equilibrium and partial equilibrium, which are still taught today. (General equilibrium describes equilibrium theory in the entire economy, while partial equilibrium only deals with one market at a time). Then, Alfred Marshall built on their work with his Principles of Economics in 1890. This book was important because it introduced rigorous mathematics into economics and launched those methods into the mainstream. Soon after, Vilfredo Pareto (namesake of Pareto efficiency) made major contributions to consumer theory that led to the formation of welfare economics. The work of these economists rested on the assumptions that human behavior could be modeled with math and studied. This is where the key assumptions of rationality, perfect information, and utility maximization came in. Without them, the basic models of microeconomics wouldn’t be able to be written as equations. <11an>limit:2;categories:Jobs|Courses|Programs|Conferences;disciplines:Microeconomics (JEL M)</11an> However, these assumptions were never intended to completely describe reality. Even Alfred Marshall himself stated that economics was closer to meteorology than to other natural sciences, because human behavior is hard to predict. Part of the reason these assumptions proliferated is because they simplified the math. This was important as economists at the time had to do their quantitative work by hand, and complicated models become intractable very quickly. In the present era, technology has allowed economists to build and study more complicated models with computer algorithms and econometric software. Problems that could take earlier economists hours or days to solve might take us only a few minutes to do now. Thus, we have more ability and freedom to re-examine these classical assumptions, perhaps to replace them with better ones. That is exactly what newer sub-disciplines like behavioral economics are doing to the field. Economists are able to challenge some of those classic but outdated assumptions and try to update old models with new findings. These new insights and theories seek to improve our models so they better represent the real world. Thus, key areas of study and research for a modern microeconomist can vary. They include public economics, game theory, contract theory, behavioral economics, income inequality, industrial organization, and more. The common thread among these research areas is that they are grounded in the decision-making of individual economic agents. Further Reading Gregory Mankiw’s Principles of Economics is a lauded and well-known introduction into economics for new students. It’s a large book, but written in clear language with plenty of examples that paint a picture of economic concepts in action. It includes chapters on macroeconomic concepts too, but those build off of the microeconomics concepts that earlier chapters present. It makes a great introduction for any student curious about economics topics at a beginner-friendly level. Additionally, The Wealth of Nations is a famous work of economics literature; even laymen know the name and understand that it is somehow important. Adam Smith, through this book, established the foundations for economics as a discipline. He introduced several concepts that form the basis of microeconomics today, including theories of competition, prices, and people seeking their own self-interest. Smith's ideas are used as a guide even among those modern economists who reject some of the stringent mathematical modeling that microeconomics developed. However, the original work is quite dense and difficult for a modern reader. To get around this problem, the Adam Smith Institute’s Eamonn Butler has written a modern translation of Adam Smith’s writings, The Condensed Wealth of Nations. Any student of economics would benefit from the read. Good to Know Aspiring microeconomists will have to be familiar with the basics of economic theory, naturally. Microeconomics also makes heavy use of mathematical optimization problems, so an understanding of derivatives and basic calculus is necessary. Knowledge of statistics topics, particularly hypothesis testing, is also very useful. And, studying logic puzzles may help an aspiring student prepare for game theory and industrial organization topics. Also, employment opportunities for microeconomists are more similar to macroeconomists than one might think at first. Often, government agencies, think tanks, and research organizations will make use of both micro- and macroeconomists, as the skillsets are complementary but not interchangeable. A microeconomist might be needed to design a specific regulation or government policy, for instance, that a macroeconomist may be ill-suited for.
Microeconomics, one of the two main branches of economics, studies the choices made by individuals. This can be a consumer, a single business, or even a household. The decisions that these individuals make with their limited resources and time are modeled and used for a wide variety of real-world applications.
Compared to the more agreed-upon and orthodox microeconomics, there is more ongoing macroeconomic research and debate still shaping the discipline. While microeconomics focuses on the behaviors of individuals, households, or firms, macroeconomics is more concerned with topics like employment, international trade, and economic growth. Areas of study for a macroeconomist include: How can economic growth be stimulated? What drives inflation? How should the central bank set interest rates to help the economy recover? What factors cause unemployment and how can government policies improve the conditions of the labor market? Should we impose tariffs on foreign goods to protect domestic markets? Varying schools of macroeconomic thought have developed due to the extreme complexity of these questions. These schools are informal and are defined by groups of economists, each of whom share similar views about how the economy works. Some of the core ideas that often form the basis of a school include: how money affects the rest of the economy, whether markets are efficient, the rationality and efficiency of individuals, and whether intervention into markets is good or bad for society. Of course, this is a simplification, and there are other points that macroeconomists may disagree on. Some well-known schools of macroeconomic thought include: the neoclassical, monetarist, real business cycle theory, and New Keynesian schools. It’s worth noting that often newer schools of thought develop out of old ones. This can happen after a unique event in history surprises economists and challenges their thinking. Such an event - like the 2008 financial crisis - is usually unexpected. Economists may struggle to explain how it occurred. Afterwards, they will be forced to study why their predictions were wrong, or why their models couldn’t explain the event as it unfolded. This causes them to review their theories and possibly generate new ones. These new theories proliferate and cause existing schools of thought to grow and change, sometimes enough for us to give them a new name. For example, New Keynesian economists have built on the work of Keynesian economists, but updated their frameworks with the theory of rational expectations. This is why macroeconomics is so dynamic - the real world is constantly forcing economists to challenge their models and explain what is really happening! <11an>limit:2;categories:Jobs|Courses|Programs|Conferences;disciplines:Macroeconomics and Monetary Economics (JEL E)</11an> Further Reading As macroeconomics is dynamic and varied, so too are options for further exploration. INOMICS has published a list of recommended macroeconomics reads already, but there are more good finds out there, particularly for those interested in specific events. For instance, much ink has been spilled over the financial market collapse and Great Recession of 2008-2009. An example is Timothy Geithner’s Stress Test: Reflections on Financial Crises. Geithner was the Treasury Secretary of the United States during and after the 2008 financial market crash. His book is a memoir focusing around that event and the failures of himself and others involved, and paints a picture of how those circles of power operated. Another book that examines those circles of power is All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera. The book dives into the complicated relationships between the Federal Reserve, Wall Street, and the Treasury Department that allowed the crisis to occur in the first place. Good to Know Macroeconomics may appear less math-heavy and logical than the more orthodox microeconomics, since much of the latter relies on game theory and optimization problems. However, this is not entirely true. Good macroeconomic models rely on microeconomic foundations, and then build further. Or, they directly model the overall economy using quantitative models built on data. Aspiring macroeconomists will benefit from studies in areas such as advanced calculus and differential equations, as models like the dynamic stochastic general-equilibrium model (DSGE) rely on those techniques. Graphs are used often to help make sense of economic relationships alongside the math. Of course, a good understanding of introductory economics courses is also essential. So is a drive to discover the answers to difficult questions and understand the linkages between different parts of the economy. When the unexpected happens, and previous beliefs appear to be wrong- that is when the macroeconomist is most excited to get to work!
Macroeconomics is one of the two main branches of economics, the other being microeconomics. Macroeconomics is a vast field with many sub-disciplines that attempt to answer questions about how the world and the various markets within it work in the long run.
Macroeconomics and Monetary Economics (JEL E)
The INOMICS Questionnaire: Fratzscher vs Miguel
Marcel Fratzscher: What is your favorite place on earth? Edward Miguel: It may be a little cliche, but my favorite physical location is the Big Island of Hawaii, on the Kona side. It’s where my family (my wife and two kids) and I have traveled regularly over the past decade or so for our family holidays, so it’s a place that holds many of our favorite memories and warm feelings. It is also a stunning landscape -- with mountains, lava and black volcanic rock all set against the Pacific. I dream about it often! MF: Outside of economics, what occupation would you have if you could be absolutely anything? EM: I have always loved studying languages -- at different times, I’ve taken courses in or learned the alphabet for Arabic, Chinese, French, Korean, Polish, Portuguese, and Swahili, in addition to Spanish, which I speak fluently -- and also have an amateur interest in historical linguistics, including which languages are related to each other, and the historical processes that led to the expansions of particular peoples and cultures. This scholarly field has also been deeply influenced by new DNA evidence on genetic differences and similarities across populations. In another life, I would have loved to be a scholar working at the intersection of these issues. MF: What is the virtue you appreciate the most? EM: I appreciate creativity, both in research interactions and in daily life (although I’m not sure it’s considered a classical virtue...). I enjoy being with people who have new ideas, combine concepts or words in unexpected ways, and generally allow others to see the world in a different light. I think this is one of the reasons I have always been drawn to the world of scientific research. MF: Your all-time favorite figure in economics? EM: The economist I admire most is Ken Arrow. I only had the chance to meet him a few times -- early in my career at Berkeley, when he was already late in his -- but was impressed by his humanity, humor, honesty, and generosity. He was also an intellectual giant, laying out new paths for others to follow in micro theory, public economics, health economics, political economy, and on and on across subfields. MF: Your # 1 economics blog? EM: I am active on Econ Twitter (at handle @tedmiguel) although don’t regularly read particular blogs per se. I follow many economists (and political scientists) on Twitter, but a few that always inform -- and entertain -- are Chris Blattman, Dina Pomeranz, Ken Opalo, and Justin Wolfers. MF: Your ideal student? EM: It may be unexpected, but my ideal student is one who likes to disagree with me and challenge me during lecture. There is nothing that makes a large lecture hall perk up and pay attention than a lively discussion between me and a student! By speaking up, these students are providing a valuable public good for their classmates. MF: What should be done to address a gender bias in research in economics? EM: There are several aspects of this important issue, including the relative lack of research attention to issues that may be particularly important to many women, and also the persistent under-representation of women in the economics profession. On the latter, I have long felt that the aggressive -- even macho -- culture that characterizes some economics departments and conferences is partly to blame for pushing some women and members of other under-represented groups out of our field, which is a tremendous loss for scholarly progress. Systematic cultural change is needed within economics. MF: What is the most misguided research agenda in economics? EM: I’m not going to take the bait! In all seriousness, economics is a diverse field, and that is part of what I love so much about it: within our field, there are some folks who are basically statisticians or data scientists, others mainly historians, and others (like me) who are very issue focused (in my case on international economic development). At any given time, econ subfields may be moving in different directions but there is still a lot that connects economists of all stripes to each other. MF: What is the most promising current research field or issue in economics? EM: One of my favorite trends over the past decade or so is the revival of serious empirical macroeconomics. Not only have macroeconomists gotten access to more and better data, but many are utilizing the rigorous econometric tools developed in applied microeconomic fields -- like labor economics and development economics -- to make credible causal statements. This trend promises a real unification of the research methods used across economics subfields, which is exciting. It’s particularly important given the impact that macroeconomics research often has on economic policy making. MF: Where does economic research have the most influence on policy making? EM: Building on my previous point, I don’t think there’s any doubt that macroeconomists as a whole have traditionally had the most influence on policy, and are best represented at the highest levels of policymaking (think of past leaders of the US Federal Reserve). That said, things have been a bit different in 2020 during the COVID-19 pandemic, since many of the most hotly debated issues have been micro in nature -- i.e., behavioral economists have more to say (than macro folks) about how to get people to wear their masks in public. MF: On what issues should policy listen more to Economists? EM: This is a tough one, as there are many. At the moment, I feel that the gap between the public policy consensus and research is particularly large with respect to tax policy. There is a growing body of evidence regarding how tax reform -- particularly new approaches to taxing wealth and the incomes of high earners -- need not have adverse effects on aggregate economic growth. But it does not appear that these findings have been fully appreciated or absorbed across the political spectrum, especially here in the US. MF: What is your career advice to a young economics researcher? EM: Young economists are lucky to be entering our field at an exciting time -- the data science and big data revolutions continue to percolate through economics, allowing us to study topics that were off limits until recently. But in this environment, with so many choices -- what topic or topics should they choose? My advice is to focus on the issues that you believe matter most for people’s lives, that are truly important for society. You will never lack motivation if you work on an issue that really matters (to you). The above article first appeared in the INOMICS Handbook 2021, which you can download on our site. Header Image Credit: Provided by Marcel Fratscher / DIW / Edward Miguel. With kind permission.
Esteemed economist, Berkeley Professor, and friend of INOMICS, Edward Miguel generously took time out of his busy schedule to take part in the fourth INOMICS Handbook Questionnaire. Opposite him in his customary role of quizmaster was Professor Marcel Fratzscher, president of the DIW Berlin, and one of Germany’s leading voices in macroeconomics. Observing tradition, and as a nod to those involved, the encounter has been dubbed ‘Fratzscher v Miguel’. What took place was both in-depth and personal, the conversation ranging from the beauty of Hawaii and gender bias in economics, all the way to wealth taxes and COVID-19. For anyone connected to economics, especially those starting out, this one is not to be missed.
However, despite pillaging the planet and endangering our existence, we still find time for solidarity and charity, betraying a nature seemingly as generous as it is destructive. Recent events draw attention to this paradox, coronavirus triggering swells of heart-warming community spirit as well as the hoarding of toilet paper. Which leads to the question: given such a paradox, what, if anything, does it mean to be human? Philosophers seem unable to muster a unified answer. In fact, little consensus has emerged anywhere - except, that is, among a cadre of economists, whose influence has gone on to define their discipline. The following is the story of how this clique defined their own answer to this question - the story of rational economic man. His evolution It begins when ‘The Father of Economics’, Adam Smith, wrote about the importance of man’s self interest in making markets work. It’s not, he famously explained in The Wealth of Nations, the benevolence of the butcher, brewer or baker that keeps us fed and refreshed; rather, it’s their selfishness, their pursuit of personal wealth. While acknowledging ‘generosity, justice, and public spirit’ as other, nobler drivers of human behavior, it’s his conception of selfishness that’s best remembered - becoming the first plank of economics’ conception of man. However, selfishness notwithstanding, man - according to Smith - was still to some degree unpredictable. Economists were, therefore, denied a discrete unit of analysis, and unable to model human behavior with much precision, reducing their work to rough prediction. What economists needed was a constant, their own version of the scientist’s gene, something both simple and predictable. It was thus, with an eye on their scientist colleagues, that they began to define human nature (and reality) to fit their theoretical needs. To gain access to the scientific method, they would first have to reverse it. <11an>limit:3;categories:Summer Schools;disciplines:Economics</11an> Key to this endeavor’s success was political economist John Stuart Mill, who, in the mid-19th century, developed ‘homo economicus’: a depiction of man that added laziness and a love of luxury to the Smith-endowed desire for wealth. Acknowledging that this formulation overlooked ‘the whole of man’s nature’, and therefore rendered the findings of political economy ‘only true… in the abstract’, Mill claimed it was only through such simplification - collapsing human behavior into a handful of uniform drives - that the emerging field’s true potential would be realized. It was, for this reason, a necessary compromise. Reliable predictability, however, was still missing - and for that their conception of human nature needed further refinement. In sketching his ‘calculating man’ in the late 1800s, economist William Jevons duly obliged, bestowing man a relentless and unfailing calculus of personal satisfaction. He saw the individual as an insatiable seeker of utility. Though satisfaction from a single activity could be exhausted - owing to the law of diminishing returns - Jevons claimed overall satiation could never be reached; for as man ‘progresses’ (gets richer), so too widens the spectrum of his desires. The individual in this interpretation was endlessly greedy, devoid of social affinity, and a slave to their own need to constantly consume. During the interwar period, Chicago School economist Frank Knight then added ‘perfect knowledge’ to this already improbable set of traits, and ever-calculating became ever-knowing. The rational economic man was now capable of comparing all goods and prices across all times. With this departure into make-believe, economics’ contemplation on human nature was complete, and the final touches to a unit of analysis now primed for mathematical theorizing were done. Rational economic man as appears in our economics textbooks was born. Since conception, his life has by and large been a charmed one, withstanding ethical criticism, and buttressed by the popular 20th century view that resources were essentially inexhaustible. And in any case, as Milton Friedman commented in the 1960s, it made little difference whether economics’ abstraction of man was accurate. The economy operated, and people behaved, as though it was - so what was the issue? His Fall That would soon become clear. Over the years, rational economic man increasingly came to frame both the ends of policy-making, and the means. Success was when he spent more money, gratifying his myriad cravings, and failure was when he spent less. By the same token responsible behavior could be coaxed by financial incentive, known as ‘market-based policy’, and bad behavior disincentivized by financial regulation. It was an encompassing mindset, seductive in its simplicity, and one that was reflected in the governing logic of parties both left and right as the 20th century rumbled on. But humans respond to more than just carrots and sticks. It’s simply not possible to create a tax bribe for every good thing that needs to happen, nor a regulatory whip to eradicate all that’s bad. Much of our modern world is built on these incentives, and look around: it’s a world defined by a climate emergency, excessive consumption, and global inequality. At a time when we need compassion, collaboration, and restraint, economics is too often based on a conception of man defined by selfishness, disregard and greed. He is no longer fit for purpose. And he never was. As writer Johnathon Rowe summarily concluded: ‘rational economic man is not the result of dispassionate inquiry into human nature… he’s the result of a drive for influence…[and was] designed in a by-gone time.’ Given the enormity of the challenges we face, it’s time for a reset. We need a new approach to funneling human energies toward human needs, one that recognizes the complexity of humankind - however undefinable - and appreciates our dependency on the natural world, reciprocity, and community. Moves towards behavioral economics are positive. But the rational economic man remains, especially in the US, a textbook staple and bedrock of policy, revealing the lingering esteem in which he’s still held. Looking into a post-COVID future, if economics is to achieve the credibility it so craves, that esteem must be snuffed out. The above article first appeared in the INOMICS Handbook 2021, which you can download on our site. Image Credit: jplenio via Pixabay (free for use under the Pixabay content license)
Humanity’s evolving nature has propelled it up the food chain, from prey to planetary predator. Just 60,000 years ago, homo sapiens roamed the earth, insignificant and insecure, their existence of little consequence. Life, as Thomas Hobbes put it, was ‘nasty, brutish, and short’. Fast forward to the present and man’s mark is unmistakable, the dawn of the ‘anthropocene’ testament to mesmerizing advances in technology - and a masochistic disregard for our ecosystems.
5 Industry Skills I Never Thought I Would Use in my PhD
Approaching an economics PhD similarly to a job helps students complete the journey in good shape. In business, people think in terms of products, projects, and stakeholders. To create a product, one needs an idea and a team. To implement the idea, one needs to arrange the process and set the deadlines. To get the product to consumers, one should market it properly. A PhD is similar. The thesis is one big project with chapters as products, and yourself, your supervisors, and the university as stakeholders. The difference is that you do the full round of tasks yourself: writing a research proposal (sales), implementing ideas (project management), and presenting the outcomes at conferences and in journals (public relations). I worked for a private think tank before starting my doctorate in economics; these five skills from my job were instrumental in helping me handle my PhD. Sales mindset Attempting to submit a winning research proposal is not unlike trying to market a new product. A successful venture solves someone’s problem and caters to someone’s needs. This someone then has high potential to become a customer. To facilitate this, a company creates brand awareness and reaches out to the target audience to gain clients. For big and expensive products, clever sales managers approach each client individually to ensure better conversion. When applied to academia, a research proposal is a sales letter, and a research idea is a future product. Academic research is rarely done in a vacuum, and a PhD is not an exception. Output is usually big, long, and expensive, which is why knowing the potential consumers of your research is crucial. Just like with target ads, research proposals and papers should be tailored to organizations, journals and individuals who will be reading and evaluating them. Be aware of who will be reading your text and plan the output accordingly. Project management A PhD is one big project with a clear delivery term, and thesis chapters are the products. In an industry job, project management lies at the core of product delivery. A project manager evaluates the feasibility of the work that needs to be done, arranges teams and keeps track of the project’s progress. They are responsible for the delivery being on time and within budget. In a PhD, you are your own project manager. Thesis chapters and papers are separate products. They need to be delivered to the stakeholders (including yourself) within the PhD track. Your supervisors, external co-authors, and fellow economics PhDs are your team. Due to the uncertainty accompanying the research output, project management may not work out perfectly. It is important to set clear and attainable goals. Deadlines and regular stand-up meetings with the team help one to not lose sight of the ultimate goal of submitting the manuscript. Public relations Visible research output contributes to one’s personal brand and improves one’s chances on the labor market. Public outreach shapes the company’s image. The way the brand is perceived by (potential) clients impacts profits. Open and responsive companies are more successful on the market. Businesses invest in marketing to sell products, build brand awareness, and retain customers. Research output, and the way it is distributed, shape the personal brand of its author. In an ideal world, academic research serves society. Thus, society should recognize the value that is being created within the university walls, that are often public institutions. One must ensure their research is readable and becomes visible to a broader audience. The skill to communicate and promote one’s work (and thus, one’s expertise) helps to stand out on the labor market. Networking Build your team, invest in connections and network from early stages. In business, networks build up the market. A local network, or people you work with, can directly impact a project’s success. Great teams create great things, and friendly relations with colleagues boost productivity and keep motivation up. Meanwhile, external networking opens up opportunities for new sales and collaboration. Businesses profit from stronger market presence. An economics PhD is mostly independent work. Yet, it is never done alone. A PhD is about the people who help make the thesis happen. Your supervisors are the default option for co-authors. They will also walk you to the labor market. Communication with fellow PhD candidates is a natural way to test new ideas and get critical feedback. At the same time, targeted networking outside the university helps to gain new stakeholders and make the research output visible. Conference connections often result in co-authorship, internship opportunities, and later in job offers. Career focus Stay focused on what comes after the degree and plan the career path accordingly. In industry, the path up the career ladder is clear, or at least predictable. Performance in line with KPIs and growing experience in the role lead to a promotion and higher paycheck. Extra effort is awarded with bonuses. During a PhD, the career ladder ceases to exist. It remains flat regardless of performance, which sometimes feels like a stagnation. Yet, a PhD has an end date. The accumulated effort starts to pay off after the defense. Entering the job market may feel intimidating after this period of “flatness”. Knowing your future path – academic or non-academic – from early stages helps to reduce uncertainty with job placements. Supervisors are your best career advisors, as they help to calibrate the research output and market it in line with the chosen career path. A PhD is difficult and does not suit everyone. Yet it is a unique period in life; when you are given all the time on Earth to satisfy intellectual curiosity, to learn and comprehend complex structures, and to dig deeper for the sake of getting the sacred truth. A little bit of patience and a business-like approach may help one get the most out of the experience.
Economics PhDs are aware of the transferable skills they should master to land a job in industry. But what about the reverse: is prior industry experience valuable for a PhD program?
At first glance, deflation may seem like a good thing. Falling prices mean that the purchasing power of money already in the economy increases. That is, the same amount of money can buy more goods and services. However, deflation is usually the consequence of a deteriorating economy, appearing alongside rising unemployment, wage cuts, and falling business profits. It also causes the real value of existing debt to increase, which makes paying off debt incredibly difficult, discouraging investment and possibly causing a debt crisis. Drivers of deflation Economists distinguish three central causes of deflation: Demand-driven deflation The main and most problematic cause of deflation is a drop in aggregate demand (AD) in reaction to a severe economic downturn – or the anticipation thereof. If consumers anticipate employment and incomes will fall, they reduce spending (the AD curve shifts inwards). Confronted with this decline in demand, companies will reduce aggregate supply (AS) and lower prices to compete for fewer customers. In this setting, deflation can easily become cumulative, creating a deflationary spiral that can intensify the economic downturn. If customers delay purchases in anticipation of further price declines, this reduction in spending will cause prices to fall, which will encourage more waiting and more price declines. Figure 1: Demand-driven deflation Supply-driven deflation On the contrary, “good” or “benign” deflation can occur when the aggregate supply of goods and services increases faster than aggregate demand, resulting in falling prices. This may be driven by a price decline for key input factors, or advances in technology resulting in rapid productivity improvements (the AS curve shifts outwards). In this case, deflation can be consistent with higher rates of economic growth. Figure 2: Supply-driven deflation Monetary deflation A reduction in money supply can also contribute to deflation. For example, if the interest rate is increased during a period of economic downturn, this would further reduce consumer spending. Contrarily, increasing the supply of money by lowering the interest rate can counter deflation. In the wake of the 2008 financial crisis and the COVID-19 pandemic, many advanced economies featured interest rates at record lows in order to stimulate growth. However, this low-rate environment means that central banks cannot reduce the interest rate further in case of deflationary pressures. This has been a main concern regarding the low interest rate environments prevalent in many advanced economies after crises, and is one reason why central bankers justify raising interest rates again. Good to know Prolonged periods of deflation are relatively rare, most commonly occurring in settings of severe recession. For example, in the United States, prices dropped substantially during the Great Depression, particularly between the years 1930 and 1933. This was due to a combination of factors, including overproduction in agriculture during the 1920s, a fall in aggregate demand, surging unemployment that peaked at 25%, as well as a fall in money supply due to bank failures. An exceptional example of chronic deflation is Japan. The country has suffered from mild but long-lasting deflation for more than two decades, since the mid-1990s. During the 1970s, Japan was the world’s second-largest economy after the United States and, by the late 1980s, ranked first in terms of per capita gross national product worldwide. However, in the early 1990s Japan entered a period of significant economic slowdown, characterized by low growth and deflation, which became known as the “Lost Decade”. The initial shock was linked to speculation that fueled stock market and real estate bubbles that eventually burst, resulting in a debt crisis and several government bailouts. The Bank of Japan has explored several measures to revive the national economy through expansive monetary policy. It adopted a zero-interest rate policy in 1999 and introduced quantitative easing – a type of monetary policy that injects liquidity to the financial system by purchases of government bonds – in 2001, ahead of other central banks. However, these measures could not create sufficient consumer and market confidence. Inflation expectations remained low, consumers continued to save, and economic activity and prices remained relatively stagnant.
Deflation describes a general decrease in the price level of goods and services in an economy. Put differently, deflation is negative inflation; unfamiliar readers are encouraged to take a look at Inflation first.
Public Economics & Economic Policy (JEL H)
The 'Recipe With No Ingredients' in Macroeconomics Textbooks
Almost fifty years ago William Nordhaus and James Tobin, both professors at Yale University and later Nobel Prize laureates in economics, wrote an article with which they intervened in the debate aroused by the well known Report to the Club of Rome, The Limits to Growth (Meadows et al, 1972)1. Among other things, they wrote: "The prevailing standard model of growth […] is basically a two-factor model in which production depends only on labor and reproducible capital. Land and [natural] resources, the third member of the classical triad, have generally been dropped" (Nordhaus and Tobin, 1973, p. 522). Nordhaus and Tobin made reference to an analytical tool largely used by the standard theory, the aggregate production function. That function is normally presented in the form Y = f(L, K), in which the determinants of product (Y) are labor (L) and capital (K) - the “factors of production”. Sometimes, along with labor and capital, “technology” or “efficiency” are considered causes of economic growth. One may wonder why natural resources, traditionally represented by “land”, were dropped from the production function. There are several answers. Firstly, some neoclassical economists in the late 19th and early 20th century included “land” in capital assets (see Daly and Cobb, 1989, pp. 109-113; Czech, 2013, pp. 91-116); so in the following years many economists didn’t see “land” in the function and simply “forgot” it, consequently forgetting natural resources. Secondly, after World War II the general atmosphere of economic optimism meant that many economists considered natural resources not scarce (see Nordhaus, 1974, p. 22, Daly, 1999a, p. 79), and so irrelevant for economics; if and when a single resource would became scarce, it could be substituted with another resource on the basis of the idea that "Nature imposes particular scarcities, not an inescapable general scarcity" (Barnett and Morse, 1963, p. 11). Moreover, many economists avoided the problem of absolute scarcity by admitting the substitutability of raw materials drawn from nature with man-made capital. According to my knowledge, the first explicit statement for this substitutability was made by Nordhaus and Tobin in the above mentioned paper (1973, pp. 522-3) and, despite the fact that for years ecological economists have repeated detailed criticisms on this point (see for example Daly, 1996, pp. 76- 8), the belief that capital may replace natural resources in production still remains widespread among neoclassical economists2. Finally, a not negligible reason for failing to consider natural resources was simply a matter of mathematical convenience, as the “two-factor model” is more manageable for mathematical processing and for explanations to students (Daly, 1996, p. 77; Czech, 2013, p. 87). Having cleared natural resources from the production function, standard economists neglected them from almost all their models and in general from their remarks, to such an extent that Robert M. Solow (emeritus professor at the MIT and Nobel Prize laureate) – author of the "standard model of growth" mentioned by Nordhaus and Tobin – came out with the following astonishing statement: "the world can, in effect, get along without natural resources" (Solow, 1974, p. 11)3. In this regard the ecological economist Herman Daly (former senior economist at the World Bank and emeritus professor at the School of Public Policy of University of Maryland - College Park) wrote: "His [of Solow] well-known work in growth theory is based on an aggregate production function in which resources do not appear at all, and which takes production to be a function only of capital and labor. […] Since the production function is often explained as a technical recipe, we might say that Solow’s recipe calls for making a cake with only the cook and his kitchen. We do not need flour, eggs, sugar etc., nor electricity or natural gas, nor even firewood" (Daly, 1999a, p. 77). In short, the neoclassical production function is a "recipe with no ingredients" (Daly, 1999b, p. 91). On the contrary, we know that production needs “ingredients”, namely raw materials derived from the stock of natural resources, transformed by labor and capital into products. Without natural resources the factors of production cannot produce anything, as everyone knows: "the smithy had been quiet for a month because they had no iron to make tools and horseshoes", wrote Ken Follett in a novel (Follett, 1996, p. 373); a neoclassical economist that reads that passage would think, instead, that the smithy could continue to produce only with blacksmiths (L), anvils, mallets and other equipment (K). The offhand attitude of standard economists towards natural resources is reflected in macroeconomics textbooks. In 1991 Herman Daly searched through the indexes of three leading (at that time) textbooks in macroeconomics and found "no entries under any of the following subjects: environment, natural resources, pollution, depletion" (Daly, 1991, p. 255)4. So professor Daly asked rhetorically: "Is it really the case, as prominent textbook writers seem to think, that macroeconomics has nothing to do with the environment?" (ib.). One can ask if nowadays, thirty years after the above mentioned Daly’s detection, the leading textbooks in macroeconomics recognize the fundamental role of natural resources in the production process and then for GDP growth. In general the answer is “NO”, even though some textbooks take a few steps forward. For example, “Economics” written by the late Paul Samuelson (professor at the MIT and winner of the Nobel Prize), renewed and updated by William Nordhaus, shows a production function with natural resources along with labor and capital (Samuelson and Nordhaus, 2010, p. 503). However this is not a satisfactory solution to consider natural resources, as Nicholas Georgescu-Roegen − one of the "pioneers of Economics of Sustainable Development" (Daly, 1996, p. 169) − showed (Georgescu-Roegen, 1979, p. 17; Georgescu Roegen, 1984). In brief, the reason is that raw materials (i.e. natural resources) perform a different role in the production process compared to labor and capital, as well explained by the following quote of Herman Daly and Joshua Farley: "Labor and capital are transforming agents, funds that transform the flow of resources into a flow of product, but are not themselves embodied physically in the product. Labor and capital are agents of transformation (efficient causes, or fund-services), while resources are that which is being transformed (material causes, or stock flows). The neoclassical production function abstracts from the difference between material and efficient causes of production and considers both to be equivalent […]" (Daly and Farley, 2011, p. 157). For this reason, considering raw materials a factor of production on the same level of labor and capital is incorrect. In the production function the factors of production are substitutable: we could produce something only by means of labor or only by means of capital (moving on the isoquant line). But in reality we couldn’t produce anything without raw materials: the baker cannot produce bread without water, flour and energy for heating the oven, precisely because production requires a flow of natural resources. The three-factor production function reported in Samuelson and Nordhaus’ “Economics” raises the logical and economic criticisms I mentioned, but at least it considers the importance of natural resources in the production process. Instead, other textbooks significantly underestimate the role of natural resources. For example, in the handbook written by two very authoritative Princeton University economists, William Baumol and Alan Blinder, natural resources and raw materials are rightly considered inputs of the production process (Baumol and Blinder, 2016, pp. 22, 430), however, when they develop their analysis using the production function, they consider only labor and capital, natural resources disappear and it seems that they are no longer needed to generate GDP: "The production function tells us how much output the economy can produce from the available supplies of labor and capital, given the state of technology" (Baumol and Blinder, 2016, p. 121; see also pp. 104ss.). The same goes for the book Macroeconomics published by Olivier Blanchard (MIT, former chief economist of IMF) and David R. Johnson (W. Laurier University): the aggregate production function is introduced stating that firms use "also raw materials" (Blanchard and Johnson, 2012, p. 122), but then these economists forget this statement and raw materials vanish5; in this book there are "no entries under any of the following subjects: environment, natural resources, pollution, depletion", just like in the textbooks examined by Daly in the early nineties. Let us examine now the interesting case of the textbook written a few years ago by Harvard professor N. Gregory Mankiw. We can read: "An economy’s output of goods and services - its GDP - depends on: (1) its quantity of inputs, called the factors of production, and (2) its ability to turn inputs into output, as represented by the production function" (Mankiw, 2010, p. 47). Therefore, according to this statement, production does not depend on raw materials and available energy resources derived from nature, which are not considered a factor apart, nor are they included in capital6: they simply “do not exist”. The only "natural" thing this text deals with is the unemployment rate. It is important to note, in the above Mankiw’s statement, the message launched to students according to which the economy "turns inputs into output". The concept is reiterated with these words: "[...] many economists consider the Cobb-Douglas production function a good approximation of how the actual economy turns capital and labor into goods and services" (Mankiw, 2010, p. 527). The same was stated by the aforementioned Baumol and Blinder: "It is useful to think of an economic system as a machine that takes inputs, such as labor and other things we call factors of production and transforms them into outputs, or the things people want to consume" (Baumol, Blinder, 2016, p. 22). The students who are trained on these texts, therefore, learn that the blacksmith who produces horseshoes and metal railings does not need either raw iron and coal to melt it (contrarily to what Ken Follett wrote): these materials can remain in mines, since what the good craftsman would do is to transform himself, the anvil, the mallet and other equipment ("labor and other things we call factors of production") into metal objects. And in a canned tuna factory, the workers and the canning equipment would turn, according to Mankiw, Baumol and Blinder, into tasty tuna steaks. Mankiw, as we have seen, affirms that "many economists" think so, but it seems quite obvious that they are wrong, given that, as we have said, are not capital and labor to be transformed into products, but raw materials, i.e. natural resources (and to make this transformation is necessary an input of energy). It should be added that fortunately this is the way it goes, because workers would not be happy at all to be transformed into goods or services! However, I must admit that the claims of Mankiw, Baumol and Blinder are sometimes verified: for example, in the Chicago of the early twentieth century, the workers who fell into the boilers used by the canned meat industry were actually transformed into products, as the writer Upton Sinclair recounted in his investigative novel The Jungle (1906). To confirm his vision Mankiw gives the following example: "… consider production at a bakery: the kitchen and its equipment are the bakery’s capital; the workers hired to make bread are its labor and the loaves of bread are its output. The bakery’s production function shows that the number of loaves produced depends on the amount of equipment and the number of workers" (Mankiw, 2010, p. 48). And not also from the quantity of flour, yeast, water and fuel for heating the oven? Fortunately, professor Mankiw in a more recent textbook remembered natural resources (or “land”) and considered them a factor of production (Mankiw, 2017, pp. 22, 242), in line with Samuelson and Nordhaus’ textbook. As we have seen, it is not a satisfactory approach, but at least natural resources are not completely neglected. Instead, in the textbook published by Charles I. Jones (Stanford University) we can read an example similar to that of Mankiw’s bakery, without any reference to the input of natural resources transformed to obtain products. Jones’s example concerns the production of ice cream: the "message" is that ice cream makers (labor) produce ice cream only by means of equipment (capital), without water, milk, sugar and chocolate (or powders); and in Jones’ ice-cream factory the equipment is still, since energy to operate the machinery is not mentioned (Jones, 2014, p. 70). Faced with arguments of this kind Herman Daly wrote the following words: "The neoclassical production function is worse than alchemy [...] Neoclassical economists, without blushing, write equations in which material output flows require no material input flows" (Daly, 1999b, p. 91). This fast survey of macroeconomics textbooks is very insightful regarding the attitude of standard economists about natural resources. Daly and Farley noted that "Ignoring the necessary role of natural resources in production is part of a pattern in neoclassical economics that has the effect of denying that nature has any role in economic life" (Daly and Farley p. 160). This pattern can be explained with the Kuhnian paradigm of neoclassical economics (ib., pp. 23-4), a paradigm that denies the absolute scarcity problem for natural resources in order not to question the dogma of infinite growth. The traditional production function is particularly suited to that paradigm. If the production function envisages only labor and capital, natural resources are neglected, with bad consequences on sustainability: if, just to say, to model the production of canned tuna one uses an analytical tool which considers only workers (the labor factor) and canning equipment (the capital factor) and not caught tuna, the problem of overfishing does not arise by definition. Moreover, if natural resources are inserted in the production function as a factor of production like labor and capital, they are automatically considered substitutable with these other two factors, and this is absurd, as workers and canning equipment cannot substitute tuna. To conclude, a correct representation of the production process implies the abandonment of the “recipe with no ingredients”. Metaphor aside, economics must stop using the traditional approach based on the production function in which natural resources are almost or completely neglected, and take an approach in which natural resources are explicitly represented as a flow of material taken from natural capital. This approach, which is that of ecological economics, should inspire textbooks used in universities. In this way young students in economics will not absorb misleading knowledge anymore and, once they become economists, they will be able to collaborate with other scientists and with all citizens to use natural resources correctly in order to preserve the ecosystem on which our economy and the life of all creatures depend. * The author is grateful to professor Herman E. Daly for the kind and helpful suggestions. This article reproduces with adaptations a paragraph of a more extensive paper published in Italian on the blog apocalottimismo.it. Notes 1 For an exhaustive overview of the content of the Meadow’s Report, of the criticisms it received and of the developments it has had, see Victor (2019, pp. 168-174). 2 In a treatise written in 2003 important environmental economists wrote that "… many economists believe that evidence points to reasonably high substitution possibilities (although there is by no means a consensus on this) […] between resources and reproducible capital" (Perman et al, 2003, p. 478). More recently an economist expert in these issues wrote that "In the majority of papers on economic growth and natural resource usage the assumption of substitutability between natural resource usage (as an energy source) and physical capital is made" (Malaczewski, 2019, p. 2207). 3 Georgescu-Roegen commented with the following words: "One must have a very erroneous view of the economic process as a whole not to see that there are no material factors other than natural resources. To maintain further that 'the world can, in effect, get along without natural resources' is to ignore the difference between the actual world and the Garden of Eden" (Georgescu Roegen, 1975, p. 361). 4 The three textbooks were: Dornbusch R. and Fischer S. (1987), Macroeconomics, McGraw-Hill, 4th ed.; Hall R. E. and Taylor J.B. (1988), Macroeconomics, W. W. Norton, 2nd ed.; Barro R. J. (1987), Macroeconomics, Wiley and Sons, 2nd ed. 5 Blanchard and Johnson only deal with oil in a box that shows the different effects of the increase in the price of crude oil in the 1970s and 2000s (p. 153). 6 From the definition given by Mankiw, it is clear that he does not consider raw materials as a component of capital: "capital is the set of tools that workers use: the construction worker’s crane, the accountant’s calculator, and this author’s personal computer" (Mankiw, 2010, p. 47). References Barnett H. J. and Morse C. (1963), Scarcity and Growth: the Economics of Natural Resource Availability, Johns Hopkins Univ. Press. Baumol W. J. and Blinder A. S. (2016), Macroeconomics – Principles and Policies, 13th ed., South Western, Cengage Learning. Blanchard O. and Johnson D. R., (2012), Macroeconomics, Pearson. Czech B. (2013), Supply Shock. Economic Growth at the Crossroads and the Steady State Revolution, New Society Publishers. Daly H. E. (1991), Towards an Environmental Macroeconomics, Land Economics, Vol. 67, No. 2, pp. 255-9. Daly H. E. (1996), Beyond Growth: The Economics of Sustainable Development, Beacon Press. Daly H. E. (1999a), Georgescu-Roegen versus Solow/Stiglitz, in Ecological Economics and the Ecology of Economics – Essays in Criticism, E. Elgar (orig. in Ecological Economics, Vol. 22, No. 3). Daly H. E. (1999b) A Note on Neoclassical Theory and Alchemy, in Ecological Economics […], op. cit. Daly H. E. and Cobb, J.B. (1989), For the Common Good […], Beacon Press. Daly H. E. and Farley J. (2011), Ecological Economics. Principles and Applications, Island Press, 2nd ed. Follett K. (1996), A Place Called Freedom, Fawcett Crest. Georgescu-Roegen N. (1975), Energy and Economic Myths, The Southern Economic Journal, Vol. 41, N. 3, pp. 347-381. Georgescu-Roegen N. (1979), Energy Analysis and Economic Valuation, The Southern Economic Journal, Vol. 45, N. 4, pp. 1023-1058. Georgescu-Roegen N. (1984), Feasible recipes versus viable technologies, Atlantic Economic Journal, Vol. 12, N. 1, pp. 21-31 Jones C. I. (2014), Macroeconomics, Third Edition, W. W. Norton & Company. Malaczewski M. (2019), Substitutes or complements? Relationship between natural resources and physical capital – a few stylised facts, Economic Research - Ekonomska Istraživanja, 32:1, 2195-2211. (https://www.tandfonline.com/doi/full/10.1080/1331677X.2019.1637762) Mankiw N. G. (2010), Macroeconomics, 7th ed., Worth Publishers. Mankiw N. G. (2018), Principles of Macroeconomics, 8th ed., Cengage Learning. Meadows D. 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Production is interaction of man and nature Karl Polanyi, The Great Transformation
Total Surplus In a stylized model, the total market surplus denotes the total welfare of all participants in a market. It is the sum of consumer surplus and producer surplus, which can be understood as the net gain to society from all trades (or transactions) that are made in that market. An individual's consumer surplus is the difference between the highest price they are willing to pay for a product and the price they actually pay. The area below the demand curve and above the market price is the total consumer surplus summed up for all consumers in the market. A producer's surplus is the difference between the lowest price they would be willing to accept, considering production costs, and the price the product is actually sold for. The area above the market supply curve and below the market price is the total producer surplus summed up for all producers in the market. In the market equilibrium where supply equals demand (denoted by P* and Q* in the figure below), the sum of consumer and producer surplus – and thus total welfare – is maximized. Figure 1: Welfare maximized in a perfectly competitive market In case of market inefficiencies, where the quantity traded on the market diverges from the socially efficient outcome, social welfare remains below the optimal outcome. For example, if market power allows producers to charge a price P' > P*, this reduces the quantity traded to Q' < Q*. Figure 2: Welfare reduced in an inefficient market exhibiting deadweight loss In this situation, the consumer surplus (CS) is lower than in equilibrium: \begin{equation*} CS' = A < CS^* = A + B + D, \end{equation*} while the producer surplus (PS) is higher than in equilibrium: \begin{equation*} PS' = B + C > PS^* = C + E. \end{equation*} While area B is transferred from consumers to producers as a consequence of a price increase, areas D + E reflect the deadweight welfare loss; that is, the cost to society created by market inefficiency: \begin{equation*} W^* - W' = (CS^* + PS^*)-(CS' + PS') = D + E. \end{equation*} In situations where market failure leads to an inefficient distribution of goods and services – like the one illustrated above – it is possible to find an alternative allocation that makes at least one person better off, without making anyone else worse off – thus improving social welfare. In these situations, government intervention can potentially improve everybody’s welfare. In the above example, if prices and quantities were set at the equilibrium values (P*, Q*), the government could charge a lump-sum consumer tax of the size of area B. Then, it could provide this amount as a lump-sum subsidy to producers, increasing the consumer surplus by area D and the producer surplus by area E. This would eliminate the deadweight loss; the total surplus would be the same as in the competitive equilibrium. Pareto Efficient Allocations An allocation is said to be Pareto efficient (or Pareto optimal) when no further exchange is feasible that would make at least one person better off without making any other person worse off. The first theorem of welfare economics states that when there exists (1) no externality; (2) perfect competition; (3) perfect information (as opposed to asymmetric information); and (4) fully rational agents, then all competitive equilibria are Pareto efficient. These equilibria form the Pareto frontier (also called Pareto set). This is illustrated in the figure below for an economy with two agents (1 and 2). The blue-shaded area represents all combinations in utility (u) that would be feasible to attain, but are not efficient since resources are left unused. The orange line indicates the Pareto frontier where all resources are used and nobody can be made better off without making someone else worse off. Importantly, Pareto efficiency defines optimality only in a limited sense, as it does not allow "fairness" ranking between different Pareto efficient allocations. For instance, it does not distinguish between outcomes A and B in the figure below, even though outcome A generates substantial inequality compared to outcome B. Figure 3: a Pareto frontier Social Welfare Function To rank different resource allocations in terms of their social desirability, economists typically use a social welfare function, W(u1, u2,...,uH). The social welfare function is non-decreasing in individual well-being, W'(uH) > 0, and therefore achieves a maximum at some Pareto optimum. To give a more concrete example, imagine a situation at a daycare center. There are two children, Lisa (L) and Tom (T), and two toys, a book (B) and a puzzle (P). The teacher is thinking about how to allocate the toys between the children. Both children like both toys, but Lisa likes puzzles better than books, while Tom likes both equally. Let's assume that Lisa derives utility uL(P) = 5 from solving the puzzle, and utility uL(B) = 2 from reading the book. Tom derives utility uT(P) = uT(B) = 2 from either activity. The following allocations and utility combinations would be feasible, assuming an additive utility and social welfare function: \begin{equation*} \text{Lisa: B,P; Tom:} \emptyset \quad \Rightarrow \quad W = u_L(P,B) + u_T(\emptyset) = (5+2) + 0 = 7 \\ \text{Lisa: B; Tom: P} \quad \Rightarrow \quad W = u_L(B) + u_T(P) = 2 + 2 = 4 \\ \text{Lisa: P; Tom: B} \quad \Rightarrow \quad W = u_L(P) + u_T(B) = 5 + 2 = 7 \\ \text{Lisa: } \emptyset; \text{Tom: B,P} \quad \Rightarrow \quad W = u_L(\emptyset) + u_T(P,B) = 0 + (2+2) = 4 \end{equation*} In this setting, the second allocation would not be efficient. By exchanging the toys, a Pareto improvement can be reached: If Tom gives the puzzle to Lisa and Lisa gives the book to Tom, Lisa's utility increases, while Tom's utility stays the same. Similarly, the fourth allocation leaves room for improvement. If Tom gave the puzzle to Lisa and only kept the book, aggregate welfare would increase. However, this would not be Pareto efficient, because Tom's utility would decrease unless he was compensated somehow. Lisa could compensate Tom for giving away the puzzle, as her welfare gain from the exchange is larger than his welfare loss. For example, Lisa could offer to read the book to Tom, if he gave her the puzzle. If this compensation (C) brings a utility cost of uL(C) < uL(P) for Lisa and a utility gain of uT(C) ≥ uT(P) for Tom, then a Pareto improvement is reached by `trading' the puzzle for compensation. If, say, reading the book to Tom brings a utility cost of uT(C) = 2 for Lisa and a utility gain of uT(C) = 2 for Tom, aggregate welfare after the exchange would be W = uL(P) - uL(C) + uT(B) + uT(C) = (5-2) + (2+2) = 7. In a market with money, the obvious solution is to have adult Lisa pay adult Tom an amount of money x that satisfies (if utility is measured in terms of money) uT(P) ≤ x ≤ uL(P). Both the first and the third allocation in the example list above are Pareto efficient. No child can be made better off without making the other worse off. However, how these allocations are ranked depends on the functional form of the social welfare function. So far, we assumed an additive structure: Lisa's and Tom's utility are perfect substitutes. We could also assume a multiplicative structure, in which case Lisa's and Tom's utility are supplements, and inequality is penalized. This is typically true in real life, since there are diminishing marginal returns to the enjoyment of almost everything; a poorer person values an extra euro more than a rich person does. In this case, the third allocation maximizes the social welfare at the daycare center: \begin{equation*} \text{Lisa: B,P; Tom:} \emptyset \quad \Rightarrow \quad W = u_L(P,B) \times u_T(\emptyset) = (5+2) \times 0 = 0 \end{equation*} \begin{equation*} \text{Lisa: B; Tom: P} \quad \Rightarrow \quad W = u_L(B) \times u_T(P) = 2 \times 2 = 4 \end{equation*} \begin{equation*} \text{Lisa: P; Tom: B} \quad \Rightarrow \quad W = u_L(P) \times u_T(B) = 5 \times 2 = 10 \end{equation*} \begin{equation*} \text{Lisa: } \emptyset; \text{Tom: B,P} \quad \Rightarrow \quad W = u_L(\emptyset) \times u_T(P,B) = 0 \times (2+2) = 0 \end{equation*} According to the second welfare theorem, each Pareto optimum can be achieved via a competitive equilibrium, if lump-sum taxes and transfers are available to shift individual endowments. For instance, if initial endowments yield point A in the figure above and our social welfare function prefers point B, we can impose a lump-sum tax on individual 2 and give it to individual 1 to induce this shift in the resulting equilibrium. In the daycare example, if Lisa decided to take the book and the puzzle (allocation 1), the teacher could intervene and take the book away from Lisa to give it to Tom (allocation 2), thereby shifting between two Pareto efficient allocations to achieve the one that is socially optimal. Unfortunately, in practice, the government’s ability to use lump-sum taxes to improve the distribution of resources in a society is limited. A lump-sum tax is a fixed amount that individuals pay based on their characteristics, independent of their choices. For example, imagine an economy with 10 persons, of whom 5 have an initial wealth of €100, while the other 5 have an initial wealth of €0. Assume that social welfare would be maximized if those with €100 paid €50 to those who do not have anything. However, this reallocation may eliminate the individuals' incentives to generate future wealth, if all gains are redistributed to be shared equally independent of each individual's work effort. Moreover, the information on the initial wealth may not be directly observable to the government. Good to Know In practice, government decisions are rarely made in situations where Pareto improvements are feasible. Most often, the government will face a trade-off between different groups' needs and interests, and the implications of different decisions on aggregate welfare may not always be clear. For example, assume that the government is considering building a new highway. Those wanting to use the highway to arrive at work faster or transport their products quicker are willing to pay a user fee, which would cover the costs of construction and maintenance. At first glance, the construction of this highway may appear to be a Pareto improvement: It will clearly make some individuals better off. But, there will most likely also be individuals who are adversely affected by the highway. Traffic delays and congestion may bring negative side-effects during construction, and entire neighborhoods may remain negatively affected by the noise from the highway. In this case, it may still be possible for the government to reduce the negative effects (e.g., build a noise protection wall) and/or compensate those who remain negatively affected. Balancing conflicting interests will be yet more challenging in times of major crises, as the COVID-19 pandemic highlighted. Strategies used to manage public health risks themselves pose risks. The healthcare sector faced risks in non-pandemic areas due to the diversion of resources to treat and fight COVID-19. Meanwhile, businesses, potential victims of domestic violence, and children's education are all areas where pandemic response protocols may have complicated a situation and made some groups relatively worse off than the average. Expert advice can help to clarify some of these trade-offs, but comparing the individual gains and losses arising from each policy option, and finding the socially optimal solution, will be less straightforward than the simple examples introduced above may suggest.
Welfare economics is the study of how a given allocation of goods and resources in a society affects economic well-being. It seeks to guide public policy toward an allocation that benefits society overall. As such, it provides the tools to compare between different resource allocations and evaluate them from a social welfare perspective – or in layman's terms, to judge how "fair" those allocations are. There are three core concepts used in welfare analysis: total surplus, allocative efficiency, and the social welfare function.
Policy or academic economist: Which should I become?
This might come as a surprise to someone outside the field, but economists come in different packaging. The two most common career options – policy and academia – offer widely different paths for economists. This begs the question, especially for the upcoming economics graduate: what are the differences? I have tasted both worlds myself: after working for an economic think tank, I returned to academia to pursue a PhD in economics. Although both paths offer an intellectually challenging environment, and my research continues to be policy-oriented, I clearly see differences in the research scope, working process, and the kind of outcome that is expected from me. Solving vs Finding Problems The most radical and noticeable difference between policy and academic economists is that the former work with the problem they are given, whereas the latter contemplate what problems are worth greater attention. For example, the government is not happy with the unemployment rate in the economy. It has increased by 2 percentage points over the past year. One of the options to bring people back into the workforce is to introduce active labor market policies, ranging from funded retraining in the workplace to career counseling programs for the unemployed. A policy economist would be hired to help design a solution. Thus, the problem is given to them. In academia, on the contrary, people have the opportunity to choose the topic they are genuinely interested in. They quest for a problem or a research question themselves, rather than have it dropped from above. So, they can choose between studying labor market policies or voting behavior of single mothers, for example. Or they may choose to study anything else within the scope of their expertise. Theoretical Mechanisms vs Practical Implementations When the problem is given to a policy economist, their task is to find a viable solution, often within the given budget constraint, so as to answer the how question. When an academic researcher faces the same issue, their task is to evaluate what works in principle, so as to answer the what question. Let’s say the government is still serious about combating unemployment. The task of a policy economist would be to study the evidence, including the world’s best practices, and propose an economic policy design that would best suit the country’s context. They do not have the luxury of time, and they have a strict budget they must adhere to. In contrast, the task of an academic economist would be to use large datasets, perhaps from other similar countries, to assess the effectiveness of each existing policy option (or perhaps theorize a new one). This is not a short project, neither is it context-specific. In academia, researchers are interested in the universal mechanism rather than the solution to a specific problem. Well-Rounded Professional vs Specialized Expert Policy economists should be equipped to tackle any problem that is thrown at them, so developing a working knowledge across a range of topics is vital. In academia, narrow expertise is valued, so an academic economist would go deeper in one direction. Considering the same unemployment issue, a policy economist is expected to be aware of the main theories and empirical evidence in Labor Economics, too. What is also expected is that they are well aware of the context: how the labor market functions in their country, including a good grasp of legislature, market trends, and existing government policies. An academic economist will devote much more time to a narrow slice of the issue, which often entails researching a pattern that fills in the patches in the literature. For example, they would research whether giving study vouchers to the unemployed increases their chances to get a job. That is why people in academia often specialize in one or two research areas, in this case, in Labor Economics. Persuasion Skills vs Methodological Precision The policy world is solution-oriented, so mobilizing as many people as possible around the policy idea is a success factor. Meanwhile, academia is expected to generate new scientific evidence, so focus is on the way the problem is approached. The task of a policy economist is to persuade a group of policymakers that the idea will solve the problem of their concern with a positive impact on the people and economy. As the stakeholders are often not economists themselves, a policy economist should know how to speak to them in a language that they understand with a degree of assertiveness. The goal is to push the idea through, as this is how a think tank makes its business; by having its policy proposals adopted and enacted. What academic economists are concerned with is how their analysis is implemented. Methodology plays an important role, and so does the way the hypotheses are framed. The output should shed new light on the old problem, methodologically or theory-wise, or discover a new phenomenon using known concepts. The goal is to share the result with the community of fellow, let’s say, labor economists, who speak the same language. Making Changes vs Furthering Knowledge Policy economists are hired to find a feasible solution to a time-specific economic problem, so the outcome of their work is a well-designed policy that brings the expected results. Academia, in contrast, produces new knowledge, so the outcome is measured in terms of the contribution that is being made to existing scholarship. Following our unemployment case, a policy economist will bring a paper to policymakers stating which of the options would work best and why. In addition to a detailed policy design, which is an obvious deliverable, a policy economist should estimate the costs and benefits of the initiative, and whether legislation needs to be amended to accommodate it. Ideally, a policy proposal turns into an act. Meanwhile, a major goal of academic output is publication in a reputable journal so that other members of the research community can get insights into a particular mechanism. Although some academic works explicitly discuss policy implications, they are often universal and not context-specific. My experience: the pros and cons of each Which career path to follow depends on one’s preferences for maintaining a wide view (policy economist) or developing a deep expertise (academic economist), changing projects quickly (policy) or slowly (academia), and communicating within (academia) or outside (policy) the professional community of economists. When I worked for a think tank, I often interacted with professionals from both the public and private sectors. Policies are made by people and for people, and as people differ, so did my approach to each policy – this required a lot of mental load and empathy. I genuinely enjoy communicating with people, so personally I found this a positive aspect of the job rather than a burden. In academia, interactions are less frequent and often within the same research communities, which is perhaps not so attractive for more extroverted people. On the other hand, as a policy economist, I did not have much of a choice of which topic to work on. Most projects were exciting and absorbing, while some just had to be done, and I could not say no or transfer my tasks to a colleague. Now that I have PhD status, I have the freedom of choice. I am responsible for the gratification I am getting from my intellectual work, and I can drop the projects I do not feel excited about. Loving what you research is crucial in academia. Although often treated as orthogonal, the paths of policy and academic economists have a lot in common. Both must have deep knowledge of economics, and both probably receive many comments about financial markets at parties. Moreover, one cannot exist without the other. Policy people need academics to generate new knowledge usable in real life, whereas academia needs real-world policy problems to evaluate, and to provide inspiration for new avenues of research. Trying out both worlds can help an economist know which they prefer, and gain an appreciation for both. What eventually matters is that one genuinely enjoys what they are doing.
“I am an economist,” I once proudly mentioned at a party, in a round of small talk. “Oh, so you do a lot of money counting and financial reporting?” was the reply I heard, like so many economics graduates before me. “Nah, let’s leave that to the business and finance professionals,” I answered. But what do real economists do exactly?
Drivers of inflation Economists distinguish three central causes of inflation: While the first and second describe imbalances on product markets, the third is the result of domestic monetary policy. Demand-pull inflation Demand-pull inflation occurs when consumer demand outpaces supply. That is, aggregate demand (AD) rises faster than production capacity and thus aggregate supply (AS). This type of inflation is typically associated with strong economic growth – or the anticipation thereof. When consumers are confident that the economy is performing well, they expect income and employment to rise, and increase spending (the AD curve shifts outwards, depicted below). Other causes of a rise in demand may include tax cuts, which increase consumers’ discretionary income, or higher government spending. Figure 1: A depiction of demand-pull inflation Cost-push inflation Cost-push inflation occurs when the aggregate supply of goods is reduced (the AS curve shifts inwards, as depicted below), while aggregate demand remains the same, thus driving up prices. This will often be caused by an increase in production costs, for example due to rising prices of raw materials. The higher production costs are passed on to consumers in the form of higher prices for finished goods. A common cause of cost-push inflation are rising oil or gas prices. These affect transport costs and thereby lead to higher prices for a range of products. Natural disasters can also cause shortages in the supply of goods that drive up prices. For example, droughts or floods affect crop and pasture production and thereby can cause spikes in food prices. Figure 2: a depiction of cost-push inflation Monetary inflation According to the quantity theory of money, excess money creation is the primary driver of inflation. If money supply outpaces output growth, there will be more money available in the economy to spend on the same number of goods, thus causing the value of money to fall. Central banks use monetary policy to affect the amount of money circulating in the economy. For example, common policy instruments to increase money supply include decreasing the interest rate, which reduces saving and increases spending; purchasing government bonds, which injects money to the economy; and lowering the reserve requirements for banks, which allows them to lend out more money. In principle, central banks can also print more paper currency. However, historically instances of printing too much money in order to pay off debts have been the primary cause of very high and rapidly accelerating inflation. This situation is described as hyperinflation. An alternative strategy used to increase the money supply is quantitative easing. This is where the central bank purchases long-term securities from the open market in order to increase the money supply. This strategy was recently used by the US central bank during the COVID-19 crisis to lessen the severity of the economic downturn. Costs of inflation and countermeasures Low and steady inflation can be a sign of economic growth. When the economy is performing well and unemployment is low, shortages in labor can occur. In this case, companies will increase wages to attract workers. This causes an increase in production costs, which translates into higher prices of goods for final consumption. At the same time, the rise in wages raises incomes and thus consumer spending, such that demand keeps up with the price increase. However, especially in cases of cost-pull and monetary inflation, the prices for goods tend to change faster than wages, which are usually set by employment contracts. If inflation outpaces wage growth, this reduces the purchasing power of consumers - that is, in an inflationary environment, the same amount of money allows consumers to buy less goods than before. This erosion of real income causes a decline in living standards and is the biggest cost of inflation. In cases of hyperinflation, prices increase by 50 per cent or more within a month, with devastating effects for the economy and governance. A low, stable, and predictable rate of inflation makes it easier for households and businesses to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy. This is why price stability is an important target of monetary policy. Governments and central banks use various instruments of monetary policy to control inflation. The most common measures are adjustments to interest rates. Higher interest rates reduce spending and increase saving. With less disposable income being spent, the economy slows and inflation decreases. Measures of Inflation The percentage change in the consumer price index (CPI) over a given period is the most widely used measure of inflation. The CPI measures price changes for a nationally representative basket of everyday goods – including items such as milk, fruit, cereal, and coffee, as well as expenses for housing, transport, clothing, health, education, and recreational activities. It is indexed to the cost of this basket in a base period and then tracks its evolution, to indicate whether prices are rising (inflation) or decreasing (deflation). An alternative way to calculate the inflation rate is the percentage change in the GDP deflator from the previous year’s GDP deflator value. The GDP gives the market value of all final goods and services produced within a country during a given time period, and the GDP deflator measures how the prices of these goods have changed over time, relative to a base period. The items and quantities that enter into the calculation of GDP vary year by year and are therefore more current than the mostly fixed CPI basket. GDP, however, also includes non-consumer items (such as military spending), which is why the CPI basket is the preferred indicator for changes in the cost of living in a country. Good to know The main task of the European Central Bank (ECB) is to maintain price stability. The Harmonised Index of Consumer Prices (HICP) is used to measure changes in the prices of consumer goods and services purchased by households in the euro area. It is 'harmonized' in the sense that all the countries in the euro area follow the same methodology to ensure comparability. Between 2000 and 2021, the average inflation rate in the euro area was 1.7%. Inflation was relatively stable at around 2% in the early 2000s, before rising to up to 4% during the financial crisis of 2007-2008. Since then, there have been stronger fluctuations. In September 2020, the euro zone glided into deflation (negative inflation) for the first time in four years, which was followed by a sharp rise to 5% inflation in December 2021. The pronounced rise in the euro area HICP inflation in late 2021 and the start of 2022 was caused by energy price developments. Rising energy prices pushed up expenses for housing (electricity, gas, etc.) and transport by about 10% from November to December 2021. Energy price inflation was driven both by oil price increases and by base effects linked to the COVID-19-related collapse in oil prices at the beginning of 2020.
Inflation describes an increase in the general price level in an economy over a certain period, usually a year. It is typically calculated for a broad basket of goods and services, reflecting changes in the overall cost of living. However, it can also be more narrowly defined for a set of specific goods, for example to reflect only price changes in the costs for food, housing, energy, or transportation.
To create the CPI, national statistical agencies usually use information from household surveys to construct a market basket of goods and services that are commonly consumed in the country. They then track the cost of purchasing this basket over time. The basket includes items of daily life like milk, fruit, cereal, and coffee, as well as expenses for housing, transport, clothing, health, education, and recreational activities. Calculating the CPI The CPI is calculated as the cost of this basket at a given point in time, Ct, relative to its cost in the base year, C0: \begin{equation*} \mathit{CPI}_t= \frac{\mathit{C}_t}{\mathit{C}_{0}}*100 \end{equation*} As an example, imagine an economy with two goods, A and B, that are consumed at two points in time, t = 0 and t = 1. The realized prices (P) and quantities (Q) are as follows: t = 0 (base) t = 1 Q P Q P Good A 10 €50 8 €55 Good B 80 €20 83 €22 How can we calculate the CPI for this economy? Let’s assume that the consumed quantities of goods A and B in t = 1 had remained at the same levels as in t = 0. We can then calculate the cost of the consumption basket as: \begin{equation*} \mathit{C}_0= \sum(\text{Q}_0*\text{P}_0) = (10 * €50) + (80 * €20) = €2,100 \end{equation*} \begin{equation*} \mathit{C}_1= \sum(\text{Q}_0*\text{P}_1) = (10 * €55) + (80 * €22) = €2,310 \end{equation*} The CPI would then be calculated as: \begin{equation*} \mathit{CPI}_0= \frac{\mathit{C}_0}{\mathit{C}_{0}} * 100 = 100 \text{ (base period)} \end{equation*} \begin{equation*} \mathit{CPI}_1= \frac{\mathit{C}_1}{\mathit{C}_{0}} * 100 = \frac{€2,310}{€2,100} * 100 = 110 \end{equation*} Keeping the items and their quantities in the consumption basket constant over time may seem odd, but this ensures comparability and allows us to isolate the price effect on what is purchased. In reality, consumers will react to these price changes depending on the elasticity and inelasticity of demand. Therefore, to account for changes in consumer habits and reflect changes in the actual cost of living, it is important to update the CPI basket periodically (ideally at least every five years). Updating the basket is costly, as it requires the collection of information from large household surveys, which is why this is usually only done in intervals of several years. For example, compared to the 1990s, in the 2020s CDs/DVDs and their players are no longer widely purchased and shouldn’t be included in the bundle anymore. Meanwhile, internet services and smartphones should enter the consumption basket as they are very commonly purchased nowadays. In the example above, we observe that the consumed quantity of good A decreased in face of the price increase, while the consumed quantity of good B increased in spite of the rise in prices. If we had calculated the value of the consumption basket at current quantities, this would be: \begin{equation*} \mathit{C}_1= \sum(\text{Q}_1*\text{P}_1) = (8 * €55) + (83 * €22) = €2,266 \text{ and} \end{equation*} \begin{equation*} \mathit{CPI}_1= \frac{\text{C}_1}{\text{C}_0} * 100 = \frac{€2,266}{€2,100} * 100 = 107.9 \end{equation*} In our example, accounting for changes in consumption patterns thus renders a smaller (and more accurate) rise in the cost of living than when the quantities are held constant. Measuring inflation The rate of inflation is easy to calculate once CPI is measured. It is the percentage change in the CPI between two points in time, where the CPI in the base year is indexed to 100. In our example, the CPI increased from 100 in the base year to 110 in the current year, which means that inflation is 10% over the period. Another method to calculate inflation uses the GDP Deflator, though the CPI method is more common. The GDP Deflator’s advantage over the CPI is that it is not based on a fixed basket of goods and services, since GDP always reflects current production patterns. However, it also takes account of some prices that aren’t relevant to consumers - like military spending - so the CPI is still preferred in many cases. Of course, every individual is likely to purchase a slightly unique basket of goods, which may differ a lot from the official average basket of goods used to calculate the CPI. Thus, when inflation is reported, while it normally represents a good indicator of the state of the economy at macroeconomic level, it may not be appropriate for everyone. Some people will have higher or lower personal inflation rates than others. Good to know Globally, consumer price indices fell between 1980s and 2000, particularly in high income countries, and remained relatively stable thereafter until the 2008 financial crisis. Since then, consumer prices have been more volatile, driven particularly by fluctuations in food and energy prices. Those categories have exhibited the highest rates of average inflation in recent decades, and make up an essential share of total consumer spending. In 2019, housing - including water, electricity, gas and other fuels - was the largest contributor to total household expenditure in the European Union (EU), accounting for 24 percent of total consumption. The second largest positions were food and beverages and transport, each accounting for 13 percent of total consumption.
The Consumer Price Index, or CPI, describes developments in the average cost of living in a country. The percentage change in the consumer price index over a given period is the most widely used measure of inflation.
Calculating the GDP Deflator The GDP deflator, Rt, is calculated as the ratio between the nominal and the real GDP, where the real GDP is measured in prices of a defined base year, t = 0: \begin{equation*} \mathit{R}_t= \frac{\text{GDP}_t}{\text{realGDP}_{t}}*100 = \frac{\sum(\text{Q}_t*\text{P}_t)}{\sum(\text{Q}_{t}*\text{P}_0)}*100 \end{equation*} As an example, imagine an economy that produces two final goods, A and B, that are consumed at two points in time, t = 0 and t = 1. The realized prices (P) and quantities (Q) are as follows: t = 0 (base year, 2018) t = 0 t = 1 (2019) t = 1 Q P Q P Good A 10 €80 15 €80 Good B 40 €20 40 €22 The nominal GDP in period t = 1 is the market value of all final goods produced in the economy in current prices: \begin{equation*} \text{GDP}_1= \sum(\text{Q}_1*\text{P}_1) = 15 * €80 + 40 * €22 = €2,080 \end{equation*} The real GDP in period t = 1 is the value of the production at constant prices of the base year, t = 0: \begin{equation*} \text{realGDP}_1= \sum(\text{Q}_1*\text{P}_0) = 15 * €80 + 40 * €20 = €2,000 \end{equation*} The GDP deflator is the ratio between the nominal and real GDP in t =1: \begin{equation*} \mathit{R}_1= \frac{\text{GDP}_1}{\text{realGDP}_1}*100 = \frac{€2,080}{€2,000} * 100 = 104 \end{equation*} The base year of the deflator is indexed at 100 and, in the example, the current value of the deflator is 104, so inflation is 4% between t = 0 and t = 1. This is easy to see in this simple example. The general formula for calculating the GDP Deflator inflation rate is as follows: \begin{equation*} \text{Inflation rate} = \frac{(\text{GDP Deflator}_{t =1}-\text{GDP Deflator}_{t =0})}{\text{GDP Deflator}_{t =0}} * 100 = \frac{(€2,080 - €2,000)}{€2,000} * 100 = 4\%. \end{equation*} Alternate method to measure inflation An alternative measure of inflation uses the consumer price index (CPI). Since the GDP Deflator reflects price changes in the prices of all domestically produced goods and services, it is a much broader price index than the CPI. While the CPI focuses on price changes in goods and services commonly purchased by consumers, the GDP deflator measures price changes purchased by consumers, businesses, and the government, and those sold for export. Thus, the key advantage the GDP Deflator has over the CPI is that the components of GDP are more current than the mostly fixed CPI basket of goods. However, it also includes non-consumer items (such as military spending), which is why the CPI basket is the preferred indicator for changes in the cost of living in a country. Good to know The two different measures of inflation (CPI and GDP deflator) have a slightly different economic interpretation and their relevance can change over time. The figure below shows the annualized inflation rate in the OECD area over the past two decades as measured by consumer prices and the GDP deflator. While both measures follow largely similar trends, there are important differences. When the 2008 financial crisis hit, average consumer prices rose by about 4 percent. After the stock market crashed and economic growth plummeted, the decline in economic activity was accompanied by a sharp decline in prices, followed by another increase up to 2011, attributable to surging energy and food prices. While the GDP deflator follows the same pattern, consumer prices have been remarkably more volatile. This deviation is also apparent in a general price decline attributable to the COVID-19 pandemic. The pandemic has had a strong impact on consumers, with demand almost disappearing for some goods and services and being temporarily in excess for others. The overall result of these opposing effects, in conjunction with volatile oil prices and increased government spending, was a stronger fall in consumer prices than in GDP. Test whether you understood the concept of the GDP Deflator... Exercises for you <use xlink:href="/themes/custom/venice/images/icons.svg#launch-18px"></use>
The gross domestic product price deflator, or GDP deflator, is a price index that shows how, on average, prices for all goods and services produced in an economy change over time. It is commonly used to estimate the rate of inflation. The GDP gives the market value of all final goods and services currently produced within a country during a given time period. The items and quantities that enter into its calculation vary year by year, so it is a very current way to estimate inflation.
Solidarity with Ukraine, ways to help and assisting international students fleeing war
How to help and donate It is difficult to know how best to concretely help those in need. Of course, donating money provides an immediate form of assistance. If you have the means, you can assist institutions like the Kyiv School of Economics, which is raising funds for humanitarian aid. You can support their campaign with a donation on their website. If your institution is offering assistance as well, please email ua-help@inomics.com and we will add your institution to the list below. We also wish to direct your attention to some of the major humanitarian aid organizations working in Ukraine right now: Red Cross special Ukraine fund UNHCR (The UN Refugee Agency) UNICEF (United Nations Children's Fund) The International Rescue Committee Doctors Without Borders Alternatively, there are multiple organizations and initiatives with a more specific focus for the support they are offering. Donate for Specific Types of Support Care.org has established a special Ukraine Crisis fund to provide food, water, hygiene kits, psychosocial support, and cash assistance — prioritizing women and girls, families, and the elderly. The Volkswagen Foundation is offering funding to Ukrainian academics and scientists who have fled their country and arrived in (or are in transit to) Germany. Doctoral students, postdocs, and established scientists have the opportunity to continue their work at a university or research institute in Germany for 6-12 months with the Foundation's help. Support Transport for People Fleeing Ukraine: Mission Lifeline are organizing transport convoys from the Ukraine Border. CARA, the Council for At-Risk Academics, provides help to academics in dangerous situations. They and their UK university partners are helping Ukrainians flee their country and find safe areas to continue their work. Support Journalism and Free speech: Ukraine Independent (English-language Ukrainian Newspaper) Fundraising Page Katapult Magazine (German/English language Ukrainian Online Magazine) Refugee Awareness Refugee Week is a UK-wide festival that encourages understanding of refugees and celebrates "the contributions, creativity and resilience of refugees and people seeking sanctuary". This year's Refugee Week is in late June. Helping students fleeing war We are additionally concerned about multiple reports - from PBS, CNN, The Guardian and others - of international students, especially those from Africa, the Middle East and Asia, facing discrimination and violence when attempting to flee the conflict. We implore for their safe passage and the chance to continue their education in safety. If you have information about resources for students fleeing the conflict, particularly international students, please email ua-help@inomics.com so we can advertise and circulate this assistance with our audience of economics students and practitioners. So far, we are aware of: HWR Berlin, Germany Charles Darwin University, Australia The University of Hamburg's UHHhilft program assists refugees who have been forced to interrupt or stop their education. Normally, German or English language skills are essential, but the program is working on a way to advise students in Ukrainian. This is a good option for refugees seeking to begin or continue their studies. Also, the Twitter account Science for Ukraine (@Sci_for_Ukraine) is collecting information about practical support provided by the global research community to Ukrainian researchers and students. This support covers all fields, not just economics. Other ways to engage Donations are not the only way to assist the humanitarian situation in Ukraine. Taking part in demonstrations or otherwise pressuring your lawmakers at home to take action will help change the dynamics of the conflict. Readers in Europe can even consider opening their homes via Airbnb, since the company has promised to host up to 100,000 refugees without charge. Finally, be alert of misinformation and do not mistake the actions of those in power as necessarily representing the will of the people. Misinformation is a common tactic used to drum up support or paint conflict in a good light, but there is nothing good about unnecessary armed conflict. Moreover, many Russian citizens have been protesting against the invasion in displays of solidarity, and many or most Russian people, both within Russia and internationally, are likely as concerned at recent events as you are. If you have additional information about helping people affected by the conflict in Ukraine, please email us at ua-help@inomics.com.
A historic tragedy like the war in Ukraine calls for historic measures of outreach and solidarity. There is an urgent demand for humanitarian aid and safe passage for the hundreds of thousands of refugees already created by the war. This includes thousands of students at Ukranian universities who have had to flee the conflict.
Economic Development, Innovation and Growth (JEL O)
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10 Qualities That Define A Good Economist
There are lots of skills that come with being an economist, some more important than others. Obviously, being able to sift through dense theoretical and scientific papers and acquire the information you need is one of the top skills an economist - and academics in general - should have. Seeing as you'll spend so much of your time reading, it's essential to be good at it. But there are other skills, both soft and hard, that are essential to your career as a successful economist. Read on for the ten we at INOMICS think are the most important. Remember, if you think you're a little weak in one area, there's always room to improve through courses (INOMICS may be able to help you here), persistence, and surrounding yourself with other successful people who have expertise in areas you do not. 1. Mathematical aptitude Numeracy is a key skill for an economist. From dealing with large datasets to interpreting visual data like graphs, you'll need to be comfortable handling numbers and working with mathematical principles. This is why many economists take preparatory classes in mathematics before beginning work or study in economics. 2. Knowledge of social sciences Economics also has a lot of common ground with other social science subjects like psychology, history, and sociology. Thus, having a working knowledge of these subjects and the methods used in them is highly beneficial. In recent years, economics and the other social sciences have become ever more interdisciplinary, meaning an understanding of these subjects is not only desirable but increasingly essential if you're to keep up to date on economic theory. Knowing a little about other, related areas will also benefit you in life in general; a bit of history knowledge gives people something else to ask you about at dinner parties, other than inflation rates or the stock market. 3. Good at understanding complex systems The unavoidable fact is that economics is a complicated subject which looks at complex and intertwined systems. To excel, you'll need to be able to pull together information from different sources and different fields to inform your theories. You’ll need to be comfortable examining data to look for trends and possible causations of a complex problem. Learning these skills requires time, effort, and a little patience. Like we mentioned before, it also entails reading a lot in order to get yourself up to speed with the latest developments in theory. 4. Curious In order to be successful as a student, professor, or researcher, you need to be interested in and engaged with your subject, so having a strong sense of curiosity will serve you well. What is unknown or unclear in your field? How do insights from other fields affect the understanding of your subject? What topics are up for debate, and what are the arguments on each side? Answering these questions is a great way to direct your focus and discover new areas of research or discovery to be had. 5. Independent thinker While curiosity will help you gain knowledge of other people's work and theories, to be truly successful as an economist you also need to have insights and ideas of your own. The ability to think for yourself and to question what you know will allow you to take new directions and to come up with original research which will make you a better economist. Being an independent thinker will also benefit you at conferences, seminars and lectures. It's engaging to have a controversial opinion shared, or at least to play the devil's advocate, as it facilitates discussion and encourages deeper thinking. Many things which are taken as common knowledge, or came to pass, were once derided as foolish and clearly wrong. Just ask economist Nouriel Roubini, who predicted the economic crisis of 2007-2008. 6. Comfortable with uncertainty You will need to be comfortable with uncertainty, as not every question in this field has a clear and unambiguous answer. Economics is good at throwing curveballs and doing things you hadn't predicted or expected. It also has the difficult characteristic of being one of those subjects in which there's rarely a 'right' or 'wrong' answer - many things are still being debated, and all is to play for. This can be a scary thought when going in, knowing that there will be people who disagree with you all the way down to your most fundamental assumptions. But this also means the discipline is varied and exciting - the curious and those who question everything shall be rewarded. 7. Writing skills It's no good having a great understanding of economics unless you can communicate that understanding to other people in a way which is meaningful. Good writing skills are essential for making sure that your articles, book chapters, and notes are useful and comprehensible to others. Unfortunately, in modern academia much writing is incomprehensible, made up of what linguist Steven Pinker calls 'academese', or the language of academics. Remember, simpler is always better, never use a long word where a short word will do, and remove any superfluous 'that's whenever you get the opportunity. (Read George Orwell for more on this). For any piece of writing, keeping its purpose and your audience in mind will help you determine how much jargon is appropriate. 8. Verbal communication skills Besides writing well, you'll also need to be an effective presenter so that you can speak at conferences and teach classes. You should be comfortable speaking in front of an audience and able to convey the essential points of your subject clearly and concisely. If you do this, and manage to become a clear and commanding speaker, people will take you more seriously and actually listen to you; there's nothing more disappointing than having a speaker whose ideas are brilliant but delivered in an underwhelming fashion. These skills also help with other social situations like job interviews, speaking to the media, or making contacts to build up your network at conferences and other events. These skills and contacts will be helpful in the future when you finally need to spread your work. 9. Open minded Fact-driven debate, and updating older views or models based on empirical evidence, are key means by which economics continues to evolve. A debate with a colleague can be a highly instructive experience, but only if you are open to hearing their views and to adjusting your own opinions where necessary. Depending on how the debate goes, you could have your opinion changed and be brought about to a new way of thinking, or you could successfully reinforce your own ideas - linking back to the idea of being an independent thinker. Thus, for success in economics (or any academic field), you need to be open-minded. It's important that you are open to new ideas and do not become too set in your perspective. You need to be able to hear the views of others and to engage productively with them even if you disagree with their reasoning. 10. Self-motivated Economists, particularly academic economists, need to be able to motivate themselves. From postgraduate studies onwards you will be expected to manage your own time and set your own priorities, so you need the drive and motivation to complete tasks without anyone else checking or supporting you. Of course, this is increasingly true from the Bachelor's level up; being self-motivated and able to get your work done will help enormously when slogging through long hours of theses, dissertations and PhDs. Remember though, that while it's important to be disciplined in work, don't forget to take time to yourself to unwind, relax, and refresh your mind for the next day.
Having helped so many economists take their next career step, we at INOMICS know full well how rewarding working in economics can be. When you find that solution you've been looking for, or contribute some research that actually seems to get read and make a difference, it can be the best feeling in the world. But this won't happen unless you work on yourself and the skills that are essential for becoming a successful economist in general.
No matter what type of economist you are, whether you’re an industry economist, a government economist, or an academic economist, you have to be getting inspiration at least sometimes to grow as a person and to excel in your field. It is what helps us come up with new ideas and motivates us to get out of bed in the morning and start working. For an academic economist specifically, inspiration plays a key role in your career. It is one of the most important main ingredients to your success as a researcher. From coming up with ideas and finding a research gap, to methodological analysis and writing style, inspiration is crucial every step of the way. Unfortunately, we all feel uninspired at times. The good news is that’s a natural part of the cognitive process that everyone struggles with. If you’re currently stuck in a slump, here is a list of 6 things you can do to get inspired again: 1. Wake up early Believe it or not, there’s something truly magical about the early morning. If you’ve ever woken up around sunrise, you would know that’s true. There’s something about the early hours of the day that give off positive vibes of absolute serenity, tranquility, and clarity of mind. During that time, your focus and energy are at their max. So use those hours wisely to think clearly, get creative, and find inspiration. 2. Get some alone time Being out in the hustle and bustle of everyday life, it’s easy to get lost in the noise and lose your focus and any form of inner thought that inspires you. This is why it’s important to disconnect for a while and spend some quiet time in solitude. See where your thoughts take you. Ponder. Give yourself some space for contemplation, and perhaps reflect on everything you’ve learned and accomplished and how you’ve made a positive difference in the world. Take a mental break to allow yourself to refocus. Write in a journal. Digging into your own mental processes can provide unexpected sources of inspiration. 3. Explore other fields; immerse yourself in learning something new Inspiration is not always going to fall upon you out of the blue. Sometimes you just need to break your old thinking patterns, and get a fresh new perspective. The easiest way to do this is by reading about something new! This is particularly good advice for economists working in academia or the research field. If you are trying to find inspiration for a new idea or trying to find a research gap, try reading about a new topic that is unrelated to your field. In order to think outside of the box you have to start getting into other, newer boxes! This will inspire your mind to think creatively, and you’ll more easily come up with new ideas or find a research gap. 4. Find a productive atmosphere, or create your own The modern age makes it easy for us to lose sight of what’s important. Especially with the rise of social media, a lot of people find that they struggle with scattered attention. This leaves many of our minds filled with shallower thoughts, leaving no space for the deep thinking that would otherwise be our source of inspiration. With your attention constantly exposed to superficial issues and distractions such as celebrity news alerts, smartphone notifications, and our preferred social media platforms, it is easy to lose focus. This often extends outside of social media and into our real lives too. Try to regain your focus and concentration perhaps by spending some time in a productive, enlightening atmosphere that becomes your go-to place for inspiration. This could be a library for instance, or any place where your mind can unwind and filter out everyday thought, allowing you to refocus and be purposeful and intentional with your time. 5. Explore some textbooks! For all the economics researchers out there, if you’re struggling to find the spark that will fuel your next research project, reading some textbooks is a great way to start! Needless to say, textbooks are a great source of information that simplify the roots of many concepts. This makes it easier for you to find a research gap, or to find your spark of inspiration. Reading through a few textbooks will help your mind spot some unique connections between certain subtopics, or in other words, identify a new relationship to be tested; and that could form your next research topic! 6. Don’t give up on yourself when you can’t seem to get inspired When you’re feeling sluggish or not in the right mood, it’s easy to start seeing yourself as a person who is incompetent and not at all skilled at what you do. That’s not necessarily true! Realize that there are some times in life when you won’t really feel inspired, and that’s absolutely normal. It’s alright to feel dull sometimes. Nobody is constantly productive and constantly being inspired with good ideas 100 percent of the time. So, remember that it’s okay to let your mind shut off for a while and just relax. You can be brought out of your stagnation phase under just the right conditions!
In a culture obsessed with measuring capabilities and results, we often overlook the important role of inspiration. As economists, inspiration awakens us to new possibilities within ourselves, allowing us to conquer our own limitations, and to succeed at doing what we do.
Breaking down this definition yields four key aspects to understanding how GDP is defined and measured: Market value: Goods are valued at their market prices. Non‐market activities like leisure, unpaid work (e.g. housework, childcare, etc.), and black market or illegal activities do not contribute to GDP. Final goods and services: GDP is the aggregate value of final goods and services intended for the end user. Intermediate goods and services used by other firms as inputs in production (i.e, fabric used to make a sweater) do not contribute to GDP. Currently produced in a given period: GDP only includes goods and services produced during the indicated time period, normally a year. Sales of goods that had been produced in the past do not contribute to GDP. Some countries also calculate quarterly GDP data. Within a country: GDP measures the value of goods and services produced within a country’s borders, whether by its own citizens or by foreigners located there. Calculating GDP GDP can be calculated using three alternative methods: the production, income, or expenditure approach. All three approaches should give the same result when calculated correctly. The circular flow diagram displayed below provides a simple model to illustrate the relationship between the three approaches. In this diagram, households own the factors of production that are supplied to firms in the production process, and earn the returns on these (factor markets). Firms use the production factors to produce goods and services, which households purchase for consumption (product market). In equilibrium, it holds that: production = income = expenditure. Figure 1: Circular flow diagram for calculating GDP As an example, imagine an economy with two companies that produce two goods: steel and cars. Steel is used as an intermediate good in the production of cars. In a given year, economic activity in the economy has been as follows: Steel Company Car Company Revenue from sales €100 Revenue from sales €250 -Expenses (wages) €80 -Expenses (wages) €70 -Expenses (steel) €100 Profit €20 Profit €80 What would be the GDP of this economy? 1. Production approach: The production approach aggregates the market value of all final goods and services. It is the sum of the “value added” (total sales minus the value of intermediate inputs) at each stage of production. Measuring value added at each stage of production avoids “double-counting” the contribution of intermediate goods. Following the production approach, GDP in our example economy is calculated as the value of steel produced, plus the value of cars produced, minus the value of intermediate goods used in production, so GDP = €100 + (€250 - €100) = €250. Note that if we had calculated GDP as the total value of all steel and cars produced (€100 + €250 = €350), then the value of steel would have been counted twice, as it is embodied in the value of cars. 2. Income approach: The income approach calculates value added as the income earned by the factors of production in the economy. Three core components enter into the calculation. The first and main component is domestic income, which is defined as: Domestic income = wages (income for labor) + rent (income for land) + interest (income for capital) + profits (income for firms) The second component of the income approach adds government taxes minus subsidies, to account for their effect on factor returns. The third component is depreciation, which reflects the decrease in the value of capital that results from its use. In our example economy, there are two sources of income: wages and profits. The production of steel generated wage earnings of €80 and firm profits of €20. The further processing to the final cars provided additional wage earnings of €70 and generated profits of €80. We thus have GDP = wages + profits = (€80 + €70) + (€20 + €80) = €250, which matches the value calculated using the production approach. Now, let’s assume this economy has a tax that earns the government €10 from the businesses’ operations. Let’s also assume we had €10 worth of depreciation for each business in the period. Then, the final calculation would be GDP = wages + profits + tax income + depreciation = (€80 + €70) + (€0 + €60) + €20 (tax income from each business) + €20 (depreciation from each business) = €250. 3. Expenditure approach: The expenditure approach is the most commonly used method to calculate GDP. It calculates the total domestic expenditure using the following formula (the same as for aggregate demand): GDP = C + I + G + (X – M) = C + I + G + NX, where C = Consumption (expenditure by households on consuming goods and services) I = Investment (expenditure on capital goods and additions to inventories) G = Government spending (government consumption expenditure and gross investment) NX = Net exports (value of exports, X, minus value of imports, M) The extended five-sector circular flow diagram displayed below illustrates the logic underlying the calculation. In this diagram, households do not spend all income on consumption expenditures, but also save money, pay government taxes, and purchase goods or services from abroad. Savings are reinjected into the economy as investment, taxes finance government spending, and products or services not sold domestically are being exported. Figure 2: Illustrating the expenditure approach for calculating GDP GDP vs. GNP As the term “Domestic” (in Gross Domestic Product) indicates, the inclusion criterion for the calculation of GDP is defined in geographic terms: It is the market value of all final goods and services produced within a country’s borders, regardless of the nationality of the producer. In contrast, the Gross “National” Product, GNP, defines the inclusion criterion based on nationality: It is the market value of all final goods and services produced by nationals of the country, regardless of whether the production occurred within or outside of the country’s borders. The relationship between GDP and GNP is thus defined as: GNP = GDP + income earned by citizens from working or investing overseas − income earned by foreign nationals in the domestic economy Nominal vs. real GDP and GDP growth rate Nominal GDP measures the value of production in current prices; that is, the prices that were realized in the economy during the period in which the output was produced. If prices increased from one period to the next while output remained unchanged, the nominal GDP would rise even though production remained constant. To improve comparability and provide a better basis for evaluating the performance of an economy over time, economists prefer calculating the ‘real’ value of GDP. Real GDP adjusts the value of output for inflation or deflation according to a defined base year, such that changes over time can be fully attributed to shifts in the quantity of production. If prices change from one period to the next but actual output does not, real GDP remains the same. The GDP growth rate is calculated as the percentage change in real GDP from one period to the next. Positive values indicate economic growth, while negative values indicate a contraction. As an example, imagine an economy that produces two final goods (A and B) at two points in time. The realized prices (P) and quantities (Q) are as follows: 2018 2019 P Q P Q Good A €80 10 €80 15 Good B €20 40 €22 40 Nominal GDP: Using the production approach, we can calculate the nominal GDP for each period t, GDPt, as the market value of all N final goods produced in the economy. This is: GDPt = P1tQ1t + P2tQ2t + … + PNtQNt. In our example, this would be: GDP2018 = €80 * 10 + €20 * 40 = €1,600, and GDP2019 = €80 * 15 + €22 * 40 = €2,080. Real GDP: However, a direct comparison of the two values may be misleading. From 2018 to 2019, we observe both an increase in the quantity of production of Good A, and an increase in the price for Good B. To assess how economic performance has changed, we may want to adjust for the price change by calculating the real GDP in period t, GDPt. It is derived as the value of the production in t at constant prices of the base year, t0. This is: realGDPt = P1t0Q1t + P2t0Q2t + … + PNt0QNt. In our example, this would be: realGDP2018 = €80 * 10 + €20 * 40 = €1,600 and realGDP2019 = €80 * 15 + €20 * 40 = €2,000. GDP Deflator: The ratio between nominal GDP and real GDP gives the GDP deflator. The GDP deflator shows how, on average, prices for all goods and services produced in an economy change over time and can be used as a measure of inflation. A full discussion of the GDP deflator is included in that article. Growth rate: Based on the real GDP value, we can then calculate the GDP growth rate between two points in time, t-1 and t, as: \begin{equation*} \text{growth}_t= \frac{(\text{realGDP}_t-\text{realGDP}_{t-1})}{\text{realGDP}_{t-1}}. \end{equation*} In our example, this would be: \begin{equation*} \text{growth}_{2019} = \frac{(\text{realGDP}_{2019}-\text{realGDP}_{2018})}{\text{realGDP}_{2018}} = \frac{(2,000 - 1,600)}{1,600} = 0.25 = 25\%. \end{equation*} GDP per capita Beyond the absolute value of GDP measuring total economic activity, economists are also interested in the average value of production (or income) generated per person in a country. Therefore, GDP per capita is calculated by dividing a country’s GDP by the total population of that country. Even though this is a rough approximation for the standard of living in that country—which is influenced by many other factors—it does give an indication of whether the country is materially better or worse off compared to others. Good to know Besides income, a society’s standard of living will be influenced by other factors that are not directly reflected in the calculation of GDP, such as levels of health, education, and environmental quality. Moreover, being calculated as an average value, GDP per capita does not account for the distribution of income in the country. To draw conclusions about the standard of living in a country and its development, it is useful to consider further metrics in addition to GDP, like the Gini index as a measure of inequality and the human development index (HDI). Test whether you understood the concept of GDP... Exercises for you <use xlink:href="/themes/custom/venice/images/icons.svg#launch-18px"></use>
What is the size of a nation’s overall economy? Is it growing or shrinking? And what sectors are driving these changes? Gross Domestic Product (GDP) is the most commonly used measure of economic activity that provides answers to these questions. It gives the market value of all final goods and services currently produced within a country’s borders during a given time period.
Its defining feature lies in the assumption that production, rather than demand, is the primary factor in creating and sustaining economic growth. To that end, its proponents advocate the lowering of taxes and removal of regulation. Less taxation, they claim, means more profits for businesses. Then, freed of red-tape and compelled by self interest, those businesses can reinvest their increased earnings to generate a larger supply of goods and jobs. It’s thus that the economy grows - tax cuts pay for themselves. Redistributing wealth by this means, creating circumstances advantageous for businesses and allowing wealth to 'trickle down', is thought meritocratic, ensuring an equity and efficiency that state intervention simply cannot match. Such conviction places it in direct opposition to Keynesianism, which, anticipating fluctuations of aggregate demand and inefficiencies in the market economy, prescribes an active government that intervenes in economic activity using fiscal and monetary stimuli to help manage moments of instability. <11an>limit:2;categories:jobs|courses|conferences|Professor;disciplines:Economic Systems (JEL P)|Economic Development, Innovation and Growth (JEL O)</11an> Reaganomics and the emergence of supply-side Keynesianism served as the standard economic model from the Great Depression onwards. But, its appeal began to fade in the 1970s, as it struggled to arrest the declining growth and rising inflation - known as stagflation - that plagued many advanced economies. Sensing an opportunity, neoliberals stepped in, pushing supply-side principles as the antidote. Most famously, the new theory became the bedrock of ‘Reaganomics’ - the economic policy pursued by the United States' first celebrity president - and since then, it’s remained highly favored, despite being shrouded in controversy. As journalist Bill Flax has described, ‘the notion that tax cuts increase tax receipts circled the globe, and was ultimately tried in such previously unimaginable locales as Euroland, Russia, India and China’. Its theoretical underpinnings and apparent authority derive from the infamous ‘Laffer Curve’, a graph accredited to conservative economist Arthur Laffer. Laffer’s legend began in 1974, at a late-afternoon meeting at the Two Continents Restaurant in Washington. He had been summoned by senior government advisers Donald Rumsfeld and Dick Cheney, and was protesting President Ford’s proposed tax increase that aimed to check the spiraling deficit. It was there, under the expectant gaze of these two Republican stalwarts, that he (allegedly) first sketched his economic vision, quite literally, on a napkin. With just a few strokes of his pen on a crumpled, coffee-stained serviette his curve came to life and the complexities of the tax system were distilled into one small graph. Despite its inevitable imprecision – the setting did not lend itself to mathematical theorizing – his company was impressed, Cheney, especially, readily converted. And with their endorsement, Ford’s proposals were reversed and the theory was assimilated into the Republican Party policy-making machine. By the time of Reagan, it had become its economic orthodoxy. The curve professes to plot the relationship between levels of taxation and government revenue. At one end, where the tax rate is 0%, revenue is zero. No surprise there. At the other, where the tax rate is 100%, the revenue is also zero - for people are presumed not to work without take-home pay. The interesting bit is the inverted U in the middle. Somewhere on the continuum, Laffer argues the existence of a ‘tipping point’, where the incentive to work and invest quickly decreases once tax rates cross this threshold. Explaining his already rather simple model, Laffer declared, ‘tax something, and you get less of it. Tax something less, and you get more of it’. As an actual tool, the curve is more theoretical than practical. Its claim of where the tipping point lies is non-specific, a vagueness that’s been one of its greatest utilities. In the hands of a government intent on tax cutting, the tipping point can easily be adjusted to ‘justify’ cuts, and prove that any loss in reduced tax revenue will be offset by an increase in growth. Big business was immediately taken by the idea, sensing how much it stood to benefit from the curve’s ‘versatility’. Persistent Republican loyalty, on the other hand, is harder to explain, existing in the face of mounting evidence suggesting the curve’s ineffectiveness. Whether a genuine belief in its efficacy or a cynical intellectual cover for vested interests, its motivation is a hard one to discern. Repeated failure Indeed, the evidence of supply-side economics' failings is persuasive: US tax cuts in the last 40 years have not been self-financing as promised. Reagan’s cuts, deep as they were, resulted in ballooning national debt, and although the economy grew in the mid-80s as it recovered from recession, there was little to no sustained economic improvement for most Americans. Instead, wealth concentrated at the top and inequality grew. By the end of his government, and after almost a decade of his economic policy, middle-class incomes were the same as they had been 10 years before; poverty rates had actually risen; and there had been no marked productivity growth. George W. Bush began his presidency in similar fashion introducing big tax cuts for the rich, promising that all would benefit and that wealth would trickle down. Rather than trickling down, however, the dividends flowed upwards, and by 2005, the top 1% had seen their after-tax household income increase by 80% compared with 1979, an increase over 10 times quicker than that experienced by the bottom 25%. As Bush left office some 4 years later, wages were lagging far behind inflation, living standards were stagnating, and employment growth was quickly falling - a stark contrast to the booming Clinton years. The optimism of the 90s had well and truly died. Old dogs, old tricks Obama’s administration made some modest attempts to better balance the tax burden, and estimates suggest the richest 1% paid more in tax in 2013 than they did in 1980. But it didn’t last. Any progress that had been made was quickly reversed, when, in 2017, Trump rolled out sweeping nation-wide tax cuts predicted to cost $6.2 trillion in just 10 years. According to economist Paul Krugman, these included ‘a cut in top individual tax rates; a cut in corporate taxes; and an end to the estate tax’. All, he was convinced, would ‘overwhelmingly benefit the wealthy, mainly the top 1 percent.’ The cuts also added more to the national debt than any other single American tax bill in the past three decades, sparking fears of future cuts to social security and Medicare, on which so many rely. In spite of the majority of economists standing in staunch opposition, supply-side economics remain inexplicably influential, central to the running of the world’s largest economy. And we shouldn’t forget that Trump’s endorsement is no outlying opinion; it's the glue that’s holding the Republicans together. The party that historically has prided itself on its empiricism now seems blind to evidence. Remember, doing the same thing over and over and expecting a different result is said to be a sign of insanity. Which prompts the question: what do they think has changed? With the answer unclear, the charmed life of supply-side continues.
​Supply-side economics. Since its conception in the 1970s, debating its merits – or lack thereof – has been at the heart of political discourse, demarcating Republican from Democrat, Tory loyalist from Labour devotee, and informing not just an economic outlook, but a world view.