JEL Codes have become the standard way to classify economics content. They can be used with papers, articles, dissertations, and even book reviews - essentially anything related to economics can be assigned a JEL Code. Although seldom taught by economics courses, the Codes are widely used by professional economists and are easy to understand. If you are a student of economics and you plan to read journals, conduct research, or study for a PhD, it pays to become familiar with the JEL classification system. There are twenty different JEL Codes. Each one contains many “sub-codes” as you drill down towards more and more specific topics. For example, JEL Code F is “International Economics”. One of the “sub-codes” under it is F6, “Economic Impacts of Globalization”. Going even further, we finally arrive at F680, which discusses the creation of policies that have been made to deal with the impacts of globalization. Top-level JEL Code Descriptions: A: General Economics and Teaching: covers general studies of economics, its relations to other disciplines, and the teaching of economics. B: History of Economic Thought, Methodology, and Heterodox Approaches: studies about schools of economic thought and methodologies used, including newer ones being developed. C: Mathematical and Quantitative Methods: includes studies about mathematical, econometric, and other quantitative methods, but not studies that merely use well-established quantitative methods. D: Microeconomics: contains many subcategories that include household behavior and family economics, market structure and pricing, general equilibrium and disequilibrium, welfare economics, select decision-making and behavioral economics topics, and more. E: Macroeconomics and Monetary Economics: studies about the performance of an economy, including output, prices, interest rates, employment, and the factors that determine them. Also includes studies on central banking and monetary policy. F: International Economics: includes trade, movement of factors of production, international finance, globalization, national security, international relations, and other topics. G: Financial Economics: contains studies about domestic and international markets for securities such as bonds, stocks, commodities, and futures, and other topics such as corporate finance and studies on financial institutions. H: Public Economics: microeconomics-focused public economics issues that include public goods, government, taxes and subsidies, the effects of fiscal policies on economic agents, and more. I: Health, Education, and Welfare: related to public economics, but focused on economic development and government policies on welfare, poverty, educational services, and healthcare. J: Labor and Demographic Economics: includes economic studies of marriage, family structure, and other demographic trends, gender economics, racial economics, wages and compensation structure, collective bargaining and unions, labor discrimination, labor contracts and standards, and more. K: Law and Economics: contains studies on property rights and contract enforcement, business laws and regulations, laws on labor, tax, bankruptcy, immigration, and more, and illegal activity such as bribery. L: Industrial Organization: includes topics on market structure, firm strategy and behavior, nonprofit organizations, antitrust policies, industrial regulation and policy, and more specific studies on specific industries like manufacturing or utilities. M: Business Administration and Business Economics; Marketing; Accounting; Personnel Economics: contains studies on business topics (including many that are not conducted by economists) on topics such as marketing, advertising, accounting, and personnel economics. N: Economic History: these studies analyze events in history or what happened over long periods of time, with particular emphasis on history before 1950. O: Economic Development, Innovation, Technological Change, and Growth: contains micro- and macro-economic studies on topics of economic development and growth, developing economies, technological change, innovation, and more. P: Economic Systems: studies capitalist, socialist, and other economic systems and their institutions. Q: Agricultural and Natural Resource Economics; Environmental and Ecological Economics: includes economic studies on agriculture, natural resources, energy, environment, and ecology. R: Urban, Rural, Regional, Real Estate, and Transportation Economics: studies on real estate, regional economics topics such as spatial distribution of economic activity, transportation networks, regional migration and government policies, and urban units like neighborhoods. Y: Miscellaneous Categories: contains useful information that doesn’t fit into one of the other categories, like introductory materials, data tables and graphs, book reviews, dissertations, and more. Z: Other Special Topics: includes sports economics, cultural economic studies, sociology topics, and the economics of tourism. A complete and interactive list of the Codes and all of their sub-disciplines can be found at the American Economics Association’s website. At INOMICS, we also use JEL Codes to classify our content. Why not check out the full list of Codes for something that interests you, and try searching INOMICS for related content?
JEL Codes are an economics classification system. They were developed by the Journal of Economic Literature to help economists identify what specific topic(s) a paper discusses. As such, the Codes can help people quickly search through economics content to find relevant information. They can also help people make sense of what topic a new paper is really focusing on, if the title is unclear.
In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole. Throughout the subsequent decade, economists sought to repair the reputational damage to their profession. These experts in self-interest had recognized a need to restore public confidence in their work. Economists took it upon themselves to engage in public debate and entire economics curricula were redesigned. Many set out to broaden their horizons through interdisciplinary work with other scientists, something that had hitherto been less common in economics than other social sciences (see figure 1). However, despite these endeavors, general attitudes toward economists were little changed. In the United Kingdom, a majority of voters chose to leave the European Union, disregarding the broad consensus among economists that it was going to do them material harm. According to a YouGov poll taken in 2017, economists were among the least trusted of a selection of “experts”, with only politicians faring worse (see figure 2). In fact, a shortage of trust in economists is nothing particularly new. As far back as 1925, Frank Fetter wrote in the American Economic Review about the relationship between economists and the public, stating, Academic economists incur popular distrust because they are supposed to echo and reflect the opinions of the business world, while business distrusts them as dangerous radicals because they refuse to worship at the altar of Mammon. As with their lack of foresight prior to the financial crisis of 2008/09, few, if any, economists saw the coming of COVID-19. The economic impact of the pandemic is huge. Yet since its primary cause is biological, there has been less finger-pointing at economists this time round. On the contrary, the wide-ranging consequences of COVID-19 have presented a wealth of new opportunities for economists to demonstrate their value to the world. There has been a surge in demand for key skills in statistical analysis and forecasting as governments everywhere face stark choices, weighing the costs against the benefits of various policy alternatives. Economists have found their moment. The following table lists initiatives that have been taken in response to the pandemic by some of the major academic bodies and research repositories in economics. Along with papers about the general effects of the pandemic on economies, others focus more directly on the social and health effects of various lockdown policies. A key feature in many of these studies is the traditional and simple economic approach to problem-solving: the analysis of trade-offs and optimization within a world of ‘second-best’. The recent hive of activity among economists is not confined to academia. Indeed, there has been a more general realization across society that an understanding of statistics is critical to managing the crisis. The radical changes to daily life imposed by governments around the world have increased uncertainty and the demand to deal with it. Economists have been called upon to reassess markets under lockdown, advise governments on new monetary and fiscal measures to mitigate the economic fallout from COVID-19, and assist more directly in modelling and forecasting the epidemiology of the disease itself. One of my own areas of research, the voluntary sector and donor behavior, led to my being commissioned to perform analysis of the fundraising market on behalf of charities in the UK. My co-author Cathy Pharoah and I considered the impact of the pandemic both on the various income streams to charities as well as on the new demands for their services. We measured the interdependence between donor trends and economic growth over recent decades to project the future path of charitable donations based on current government forecasts of GDP, acknowledging very large differences between best and worst-case scenarios. In our research report we outline some key pointers for fundraisers to consider, to encourage them to think more as economists when planning their appeals and to focus on what is within their control while being prepared to adapt to new events as they occur. The US Bureau of Labor Statistics was already expecting higher job growth for economists than for other occupations over the coming decade (14% versus 4% growth, see here. Increased use of “big data” to aid pricing and advertising, in tandem with a more complex and competitive global economy, are cited as the main reasons for the predicted job growth. The coronavirus pandemic is only accelerating such developments. Economists are trained to analyze data and are equipped with tools that aid decision-making under uncertainty, be that at the individual, group or societal level. While economists may not have been classified among the ‘essential workers’ as the health crisis took hold, they are better positioned than most to show ways out of it and to think beyond. Economists also belong to the group of professionals who can do their job remotely. It may only be thanks to lockdown and social-distancing that the epidemiologists and public health scientists at the London School of Hygiene and Tropical Medicine have thus far escaped royal scrutiny on the lack of preventative measures for COVID-19. Having already suffered that fate when the previous crisis hit, economists now have a great chance to redeem themselves. Many of them are already capitalizing on it. The above article first appeared in the INOMICS Handbook 2021. Download the INOMICS Handbook References Fetter FA (1925) “The Economists and the Public”, The American Economic Review 15(1), 13-26. Fourcade M, E Ollion and Y Algan (2015) “The Superiority of Economists”, The Journal of Economic Perspectives 29(1), 89-113.
The following article first appeared in the INOMICS Handbook 2021. Download the INOMICS Handbook On a visit to the London School of Economics in November 2008, the Queen asked her hosts why no one had seen the financial crisis coming. It took the professors nine months to come up with an excuse, put forth in a letter in July 2009:
A growing number of universities offer different career pathways into teaching roles, making it possible to pursue a career in academia tailored towards your specialism. This might be a traditional teaching and research role or a teaching and scholarship-focused role. For a research and teaching role, universities will often place a great weight on your published and ongoing research, your potential for producing world-leading research, and how well your research fits into the overall balance of the department. Institutions will also look at your statement of teaching philosophy. Though, in some institutions, research potential may be given more weight in decision making. However, for teaching-focused positions the balance of the role will be skewed towards teaching. So, institutions will be looking for evidence of your teaching philosophy and engagement in thinking about pedagogy, alongside your research. Some institutions will expect academics working in teaching and scholarship-related roles to continue with discipline-focused research, whereas others will place more emphasis on scholarship of teaching and learning, such as through evaluation and development of pedagogies. It is likely that a teaching-focused career will require you to engage with a higher teaching load than a traditional research and teaching role. In some institutions, teaching-focused academics may teach twice as many hours as “research and teaching” academics. Any application will need to be tailored to the role and institution to which you are applying. Be passionate about teaching and pedagogy! If you intend to start a teaching career in economics, it is important to have a passion for teaching and the ability to motivate and inspire students. Teaching with passion means bringing knowledge into the classroom with enthusiasm, creating interaction with students, and sharing your own interests and research, where relevant, for discussion. If you are passionate about education, a teaching career in economics can be highly rewarding. However, you will need to spend time on preparation and be wise enough to accept that you don’t know everything. At times, it could be tough, as you may be asked to teach material that will require you to familiarise yourself with a new topic that you have never come across before. You should also be aware that the breadth and depth of learning material is likely to vary as students advance their knowledge of the discipline in their degree (e.g., undergraduate versus postgraduate modules), and depending on the institutions you are working in. Furthermore, be aware that innovative pedagogy and engagement with appropriate technology may be more crucial than ever before. Over the past couple of years, education has seen a fundamental structural change in the different ways to support student teaching and learning. This has been brought into further focus by the COVID-19 pandemic. Blended learning and flipped classrooms are becoming increasingly normalised in the higher education environment, along with tools such as message boards and in-class learning aids. Alongside this, institutions are developing online course offerings. Thus, make sure you don’t forget to mention your innovative practices during an interview as, in the current times, this is very much what employers are looking for. Teaching-specific career pathways are relatively new across the sector, and whilst many institutions have teaching-focused roles, some of these may not be part of a career framework, limiting progression. However, in a growing number of institutions, teaching pathways can lead to a career ranging from teaching assistant to professor. Pathways to Professor The titles that individual institutions use for teaching roles can vary quite a lot across the sector. In some institutions, there may be a clear demarcation between traditional research and teaching “lecturers” and their teaching and scholarship equivalents (often using terms such as “teaching fellow”). But in others, this may be much less clear. We have tried to illustrate the equivalent levels throughout this article. Teaching Fellow/Assistant Many teaching-focused academics begin as a teaching assistant or teaching fellow. These roles are designed to support teaching, led by more senior academics within your department. For instance, they might include leading large- or small-group seminars, marking assignments and examinations, and helping to enhance the student experience. Alongside these tasks, you will normally be expected to continue your own personal and professional development, which may involve engaging with research, developing your own pedagogies and/or teaching innovations, and attending departmental and institutional seminars and national/international conferences. With this in mind, when writing your application and preparing for your interview, you may want to think about how you could help improve the student experience. Providing evidence of previous teaching experience in higher education could also help you succeed in getting the post. Assistant Professor (teaching-focused)/Senior Teaching Fellow/Lecturer (teaching focused) At Assistant Professor level, you are likely to begin to demonstrate leadership. You will usually be expected to lead individual modules, or you may be required to take a programme leadership role. In addition, you may be asked to engage in student pastoral care (such as personal tutoring) and lead on developing activities that aim to provide additional academic support for students, and engage collegiately within the wider institution. These activities may be focused on applicants (e.g., open days and widening participation events/initiatives), current students (e.g., work on the development of key study skills within the degree programme), or post-university activities (e.g., support for alumni relations). Alongside this, you will normally be expected to engage with scholarship, which may be discipline-related research, pedagogic research or other scholarly activities. The latter may include contributing to the identification of sources of funding and the process of applying for and securing funds for scholarly activities, as well as their dissemination. Evidence of teaching excellence is crucial for these types of posts. Thus, accreditation (such as a fellowship from Advance HE in the UK) would be very helpful. You might want to consider working towards this qualification as soon as you start your academic career in a teaching-focused role. Candidates should also demonstrate a good understanding of the wider student experience, particularly in relation to welfare, student support, study skills, internships, and employability. Associate Professor (teaching-focused) Moving onto the role of Associate Professor (teaching-focused), your role will likely become more concentrated on academic leadership through programme directorships, mentoring of peers and colleagues, and more general leadership within your academic department and the wider university. Engagement with external organisations within the discipline or other institutions is also likely to be valuable in these roles. This could involve joining a committee of a learned society, contributing towards quality assurance processes across the sector, serving as an external examiner, or engaging with an organisation such as the Economics Network. Among other teaching responsibilities, you may be required to engage more with curriculum design and planning learning activities to support the implementation of new modules/degree programmes. Similarly, as a course leader or equivalent, you may provide leadership in coordinating the work of others to ensure that courses are delivered effectively. You may also contribute to colleagues’ professional and career development, acting as personal mentor and providing advice. You should also have an in-depth understanding of your own specialism. A track record of publications in your area of expertise and/or pedagogic research would be desirable at this stage. You should show ability and major achievement in teaching, demonstrated by high quality instruction and a substantial teaching record. Professor (teaching-focused) Becoming a teaching-focused professor in economics involves demonstrating sustained impact, not just within your institution, but within the discipline more generally. Just as with traditional research and teaching roles, a teaching-focused professor will be expected to provide leadership both within the university and beyond, within the discipline. There is a wide variation in what your leadership role could look like. Some may take editorial roles with scholarly journals, others may have administrative leadership roles at their universities, and others may have leadership roles within the sector to shape economics teaching. Moreover, teaching-focused professors will build upon their scholarship, and may produce subject-specific or pedagogic research of international quality to inform research-led teaching practice. They may also work collaboratively and collegially on academic, pastoral and other administrative duties within their department. A career on a teaching pathway can be extremely rewarding. As you progress in your role, you may have the opportunity to shape university education of economics in your department and beyond. 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.
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. When you enter the job market for teaching economics, the institutions that you are applying for may well have different characteristics. Therefore, you may need to tailor your application to the type of institution and the role specifications in the job advert.
Based on aggregating the total interest in offers publicized on INOMICS during the previous year (see methodology) winners were chosen across 7 different categories. In each category, we identify the Top 3 institutions as well as those in the Top 20, listed in no particular order. The awards (past awards) hope to acknowledge the universities, research centers, economics schools, banks, think tanks, and government and private institutions which listed their career and study opportunities on INOMICS in 2021, and were the most popular among our users. The full list of award winners can be found in the INOMICS Handbook 2022, alongside expert career advice from economics professors and a fascinating interview with economic historian Adam Tooze, who offers his wisdom on the economics landscape. Download the INOMICS Handbook for free. Top 3 Employers University of Copenhagen (Denmark) University of Cape Town (South Africa) Queen Mary University of London (United Kingdom) Top 3 Training Course Organizer Vrije Universiteit Amsterdam (The Netherlands) University of St.Gallen (Switzerland) Barcelona School of Economics (Spain) Top 3 Places to Do a Master's University of Luxembourg (Luxembourg) CERGE-EI (Czechia) University of Alicante (Spain) Top 3 Places to Do a PhD Graduate School of Economic & Social Sciences (GESS), University of Mannheim (Germany) University of Surrey (United Kingdom) University of Konstanz (Germany) Top 3 Conference Organizers Review of Socio-Economic Perspectives (RSEP) Ruhr Graduate School in Economics (RGS Econ) (Germany) Masters International Research and Development Center Top 3 Summer School Organizers University of Oxford (United Kingdom) Paris School of Economics (France) The University of Surrey (United Kingdom) Top 3 Scholarship Providers CEMFI (Spain) The Institute for Employment Research (IAB) (Germany) UniCredit Foundation See all winners in Handbook
Now in their sixth year, the INOMICS Awards remain unique in their celebration of institutions committed to the career development of economists worldwide.
The Value of Nature’s Services to Modern Economies
These factors of production from nature hold the core of all economies’ potential output, which therefore makes our economy dependent on the life-support systems of our planet. Even businesses seemingly removed from raw materials - like software-as-a-service companies - depend on power generated from natural sources. Yet, over the past few decades, economic theory has managed to fabricate the illusion that somehow we can get by without natural resources, or that they are insignificant to our modern world. We know that resources are finite, but apparently as a species we lack the feeling of urgency to realize their significance for the maintenance of our world and for the future generations that will follow us. National governments continue to focus on growing their economies, paying little heed to the consequences they may have on nature. The services provided to us by nature take four main forms, as first identified by the UN Millennium Ecosystem Assessment’s 2003 “Ecosystems and Human Well-being: A Framework for Assessment” report. They are called provisioning services, regulating services, cultural services, and support services. The value estimates for ecosystem services in the rest of this article are typically estimated by: the market value method, avoided damage cost method, replacement cost method, opportunity cost method, or by hedonic property models. These are some of the most prominent ecosystem valuation methods, but there are others as well. Provisioning Services Provisioning services are the ecosystem services provided to humans as products obtained directly from nature, such as: Food from plant, animal and microbe sources. Fuel, wood, and other sources of energy. Fiber, cotton, wool, hemp and silk. Genetic resources such as the genetic information used for biotechnology and animal and plant breeding. Ornamental resources such as shells, animal skins and flowers. Biochemicals, natural medicines and food additives. Fresh water from sources such as rivers. The value of every single provisioning service is enormous. In fact, each of these services comprises the core of some multi-million dollar industry, and when combined together, all of these industries make up a huge portion of most nations’ GDPs. In other words, these services make up an essential and irreplaceable part of the entire world economy. Here are some examples of provisioning services that contribute significantly to economic growth: In Switzerland, the pollination services provided by specific species of bees support the production of about 231 million dollars worth of agricultural sales per year (TEEB, 2010). Thus, pollination in this case is a provisioning service - allowing our crops to grow as normal. It is possible for natural services to fill more than one role; see the next section for how pollination can also be a regulating service. Honey production worldwide generates a value of approximately 8 billion dollars annually (Statista, 2020). Globally, more than 30 million people in coastal and island communities are entirely dependent on resources extracted from coral reefs as their main source of income, food, and livelihood (Wilkinson, 2004). Accordingly, losing natural resources that compose or support these industries would entail serious economic losses. On the other hand, the optimal, sustainable utilization of such natural assets could boost economic growth, driving nations to prosperity. Regulating Services Regulating services are the benefits provided by nature that moderate natural phenomena in order to improve the physical environment for specific human purposes. Regulating services include the processes of erosion, pollination, water purification, decomposition and flood control, disease prevention, carbon storage, and climate regulation. However, the economic values of most regulating services are not calculated in terms of monetary valuation, despite their importance. This is because regulating services are not traded or sold. However, regulating ecosystem services are extremely beneficial because they could reduce the impact of climate change as well as aid in agricultural production, along with many other valuable benefits. In fact, the total global value of regulating ecosystem services is estimated to be worth approximately US$29.085 trillion (Balasubramanian, 2019). More specific examples include: The regulating ecosystem services of the Tampere region in Finland amount to approximately 1 billion Euros in total, contributed annually (Tammi et al. 2017). For Tampere city (in Finland) alone, ecosystem services such as carbon sequestration have an estimated value of 31 million Euros, pollination amounts to about 9.9 million Euros, and nutrient retention generates a value of roughly 54 million Euros (Tammi et al. 2017). In this case, pollination is a regulating service since it helps to stabilize the city’s ecosystem. In the Netherlands, the economic value of air quality regulation services has been found to be worth approximately 2 million Euros (Remme et al. 2015). The economic value of climate regulation (which includes natural services such as carbon sequestration and others) in the Czech Republic is worth approximately 267.32 million dollars (Balasubramanian, 2019). Cultural Services Over the years, the natural world has continued to guide our cultural and social advancement by being a constant force present in our lives. Cultural services that nature provides include recreation and aesthetic and spiritual values of nature, such as: Ecotourism, outdoor sports and all other types of recreation. Therapeutics such as eco-therapy and social forestry. Spiritual, historical, or religious value that people derive from nature. Other cultural services include books, film, folklore, national symbols, advertising, different forms of art, etc. that nature supports, makes possible, or features in. Despite the fact that cultural services provided by nature are usually immaterial, the annual revenue flow from ecotourism (as an example) could amount to an estimated US$29 billion. Egypt, Kenya, and Cambodia, among other countries, have recently started implementing ecotourism projects. Similarly, the spiritual, historical, or religious value attached to natural environments or natural phenomena also entails significant economic value. There are many other economic growth opportunities that could be obtained through the utilization of nature's cultural services. For example, for countries rich in greenery and natural scenery, why not implement ecotherapy programs? With evidence of booming anxiety and depression, especially among younger generations, the opportunity to spend a vacation in a tranquil natural landscape may be an attractive opportunity for many. In many countries, ecotherapy has started to gain a foothold as a legitimate mental health treatment. Some of these programs include: The Song House (Ireland), The Ecotherapy Retreat (UK), and Go Into Nature (US), among many others. Support Services The natural world provides us with countless services, and sometimes we overlook the most fundamental of them. Ecosystems themselves couldn't be sustained without the consistency of underlying natural processes. These processes are known as supporting services, and they form the necessary core of the production of all other natural services. The provisioning, regulating, and cultural services discussed in this article themselves depend on support services. These include processes such as photosynthesis, nutrient cycling, soil formation, and habitat provision. These processes allow the Earth to sustain the most basic forms of life, and thus to support whole ecosystems, humans, and economies. Without supporting services, the natural world would break down and so provisional, regulating, and cultural services would cease to exist. Natural services are essential to the global economy’s functioning… It is estimated that these natural services contribute a total global value of around $145 trillion per year to human society (Costanza et al. 2014). This figure was constructed as an estimate of “...the support of sustainable human well-being that ecosystems provide…The value of ecosystem services is therefore the relative contribution of ecosystems to that goal.”1 Putting that contribution to human well-being into perspective, this is more than seven times the GDP of the United States, and is much larger than total global GDP. In other words, nature’s contribution to our lives is much more than our total economic output. To be clear, this is value that we freely receive from nature and don’t have to pay for. It underpins our economic system, but since we don’t pay for it, we don’t account for it in our GDP metric. Thus, markets and governments “ignore” the value provided and fail to protect them properly. Yet these are services - like the water cycle, or oxygen production - that we can’t live without. …but are being degraded and ignored, to our future detriment Many government policies and corporations seem to behave as if there is a clash of interests between preserving the natural world and their bottom line. This seems extremely irrational, as they neglect the possibility that environmental degradation could shut down their markets entirely and put our economies at risk. Already, due to unsustainable and exploitative growth, global warming is increasingly causing economic damage. Additionally, the world has been experiencing a rapid decline in hundreds of plant and animal species that contribute to our ecosystems. The absence of clear environmental policy goals, poor enforcement of existing regulation, corruption, and lack of institutional capacity are some of the main reasons that lead to ecosystem degradation. This process of degradation could be considered a negative externality that is not properly accounted for by our economies’ markets, as again metrics like GDP don’t include them. Perhaps our limited capacity to deal with the potentially disastrous consequences of environmental degradation is aggravated by the absence of sufficient information. Governments and the public need more knowledge about ecosystem functions, the benefits they generate for economies, and the value they represent in and of themselves. We don’t necessarily have to choose between protecting the environment and continuing our economic growth. Rather, we must choose to protect the environment to ensure our economic future. References: Costanza, R. et al. Changes in the global value of ecosystem services. Global Environmental Change 26: 152-158, doi:10.1016/j.gloenvcha.2014.04.002 (2014). TEEB, RECOMMENDATIONS OF. "Mainstreaming the Economics of Nature." (2010). Wilkinson, Clive. "Status of coral reefs of the world: summary of threats and remedial action." Coral reef conservation 13 (2006): 3-39. Tammi, Ilpo, Kaisa Mustajärvi, and Jussi Rasinmäki. "Integrating spatial valuation of ecosystem services into regional planning and development." Ecosystem Services 26 (2017): 329-344. Remme, Roy P., Bram Edens, Matthias Schröter, and Lars Hein. "Monetary accounting of ecosystem services: A test case for Limburg province, the Netherlands." Ecological Economics 112 (2015): 116-128. Balasubramanian, M. "Economic value of regulating ecosystem services: a comprehensive at the global level review." Environmental monitoring and assessment 191, no. 10 (2019): 1-27.
For as long as we can remember, Mother Nature has been serving mankind as our major root source of livelihood. From the land that provides the nutrients for our crops, to the stone for our roads and buildings, to the oil for transport in our globalized world, we rely on these natural resources to maintain our modern way of life.
Agricultural and Environmental Economics (JEL Q)
This theory was originally formulated by the Polish mathematician Nicolaus Copernicus in 1517, but the version most commonly known today was developed by the American economist Irving Fisher in 1911. It gained popularity in 1963 with the publication of Milton Friedman's and Anna Schwartz's influential book A Monetary History of the United States. Since then, it has become a cornerstone of the monetarist school of economics, which sees excessive expansions in the supply of money as the primary driver of rising prices and hence inflation. Fisher’s Equation of Exchange Fisher's Equation of Exchange is an identity that always holds true by definition. It essentially states that the quantity of money spent in an economy needs to equal the quantity of money used. This is expressed as: \begin{equation*} MV_T \equiv P_TT \end{equation*} where M = Quantity of money VT = Money velocity of all transactions (money turnover) PT = Price level of all transactions T = Total transactions in the economy. According to the QTM, in any given time period, total money expenditure is equal to the total value of goods traded in the economy. The volume of transactions T depends on the supply of goods and services to be exchanged. The greater the supply of goods in an economy, the larger the number of transactions and trade, and vice versa. An alternative formulation makes this relationship more explicit by introducing real output or gross domestic product (GDP) to the equation. This particular formulation of QTM is quite common and regularly taught to students of economics, so you may recognize it: \begin{equation*} MV \equiv PY \end{equation*} where M = Quantity of money V = Income velocity of money P = Price index (not price level) Y = Real output (GDP). In this equation, as with the price of a commodity, the value of money is determined by supply and demand factors. Under the assumption of full employment and full use of all resources, Y cannot be increased and is therefore assumed constant. Another central assumption is that the velocity of money V is considered fixed or externally determined. With V and Y being held constant, the QTM then states that prices P evolve proportionally to the money supply M. \begin{equation*} MV = PY \Longleftrightarrow P = V\frac{M}{Y} \end{equation*} That is, any change in M leads directly to a change in P, or in other words, an increase in the money supply causes inflation. It's worth noting that M itself can be broken up into at least two components. Monetary assets that are very liquid, such as cash, are considered part of "M1". Other monetary assets including savings deposits are part of "M2". These sub-categories of the money supply are more fully explained in our article on velocity. Cambridge Cash Balances Equation An alternative approach to the QTM, known as the Cash Balances Equation, was developed by a group of Cambridge economists - including Alfred Marshall, Arthur Cecil Pigou, and John Maynard Keynes, in the early 1900s. While Fisher's version focuses on money supply, the Cambridge approach focuses on money demand, identifying different uses of money which the Fisher approach did not address. The main argument reflected in the Cambridge version is that money acts not only as a medium of exchange but also as a store of wealth. That is, people want to hold money both to finance transactions (medium of exchange) and as a security against unforeseen needs (store of wealth). It is assumed that a person’s demand for cash balances is proportional to their income. This leads to the following equation: \begin{equation*} M_dV \equiv k(PY) \end{equation*} where Md = Money demand k = Proportion of nominal income (PY) that is demanded as cash-holding P = Price index Y = Real output (GDP) In equilibrium, money supply must equal money demand. That is: \begin{equation*} M_s = M_d = M \Longleftrightarrow M = kPY \text{ or } P = \frac{M}{kY} = \frac{1}{k}\frac{M}{Y} \end{equation*} We can see that this is a transformation of Fisher's equation, with k being the reciprocal of V. Assuming that Y is constant because of full employment and full resource use, and assuming that k is a behavioral constant, the conclusion is similar to Fisher’s version. That is, an increase or decline in the money supply leads to a proportional price change. Good to Know While the QTM in essence is accepted by most economists, disagreement exists about the extent to which each of the variables depends upon the others, and which variables can reasonably be assumed constant in the real world where conditions are dynamic in nature. Moreover, additional factors which influence the demand for money such as rate of interest, wealth, and expectations about future prices have not been sufficiently accounted for in this simple model. While both Fisher's and the Cambridge version assume that output Y is constant because of full employment, the implications change once allowing for unemployment. As later pointed out by Keynes in his General Theory, the chain of causation between changes in the quantity of money and in prices is not direct but indirect. In the first place, an expansion in the total quantity of money leads to a fall in the rate of interest and, in consequence, a rise in investment. If there are unemployed resources, this will lead to an expansion of production, increasing output, employment, and income. However, once full employment is reached, output will cease to respond and the effect will be exerted on prices, which rise in response. Adapting consumer behavior is another factor that challenges the assumptions of the QTM theory. For example, if consumers expect that prices will rise in the near future, and in response decide to hold less cash and increase spending to stock up on goods, this will reduce k or increase V respectively.
According to the quantity theory of money (often abbreviated QTM), the general price level of goods and services is proportional to the quantity of money in an economy.
Macroeconomics and Monetary Economics (JEL E)
The velocity of money gives an indication of whether consumers and businesses are saving or spending their money. It is influenced by a variety of factors, such as the frequency of transactions, trade volume, business conditions, prevailing price levels and expectation regarding future prices, and borrowing and lending policies. Being typically higher during periods of economic growth and lower during contractions and recessions, the velocity of money can be used as a measure of economic activity alongside other key economic indicators such as GDP, unemployment, and inflation. Calculating the velocity of circulation The velocity V of money measures the rate at which money is exchanged to purchase domestically-produced goods and services within a given period. Following Fisher's Equation of Exchange, V is calculated as the ratio of nominal GDP (output Y evaluated at current prices P) to money supply M: \begin{equation*} MV = PY \Longleftrightarrow V = \frac{PY}{M} \Longrightarrow V = \frac{GDP}{M} \end{equation*} While GDP is typically used as the numerator, gross national product (GNP) may also be used. In the denominator, two alternative measures for the average stock of money can be applied: M1 is the sum of currency, demand deposits, and other liquid deposits in circulation. It is typically used in shorter-term transactions of everyday consumption. When you buy something with cash or a card, you are using money from the M1 supply. M2 is a broader measure. It consists of M1 plus several assets that are less liquid but still easily convertible, such as savings deposits, money market securities, and other time deposits. Central banks closely follow the evolution of M2 as an indicator of money supply and future inflation. It is a common target of monetary policy. To give an example, imagine an economy with two agents: a farmer and a mechanic. Both have initial cash holdings of €50, for a total stock of money equal to €100. In one year, the farmer produces wheat worth €100. However, before being able to harvest, he calls the mechanic to repair his tractor, for which the mechanic charges €50. The farmer then collects the wheat and sells the full harvest to the mechanic. In this example, the money supply is €100 (since both the farmer and mechanic start with €50 each) and the nominal value of goods and services produced is €150 (€50 for mechanic services + €100 worth of wheat). The velocity of money is then calculated as 150/100 = 1.5. That is, each Euro in the economy changed hands from one agent to the other 1.5 times within the time period. Factors affecting the velocity of circulation According to the quantity theory of money, changes in the price level of an economy are explained by changes in the quantity of money in circulation, while keeping the number of transactions and the velocity of money constant. In this setting, an increase or decrease in the price level would occur solely due to an increase or decrease in the quantity of money. In reality, the velocity of money may change in reaction to a variety of factors, including but not limited to the following: Money supply: The velocity of money depends upon the supply of money in the economy. If prices are “sticky'' in the short term and output is fixed, then a reduction in the supply of money would lead to an increase in the velocity of money. Frequency of transaction: Generally, the velocity of money increases with the frequency of transaction. In a climate of favorable business conditions and expanding trade volume, the velocity of money will increase. Contrarily, it will decrease in a climate of reduced economic activity. Behavioral responses: The velocity of money also depends on people's behavioral responses. For example, if workers are paid at regular intervals, they will spend their income more freely, while uncertain payment schedules lead people to hold on to cash reserves. Moreover, if people expect prices to rise and the value of money to decline in the near future, the rate of circulation will increase as people prefer spending their money rather than holding on to it. Good to Know The figure below displays the quarterly velocity of the M2 money stock in the United States from the first quarter of 1990 to the first quarter of 2022. It can be seen that the steepest declines in the velocity of money generally coincided with periods of recession (the shaded regions in the graph) in the U.S., including the Great Recession between 2007 and 2009 and the economic shock of the COVID-19 pandemic and associated lockdown measures in early 2020.
The velocity of circulation is the frequency at which one unit of currency (i.e., a one-Euro coin) is exchanged in an economy within a given time period. If it is rising, then more transactions are taking place between individuals in an economy. It is also known as the velocity of money.
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.
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. H., Meadows D. L., Randers J., Behrens III W. W. (1972), The Limits to Growth, Universe Books. Nordhaus W. D. (1974), Resources as a Constraint on Growth, The American Economic Review, Vol. 64, No. 2. Nordhaus W. D. and Tobin J., (1973), Is Growth Obsolete?, in Moss M. (ed.), The Measurement of Economic and Social Performance, NBER. Perman R. at al. (2003), Natural Resource and Environmental Economics, Pearson. Samuelson P. A. and Nordhaus W. D. (2010), Economics, McGraw-Hill, 19th ed. Solow R. (1974), The Economics of resources or the resources of economics, The American Economic Review., Vol. 64, No. 2, Papers and Proceedings of the Eighty-sixth Annual Meeting of the American Economic Association, May. Victor P. (2019), Managing without Growth – Slower by Design, not Disaster, Second Edition, E. Elgar.
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.