The INOMICS Questionnaire: Fratzscher vs Blanchard
Olivier Blanchard is the C. Fred Bergsten Senior Fellow at the Peterson Institute for International Economics and the Robert M. Solow Professor of Economics emeritus at the Massachusetts Institute of Technology (MIT). After obtaining his PhD in economics from MIT in 1977, he taught at Harvard University before returning to MIT in 1982. He was chair of the economics department from 1998 to 2003. In 2008, he took a leave of absence to serve as economic counselor and director of the research department at the International Monetary Fund, where he stayed until 2015. He then joined the Peterson Institute. Blanchard has worked on a wide set of macroeconomic issues, including the role of monetary and fiscal policy, speculative bubbles, the labor market and determinants of unemployment, economic transition in former communist countries, the nature of the Global Financial Crisis, and the recent burst of inflation. He is the author of many books and articles, including two textbooks on macroeconomics (one at the graduate level with Stanley Fischer and the other at the undergraduate level). He is a past editor of the Quarterly Journal of Economics and the NBER Macroeconomics Annual; he is also a founding editor of the American Economic Journal: Macroeconomics. He is a fellow and former Council member of the Econometric Society, a past president of the American Economic Association, and a member of the American Academy of Arts and Sciences. Marcel Fratscher: What is your favorite place on earth? Olivier Blanchard: The French island where I have spent most of my summers, and, with time, a longer and longer period of time each year. Zen, sea, and fortunately and unfortunately, zoom. MF: Outside of economics, what occupation would you choose if you could be absolutely anything? OB: Concert pianist (although there is zero evidence that I have the slightest gift in that particular direction). But music moves me more than nearly anything else. MF: What is your favorite piece of music? OB: Gymnopediés by Eric Satie. MF: What is the virtue you appreciate the most? OB: Straightforwardness, honesty. MF: Your all-time favourite figure in economics? OB: I shall choose close to home: my advisor, Bob Solow. I admire him for the importance and the beauty of his work, but also his human qualities. I admire, but am not sure I would have loved him, Keynes. MF: Your #1 economics blog? OB: I do not read economic blogs. Nothing personal. (I am more a short Twitter person). On general blogs, Ezra Klein. MF: Your ideal student? OB: Somebody from whom I learn. I have written papers with many of my students, learned a lot and always enormously enjoyed it. MF: What should be done to address a gender bias in research in economics? OB: I am proud of what we have done at the American Economic Association. I think the right institutions and rules are in place. (Some) male behavior unfortunately will take more time to adjust.* *Editor’s note: Aside from making policy changes to improve the environment for women in economics, the AEA launched the Committee on the Status of Women in the Economics Profession. An update on the Committee and the AEA’s work can be found in the 2023 CSWEP News Issue IV on the AEA’s website. MF: What is the most misguided research agenda in economics? OB: Let me avoid labeling it misguided, but Real Business Cycle theory and methodology is the quintessential example of a disrupting technology. 50 years after its inception, I am still not sure whether the benefits are offsetting the costs. It is definitely becoming more useful by incorporating more distortions and more heterogeneity, but it suffers from nearly genetic problems, such as the black box aspect. This is actually made worse by the increased complexity of modern DSGE versions. MF: What is the most promising current research field or issue in economics? OB: Quite clearly, all the fields that benefit from the increasing availability of large data sets. But, in general, looking for examples at the NBER working paper list each week or so, I am amazed at the richness and the scope of current research. They include forays in behavioral issues, use of experiments, forays at the border of sociology and psychology, and work on institutions. MF: Where does economic research have the most influence on policy-making? OB: In a lot of places, antitrust, macro, etc. But, and this is a plaidoyer pro domo, there have to be people with one foot in research, and one foot in the real world, to be able to translate the conclusions of research to specific policy recommendations. MF: On what issues should policy listen more to economists? OB: All the time…but especially when economists derive conclusions at odds with what would seem to be common sense. The paradox of saving, the incidence of taxes, the market for lemons, etc. MF: What is your career advice to a young economics researcher? OB: You need to demonstrate two things. Your analytical abilities, i.e. your ability to cleanly formalize an issue and derive implications. And more importantly, your creativity, i.e. thinking in a new way about an essential issue. The challenge: Balancing the two in your thesis. Start with a question to which you do not know, but would like to know, the answer (and one where you think the answer will be interesting to others too). Preferably not from an extension of another paper. References: The Peterson Institute for International Economics’s bio page for Dr. Olivier Blanchard was referenced when writing the introduction to this article. It can be found at the following address: https://www.piie.com/experts/senior-research-staff/olivier-blanchard Header Image: Composite. Photos kindly provided by Marcel Fratzscher and Olivier Blanchard.
The following article first appeared in the INOMICS Handbook 2024. Download the INOMICS Handbook Professor Marcel Fratzscher, esteemed macroeconomist and president of the DIW Berlin, once again asks questions about economics and life in general to a peer in the 2024 edition of the INOMICS Handbook Questionnaire. This time, he poses the questions to Dr. Olivier Blanchard, a prominent macroeconomist, who graciously took to the spotlight in this latest round. Thus, the back-and-forth has been dubbed Fratzscher vs. Blanchard, as is tradition. Dr. Blanchard offers us some interesting food for thought: the interview touches on the joy of conducting research with former students, the sometimes counterintuitive things we learn from economics, an analysis of Real Business Cycle Theory, and more.
You may be wondering how to make a strong resume for economics jobs that you’re interested in. Resume tips abound online, and many of them are quite good for your economics job application, too. In this article, we share some of the best ones, as well as economics-specific advice to help make your application stand out and ensure your resume gets noticed and read. Keep in mind that this article will focus on resume tips for an industry job application. If you’re more interested in applying for a PhD or academic jobs, check out our PhD application infographic or academic cover letter examples. You may also be interested in professional cover letters, or even highlighting your study abroad experience to your future employers. Now on with the tips! Formatting, formatting, formatting Realistically, the most important part of your resume is the formatting. That’s because the majority of recruiters and hiring managers will take only 6-7 seconds to “read” your resume (according to Indeed)! Applications submitted to job postings number in the hundreds on average (according to Zippia), and can be much higher. This incentivizes recruiters to spend as little time as possible skimming their massive stack of resumes to pick out potential leads. Although AI-assisted algorithms are increasingly being used to pick out the best applications for hiring managers, you need to ensure that your resume is formatted well so that when it is seen by a human, it isn’t tossed out immediately. So what makes for good formatting? Important information in bold (your name, job titles you’ve held, section headings, etc.) Use a clear, professional font, and use the same font throughout the entire document (like Arial, Cambria, or Times New Roman, etc.) Font size no smaller than 11pt Consistent margins, spacing, and font size Very little color; black-and-white should be sufficient Prioritizes readability and logical flow over creative design Clearly labeled, skimmable sections for Education and Professional Experience, and possibly Skills Limit your resume to one page only; if you’re running out of space, consider cutting experiences that are older or less relevant to the job Design and structure In general, a simple structure is better than a complicated one. Your resume should be easy to read and does not need to be creative to succeed in the economics job market; rather, it must be relevant and informative first. A header section towards the top with your name, contact information, and current location is a good start. Job seekers usually put their name in slightly larger text than the rest, so that it stands out and is easy to find among a stack of resumes. Keep in mind, too, that recruiters often read resumes using an “upside down L” shape; they’ll skim the top few lines and the left-hand side of the page, looking for key words and phrases. Only the absolutely most interesting resumes will get more attention than this. So, you should do your best to make sure the important keywords are to the left side of the page. Below are some further tips for the body of your economics resume: Don’t pack your resume to the brim, keep it concise and informative Consider using bullet points instead of paragraphs; avoid large blocks of text! Highlight your achievements as concisely as possible Emphasize experience that matches the job, and use keywords found in the job post Use numbers to quantify your successes if you can (i.e., reduced department overhead by 20%) Present information in reverse chronological order; your most recent experience should go first (unless you have earlier experience that is particularly relevant for the job) Double and triple-check your resume to correct any spelling or grammar errors Plenty of good, professional examples can be found online using a quick search. We recommend finding an example you like and making something that looks similar. Be specific Aside from common themes like communication skills, flexibility, and the ability to stick to deadlines, there will be economics-specific skills that employers mention in the job postings. In your resume, specificity will set you apart, and show that you’re qualified. When describing your experiences, avoid generic phrasing such as “analyzed voting patterns” or “researched fluctuations in international trade”. It’s much better to include specifics, for example “analyzed voting patterns using logit regressions” or “With a gravity model, described fluctuations in international trade”. This gives the employer a much clearer impression of your skills, showing that you have the specific economics knowledge to succeed in the role. Further, even if the employer has no need for those exact skills, being specific like this proves that you’re capable of learning and applying various quantitative (or qualitative) methods to a task. In fact, many economists opt to include a short “Skills” section that lists specific quantitative techniques and software skills. For recent graduates, a “Relevant Coursework” section is also acceptable and fulfills a similar purpose. But be careful – it’s not recommended to highlight prior coursework for too long after you graduate. If you’ve been out of university for more than 2-3 years, consider trimming down or cutting this section entirely and focusing only on your experience. Be concise When drafting your resume, you’ll need to be brief, often painfully so. Aim to describe only the most important points about your experiences (using specific language!). And, share these using the shortest sentences possible. For example, suppose you contributed to a research study that studied the link between capital accumulation and income inequality using historical data. The research aimed to prove that increasing capital accumulation would drive inequality by concentrating income in the hands of the few, who would then continue to accumulate capital – and wealth – at increasing rates. To do this, you used historical datasets from countries formerly occupied by the U.S.S.R. This involved months of work to find, clean, and use historical datasets from several different countries. With your research partners, you decided to use a two-way linear fixed effects regression model, tested for heteroskedasticity, ensured the residuals were approximately normal, justified your usage of certain control variables and proxies, and more. After months, you emerged from your trials, with a hypothesis definitively proved. Success! How should you summarize such a mighty task on your resume? Here’s a good example: Studied capital accumulation’s effect on inequality via two-way fixed effects regression using the methodology found in Bartels et. al. (2024)1. It’s challenging to summarize months of your life’s best work in a single sentence, but on a resume this is necessary. If you find that it’s not hard, chances are you need to make it even shorter! So how do you decide what to emphasize? A great question, answered by the next point… Go back and re-read the job description A job description is a gold mine of information. The description will describe the nature of the work and the skills the employer is looking for. You should add or re-write details to your resume to (truthfully) match as many of these as possible. If you’re applying for an industry position that requires economic research, for example, you should highlight the research experience you have as well as your thesis topic, especially if it is relevant. Or, if the job posting mentions the importance of presenting to company leadership, highlight your presentation experience at previous jobs, or in conferences or other roles. In short, look for specific quantitative or qualitative methods, responsibilities, topic areas, and software programs (like R, Stata, SQL, etc.) that are mentioned in the post. Then, include a bullet point to show your experience with each of these topics. It’s best to include these naturally as bullet points under the experiences where you used those skills, and how you used them (even if you also make a separate “Skills” section on your resume). Finally: Don’t Give Up! Looking for a job can be a difficult and discouraging process. But, don’t give up! With these tips and your economics degree in hand, you’ll be well on your way to a successful application. Remember, it only takes one successful application to land yourself an economics job, and economists are in high demand. Aside from polishing your resume, we also recommend networking to help you find a job. A business is much more likely to consider a candidate seriously if an employee knows them already. And, your network might be able to help you improve your resume, too, if you ask the right people. Just be sure to treat them to coffee or send them a thank-you to show your gratitude. Don’t forget, too, that you can always patch up holes in your economics skill set and strengthen your resume by taking professional training courses, summer school classes, or even deciding if doing a PhD is the right way to go for you. Whatever your choices, we wish you the best of luck and imminent success! References 1: Bartels, C., Kersting, F. and Wolf, N. (2024): "Testing Marx. Capital Accumulation, Income Inequality, and Socialism in Late Nineteenth-Century Germany", Review of Economics and Statistics (forthcoming), CEPR Discussion Paper 17925. Header image credit: Drazen Zigic on Freepik.com / Magnific (free license).
Completing an economics degree course is hard enough. But after you’ve earned your degree, you may very well begin to look for a job in economics, which is a whole new type of challenge!
Publish A Summary of Your Economics Research on INOMICS
We invite economists who are conducting or have conducted research to write a summary of their research and why it’s important, interesting, or unique in the field, and share that article with other economists via INOMICS. This “research summary” article can function as an extended abstract that will help other economists discover your work and learn more about your area of expertise. The tone can be similar to a relatively casual lunchtime conversation with colleagues who are trained in economics but unfamiliar with your work. Please note: We do not publish academic research. However, an article that describes your research and its importance to an audience of early-career economists and economics students is encouraged. Writing a research summary article on INOMICS can help your research reach a broader economist audience, inspire others’ research, broaden your network by reaching others in related areas, and add to your portfolio of written work. Our Goals for Your Submission: You are able to share your research topic and other factors related to it with economists on INOMICS. Economist readers of INOMICS can find interesting articles about recent or upcoming research in economics on the INOMICS Blog, in addition to what’s already been shared on the Blog. You are able to build your portfolio of written work, and develop your reputation among the thousands of readers who use INOMICS. You add to the library of interesting INOMICS content; readers benefit from learning about the interesting topic area. Less experienced readers additionally benefit from learning about your research, evaluation of economics issues, methodology or challenges overcome while researching, etc. Submission guidelines: Articles must be written in English Articles should be at least 1000 word and no more than 2500 words. Use a conversational but intelligent style - short introduction and conclusion, relatively short sentences, informal but intelligent tone (imagine you are speaking to a junior economist colleague or student at lunch hour). Additionally, please send a description of yourself and your academic and/or career credentials, no longer than 300 words, including a photo and a mention of your affiliated institution or your job title. Again, please note: We do not publish academic research. However, an article that describes your research and its importance to an audience of early-career economists and economics students is encouraged. Submission Process: Please send complete article drafts to: mailto:submissions@inomics.com. Articles that match these submission guidelines will be reviewed by a member of the INOMICS editorial board. If your article is of sufficient quality and adds to our content, we will contact you with initial edits, and begin the editing process with a member of our team. This may entail several rounds of edits. The final draft will be reviewed by another member of our editing team, and any last changes will be communicated with the author. Then, the article will be published on INOMICS, and you will be able to share it across your own channels as long as they are linked to the article’s “home” on INOMICS. Finally, contributors whose articles are published will receive a profile page on INOMICS and will have the opportunity to submit further articles for publication on INOMICS in the future. Contact: INOMICS Team submissions@inomics.com +49 30 2084712 50 Terms of Submission: By sending your submission, you guarantee that the submitted research summary article has not been published in part or in full elsewhere (note that this regards the summary written about the research, NOT the research itself). By sending your article submission you agree that INOMICS may publish your research summary article in-part or in-full, or publish an excerpt of your article in a larger content piece (for example a collection of opinions). If your research summary article is published in-full by INOMICS, you agree that in the event that you share or publish the article elsewhere, you will refer/link to INOMICS as the original location of publication for the research summary article (but NOT the research itself). You guarantee that you are the sole author(s) or that you have permission from your co-authors to publish this summary, and you confirm that you need no further permission from other co-authors, employers or funding bodies in order to grant copyright of the article to INOMICS.
Call for Submissions At INOMICS we aim to support economists, their studies, and their careers.
Economic Development, Innovation and Growth (JEL O)
Macroeconomics and Monetary Economics (JEL E)
Agricultural and Environmental Economics (JEL Q)
Public Economics & Economic Policy (JEL H)
Urban, Rural and Transportation Economics (JEL R)
Econometrics, Statistics and Quantitative Methods (JEL C)
Indeed, Alfred Marshall is considered one of the founding thinkers of neoclassical economics. He was a mathematician and philosopher who later became a microeconomist. His work formalized foundational economic concepts and theories such as supply and demand, price elasticity of demand, consumer and producer surplus, marginal utility, and production costs to produce some of the earliest cohesive economic models. He was even instrumental in making economics its own separate subject for the very first time at Cambridge, where he taught for much of his career. The entire field of economics was greatly influenced by both Marshall and several of his pupils, including famous economists Arthur Pigou and John Maynard Keynes. Alfred Marshall’s life Marshall was born in 1842 in London, England. He was at one time considering a career in the clergy, but abandoned the idea after he demonstrated significant talent for mathematics. Thereafter, Marshall attended St. John’s College in Cambridge, earning accolades in math (such as “Second Wrangler” in the Cambridge Mathematical Tripos) and securing his future as an academic. At first, Marshall wasn’t an economist – few in his time were! Rather, he studied subjects like math, physics, philosophy, and ethics, like many other thinkers of his time. It was allegedly Marshall’s love for ethics that led him to eventually study economic decision-making, as he saw economics as a means of improving the human condition for the common man. This was an ideal he shared with Adam Smith, another (earlier) important British thinker in economics. Thus, Marshall lent his considerable intellect to economic pursuits. In 1865, he was elected to a fellowship at St. John’s College at Cambridge. He married in 1877, left St. John’s, and taught at the University of Bristol and then at Oxford for a period afterward. In 1885, he became the Professor of Political Economy at the University of Cambridge, where he remained until his retirement in 1908. During this time, Marshall turned the study of economics into its own, self-contained discipline, creating the Faculty of Economics and Politics and helping to launch the first formal economics degree program at Cambridge in 1903. Famously, Marshall taught economic giants Arthur C. Pigou and John Maynard Keynes, who each went on to make their own grand contributions to the field, and often had great things to say about Marshall’s influence and teaching. The book Principles of Economics was Alfred Marshall’s magnum opus. He worked on it from 1881 to 1890. It was rapidly recognized as a success and a great achievement in economics upon its publishing. Yet Marshall was unsatisfied with the limiting assumptions of classical economics (some of which he helped to popularize!), so his work shouldn’t be viewed as a definitive snapshot of his economic beliefs. Instead, Marshall was keen to have his students surpass him and replace his models with more accurate ones, such that he was known to gift them copies of his Principles of Economics with signed messages such as ‘To [name], in the hope that in due course [they] will render this treatise obsolete’. Alfred Marshall died in Cambridge in 1924, at the age of 81. Alfred Marshall’s contributions to economics Marshall’s contributions to economics are numerous. As a former mathematician, he formulated many concepts in the field with equations. This approach helped him formally define many of the concepts mentioned at the beginning of this article, which other economists of his time had not been able to do. Nevertheless, he also attempted to distill economic insights into language that was understandable by non-mathematicians, a crucial skill for successful economists even in today’s world. This is evidenced by his placing math equations and graphs only in the footnotes and appendices of his Principles of Economics, not the main text. Besides Principles of Economics, Marshall’s other economics works include the 1879 text The Economics of Industry, which he co-wrote with his wife Mary Paley (a former student of his, and one of the first-ever female economics students. She was denied a degree on the basis of being a woman, a discriminatory policy that her husband Alfred Marshall supported; but nevertheless she was a brilliant economist in her own right). Alfred Marshall was also a crucial figure in popularizing the idea of “thinking on the margin”. Marginal analysis today is a core and foundational concept in economics, where someone’s decision is based on the benefit that the next unit provides, not the sum total of all units. The so-called “Marginal Revolution” began with economists William Jevons, Carl Menger, and Léon Walras in the 1870s. Marshall is one of a “second wave” of economists who, seeing the brilliance of these marginal ideas, set about integrating them into economic models. John Keynes, his former student, said this of his work: “[William] Jevons saw the kettle boil and called out with the delighted voice of a child; Marshall too had seen the kettle boil and sat down silently to build an engine.” According to Keynes, Marshall’s writing also put an end to a debate over whether cost or demand determined the value of items in a market, positing convincingly that it was actually both. As such, Marshall is credited with developing the idea that the price and output supplied of a good are determined by the intersection of supply and demand. This approach is so foundational as to seem obvious to economists today, which speaks to the success of his idea! Marshall also introduced early ideas of the different “time horizons” that economists frequently reference. He pointed out that in the short run, changes in demand tend to have more effects on markets than costs, while in the long run supply-side facts like costs can significantly shape markets. According to Keynes, Marshall was also the first to provide an actual formula for price elasticity of demand – which earlier authors had mentioned, but not formalized. He did the same with consumer and producer surplus as well, which French engineer and later self-taught economist Jules Dupuit had originally described. Marshall’s works were broad, covering even more topics than these. His students Keynes and Pigou, and later economists like Joseph Schumpeter, have several recorded quotes about the thoroughness of Marshall’s Principles that are readily available online. These include the fact that Marshall’s models and formulae hidden in the footnotes of the Principles often provided solutions to problems that were only thought of later on. So, next time you’re studying economics – particularly microeconomics topics – don’t be surprised to hear Alfred Marshall being given the credit! References 1 https://www.econlib.org/library/Enc/bios/Marshall.html 2 https://carleton.ca/keirarmstrong/learning-resources/selected-biographies/marshall-alfred-1842-1924/ 3 https://hope.econ.duke.edu/sites/hope.econ.duke.edu/files/documents/caldwell_2004_ALFRED%20MARSHALL%20and%20the%20CAMBRIDGE%20SCHOOL_0.pdf Header image credit: wikimedia / public domain.
Alfred Marshall is a famous economist who made great contributions to the field when it was still relatively new towards the end of the 19th century. Yet, students often learn about important figures in economics only briefly and in passing, although the content taught in economics courses often comes from brilliant economists such as Marshall.
Recruiting Economists for Your Professional Training Courses
Economics is a large field with many sub-disciplines, and it’s impossible to master the whole lot from just one Master’s degree or even a PhD. A single economist doesn’t have to master the entire field, but taking time to deepen important skills can be very helpful for an economist’s career. So, proactive economists will seek opportunities to further their skills beyond graduation, especially as they encounter situations in the workplace that demand more technical or subject-specific skills. Professional development courses or skills training are one great method for them to do so, and institutions can develop and advertise them with this in mind. Who, what, and where: the basics of skills trainings for economists Professional training courses for economists may be offered by universities or by other organizations, including private companies and even multinational organizations like the IMF. Usually for a modest tuition fee, applicants can take a class that lasts anywhere from a single day to a few weeks. Some of these economics trainings are only offered in person and on-site, but many course providers are increasingly offering online courses so that anyone around the world can join in. These training courses are usually focused around a particular topic, and are designed to give either an introduction to a specific area of economics (for example, macroeconomic forecasting), a useful tool for economists (such as R or Python), or a related field (like data science). Economists looking to develop their skills will often search the Internet to look at online courses offered by their alma mater, another school they know of, or a reputable international organization. Online course platforms like Coursera are also a common place to search, but economists will typically still want to know which university is actually behind the course. And of course, to develop or host such a course, one must have an appropriate expert to help develop and deliver the course. This is one of the main reasons why universities and well-known international organizations tend to be the ones hosting economics trainings – they already have access to experienced economists willing to teach, as well as access to a community of (young) economists who might be interested in taking them. Common topic areas of professional development for economists There are a number of in-demand areas in which economists (particularly fresh Master’s or PhD graduates) seek to further hone their skillset. Below we list major topic areas institutions should consider promoting specifically to economics graduates and professionals: Econometrics and statistics: This is an important area containing many critical skills for economists, and as such these courses tend to be very popular – but that doesn’t necessarily mean they’re the easiest to recruit for, since there’s also lots of competition for these courses. Additional coursework in econometrics or statistics can be massively helpful in a young economist’s career, offering a deeper understanding of the math and methods that power economic analysis. This can include topics on statistics, time series analysis, managing panel data, niche or advanced regression models (like gravity models), etc. Courses on quantitative topics such as these are both difficult to learn and widely applicable across a variety of economics subfields, which lends to their popularity. It’s usually necessary for professional economists to develop their skills in a few useful quantitative methods at some point in their careers. If your institution is attempting to design and launch more professional training courses for economists, consider starting with courses in these areas first. Software tools: R, Stata, Python, SAS, SPSS, Eviews and dozens more: the statistical software tool options for economists are as myriad as they are complex. It’s likely that economists will need to learn at least one of these tools well in order to conduct data analysis. While many institutions offer introductory courses on these tools during economics degrees, professional economists often need a deeper expertise that schools usually cannot provide during the already-demanding economics degree program. So, many economists find themselves lacking advanced proficiency with software tools that they’ll need in the workplace. Courses in this area can help patch up those deficiencies. Data Science topics: Data science is a distinct field from economics or the econometric software that they use. Nevertheless, economists increasingly find many topics in data science interesting and helpful for their research and career. That’s because understanding data science can help economists work more effectively and conscientiously with their large economic datasets. Data science courses can also help prepare economists for the cutting-edge technology and research methods that will impact how economics is researched in the future. For example, economists and data scientists are already using machine learning algorithms to make forecasts, and may increasingly be using large-language models (LLMs) to analyze economic data. Other elements of data science (such as bootstrapping and decision tree models) have already made their way into the field of economics, so it can be helpful for economists to become familiar with these tools. Advanced micro- or macroeconomics: Although every economics degree comes with micro- and macroeconomics coursework, advanced topics within these broad categories may need refreshing after a graduate has taken the first steps into their economics career. Advanced microeconomic or macroeconomic courses help take the fundamentals closer to real-world application, and can even inspire research by reminding graduates how macroeconomists (for example) tackle some problems that microeconomics-focused specialists don’t think about as often. Niche topics within these categories may be helpful for economists in a new role, too; perhaps a labor economist could benefit from reviewing the latest behavioral economics models, for example. And finally, some courses could delve deep into newly emerging research methods, or explain niche economic models that semester courses didn’t have time to introduce. Advertising your course When advertising your training courses, it’s important to emphasize the specific professional development skills that each course aims to provide, and offer a clear look at the course curriculum. These factors are usually the bare minimum for an economist to consider the course. For example, if they want to develop their Stata skills, they’ll look for a course that is all about Stata and contains specific topics they’re struggling with. Therefore, in your communications about the course – via advertisements, emails, or other messaging – be sure to clearly state the course’s topic areas of focus. Any accolades earned by the economics department or professor overseeing the course should be mentioned as well. Similarly, It’s also important to design an informative title for the training course. This involves understanding the reasons why an economist might search for the course. Designing the name of the course to clearly communicate the skills economists will learn is key to driving recruitment and engagement. For example, “Advanced Macroeconomic Analysis” is a fine name for a required course during a degree program. But for a professional training course, it falls flat. That’s because it’s unclear what the course is actually about, other than ‘macroeconomics’. A better title clearly lists the specifics, so that a prospective learner can quickly determine if the course will help them with what they need. For example, titles like “DSGE Models for Macroeconomic Analysis”, “Advanced Stata Tools for Time Series Analysis”, and “Analyzing Business Cycle Theory with Panel Data Tools” are much more eye catching to students looking to develop in those areas, and help a prospective student get excited about the course content before they even click on the link. Announce your course on INOMICS For most economists, the first place to search for professional development training courses is online. Therefore, finding a useful hub for economists where your course can be listed is very helpful. Generic course-catalog sites like Coursera can serve this purpose, for a fee to the institution. Other options include economics-specific sites where you’re likely to find a very high concentration of your target audience, like INOMICS. INOMICS helps put your Professional Training Announcement in front of potential candidates in economics across the web, email and social media, increasing your chances of reaching interested candidates and making your course a success. To really expand the number of candidates seeing your announcement, we have advanced promotion options and tools like Multi-Channel Promotion to try. This gives recruiters a tailor-made blend of content marketing, social media and email advertising to target the listing among our audience of economics professionals and students. Be sure to speak to our Sales Team at info@inomics.com to customize the right package for your institution, or check out our publish page for our latest pricing. INOMICS’ mission is to help institutions raise their profile and reputation and effectively recruit the best candidates in economics. Whether you are promoting a study program, postdoc, professor job, industry position, economics conference, scholarship, professional training course, or institution, our packages can be tailored to your needs to produce the best results. Header Image Credit: Robert Kneschke via Shutterstock (Licensed image - copyright)
This article overviews different types of economics skills training courses and discusses how course organizers and recruiters can make sure their programs get seen and attract the right talent. If you’re looking to better serve the economics alumni from your degree programs, build a pipeline of potential PhD candidates, or just attract more attention to the professional training courses you offer, keep reading for more.
In the labor market, employees sell their labor (the service being sold) to employers for a wage (the price at which employers can purchase the service we call labor). Since labor is a very important factor of production, the labor market is classified as a factor market. As with the market for any normal good or service, demand for labor tends to increase as the wage (or, the price of labor) falls, while the supply of labor tends to increase as the wage rises and it becomes more attractive for people to work. This is the same general relationship that can be observed in most product markets. However, the market for labor has a few unique characteristics that other markets don’t have. For example, as wages increase beyond a certain hourly wage level, the labor supply will start to decrease. This happens because when wages become high enough, employees become satisfied with their total income and begin to want more leisure rather than more income. This causes them to substitute work time for leisure. Due to this desire for work-life balance, the labor supply curve is “backward-bending”, unlike most product or service markets. In other words, an increasingly high wage will eventually incentivize people to work less, since they can afford to take a large amount of time off and still enjoy a high income. Figure 1 shows a typical labor market with downward-sloping employer demand for labor D and upward-sloping employee supply of labor S. The market is in equilibrium at an hourly wage of w* for h* hours of labor per week. The supply of labor is backward-bending beyond a "high enough" wage level of w', where further increases in wages will only incentivize workers to take more time off. That is, if quantity demanded for labor in this market increased such that employers were willing to pay more than w' per hour (for example due to a surge in demand for a product that requires specialist skilled labor), employees in the market would not supply hours of labor beyond h' per week as they would prefer to have more leisure time instead. The labor market would then be said to be “tight” and/or a “sellers’ market”. Since employees sell their labor to employers, the employees would have more power than employers in this situation. Figure 1: Labor supply as hours and wages increase Labor Economics Labor economics is the sub-field of economics that studies the labor market and the labor force. Labor markets, job markets, the movement of workers, labor force participation rates, and more can be studied at different levels of the economy. And, these can all be studied for different types of employment, from the perspective of different types of workers, by gender, by level of education, across borders, and much more. No wonder labor economics is one of the largest subfields of economics! It is common to sort employment in an economy by region, industry, occupation and the educational qualifications of employees. In practice, the process by which wages are determined also varies according to industry, education level, and occupation – and sometimes, even by factors such as ethnicity or gender (even though determining wages based on these factors can constitute illegal discrimination in many cases). In some sectors, free bargaining over wages takes place between employers and employees. This bargaining is heavily affected by the relative market power that employers and laborers hold. In situations where employers have more power (i.e., labor supply exceeds demand), negotiations will be tilted in favor of the employers, and vice versa. Another common type of wage determination involves trade unions, which negotiate wages with employers on behalf of employees. In these cases, individuals don’t negotiate for their wages; representatives for the employees do. Negotiating failures in these circumstances can often lead to widely-publicized strikes, where employees refuse to work until employers make concessions in wage negotiations. Meanwhile, in the public sector, wages may be subject to strict regulation such that its labor market is not really in free-market equilibrium. Furthermore, governments often set minimum wages for the economy as a whole (which function as a price floor in the market for labor). Labor markets differ from the markets for other items in that the labor being exchanged is inherently human; labor is not a simple commodity. Indeed, the conceptualization of the market for employment as hours worked in direct exchange for a wage is overly simplistic. The notion that people only go to work for the money is misplaced. There are many other motivations for seeking employment such as the desire to make a contribution to society, as well as one’s personal and social esteem associated with a job. There are benefits to holding a job in addition to the direct monetary compensation, typically including access to health and other social insurance, accommodation during the working day and opportunities to access wider professional and social networks. The fact that people volunteer their labor for no wage at all in some sectors of the economy is evidence of these other motivations. Nevertheless, the basic tools of microeconomics can still be used to quantify labor supply and demand in more complex labor markets: people’s valuation of a job in excess of the visible wage can be estimated by observing their working behavior over time. Labor Economics is a very rich and interesting area of study for economists precisely because of its more human aspects. Further reading The US Bureau of Labor Statistics offers a vast range of information and statistics on the American labor market on its website, and it is an excellent starting place to gain an overview of important and current topics for the sub-discipline of Labor Economics. For the more theoretically-minded reader, Chung-cheng Lin provides a plausible alternative explanation for backward-bending labor supply curves in his article, “A backward-bending labor supply curve without an income effect” (Oxford Economic Papers, 2003). Good to know In recent years, much has been made of the emergence of a “gig economy” in which firms hire workers on a short-term basis via contracts that offer little or no job security (just as musicians and other artists have traditionally been hired for gigs). People then no longer work as employees for an employer but rather as contractors paid by the hour or, more commonly, based on some specified output as gig workers (such as number of rides given for an Uber driver). While the pros and cons of such set-ups like gig work are certainly debatable, it is very possible that the future world of work will be more gig-like. In fact, when the labels of “employee” and “employer” are dropped for participants in the market, a gig economy comes closer to a "pure" labor market and it is thus easier for economists to study, understand and predict than employment markets that are regulated with high degrees of social protection for employees.
Employment is a major topic within macroeconomics, so much that labor economics is a massive field of research on its own. The market for employment, while unique, can be thought of just like the market for a physical good or service. So, what is the labor market?
A producer is typically a seller in the market for a final good or service (supply SG in the graph below). Simultaneously, these producers are also buyers in the markets for the factors of production (demand DF below) that they use in their production processes. For example, a paper manufacturer is a seller in the market for paper while being a buyer in the market for wood pulp. Figure 1: Illustration of factor markets for a firm producing final good G Figure 1 depicts how markets are often interlinked with one another. For example, the market for cars depends on the markets for raw materials such as steel, rubber and glass. It also hinges on labor markets for people to design and assemble the cars. That’s because these factors are all inputs to production for car producers, who depend on the markets for steel, rubber, glass, laborers, etc. to help them build and sell cars. Therefore, what is happening in one market can have a “ripple effect” on surrounding markets. If the price of steel increases, car producers face higher costs to produce the same products. This will cause them either to reduce the supply of cars, or to increase their price. Similarly, if the price of fuel increases, demand for cars will fall due to cross elasticity of demand. This will result in declining demand for steel, rubber, and other inputs by car producers, as they produce fewer cars in response to the lowered demand for cars. When deciding how much of a production factor to employ, producers weigh its marginal cost (MC) against its marginal revenue product (MRP). MC is derived from prices in the factor market. MRP depends on the market for the final product. As long as the last unit of input adds more to revenue than it does to cost (MRP > MC), it still makes economic sense to use it. If there were perfect competition in all markets, then the effects of a supply or demand shock from one market onto another’s prices would be relatively easy to calculate. However, in reality, most markets exist in some state of imperfect competition. This means that power is not equally balanced between buyers and sellers. For example, the labor market is a factor market where prices (i.e. wages) are often affected by collective bargaining through trade unions. It could also be influenced by a government’s decision to implement a minimum wage or some other regulation. Producers can then find themselves squeezed between a high degree of competition in the markets for their final products and high or inflexible costs in their factor markets. Interdependencies between factor and product markets sometimes provide good reason for producers to buy out their input suppliers, merging along the supply chain (so-called vertical integration). For instance, if a car manufacturer purchases the firm they buy steel from, they would be vertically integrating. In effect, sales contracts are then replaced by employment contracts and free, internal transactions between departments. This helps a business reduce transaction costs when acquiring inputs, and gain a higher degree of control over the production process. While such changes in ownership structure can help producers to control risk and increase efficiency, they also tend to reduce competition. This can lead to market failure and issues of antitrust. The major factors of production in an economy So far in this article, we’ve discussed factors from the perspective of firms selling final goods. But, there are a few other major factors of production to discuss: land, labor, capital, and entrepreneurship. These four factors of production aren’t always bought and sold like typical factor inputs, yet they are all considered inputs to production. Land as a factor is bought and sold much the same way as other factors, but it is unique in that there is a finite amount of land to share between everyone. Labor has already been alluded to. The labor market is the factor market for labor, where skilled workers vie for employment as a valuable input for an employer’s business. Labor is usually accounted for in the basic Cobb-Douglas model of production by the variable L. Capital itself is also a factor of production. Capital as a factor includes inputs such as manufacturing machines and other tools and equipment. It also includes financial capital that businesses use to operate, and human capital, a very important input that is developed by education and on-the-job training. Capital is represented in the basic Cobb-Douglas model of production by the variable K. Entrepreneurship is not always pointed out as a factor of production, but some economists mention it because it is the ingenuity that helps foster economic growth. Entrepreneurs combine inputs in new ways, develop more efficient and productive economic processes, and launch entirely new ventures that can disrupt industries and lead to creative destruction. Further reading John Dunlop and Benjamin Higgins discuss how different forms of competition in factor markets can affect wages and prices across the economy. They use a general-equilibrium approach in their early paper, “‘Bargaining Power’ and Market Structures” (Journal of Political Economy, 1942). Good to know A sound understanding of factor markets is imperative for making successful investments in the stock market. When assessing a firm’s future potential it is important not just to consider direct competition in its final product market but also to look at the trends in its factor markets and their effects on its future performance. For example, if the price of jet fuel rises, ceteris paribus one would expect airlines' financial performances to decline. Generally speaking, the higher the degree of competition in factor markets and the lower the degree of competition in the final-product market, the higher the value of a final producer.
Factor markets (or resource markets) are markets that help connect buyers and sellers of the inputs used to produce goods and services. “Factors”, then, are inputs used in production, often natural resources or intermediary products that are needed to make more complex goods, like nails or computer chips.
Austrian Economics: Historical Contributions and Modern Warnings
Although these “schools” are separately defined, many modern economists probably consider themselves to fall into an ideological mix of several, and theories from a school can be useful even if an economist considers themselves a “member” of another. This article focuses on the latter of these schools of thought, which happens to be set apart from the others in a unique way. Austrian economics is considered “heterodox”, or not mainstream. The Austrian school of economics may not even be considered legitimate economics by some modern economists. This article provides a brief history of the school, its contributions to economic theory and the reasons it’s generally no longer considered orthodox. Finally, there is a gentle warning about how the label may be misused in modern discourse. Defining Austrian economics To an Austrian economist, economics is about individual people making choices based on their preferences – in other words, human behavior (or “praxeology”, as Austrian school thinkers like to reference). Austrian economists are often also concerned with the unintended consequences of these individual choices, which have lasting effects on economic activity. Due to this concept of unintended consequences, Austrian economists tend to purport the idea that economic institutions form in unintentional and inefficient ways, as the result of individual agents’ own decisions and actions. In this view, it’s no one person who designs the economic systems we put in place – rather, they result as a by-product of the self-interested actions that individuals take. Then, because these systems are not purposefully designed, and because it’s impossible to know the preferences and utilities of every individual, Austrian economists tend to believe that government activity is usually harmful. In this way, they agree with classical economists who believe that government intervention is neutral at best. However, Austrian school economists disagree with the classical economists on other key ideas; the classicals believe that money is neutral, while the Austrians assert that money is not neutral at all (similar to the monetarists). In the present day, there are two major camps of Austrian thinkers, with two historical figures acting as their guide. One camp functions as stated already, being staunchly against government intervention and rejecting much of neoclassical economic theory. They follow the philosophies of Ludwig von Mises and Murray Rothbard. The other camp is more lax about these concepts and may not always be against intervention, though they certainly don’t promote it as (neo-)Keynesians would. These Austrians accept more of neoclassical economics than the others, and follow the thinking of Friedrich Hayek, who won the Nobel Prize in 1974 for his contributions to “the theory of money and economic fluctuations” (alongside Gunnar Myrdal). Austrian economists believe that economic truths can be learned by conducting “thought experiments” that don’t have to rely on data. This involves using logic and reasoning to postulate their theories. Austrian economists therefore tend to downplay (or altogether reject) the role of econometrics and data in economics – as many of them believe that human behavior cannot be modeled effectively in mathematics as conveniently as many orthodox economic theories attempt to. In the modern age, this stands in stark contrast to mainstream, orthodox economics, where empirical evidence and quantitative skills are considered critically important to support or discredit economic theories and models. Modern academic research prizes falsifiable hypotheses and quantitative analysis to support theories, so these skills remain crucial for economists hoping to publish in top journals. This is, of course, a relatively recent development; economists began to favor econometric methods more heavily in the mid-twentieth century. Until then, most economists’ methods were much more similar to those of Austrian economists. Yet, more recently Austrian economists have tended to reject some economic theories and concepts that are widely accepted by those in the mainstream, further separating them ideologically. For example, many Austrian thinkers would reject the idea that the free market can be inefficient, while the majority of mainstream economists would agree that externalities, asymmetric information, and more can make markets inefficient (though of course, they may disagree about the best interventions to solve the problem, if any!). The vast majority of professional economists today consider themselves non-Austrian, and would consider Austrian economics at its best to be misguided. Economist Leland Yeager wrote that he opposed Austrian economists’ “...ultra-subjectivism in value theory and particularly in interest-rate theory, their insistence on unidirectional causality rather than general interdependence, and their fondness for methodological brooding, pointless profundities, and verbal gymnastics"1. Similarly, economist Paul A. Samuelson wrote that “...the exaggerated claims that used to be made in economics for the power of deduction and a priori reasoning…Fortunately, we have left that behind us.”2 However, this ideological divide was not always so stark. The beginnings of Austrian economics Austrian economics is widely considered to have begun upon the completion of Carl Menger’s Principles of Economics, which was published in 1871. This work put forth the idea that the logic of individual choices, even when those choices are uniquely human and not “economically rational”, should form the basis of economic analysis. Nevertheless, although he is considered the “father” of the Austrian school, Menger himself wasn’t necessarily opposed to or opposed by mainstream economists of his time. He dedicated his seminal work to a prominent German economist (William Roscher), who at the time belonged to a philosophical camp that touted historical evidence as key to learning economic truths and proving theories. This camp became a major force opposing the emergence of Austrian economics, which argued that historical facts were merely illustrative of human behavior, but that theory alone should be relied upon. In fact, it was these German “historical school” economists who labeled Menger’s ideas as “Austrian economics” in the first place. The term was meant to be derogatory, but it was later adopted by Austrian economists, who began using it to label themselves. Contributions of Austrian economists Economists used to be quite limited in their ability to conduct quantitative analysis, when calculators and computers weren’t widely available. Conducting procedures like regression analysis by hand can be extraordinarily tedious, and being forced to research economic data by finding historical records in libraries was much more time-consuming than downloading an economic dataset from the Internet. It should be no surprise, then, that Austrian theories and methods – that don’t always rely on empirical evidence – were quite relevant and more accepted by economists in the past, as they reflected mainstream approaches of the time. In fact, Austrian economists have contributed to theories and ideas that support what is very much considered orthodox today. For example, Austrian ideas are credited with influencing the “Marginal Revolution” in economics, which occurred in the late 1800s and introduced the now-mainstream idea of “thinking on the margin” or “marginal analysis” to economics. For example, the “father of Austrian economics” himself, Carl Menger, is partially credited – alongside famous economists such as Léon Walras – with developing the idea of marginal analysis. The “Marginal Revolution” (or marginalist revolution) introduced concepts like the theory of marginal utility for the first time. These ideas showed that economic agents make decisions based on their consumption of the “next unit”, as they weigh the costs and benefits of each action they take. Core economics concepts such as diminishing marginal returns sprang from this period, and continue to be widely acknowledged and taught in mainstream economics today. Opportunity cost is another example of an economic theory first introduced by an Austrian economist, as it’s attributed to Friedrich von Wieser, an Austrian economist who formulated the idea around the same time, in the late 19th century. Therefore, it’s undeniable that Austrian economists in the past have contributed to the development of the field of economics today. And, Friedrich Hayek winning the Nobel Prize in Economic Sciences in 1974 gave a brief resurgence of legitimacy to the Austrian school. But even by that point, Austrian economics was widely considered heterodox by most professional economists. As time went on, and as math, statistics and econometrics became increasingly important in economics, the majority of economists came to believe that quantitative analysis of empirical data is a key tool to furthering our understanding of the economy. As a result, Austrian economics is now considered heterodox in large part due to what other economists would call a lack of empirical rigor (of course, some Austrian economists may actually use empirical methods and so argue this point, but the school overall remains less committed to empirical evidence than many modern economists are comfortable with). The accusations run in both directions; Austrian economists have levied critiques against mainstream economists, as well. According to some Austrian economists, orthodox schools of thought fail to account for the unintended consequences of economic policy or individual choice. Others would claim that an over-dependence on quantitative rigor has led modern economics astray. While it’s not correct to “throw the baby out with the bath water” with regards to quantitative methods in economics, there may be some merit to this latter claim. Occasionally, mainstream economics is criticized by other actors as well for failing to see the “big picture” from among the strings of equations and data. One example of this is the 2008 financial crisis that precipitated the Great Recession. Very few economists correctly predicted the crisis or warned about the weaknesses in the global financial system. Arguably, a lack of “big picture” thinking partly led to the failure of economics to prevent catastrophe. This illustrates how economists should be careful not to get caught fully up in data or empiricism so they can still see the whole picture – though of course, data and empirical analysis are key tools when used properly. Finally, other factors (like corporate greed and lax legislation) were arguably much more to blame for the crisis than economists' failure to raise the alarm about the economy, although that task certainly does belong in the economics wheelhouse. The intertwining of the far right and Austrian economics Regardless of ideological differences, readers ought to consider the economic theories and evidence critically when encountering a self-described Austrian economist in the present day. Unfortunately, Austrian economics’ fondness for thought experiments, de-emphasis of quantitative rigor, and the label “economics” itself has caused the school of thought to be an attractive ideological tool for disingenuous actors in contemporary times. Because these facets of the school lower the barrier to entry for individuals who haven’t studied economics (at least to feel that they are competent economists), they have allowed unsavory groups, including far-right ideologues, to flock to “Austrian economics” as a means of disguising hateful ideologies as “economic theories”. Austrian economic theories heavily favor unregulated free markets, and are against almost every form of government intervention. These facts, too, tend to attract political actors who fall into libertarian, anarchist, or right-wing camps, who then tout the theories of Austrian economics as a priori fact and use them to push their own policy agendas without much factual backing. Further, this lower barrier to entry required by Austrian views encourages the development of “armchair economists”. This is in line with the general decline in trust of experts that has plagued society in the 21st century. It’s easier for an individual with a moderate view to read the writings of extreme “Austrian economist” conservatives touting these a priori theories as fact, than it is for them to work through a detailed economic paper using quantitative methods that provide a sound empirical basis, let alone study a degree in economics and learn about the vast depth of nuance that characterizes modern economic research on topics that might seem obvious at first – like the effects of a minimum wage. These actors may then very well consider themselves on par with professional economists, and even write “economics” opinion pieces without any sort of formal training, and repeat ideas that far-right actors have pushed as economic truth. For example, racist individuals can point to Austrian school style non-interventionism to push the idea that affirmative action, or any sort of policy that benefits minority interests, are destructive and should never be implemented for any reason. Similarly, any government redistribution programs – such as those to alleviate poverty, support retired veterans, etc. – are considered wasteful and a net loss for society. These views easily lend themselves to the types of far right-wing ideas that quickly spiral into anti-immigrant, racist, or other ultra-conservative positions. For example, far-right ideologues can take the anti-affirmative action or anti-redistribution stance, and go a direct step of (bad) logic further to state that these policies are really just discrimination against white people, decry them as morally wrong, and stoke the flames of racist anger – while hiding behind the guise of analyzing society as an unbiased “economist”. Sometimes, these actors may use Austrian positions to denounce the work of professional economists, central banks, and governments. And, a proportion of “armchair” Austrian economists may completely disregard the findings of economics professionals. Be wary of such discourse, and be sure to look to the evidence, research, or teachings backing any self-described Austrian positions, to determine what lines of reasoning are based on legitimate economic theorizing, and which are not. Be aware of bad-faith critiques of professional economists Whether connected to political agendas or not, there are modern-day Austrian economists who disparage the field of economics at large. The label “economics” has given a sense of legitimacy to these actors, emboldened by the writings of so-called Austrian economists who may have an agenda. Some of these writings come from self-described Austrian think tanks or other ideologically-focused organizations. One clear example is Jonathan Newman’s writing for the Mises Institute. In a March 2024 article, “Economics Needs a New Methodenstreit Based on Austrian Methodology”, Newman sets about criticizing mainstream economics (“Even a cursory look at what passes for economic scholarship in mainstream journals today shows that the methodological errors that were exploded by Menger and Mises persist”). One of the underlying assumptions in Newman’s writing is that state intervention is always undesirable – such that it is a foregone conclusion that the American Economic Review articles he shares must be biased because they conclude that state intervention or government programs led to positive results in some cases. His article also notably demonstrates the disdain for econometric methods common in modern Austrian economics discourse. Newman’s third and fourth examples of poorly-done economics research are simply an abstract about econometric methodology and a screenshot showing several equations. These are apparently evidence of those papers’ lack of usefulness. As another, more in-depth example, Henry Hazlitt’s 1946 book Economics in One Lesson3 is a popular and acclaimed read among contemporary Austrian economists. Unfortunately, the book contains a large amount of disingenuous language that seeks to discredit professional economists, and proposes the Austrian model of thinking as the obviously superior alternative. The following quotes offer examples taken from the book. “…the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups…Nine-tenths of the economic fallacies that are working such dreadful harm in the world today are the result of ignoring this lesson.” (page 5) Here, Hazlitt attempts to reduce the entirety of economics to one sentence, and in the same breath claims implicitly that economists routinely fail to consider longer-term effects of their policy suggestions. “But comparatively few people today make this error; and those few consist mainly of professional economists. The most frequent fallacy by far today, the fallacy that emerges again and again in nearly every conversation that touches on economic affairs…the central sophism of the “new” economics, is to concentrate on the short-run effects of policies on special groups and to ignore or belittle the long-run effects on the community as a whole” (page 5) This quote more blatantly targets “professional economists” as people who fail to consider long-run effects of their policy recommendations, a fallacy that other people would not make. “An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments’ thought. Yet the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics…It is solemnly reaffirmed every day by great captains of industry…by learned statisticians using the most refined techniques, by professors of economics in our best universities. In their various ways they all dilate upon the advantages of destruction…they see almost endless benefits in enormous acts of destruction. They tell us how much better off economically we all are in war than in peace.” (page 13) This quote from Hazlitt stands out as a neat summary of a chapter that disingenuously presents economists as professionals that celebrate destruction. Hazlitt correctly identifies that destruction is not good, and in fact that it’s wasteful when the money that would have gone towards other things must go towards rebuilding instead. However, he asserts that professional economists do not make this connection. “The analysis of our illustrations has taught us another incidental lesson. This is that, when we study the effects of various proposals…the conclusions we arrive at usually correspond with those of unsophisticated common sense.” (page 177) This quote from Hazlitt’s book asserts the idea that correct economic conclusions “usually correspond with those of unsophisticated common sense”. This is, clearly, a minimization and denunciation of the field of economics at large. The above direct quotes are filled with bold claims about the ineptitude of professional economists. This type of charged language is a red flag signifying that the written work itself has not been written with a full understanding of economics, its aims, and role in decision making. Nor, clearly, has it been written in good faith, or without bias. It should be clear that these types of emotionally-charged critiques of mainstream economics often contain dishonest assertions and sweeping generalizations about how economists think, advise, and research. To believe that the scores of professional economists working around the globe are unwilling or unable to consider the consequences of the policies they research, support, or criticize, is to think that all economists are short-sighted at the very best – and is a blanket insult to the profession. Yet they come from a self-described Austrian economist who did not study economics. The author of the book, Henry Hazlitt, was a journalist who wrote for the business and finance sections of several publications. However, his writing is often cited by present-day “Austrian economists” and touted as fact. In summary: the legacy and pitfalls of Austrian economics In summary, then, readers should take care when encountering self-described Austrian economists. In the past, such economists did contribute to economic theory and helped to advance the field. Today, however, Austrian economics has remained rooted in the past such that it is no longer considered mainstream, preferring to remain with thought experiments and eschew the empirical research that economics at large has embraced. Further, the label “Austrian economics” is often applied to harmful or disingenuous political positions, to grant them an air of legitimacy that the average member of the public may not be informed enough to think twice about. The best legacy of Austrian economics is the serious theorizing that gave rise to concepts like marginal analysis and opportunity cost, and Friedrich Hayek’s Nobel Prize-winning study of money and economic fluctuations. But unfortunately, readers must be wary of ultra-conservative, anti-expert pundits and self-described economists who take the label to further their own, sometimes problematic and politically-charged ideas without substantial evidence to back them. References 1: Yeager, Leland B. (1997). "Austrian Economics, Neoclassicism, and the Market Test". Journal of Economic Perspectives. 11 (4): 153–165. 2: Samuelson, Paul A. (September 1964). "Theory and Realism: A Reply". The American Economic Review. American Economic Association: 736–739. 3: Hazlitt, H. (1946). Economics in One Lesson. Harper & Brothers Publishers. First edition reprint accessed at https://www.liberalstudies.ca/wp-content/uploads/2014/11/Economics-in-One-Lesson_2.pdf. Header image credit: Mises Institute - Fair use image of Friedrich Hayek retrieved from Wikipedia at https://en.wikipedia.org/wiki/File:Friedrich_Hayek_portrait.jpg.
There are many schools of thought in economics. Each rallies around one or more different theories about how the world works, and builds models to support those theories and explain the economy. These schools include the (neo)classical, (neo)Keynesian, monetarist, and Chicago schools. Readers may have heard about the Austrian school of thought as well.
After high school, you got the economics degree. At great emotional and financial cost, you got it. Three years of diligent work, complete. Never to be repeated, either; your liver feels permanently weakened, you continually explain to people that your degree had nothing to do with the stock market, and you’ll never hear the word “incentive” quite the same way. You then finished the internship. Though it was lengthy, unpaid, and involved minimal compensation, it was likely worthwhile because everyone strongly encouraged you to do it, and you complied. It served one important purpose at least. Brought up-to-date, with the font size adjusted to 24, your CV finally ran to a full page of A4, now ready for new job opportunities. Emboldened, you began the job search. 14 months later, self-esteem long gone, your persistence paid off, the application process, the long-awaited interview, vindication. You remained calm under pressure, outperformed tough competitors through four rounds of interview questions, and impressed your hiring managers with your commitment to working weekends. Contract signed, you now sit at the computer, nervously, waiting for adulthood to begin in this first step into the working world. <11an>limit:3;categories:Postdoc;disciplines:Economics</11an> Now, don’t get fired! And the nerves are there for a reason. Work is no walk in the park. Indeed, resting on your laurels now would be unwise. The 9-to-5 can be a cruel master, ruling with an iron fist, and is particularly prone to nepotism and other office politics. To survive its tumult and built-in bias, one must be smart, savvy and alert - things they don't teach at college, yet things you’ll need asap. Complacency on any of these fronts and, well, expect disappointing results. But let’s remain positive! You can prepare. Follow these tips to reduce the risk of floundering and increase your chances of experiencing success. Together, they make up the INOMICS guide to surviving your first entry level job. Get to know the office culture, quickly An appreciation of office culture will be critical to your longevity. As a general rule you should respect it (unless, of course, it’s toxic), particularly at the start. That includes the parts that seem silly, too. For inevitably - and this is fine - there will be aspects of it you don't like. Wearing a tie in 35 degree heat, for instance, is gross, and there’s nothing professional about sweaty, red faces. But as a newbie in an entry level position, save the protest and keep your neck below the parapet. Try to gauge the work culture before you go about dismantling it (great advice to remember when you are inevitably promoted to a manager position, too!). It developed in your absence and will reflect both the history and values of the company, which, unsurprisingly, many will hold dear. Don’t go about offending on day one. And not offending should be easy, you’re a considerate person after all. But presumably you’ll have loftier aspirations; you’ll want to impress. One of the best ways to do so - besides routinely leaving cookies in the staff kitchen, which can be expensive - is to ask questions. Not to just anyone, though. Find a sympathetic colleague, someone with years of experience within the company, and get the office low down. Do people leave as the clock strikes 5? Are hour-long lunch breaks standard, or looked down upon? Does the boss have any unusual quirks you may need to tip-toe around? And how formal is office etiquette? Not only will getting a grip of these practices help you settle, it will move you out of the firing line and push you towards your dream job. And certainly, if you can afford it, don't forget to bring cookies. Bribery works. Signpost your humility and willingness to learn It may sound desperately obvious, but you’d be surprised how many people fail at their first job for not showing enough eagerness to learn. Don’t be one of them. Learn from your mistakes quickly, ideally while remaining dignified. And be open about what you don’t yet understand. Asking for instruction when unsure on something is preferable to charging ahead, effectively blind, and hoping for the best. The results of this wrecking-ball approach are time-consuming, discomfiting and potentially even job-losing. Avoid it. In fact, you ought to consider surveying your workload and your colleagues in your first few weeks. What skills do others have that you might need, or be expected to learn? What parts of your job make you feel the least qualified? Especially in economics, it pays to review areas of study that you may need more intensely in the office than in school, or topics that you might be unfamiliar with but need in this role. Companies often hire economists for their proven ability to learn and analyze data, not just their expertise in labor movements across borders (for instance). Bosses also admire humility in their employees. Its practice facilitates honest, efficient communication, and demonstrates both maturity and confidence. Remember, you’re only entry-level. No one is expecting perfection, so there’s no need to pretend you offer it. Be cool with what you do know. It did, after all, get you hired. However, keep in mind that excessive humility is to be avoided. You don’t want your colleagues to think you’re incapable. Be honest when you’re in over your head and ask for help; gracefully accept the praises given to you, and earnestly consider the feedback (positive and negative) you receive. Now to the signposting. A practical way of doing this is establishing an open dialogue with your superiors. Not all companies will automatically schedule performance reviews, and oftentimes when they do, they’re sporadic. Not so helpful for a newb. If this is your experience, be proactive (signposting in action) and request one. It doesn't need to be too formal. It is just a way to check your progress and identify areas for improvement. Consider bringing specific topics or questions for feedback, to tighten the scope of such meetings. Also, a bit of one-on-one time with your seniors is always handy for making - or hopefully consolidating - a good first impression and to build relationships. Be sensible, though: sycophancy is an unattractive trait. Limit any excessive flattery, customize it to suit your boss's ego in a subtle way. Over stretching is bad And easily done. It's normal to want to make promises to everyone, especially in the first few weeks when you may still be nervous. We all know the desperate desire to impress, to be seen as competent, independent, and unfazed. Abstractly these inclinations are positive, they show you to be a well-intentioned person, willing to pull your weight, and more. So on that front, well done. However, you must have them under control. Unfettered enthusiasm can get you into all kinds of trouble. Don't make big promises you can't keep. It can upset important people who have control over your job and could fire you. Ward against this. It’s fine to say no to doing yet another ‘favor’, and sometimes necessary. As the famous saying goes: it’s better to do one thing well than three things catastrophically. Don’t undersell yourself, just be realistic with what you can manage. If you’re nervous about refusing a favor outright, consider asking if it can be delayed, and mention that your work time is dedicated to other important, time-sensitive projects. Don't be afraid to take the initiative While keeping the above in mind, you should take the initiative. And if possible, try and do so when people - the more senior the better - are watching: make it visible. This will make you look accomplished, show leadership, and when promotions are in the offing, help you stand out. Taking initiative can be achieved in a number of ways. The most obvious is doing more than is expected of you. At the beginning, your task will be clearly defined and not too difficult. Try to do more than expected, but be careful not to do too much as advised above. This does not mean taking out the bins, although that’s a nice gesture and a chore many avoid. It means sharing your ideas, skill sets and expertise in topics you are interested in, even if no one has requested them. It also means thinking critically about the tasks you’ve been handed, and trying to find new, innovative ways to accomplish them. Modern institutions know well the need to innovate to stay relevant. Try to become part of this innovation. For if you do, you’ll find your career path, safe from the next round of cuts. Final words Okay, back to you, sitting there at your computer, tense. You can take a breath, we’ve covered the basics. It is now for you to remember them. Print them out, recite them and make sure you follow them. The imposter syndrome will subside if you do; and what a feeling that would be. Seriously though, things, in all likelihood, will be fine. With a good attitude and the ability you (surely) have, it won't be long before you gain the confidence to look away from your computer screen to the room and colleagues around you. In that beautiful moment you’ll realize you deserve the position you’re in. You’ve worked hard, and in reality, you are ready for this job. You may also notice that actually most of your work is pretty well received. You feel a bit less stressed, and you’re even getting invited to after work drinks now and again. The bliss... Now, to ask for a pay raise. Image Credit: fizkes / Shutterstock (Licensed Image - Copyright)
It’s your first day at work and you’re nervous, naturally. You decide to quickly remember the journey that brought you to the computer screen you are now looking at. Many INOMICS readers will relate to this journey.
Cultural goods Heavy metal is an example of a cultural good. Cultural goods, like books, art, and music, can be studied using the standard tools of economics, such as supply and demand. Yet, cultural goods have unique characteristics that require further examination. Cultural goods embody aspects of both experience goods and information goods. Assessing their quality without experiencing them is challenging, as their value lies in the information they contain rather than in tangible commodities that are more easily compared. As a consequence, heavy metal music relies on word-of-mouth advertising within underground social networks to build a following. Quality signals, like fans wearing band T-shirts and posting on social media platforms, contribute to the genre’s growth, even amidst fluctuations in commercial popularity. Cultural goods like heavy metal music also generate positive externalities, meaning they produce value beyond private consumption. Heavy metal music helps develop social cohesion among its dedicated fanbase, and it inspires future musicians. These types of positive externalities are a common feature of cultural goods; part of their value is in helping groups of like-minded people form communities. On the other hand, cultural goods can also produce negative externalities, as not everyone will appreciate the noise pollution of their neighbor blaring death metal around the clock. Superstar theory Another way to consider the distinct attributes of cultural goods is to apply Sherwin Rosen’s superstar theory. Rosen (1981) demonstrated why a small number of top performers appropriate the majority of the earnings in certain industries like music, art and professional sports. We can apply this theory to heavy metal by considering two American thrash metal bands that became popular in the 1980s: Anthrax and Metallica. Both bands have a similar style and sound, but Metallica has a slight edge over Anthrax in terms of catchy, memorable melodies. In other words, they are imperfect substitutes. As the superstar theory suggests, this small difference in quality results in a large difference in earnings thanks to recording and amplification technology that allows for economies of scale. Packed stadiums and global album distribution allowed Metallica to become a household name with an estimated $1 billion dollar net worth in 2023. Meanwhile Anthrax, still considered one of the “Big Four” thrash metal bands (together with Megadeth and and Slayer), has a net worth of only $39 million. This “winner-takes-all” dynamic helps explain why it is challenging for the majority of metal musicians to make a living from their craft. Globalization and economic growth Heavy metal originated from the industrial landscape of post-war Birmingham, England, with pioneering bands Black Sabbath and Judas Priest in the late 1960s. Their influence has since crossed borders, reaching nearly every country in the world. However, the number of heavy metal bands is distributed unevenly across countries. These days, most metal music is produced in high income nations with the best access to healthcare and education. In particular, Finland had the highest ratio of heavy metal bands per 100,000 residents in 2021 and 2022. Since heavy metal is a highly technical and virtuosic style of music, it requires significant human capital investment. And, because the likelihood of success is lower compared to other industries, pursuing a career in heavy metal is more feasible in countries with strong social safety nets and opportunities for advanced musical training. Thus, it is not surprising that most metal bands now originate from countries with higher standards of living. Nonetheless, this change in economic circumstances shaped the evolution of metal music. While it once was primarily a reflection of working class struggles, it has become more diverse and intellectual, with over 25 distinct sub-genres including progressive metal, symphonic metal, and folk metal. Technological change Technology is an important driver of economic growth, but it also changes how we produce and consume cultural goods.The music industry radically changed in the shift from physical media like vinyl records, tapes, and CDs to digital formats accessed via the internet. Heavy metal was at the epicenter of this transformation in 1999 with the landmark case Metallica vs. Napster Inc. Napster was a peer-to-peer file sharing program developed to facilitate the transfer of high quality digital music files, called MP3s. Metallica drummer Lars Ulrich became an outspoken opponent of the service after an unfinished version of the song “I Disappear,” recorded for the Mission: Impossible II soundtrack, was leaked to Napster. Ulrich argued that Napster made Metallica’s entire catalog of music available for free without asking for permission, prompting Metallica to sue for over $10 million in copyright infringement damages. The lawsuit raised new concerns about the role of technology and the scope of intellectual property laws for recorded music, and set a precedent for future legal proceedings and industry practices. Napster settled with Metallica and ceased operations in 2001, though they were quickly replaced by other similar services. Because Metallica had originally gained notoriety, in part, through underground tape trading, their actions were seen by metal fans as hypocritical. Ultimately, improvements in internet speed made streaming more convenient, essentially lowering the price of music relative to the costs of piracy. Looking back, file sharing was likely beneficial for underground music like heavy metal, because it allowed the music to propagate in countries where it was otherwise inaccessible due to religious laws and authoritarian control of cultural goods. Conclusion The example of heavy metal economics is a fun application that can help spark student interest in economics. Importantly, it serves as a reminder that art and culture are inextricably linked with economic circumstances, highlighting the impact that market forces can have on creative expression. References Krueger, A. B. (2019). Rockonomics: A backstage tour of what the music industry can teach us about economics and life. Penguin Random House. Rosen, S. (1981). The economics of superstars. The American Economic Review, 71(5), 845-858. Header image credit: Mainzer on Pixabay.
Economics can be used to study almost anything, including popular music. For example, the late Alan Krueger analyzed the music industry, examining live concert revenue, copyright protection, and streaming services in the book Rockonomics. Similarly, economics can offer insights about heavy metal specifically, a type of rock music characterized by loud distorted guitars, intense rhythms, and powerful vocal styles.
The market for loanable funds is a market that behaves similarly to a typical product market that students learn about in microeconomics, with supply and demand curves and all. In this case, the “product” is an amount of loanable funds. But what exactly are these funds, why are they important, and how do they help to determine the interest rate? Defining loanable funds Loanable funds are sums of money saved by lenders that are available for borrowers to use. When a firm or an individual wants to make a major investment, like upgrading the company’s manufacturing software or buying a house, they’ll usually need to take out a loan in order to afford the investment. These borrowers then seek a lender from whom they can take out a loan. In the modern economy, this process is usually aided by organizations like banks that help to connect savers and borrowers. Like with any other market, there is a supply of savings that are available for borrowing – or in other words, loanable funds – and a demand for borrowing those funds. Equilibrium is normally determined where the quantity supplied and the quantity demanded of an item are equal to one another at a certain price. But what’s the price for a loan? The answer is the interest rate. The interest rate on a loan determines the amount of money in addition to the loan’s original amount that the borrower must pay back to the lender when the debt comes due. So, the interest rate represents the price for the loan. When many new borrowers start to demand loans, the price for borrowing will rise, meaning the interest rate will increase. But when there are more lenders than borrowers, lenders must reduce the price of the loanable funds they offer in order to compete for borrowers, lowering the interest rate. The market for loanable funds can be graphed just like a market for a “typical” good or service. Graphing the market for loanable funds Figure 1: equilibrium in the market for loanable funds (LF) Figure 1 shows the loanable funds market at equilibrium. First, note that the supply curve and demand curve here represent the supply and demand for loanable funds (abbreviated as LF). On the vertical axis is the real interest rate, which is the price for loanable funds. The horizontal axis shows the quantity of funds demanded and supplied. This market works much the same as a typical market for a traditional good or service in microeconomics. Equilibrium is reached when the quantity demanded and quantity supplied for loanable funds are equal at a given price for those funds (the interest rate). Loanable funds are an important part of the savings-investment identity in economics as well. In short, this identity states that the quantity of funds used for investment must be equal to the amount of savings in the economy. Note that this identity is always true because the funds used for a loan are repackaged from savings. Readers may wonder if this means the LF market is always in equilibrium. That’s not the case; the LF market can be in disequilibrium. For example, a rightward shift (increase) in the demand for LF without a matching increase in the supply will eventually cause the real interest rate to rise and the quantity of loanable funds “traded” to rise. While the economy reaches the new equilibrium, the savings-investment identity still continues to hold by definition, as investors with their increased demand offer to pay higher interest rates to acquire loans for the projects they now wish to fund (or suppliers realize they can raise rates, which attracts more savers). Shifts in the LF market This begs the question: what causes either the supply or demand for loanable funds to shift? Any factors that change savings or investment behavior at any given interest rate will shift the equilibrium in the market for loanable funds by shifting either the supply (savings) or demand (investment) for loanable funds. For example, the rightward shift in the demand for loanable funds above could have been caused by increased business confidence in the economy, causing firms to seek more funding for investments even though interest rates hadn’t changed. Some factors that can shift equilibrium in the market for loanable funds include, but are not limited to: Increased consumer and business confidence (increasing the demand for loanable funds) Changing government policies that influence savings (i.e., changes to inheritance taxes, pensions) Introducing incentives for investing, such as subsidies or tax credits for investments (increasing the demand for loanable funds) Increasing economic growth (a bigger economy means more investment, ceteris paribus) The central bank conducting open market operations or other monetary policies (for example, the central bank can reduce the supply of loanable funds by reducing the money supply) Changes in the balance of international trade (for example, a trade surplus causing capital inflows increases the amount of savings in the domestic economy) Changes in the age distribution of the population (aging workers tend to save less for the future) Changing expectations of future inflation (higher expected future inflation lowers the supply of savings today, and vice-versa, as long as the Fisher Effect does not hold) In short, the demand for loanable funds shifts when investment projects become more or less attractive even if the real interest rate hasn’t changed. Similarly, the supply of loanable funds shifts when saving money becomes more or less attractive even if the interest rate hasn’t changed. The LF market and Aggregate Demand Monetary policy often involves pressuring interest rates to move towards the central bank’s target interest rate. Central banks attempt to reach their target interest rate through various instruments, like buying and selling securities (“open market operations”). Monetary policy actions also have consequences for aggregate demand. In fact, many factors that affect aggregate demand also affect the market for loanable funds. Recall that the formula for aggregate demand (or AD) is Y = C + I + G + NX, where Y stands for output, C stands for consumption spending, I stands for investment, G shows government spending, and NX represents net exports. Factors that shift aggregate demand are factors that shift one or more of its components: C, I, G, or NX. Clearly, with investment I being a core component of the aggregate demand equation, factors that shift the supply or demand for loanable funds and cause a new equilibrium in the LF market will affect the I component of aggregate demand. This can cause shifts in aggregate demand, and therefore change the equilibrium output in the economy. For example, suppose a newsworthy event increases businesses’ confidence in the economy for the better. In this case, businesses will increase their investment for any given interest rate as they expect the economy to perform well in the future. Thus, the demand for loanable funds shifts to the right, and the equilibrium quantity of investment I increases. This causes an increase in the I component of aggregate demand, and shifts the aggregate demand curve to the right. Further Reading Because of the savings-investment identity, we know that I = S where S stands for savings. Investment can be thought of as the “demand side” of this equation, while savings is the “supply side”. Therefore, changes in the amount of saving in the economy will have an effect on investment and the LF market as well. A 1990 IMF research paper, “The Role of National Saving in the World Economy”, examines a variety of factors that influence the savings rate as it explores reasons why the savings rate has dropped over time in developed economies. Chapter II in particular examines the determinants of savings in great detail. It’s a very useful read for students interested in learning more about the behavior of saving in economics. The paper is freely available for download at the IMF’s eLibrary site. Good to Know When economies are not in autarky, the market for loanable funds is affected by capital flows across borders. Countries where the real interest rate is relatively high will tend to experience capital inflows (ceteris paribus), as foreign savers attempt to take advantage of the high interest rates in those economies. Meanwhile, countries with lower real interest rates will experience capital outflows as domestic savers seek better returns for their savings elsewhere. These forces combine to pressure interest rates into an international equilibrium. Countries experiencing net capital inflows will face a downward pressure on the real interest rate, as new borrowers from abroad seek to “purchase” savings alongside domestic savers. Meanwhile, the lack of savers in low-real-interest-rate markets will cause savers in those places to demand higher rates. In turn, this will prompt banks and other institutions to raise rates in an attempt to attract more savers.
The loanable funds market (also sometimes called the “market for loanable funds” in economics) is an important macroeconomic concept. Loanable funds are the most common way that major economic investments are funded, leading to long-term economic growth. It’s also an important concept because it shows one way that the (real) interest rate can be determined.
For example, an economist might ask: is a Japanese car more expensive to purchase in Japan or in the United States? Since the currencies between the two countries differ, economists will have to calculate one currency in terms of the other in order to compare directly. One method for doing this is by using an exchange rate. But currency exchange rates fluctuate very often, and are influenced by financial speculation as well as economic activity; so, the value of a Japanese car in terms of USD might change drastically from one day to the next. Thus, relying on exchange rates can be misleading for some applications, leading economists to search for alternative methods of comparison. Purchasing Power Parity explained Enter Purchasing Power Parity (PPP), which is used by economists as a way to directly compare the prices of goods in different countries more reliably and fairly. PPP is constructed as an exchange rate based on the total cost of a representative basket of goods and services in different countries (similar to how the CPI is constructed). An accurate PPP rate cannot be constructed by comparing only a single good. However, once constructed, the PPP rate can be used to both compare the costs of specific goods and also give an indication of differences in the overall price level between countries. As such, PPP rates are used often by groups such as the International Monetary Fund, World Bank, the United Nations, and individual governments to answer macroeconomic questions. PPP in its most simple form is constructed as a ratio of prices. For example, if the representative basket of goods costs $42,000 USD, and ¥3,906,000 (¥ is the symbol for Japanese yen), then the PPP rate between the US and Japan based on this consumer good is (42000 / 3906000) = 93. This means that the same quality and quantity of goods takes roughly 93 times more currency to purchase in Japan than in the US, or that 1 USD in the United States can buy roughly the same amount of goods and services as ¥93 can in Japan. Using PPP in this way, the costs of specific goods and services become directly comparable, and more accurately describe the true cost of living than market exchange rates. Exchange rates are partially determined by world news, financial speculation, and fluctuations in supply and demand for currencies – while PPP is a purely theoretical conversion, and is not traded or used in financial transactions. Avoid common pitfalls when interpreting PPP Interpreting PPP rates should be done with care. Note that even though our assumed PPP rate shows that 1 USD in the US can buy about the same as ¥93 in Japan, this does not mean that US residents are 93 times wealthier than residents of Japan. This does mean that, in order to compare prices between US markets and Japanese markets fairly, USD prices must be multiplied by 93 (or prices in yen could be divided by 93). But this does not state outright which country is wealthier or where residents are better off. To see this, consider the following. One of the main differences between currencies is the magnitude of prices denoted in those currencies. Prices are set by market equilibrium (or occasionally by government decree), but the actual number is usually somewhat arbitrary in a measurement sense. To illustrate this concept, suppose that all prices in the economy doubled at the exact same time. What happens in such a scenario? Most economists would agree that in this scenario, nothing happens. Since all prices doubled, the underlying logic of economic activity has remained completely unchanged. Therefore, behavior will not change at all. The term Monetary Neutrality explores a related idea, how the money supply – which influences prices – does not affect real economic variables. In this way, it should be clear that only real economic output and real economic variables affect the economy’s functioning. Therefore prices themselves can be considered arbitrary measurements of economic value. They are simply numbers, and different societies around the world might choose to measure the same amount of economic value with a different number. To put it another way, let’s return to our example between the US and Japan above. It’s possible that US residents earn on average, say, $25 USD per hour of work, while residents of Japan earn on average ¥2325 per hour of work. If this is true, workers in both countries are just as well off as each other in real terms. In this theoretical example, Yen prices in Japan are simply 93 times higher than US Dollar prices in the US, because the numbers used for the value of goods in Japan happen to be 93 times higher than those used in the US. (This is just an example; whether or not US workers make relatively as much as Japanese workers is not known from PPP alone). Thus, PPP describes the relative price level in a region, but it does not describe the full picture of wealth or standards of living. To determine that, other information on average income, GDP per capita, inequality, costs of living, happiness, etc. are needed. Nevertheless, converting prices to a common currency using PPP rates is often a necessary and helpful first step in making macroeconomic comparisons. Comparing actual PPP rates as of February 8, 2024 Finally, consider the following Table 1 as a demonstration of how PPP rates should be used and interpreted. The following PPP data was taken from the OECD’s “Monthly comparative price levels” table on February 8, 2024. Meanwhile, the GDP per capita column uses data taken from the World Bank’s “GDP per capita, PPP (current international $)” table on February 8, 2024. Country Currency PPP rate (to USD) GDP per capita (USD) United States USD $1 $76,329 Germany Euro $0.81 $63,521 Ireland Euro $1.10 $126,837 Estonia Euro $0.78 $46,556 Denmark Krone $1.40 $74,897 Japan Yen $0.73 $45,583 Table 1: PPP rates comparison for select countries (converting to USD) All currencies listed in Table 1 are converted to USD in the third column using PPP rates taken from the OECD. In the rest of this article, the phrase “PPP rate” is used to mean “PPP rate when converted to USD”. The OECD constructed this data by building a basket of goods worth 100 currency units in each country, and comparing the cost to a 100-currency-unit basket of goods in the other countries (we have divided their numbers in the third column by 100 to present it in terms of $1). This table shows that in order to buy a basket of goods worth $1.00 USD in the United States, an individual must spend the equivalent of $0.81 USD in Germany, $1.10 USD in Ireland, $0.78 USD in Estonia, etc. to buy the same basket of goods. There are a few interesting results to discuss in the above table. First, readers might notice that those three countries use the same currency, but have different PPP conversion rates! How can this be? Recall that PPP helps economists measure the relative price level of goods and services in each country. Although many countries in the European Union use the same currency, the relative price levels in each country can and do still differ – despite the value of the currency, the Euro, remaining the same. To see this, consider that the same goods and services delivered in a major city might be more expensive than those same goods or services delivered in a rural village. A haircut in Paris is probably more expensive than a haircut in Colmar, France, which has a population of just over 70,000. Even though the same currency is being used, differences in economic activity in different areas can result in different price levels. So, even in cases where countries use the same currency, it’s a mistake to directly compare prices of the same good without taking the relative price level into account. PPP-converted rates must be used instead. Another observation from Table 1: the PPP rate intended to compare price levels should not necessarily be taken as an indicator of a nation’s economic activity or GDP compared to another (there are, however, PPP rates at the GDP level, which are used in the fourth column – also see Further Reading below). For example, the United States has one of the largest economies in the world. Because of this, casual observers might think that most other countries would have a PPP rate that is higher than 1, because if the US is such a rich and productive economy, people in other countries would need to make a lot of money to buy valuable American goods. But this is not true. The PPP rate for Germany, 0.81, is similar to the PPP rate for Estonia, 0.78. Meanwhile, Denmark’s PPP rate is 1.4. But neither Germany nor Estonia is more productive overall than the US, despite having a lower PPP. And, Denmark is often rated one of the best places to live in the world – above the US – despite having a PPP rate above 1, and a lower GDP per capita than the US. Also perhaps surprisingly, Ireland’s PPP-converted GDP per capita is much higher than the other countries in the table – and almost three times that of Japan! This might suggest that Irish residents are better off than Japanese residents, though other data is needed to paint a more complete picture. Using these rates to compare relative standards of living can be useful, but this rate doesn’t say anything about – for example – how fairly wealth is distributed. The Gini Coefficient does this, and can be used in tandem to compare living standards for the average resident more in-depth. In summary, then, it is critically important when making economic comparisons to find an appropriate PPP rate, and to understand exactly what that PPP rate can – and cannot – be used for. Most often, a PPP rate is used to directly compare the prices of specific goods or the standard of living between countries. At INOMICS, we use PPP exchange rates to compare the salaries of economists on level terms in our annual Salary Report; if we did not, our comparisons of economist earnings around the world would be misleading – for example, unfairly overstating how much economists in North America earn. Further Reading With the exception of Table 1’s fourth column, this article has only considered PPP rates used for price comparisons for specific goods. However, PPP aggregates can be constructed in order to compare entire product groups, industries, and GDP. The OECD has published a very helpful webpage about PPP, and has even produced a graphic that displays the proper use cases for PPP and pitfalls to avoid. For more information – and links to more technically detailed breakdowns of how PPP is calculated (aspiring macroeconomists, take note!) – visit the OECD’s page here. Finally, numbeo.com is a good place for curious economists to have fun examining price data. The website tracks price and cost-of-living information across the entire world, and is partially supported by individuals reporting on prices in their local markets. Good to Know Economics students may be familiar with other indexes that are used to compare different regions for various topics. For example, economists might want to compare inflation levels using an index like the Consumer Price Index, or inequality using something like the Gini Coefficient. But indexes can’t typically answer more specific questions that economists might want to study. Purchasing Power Parity – and sometimes exchange rates – are useful tools that can help provide an answer in such cases. There are many different tools to answer various economic questions, and often the most accurate indicator for one question might not be suitable for another!
In macroeconomics, comparing economic data between different regions or countries is commonplace. But comparisons shouldn’t be made hastily. Naturally, goods and services are very often sold in different currencies that hold different values, so direct comparison often requires a currency conversion of some sort. And, the relative price level may differ between countries, such that making a direct comparison can be misleading.
Interest rates in general economics are (for once) essentially the same thing as they are in finance: a percentage that determines how much a financial balance will grow with each predefined period of time. Nevertheless, interest rates are a very important linchpin of macroeconomics and have far-reaching consequences for the economy. Before describing why this is, it helps to clearly define what interest rates are in economics. As a side note, inflation happens to be very important when learning about interest rates. It’s a good idea to be comfortable with the concept before learning more fully about interest rates. Nominal vs. real interest rates: what’s the difference? In the real world, the cost of borrowing is denoted in terms of the (nominal) interest rate. But there are actually two interest rates that exist simultaneously: nominal interest rates and real interest rates. The nominal rate is the rate that we always deal with in the real world. Interest rates that are listed on savings accounts, mortgages, other types of loans, etc. are nominal interest rates. They are used to calculate interest payments and other quantities that factor in the rate of interest. Real interest rates, though, are “hidden” interest rates that people are actually paying instead of the nominal rates they agreed to! But rather than being the result of some crazy conspiracy, real interest rates exist because of inflation. When there is inflation, money loses its purchasing power over time. The same amount of cash can purchase fewer goods and services in the future. This means that nominal interest rates don’t tell the full story of a financial agreement. For example, suppose that you take out a loan of $100 that must be paid back with interest in one year. The nominal interest rate that you agree to is 5% – that is, when the debt comes due, you must pay back $105, which is an extra $5 on top of the original amount. If there is no inflation, the real interest rate is also 5% in this case. But, suppose that inflation is currently 1% per year. This means that one year later when your debt comes due, you still owe $105, but the purchasing power of that money has changed over the life of the loan. The inflation has eroded the value of $105 so that it can buy fewer things than it could the year prior – specifically, it can purchase 1% fewer goods or services than it could before. Because of this inflation, when you pay back the $105, you’re actually paying an interest rate of only 4% – the agreed-upon 5% interest minus the amount of inflation, which was 1%. Therefore, in this case the real interest rate – the one that accounts for the effect of inflation on the purchasing power of money – was only 4%. But when you signed the loan, neither you nor the loan servicer could know that inflation would be 1%, so it was difficult to account for when making the agreement. Therefore, the real interest rate has a simple formula that we can write down mathematically: r = i – 𝜋, where r is the real interest rate, i is the nominal rate, and 𝜋 is the inflation rate. Incidentally, this equation is known as the Fisher Effect in economics. Note that it’s technically possible for the real rate of interest to be negative if inflation is higher than the nominal rate. Winners and losers when real interest rates differ due to inflation The above example was relatively innocuous, but it should quickly become evident that large changes in inflation can cause serious problems for these types of financial agreements. As a quick summary, let’s consider who “wins” and who “loses” when high inflation causes the real rate of interest to be less than the nominal rate, like it was in our example. Clearly, an economic agent who takes on debt wins when the real interest rate is lower than the agreed-upon nominal interest rate. In this case, they end up paying back less than the agreed-upon amount in terms of real purchasing power. Conversely, the lender “loses”, as they receive less than they would have without inflation. Similarly, savers lose when inflation is high, too, as the money they earn from the interest on their savings accounts is worth less than it would have been without inflation. In fact, because savings constitute the loans that make up investment funding, these savers are technically also the lenders (though of course in the real world, these loans are mainly issued by financial institutions like banks), and thus the amount of money available for lending, or investment via the bank, is equal to the amount of savings (a concept known as the savings-investment identity). In the opposite case, the opposite is true: lenders and savers “win” when low inflation causes the real interest rate to be higher than expected. In this case they earn more than anticipated, while borrowers end up paying more than expected in real terms. Clearly, then, borrowers are the “losers” in this case. It may not be immediately clear from these examples, but borrowers – or economic agents taking out loans – are very important to a healthy economy. That’s because firms often take out massive loans in order to fund economic projects that can greatly grow the economy, increasing prosperity and economic output (as measured by GDP, for example). So, if rampant inflation pressures savers and lenders to raise interest rates and therefore disincentivizes firms from borrowing funds to make productive investments, the economy can slip and enter a recession. Recall that investment, I, is one of the components of aggregate demand; if I falls because the interest rate is too high, AD can shift to the left, reducing economic output. Of course, rational economic agents in the real world understand the relationship between the interest rate and inflation. And even though nobody can predict the future, everybody can at least make predictions. So, when borrowers and lenders come together to make a loan agreement in the real world, they won’t simply ignore the possibility of inflation and suffer the consequences. Instead, their expectations of what future inflation will be changes the terms of their agreement, including the interest rate that they’ll agree to. Adding inflation expectations to the interest rate equation Our relationship between the two interest rates earlier can be modified to incorporate “inflation expectations”, which were already hinted at in the discussion above. In macroeconomic models, this term is generally understood to represent the average inflation expected by everyone in the economy. If a borrower and a lender both expect inflation to remain steady at 1% per year, they’ll agree to a nominal interest rate that reflects this information. Suppose a borrower and a lender enter a one-year contract. The lender who wants a real return of 5% of the purchasing power of the lent money will suggest a nominal interest rate of 6% instead of 5%. The borrower, who expects to have to pay back an extra 5% of the loan’s worth when the debt comes due, agrees to the 6% rate because he knows he’s really only paying 5% next year once inflation is factored in. Remember, this is because the 1% inflation reduces the purchasing power of money over time. This behavior allows us to modify the equation for interest rates as follows. Now, i = rd + 𝜋e, where variables are defined nearly the same as above; the nominal interest rate equals the expected real interest rate plus the expected inflation rate at the time the agreement is made. The only changes from above are that r has become rd and 𝜋 has become 𝜋e. Instead of representing the real interest rate and inflation, these variables now represent the desired real interest rate and the expected inflation rate. This accurately portrays the fact that we cannot predict the future. In summary, economic agents agree to a nominal interest rate that captures the real rate of interest they wish to receive (or pay), according to their expectations of inflation. Consequences of inflation differing from expected inflation This introduces a new dimension of risk to financial agreements. When actual inflation over the period considered equals inflation expectations at the time an agreement was made, nothing changes compared to our analysis before. Rational economic agents are able to account for the inflation. But there are two more cases to now consider: when inflation is greater than or less than expected, what happens? This slight modification to the interest rate formula has massive implications for economic activity. If the inflation rate is different than expected, suddenly financial contracts become somewhat of a gamble. It’s simply unknown who will benefit from inflation and who will lose. In times of volatile inflation, more risk-averse individuals might even decide it isn’t worth borrowing or lending at all, since they could end up with a much worse deal than they agreed to. There are now two sets of equations to consider in parallel. Before considering the role of expectations, we had the formula r = i – 𝜋 for the real interest rate. This equation remains unchanged even though we’ve introduced inflation expectations. That’s because once a period of time is over, and a loan (for instance) comes due, the rate of inflation over the period has become known. In other words, this can be thought of as a formula for the actual real interest rate. But when making an agreement, the inflation rate – and therefore the real interest rate – are unknown, so economic agents must utilize their expectations 𝜋e instead. Above we defined the nominal interest rate they’ll agree to as i = rd + 𝜋e. Let’s rearrange to get: rd = i – 𝜋e. Using the example of a loan, if lenders and borrowers expect a 1% inflation rate (𝜋e = 1%), and agree to a 5% desired real interest rate (rd = 5%), they’ll set the nominal interest rate as i = 6%. Suppose that inflation turns out to be higher than expected such that 𝜋 > 𝜋e, as the actual rate of inflation over the period was 𝜋 = 3%. This means that the real interest rate r turns out to be: r = 6% – 3% = 3%. This is a situation we’ve discussed before. When the real interest rate is lower than expected, borrowers win, because they end up paying back less money in real terms than they agreed to originally. Lenders lose and receive less than they expected. If the actual rate of inflation had been, say, 0.1%, the situation is reversed. Now, the real interest rate r = 6% – 0.1% = 5.9%. This is more than rd = 5%, which means borrowers must pay back more than they agreed and lenders gain. A note on patience and risk Clearly, then, interest rates are linked to specific periods of time by financial agreements, and often state something about inflation and the state of the economy. But interest rates are affected by other factors, too, like patience and risk. A more patient individual will have a lower “personal” interest rate, because the cost of waiting is not very high for them. In other words, a patient individual is more likely to accept a lower interest rate over long time horizons in an agreement. Conversely, an impatient agent will only agree to higher interest rates for longer-term agreements, ceteris paribus, because waiting is a more painful prospect for them. And, riskier individuals will be given a higher interest rate than safer borrowers. That’s because lenders will demand a higher return when investing their money in a project or an individual that is more likely to default. The determination of interest rates In the real world, interest rates rise and fall based on a wide variety of factors. These include, but are not limited to: Changing inflation expectations The central bank’s interest rate target and monetary policy used to reach it Government spending activity (fiscal policy) Changes in the business cycle (expansions or recessions) Shifts in the market for loanable funds Changes in the demand for and supply of money Government influence on the interest rate Many of the articles linked in the above list of factors describe their effects on interest rates in detail. But here we consider a few more important points to know about how government and central bank policies interact with interest rates. First, inflation expectations are clearly very important, and are usually set by precedent. If there’s been consistent inflation in the economy, people expect interest rates to continue to rise to match it. But of course, inflation doesn't have to behave as expected. One way the government can improve the situation and bring rising interest rates under control in a case of high inflation is to announce plans that will lower the inflation rate (usually, the inflation rate is the target of concern, not interest rates, but here we ignore this fact for the sake of illustration). If the government is successful in convincing the public that their plans will work, people may believe that inflation won’t be as bad, and 𝜋e will fall. This means that the nominal interest rate i will fall too. So, any official policy of communication that can help inform the public and convince people that the economic situation is under control can actually help the economy stabilize on its own! Limitations of central bank policy Finally, consider again the equation i = rd + 𝜋e, which shows the nominal interest rate that borrowers and lenders will agree upon. Suppose that there is a period of deflation in the economy, such that economic agents expect that there will be continued deflation in the future; 𝜋e < 0. Also suppose that the desired real rate of interest is smaller in absolute terms than the expected rate of deflation. What happens in such a scenario when borrowers and lenders try to make a transaction? Since 𝜋e < 0 and 𝜋e is larger in absolute terms than rd, the chosen nominal interest rate i would be negative. But there’s a catch. Normally, lenders won’t agree to a negative nominal interest rate! That’s because the nominal interest rate of simply holding onto their own cash is 0% (theoretically; of course in real life there are risks to holding cash). It’s therefore irrational to make a financial agreement with a negative nominal interest rate; lenders would be better off just holding onto their cash and doing nothing with it. This scenario – and others like it, where the “best” nominal interest rate would be below zero – illustrates the “zero lower bound” of interest rates. This is a concern for central banks in times of low inflation and sluggish economic growth, since an interest rate cut is one way to boost the economy. But if the interest rate is already at 0%, it can’t be cut further. Yet, there are some cases of dire (or just strange) economic circumstances that have had lenders (or savers) agree to financial instruments with negative interest rates, though it is quite rare. In these cases, usually the economy is in such a bad shape that people will accept a negative interest rate in exchange for their savings being secured somewhere. For instance, in 2014 the European Central Bank (ECB) implemented negative interest rates in order to encourage investment that could lead to inflation and avoid a deflationary spiral. The idea is that since borrowers get paid to borrow money, and savers/lenders receive no or even negative interest for depositing money, investment – and hence aggregate demand and the economy – ought to be stimulated by the negative rates. The ECB’s original rationale for doing so can be read on their website here. Further Reading Interest rates are an important part of the puzzle for many other macroeconomic concepts, such as the savings-investment identity, the IS-LM Model, the Fisher Effect, Aggregate Demand, Monetary Policy, Fiscal Policy, Crowding Out, Net Present Value, the Loanable Funds Market, and Banks. For more on how interest rates relate to each topic, see the accompanying Economics Terms A-Z article. Advanced students interested in exploring how inflation expectations affect prices and interest rates should take a look at John Muth’s Rational Expectations and the Theory of Price Movements, first published in Econometrica in 1961.
Readers are probably familiar with the concept of interest rates in the world of everyday finance. Savings accounts, student loans, mortgages, etc. are all accompanied by an interest rate that partly determines how much money is added to a savings account or to the amount of debt someone owes.
Money serves several important functions in the economy. It is a unit of account, which allows people to view the cost of goods in comparable terms. It is a store of value, allowing people to store up the value of their labor over time, i.e. saving to grow their wealth. It is also a medium of exchange, allowing people to trade goods for just money rather than being forced to barter. The article money and the money supply dives further into these useful qualities of money. Directly following from these qualities is the fact that money forms the basis of prices in the economy. Prices are quite useful as they are directly comparable numbers that tell economic agents how much a good or service costs in nominal terms. Money affects nominal values only In economics, real variables measure actual economic output that occurs in the real world. For example, if a candlemaker produces three candles, the value of those three candles would be included in the count of real GDP. Meanwhile, nominal variables are those – such as prices – that are not exact or direct measurements of real economic value, but approximations. In short, nominal values measure the price of a good or service, which is meaningless without knowing the prices of other goods in the economy. Real values are meaningful and allow for direct comparison, because they are relative values compared to other real goods and services. When considering the economy as a whole, using real values allows for meaningful comparison of various countries’ GDPs to one another and across different years, for example. With real values, we can directly compare if the Bolivian economy was more productive in 2022 or 2023. Monetary neutrality states that money only affects nominal values, but not any real values in the economy. Therefore, because economic agents are rational and make decisions based on real values, money essentially doesn’t affect the economy at all. Recall that classical economic theory also states that price changes are spread instantaneously throughout the economy, and recognized by everyone. This means that when prices in the economy change, the only effect is to change prices throughout the economy – real values, including the decisions of economic agents, are unaffected. In other words, the real, relative values of goods and services are unchanged. Thus, changing the supply of money – which would change prices – doesn’t affect the economy. The philosophy behind monetary neutrality If this seems ludicrous, consider the following. Let’s say that our friend the candlemaker produces and sells candles for $2.50 each in the year 1995. The candlemaker wants to buy a liter of milk on the way home from work one day, which costs $7.50. In order to purchase this liter, then, he must sell 3 candles that day. Then, prices across the economy suddenly double, so that the candles now sell for $5 (suppose that nobody is holding any cash in this economy). Is the candle worth twice as much as before? The answer is clearly no. If all prices have doubled in the economy, the candle is still worth the same compared to every other good in the economy. The candlemaker must still sell three candles (now at $5 each) in order to purchase the same liter of milk, which now costs $15. Effectively nothing has changed. The previous example shows that prices are essentially just arbitrary numbers. Although they do communicate information to consumers, they are only meaningful in the context of the rest of the economy. If we double them, triple them, or reduce them by a factor of 100, nothing happens – as long as we do the same for all other price values. Prices are one thing. But how does doubling prices in the previous example show that money is neutral? Money, of course, is closely related to the price level in the economy. Ceteris paribus, if there is more money in the economy, prices will be higher. This is because more money is chasing the same amount of real goods and services that have been produced. This is also a key reason why increasing the money supply can often lead to inflation. Monetary neutrality as told by the Big Mac Index A great way to illustrate monetary neutrality is by using the Big Mac Index. This index compares the prices of the McDonald’s Big Mac sandwich around the world (view the latest Index values here), and as such is normally used to examine which currencies are over- or under-valued compared to one another, or to introduce concepts like Purchasing Power Parity. It was initially published by the Economist in 1986 as a fun way to compare prices across countries, but it has taken off and remained part of our economic discourse ever since. As of this article’s publishing, in Mexico, a Big Mac costs about 85 pesos. In the US, meanwhile, it is roughly $5.58. But, according to the Index, both the US and Mexico share a Big Mac price of 5.58 US dollars. This means that the Big Mac is worth the same in both countries, even though the prices, money supplies, velocity of money, and monetary policies are completely different in each local market. In other words, the same real good is worth the same amount regardless of the differences in the amount of money in each economy. Of course, examining the Big Mac Index shows varying values for different countries. This can be due to several factors. The availability and cost of alternatives in different local markets, the usage of different ingredients, cultural factors, and the existence of different taxes in different countries could all contribute to different prices for a Big Mac to the end consumer in different places. Nevertheless, the Index shows how monetary neutrality could work across very different markets; Big Macs sold in many countries that have different currencies (and different money supplies) may still cost the same in real terms. Comparing prices across countries doesn’t need to be left to the Big Mac Index, thankfully. Economists typically use Purchasing Power Parity and currency exchange rates to compare prices. Examining monetary neutrality through MV = PY Despite the example with the candlemaker, money and prices are not perfectly linked. If the amount of transactions in the economy increases in any given period of time, prices will be increased as well, even if the money supply doesn’t change. This is because the price level (represented by the price level, P, times output Y) is equal to the amount of money held in the economy M times the velocity of circulation V. This gives us the equation MV = PY. Studying this equation reveals a few things. First, if the money supply M or the amount of transactions occurring V increases, output Y might not change at all. If the price level P simply rises (or falls) in proportion with increases (or decreases) in M and V, output will be unchanged. This is precisely what monetary neutrality states; any changes in M and V will be perfectly offset by changes in P, leaving Y unchanged. In the short run, money probably does matter… Although there are perfectly fine arguments to suggest that money is neutral, it’s quite difficult to believe that money is always neutral in our modern economy. First of all, the classical theory of money neutrality rests on a few assumptions that are difficult to believe: first, that prices adjust immediately across the whole economy, and second that economic agents always have full information about prices to make rational decisions. After all, wages – the price for labor, a very important factor of production – are often set by legal agreements and cannot be changed quickly (this idea is known as “sticky wages” in economics). Further, when increases in the money supply cause inflation, people feel worse off as the purchasing power of their money is reduced. Likewise, when the government needs to pay off its debts, it might try to print money in order to do so (which can cause hyperinflation if they’re not careful). Most economists have come to agree that money probably does affect real economic variables in the short run. Increased prices for goods (like from an upward shift of the aggregate demand curve) incentivize producers to make more of those goods in the short run to take advantage of the temporarily increased profitability, moving equilibrium up the short-run aggregate supply curve. This increased production may reduce the unemployment rate and increase production (as measured by GDP, for example). Classical economists have adopted these ideas into updated theories, eventually giving rise to the “neoclassical” school of economic thought. …but in the long run, monetary neutrality generally holds This doesn’t mean that monetary neutrality is an outdated and useless theory, though. In the long term, most economists agree that prices are considered “fully flexible”. Time allows wages to be renegotiated, and other prices across the economy to be updated. Further, it allows economic agents to get used to the new prices. Therefore, in the long run, changes in the supply of money (or the velocity of money) eventually do nothing except change the price level. This causes only nominal values to change, and has no effects on real values. Most current macroeconomic models include this idea of long-term monetary neutrality. Going further, it makes sense that the amount of money in the economy does not affect the function of the economy in long run equilibrium. The productivity of labor, availability of natural resources, the contributions of human capital, and more are all unaffected by money in the long run. Having more paper slips used for cash doesn’t make people smarter and doesn’t make crops grow more. In other words, money does not directly improve or cause any real economic factors that grow the economy. Therefore, in the long run, it is neutral. Good to Know The idea of monetary neutrality in the short run suggests that printing money, or changing the money supply in other ways, is completely ineffective. The economy will instantly adjust to any changes in the money supply, causing the short-run aggregate supply curve to be vertical. This means that, from a classical economics perspective, monetary policy conducted by the central bank is essentially useless. Therefore, classical economists might argue against having a central bank conduct any monetary policy at all!
Monetary neutrality is an economic theory that states money and the money supply do not affect any real economic variables, only nominal ones. This theory was initially popularized by classical economists, and though it has received challenges from Keynesian and monetarist ideas, it remains an important theory in the field.
Is an Economics PhD Worth It? The PhD Pay Premium
Perhaps unsurprisingly, the typical PhD in economics earns more than the typical economist with “only” a Master’s degree. But how much more? Is doing an economics PhD program worth it in the long term? <11an>limit:3;categories:PhD Programs;disciplines:Economics</11an> The short answer: yes. INOMICS Salary Report data shows that in 2023, economics PhDs earned on average 96% more than economists with a Master’s degree. These are worldwide statistics taken from the full breadth of the INOMICS Salary Survey data. The benefit to doing a PhD in economics varies by region. Figure 1 compares the “earnings premium” that an economics PhD has over economists with a Master’s degree across the world, using 2023 INOMICS Salary Survey data. Figure 1: Regional Premiums in economics PhD pay compared to a Master’s Clearly, in most regions acquiring a PhD in economics offers quite the premium. Some results may stand out as surprising, however. First, in North America in particular, the premium for earning a PhD in economics seems smaller than expected. If a PhD only earns an economist an extra 36% increase in wages, ignoring a PhD and continuing to work might seem like a preferred option in this high-wage region. In the Caribbean, South & Central America and Africa, PhD earnings are below Master’s earnings. This unexpected result appears to be the case due to the distribution of survey respondents. In both regions, the amount of industry economist respondents is much larger than academic respondents, and Master’s-degree-holding economists outnumber PhD economists in Government, Central & International Bank, and private business roles. These three categories of employer tend to pay more highly than others. This suggests that in these two regions, acquiring a PhD may not be necessary to have a well-compensated industry career. Further, it seems more realistic for Master’s-degree-holding economists to attain high-paying roles in these sectors without a PhD, as opposed to many other regions where a PhD would be considered a requirement. As the previous discussion just showed, Figure 1 doesn’t account for the different sectors that economists work in. In general, economists who work in industry tend to earn very high wages, while economists who work in academia earn noticeably less until they are finally promoted to a full Professor of Economics. Then, academic economist pay catches up to industry pay. This is a trend noted in multiple editions of the INOMICS Salary Report. This is particularly true in North America, the highest-paying region on average. Economists working in industry can earn high wages with only a Master’s degree. This is also true of Western Europe & Scandinavia and East Asia & Australasia, the second and third highest-paying regions identified by the Report. Some other regions of the world feature much more of a premium for PhD economists. Part of the reason for this is clear. Since high-paying regions like Western Europe and Australasia pay higher salaries to begin with due to the higher cost of living, a high pay increase in these regions represents a lower percentage of overall pay. This fact is supported by the graph; North America is the highest-paying region and features the lowest positive percentage increase in pay for PhDs. Western Europe, which pays the second most on average, features a slightly higher percentage increase. Readers should make no mistake; a 35.6% increase from a base salary of $100,833 (the average Master’s degree economist salary in North America) is a massive increase in pay. Comparably, the almost 120% increase in pay in the Middle East, Central Asia & North Africa region is an increase from an average Master’s degree salary of $17,321 to almost $40,000. In percentage terms, this is obviously enormous, but in cash terms less than the difference in North America. Additionally, however, the high percentage premium for PhD economists in lower-paying regions may suggest that in these regions (i.e., South Asia, Middle East) there are more opportunities for economists without a PhD to find meaningful employment, so fewer individuals elect to study for a PhD. If this is true, those who do complete a PhD enjoy a high pay premium over their economist peers since economics PhDs are more rare in those regions. Academic economists need a PhD Economics students should keep in mind that academic jobs will almost certainly require a PhD in economics. Economics students interested in a career in academia should therefore be strongly encouraged to pursue an economics PhD, regardless of differences in pay. The following Figure 2 shows the pay premium for economists employed at universities, by region: Figure 2: Regional Premiums in economics PhD pay compared to a Master’s (Academic only) The pay premiums for economics PhDs tells the story quite clearly: across the board, in every world region, economics PhDs in academia earn much more than their counterparts without a PhD. Readers might note that this graph is likely skewed because economics PhDs are probably more senior economists than economists without a PhD in academic settings, and likely hold higher-level positions; but this skewness supports the point. Economists interested in a serious career in academia must strongly consider getting a PhD, or have a specific reason to not need one. It is very difficult to earn a Professor of Economics position without a PhD in most of the world. Figure 3 below provides evidence to support this point. Figure 3: % of Master’s degree economists in Professor roles by region Figure 3 shows very clearly that burgeoning economists should expect to earn a PhD if they wish to work as a Professor of Economics in the future. Every world region has very few Professors with just a Master’s degree. Even in South Asia, which has by far the largest representation for Professors with a Master’s degree in our data, only 20% of Professors have a Master’s while 80% have a PhD. Industry economist roles It’s clear that academic economists usually need a PhD, but this isn’t necessarily the case in industry. However, readers may be curious to repeat the above breakdowns in industry roles, which can be instructive. Figure 4 thus shows the pay premium for PhD economists in industry roles by region: Figure 4: Regional Premiums in economics PhD pay compared to a Master’s (Industry only) Figure 4 shows that PhD economists out-earn Master’s-holding economists in industry jobs by a substantial amount in most regions. The lower industry PhD economist pay compared to Master’s degree economists was already discussed above for Africa and the Caribbean. In summary, Master’s degree holding economists outnumber PhD economists in Government, Central & International Bank, and private business roles in these two regions. Since these three categories of employer tend to pay more highly than others, it may slightly skew the graph in favor of Master’s degree holders. However, this suggests that in these two regions, acquiring a PhD may not be necessary to have a well-compensated industry career. In North America, part of the reason for a lower than expected premium is likely the fact that in this high-paying region, high base salaries mean that salary increases will be lower percentage-wise. This was discussed above as well. Average years of experience are quite comparable for industry economists in North America (about 12 for Master’s degree holders and 15 for PhD holders), and the employer distribution is relatively balanced. Figure 4 suggests that industry economists with a Master’s degree in North America ought to consider their career path and whether a PhD is right for them before going back to school. A PhD opens up some employment opportunities in the private sector that aren’t available to Master’s degree holders, and will increase pay, but whether or not that is necessary or desired is likely up to the individual. Keep in mind that specific non-academic employers – especially governments, central banks like the Federal Reserve, institutions seeking economics researchers, NGOs like the World Bank, and even increasingly consulting firms – are likely to require an econ PhD for some higher-level positions. Be sure to check job listings for economics jobs that you’re interested in to see if a PhD might help you reach them in your career. Comparing previous years: PhD earnings on the rise again Using past years of INOMICS survey data, we can examine how the benefit to doing an economics PhD has changed over time. It appears that the premium in pay that economics PhDs enjoy is recovering after a slight dip during the pandemic years. See below Figure 5 below: Figure 5: How much more PhD economists earn vs. Master’s economists by year, INOMICS data Figure 5 shows that earnings for economics PhDs are once again rising relative to pay for economists without a PhD. It’s worth noting that pay for economists with both degree types has increased this year. According to the latest INOMICS Salary Report, economists with a Master’s as their highest degree experienced a 3.2% increase in pay on average since 2022, while those with a PhD have experienced a 35.9% increase. This has widened the earnings premium between the two categories from 80% in 2022 to 91% in 2023. The dip in pay that economists experienced in 2022 may be partially due to the COVID-19 pandemic. And PhD pay is not the only factor that appears to be improving since COVID. The post-pandemic recovery of the economics jobs market has already been discussed by INOMICS, showing that earnings for economists with Master’s and Bachelor’s degrees recovered sharply after the first waves of the pandemic. So, is doing a PhD in economics right for you? According to the data, in most cases it will be. However, you must weigh the tradeoffs yourself. You may not need a PhD to have a fulfilling career in economics, particularly if you plan to work in a non-governmental and non-central bank role in industry, and particularly in certain countries and regions. Header image credit: Freepik /Magnific
Economics students may often wonder if doing a PhD is the right move for them. After all, you can still get a good job in economics with just a Master’s degree. We’ve covered different angles of this topic before with helpful advice about what degree you’ll need as an economist, asking whether you should do a PhD, and even asking what kinds of economists are paid the most. Thanks to INOMICS Salary Report 2023 data, we can look more closely at the pay benefit for an economics PhD in today’s job market. This will help you decide if doing an economics PhD will be worth it for your own career.
A very brief history of banking Banking can be traced all the way back to institutions in ancient Mesopotamia (circa 2000 BCE), including Babylonia and Sumer. In these ancient societies, religious temples sometimes offered space for civilians to store wealth. For example, farmers were able to store grain, coins and other valuables. Sometimes, civilians were charged small fees when depositing resources. The temples then lent out some of their stores to help others – representing a form of early loan. Contracts for these services eventually developed, such that the Code of Hammurabi contained a series of laws regarding loan repayments and the liabilities of debtors and lenders. Other ancient societies developed banking practices as well; there are records of early banking and lending practices in Mughal India and in the Qing Dynasty in China. In Italy in the 14th and 15th centuries CE, the Medici family invented a double-entry record-keeping system, which is still being used today in modern accounting. This paved the way for more complex financial instruments and transactions to be created. And of course, central banks eventually evolved out of the concept of a standard bank. The earliest two were the Sveriges Riksbank (originally the Riksens Ständers Bank), founded in 1668, and the Central Bank of England, founded in 1694. In both cases, the banks were founded as lenders for the government, though the Central Bank of England was private and thus became a model for other central banks to follow. In 1913, the United States introduced the Federal Reserve system of decentralized central bank branches organized by region, a system that is considered both public and private. And, after World War II, the Bretton Woods agreement in 1944 led to the creation of the IMF and the World Bank, institutions that are meant to serve as financial lenders for the community of nations around the world. In the modern age, the role of banks in the economy still includes acting as safe places to store wealth, and as moneylenders for agents in the economy. Innovations like wire transfers and fractional reserve banking have allowed traditional banks (and newer investment banks) to form the now-global and interconnected network of finance. Increasingly, banking services can be done virtually, to the point where some new banks don’t have physical branches at all. But the important roles they play in the economy remain the same. The many roles of banks in the economy Storing one’s wealth in a safe place has been important for the development of the economy throughout human history. Having a way to store up excess wealth could help any economic actor, from businesses and governments to families and farmers survive difficult seasons and save money to invest in the future. These are critical functions; in many macroeconomic models of the economy (such as the Investment-Saving/Liquidity preference-Money supply model (IS-LM)), savings fuel investment, which fuels economic growth. Despite the negative stigma associated with holding debt, loans and debt are crucial to the economy’s functioning. Taking out a loan allows individuals and businesses to afford goods and invest in the future in ways that would be impossible without debt. This, too, fuels economic growth; it’s far easier to build a factory that can quickly begin churning out economy-enhancing machine parts, for instance, if a company can take out a loan and repay that loan with interest over the course of several years. If loans aren’t available, the company would be forced to save money until it could cover the entire cost of the factory, which could delay production of the machine parts, and consequent value to the company and the economy, for years. These two major services – storing money and lending it – work in tandem in a mutually beneficial way. Banks are able to naturally function as a third-party broker that can easily match savers (who function as lenders) and borrowers. This reduces transaction costs and increases the amount of trade in the economy. This “broker” role enables the banking system to perform two more important functions. First, banks act as natural stewards of the economy’s wealth, since their profit-seeking motive ensures they lend only to promising projects – an elegant example of Adam Smith’s invisible hand (though it is worth noting that moral hazard may lead them to act against the economy’s best interest, impeding this role). Second, banks form the backbone of our modern electronic payment infrastructure, issuing payment methods like credit cards. These allow individuals to easily access their assets like checking accounts and savings accounts on the go, increasing the velocity of money by making transactions easier. To see this, first recall that savings fuel investment by allowing borrowers to use other people’s savings to fund their investments, then return more money than they lent. Imagine a family wishes to save $5,000. Without banks, the family would have to either store that money under a mattress – which is liable to loss, theft, or natural deterioration – or find an individual or business that wanted to borrow $5,000 and make a contract with them. The latter takes time, effort, and legal expertise that many families (and businesses) in the country probably don’t have. But by saving in a bank, any family is able to save with a level of risk acceptable to them, and the bank is then able to match their funds to worthy borrowers, growing wealth for everyone. Further Reading Banks operate using a system of reserves where not all of their obligations to their customers are held at once. That is, if customers deposit $100 into a bank, it may only keep $20 of that money on hand because only a small portion of that deposit is likely to be retrieved at any given time. This system is known as fractional reserve banking. But, because the bank is only keeping a fraction of its obligations on hand at any given time, it can become vulnerable to bank runs – situations where many depositors suddenly demand their money at once, potentially leading to the collapse of the institution as it fails to fulfill its obligations. Banks are often governed by both government regulations and the central bank, which sets several of the rules that the institutions must adhere to. These include the reserve requirement and the federal funds rate. References https://firstutahbank.com/the-history-of-banking-from-ancient-times-to-now/
Banks are most commonly associated with storing people's money. But banks are financial institutions with multiple functions that are crucial in a modern economy. As such, though they are usually private businesses, banks face unique federal government-mandated regulations and protections that other industries do not (to the point that they may receive bailouts in times of dire recession). The importance of banks in economics goes beyond the traditional consumer-facing roles that we typically think about first.
Let’s briefly examine crowding out in the context of the aggregate demand component of the aggregate demand–aggregate supply (AD-AS model) of the economy. Aggregate demand is, put simply, the summation of demand in the economy, and when it increases it encourages economic growth. The formula for aggregate demand is AD = C + I + G + NX. In this formula, C is consumption spending by individuals and firms, I is investment spending, G is government spending, and NX is net exports. If any one of these components changes, ceteris paribus, the AD curve will shift. For more on aggregate demand and its components, read the linked article. Students familiar with this concept may be confused by crowding out at first. G in the above formula is related positively to aggregate demand. In other words, when G increases, it should increase AD, too. And since AD can be thought of as overall demand in the economy, increasing AD should encourage economic growth, and thus be a good thing. How, then, does crowding out work? How could increased government spending be a bad thing for the economy? The mechanics of crowding out There are two main ways that increased government spending can reduce, or “crowd-out”, private and investment spending. These take place when the government either raises taxes or takes on debt to pay for increased government spending G. In the former case, raising taxes reduces C and I by some amount that may or may not be larger than the increase in government spending G, because when consumers and firms pay higher taxes, they have less money of their own to spend. In other words, if increasing G means that C or I must decrease, it’s mathematically clear that the increase in G might be completely offset by reductions in C or I. This would lower AD and depress the economy. Without more specifics, we can’t say for certain if aggregate demand increases or decreases overall. One prominent theory among economists is that when the economy is depressed or in recession, it’s performing below its potential, so an increase in government spending increases G more than it reduces C or I. This increases AD; thus, increased government spending is good in times of recession. This is the view taken in particular by many Keynesian economists. Further, in these times households and businesses typically have a lower marginal propensity to consume, instead choosing to save more. So, government spending funded by taxes can help shift the balance of income towards more consumption spending, boosting the economy (in the Keynesian view, at least). The second way that crowding out can work is as follows. When the government borrows money, it affects interest rates through the loanable funds market, depressing investment spending and encouraging saving. In short: increasing government debt increases the interest rate, which makes it more expensive for everyone else to borrow, disincentivizing firms from making economy-growing investments. This “crowding out” of firms’ investment is either net-neutral or negative for the economy’s growth. To see how government debt increases the interest rate, consider the following. When the government takes out debt, it is essentially acting as a large consumer in the market for loanable funds. Thus, the demand for loanable funds increases; and what happens when demand increases for a specific product or service? The price increases, too, to maintain equilibrium. In this case, the price of borrowing funds is the interest rate. So, increasing government debt drives up the interest rate and therefore disincentivizes firms from making costly but economy-growing investment spending. Over the long term, this can reduce the economy’s competitiveness in a global market, slow down the pace of innovation, and ultimately reduce the economy’s long-term growth potential. In summary, then: crowding out can occur when increased government spending G is funded by higher taxes (which reduces the amount of money that individuals and firms have to spend), or by increased government debt (which increases the interest rate, reducing investment spending by individuals and firms in the economy). Further details on how crowding out works As an aside, astute readers may wonder how government spending changes interest rates when the central bank exists. After all, doesn’t the central bank set interest rates? The article monetary policy dives into this further; essentially, the central bank is (normally) a separate entity from the federal government and is (in most cases) not beholden to political whims. It sets an interest rate target and uses monetary policy to achieve that goal. But the federal government may have its own aims with its fiscal policy, and so may choose to increase spending – possibly putting upward pressure on the interest rate regardless of the central bank’s policy. Conversely, it’s also possible for fiscal and monetary policy work in tandem if the central bank and federal government share the same goal, like helping the economy recover from a recession. It may be unclear to some readers why exactly an increased interest rate discourages investment spending. Recall that the interest rate represents the cost of borrowing money. At a low interest rate, it’s cheaper to take out loans that can be used to pay for big, important purchases like a house, an advanced degree, or building a factory. Typically, when making investments into growing the business, a firm needs to raise a lot of money – and borrowing money is a common tactic to do so (and an important function that banks provide to the economy). So, at a lower interest rate, borrowing is cheaper and many such investment projects would be profitable, growing the economy. But, a higher interest rate means that more investment projects become too expensive to be worth it, so fewer firms will borrow money to build new factories (for example). Thus the economy grows more slowly than if interest rates had been lower. In summary then: crowding out can occur if increased government debt drives up the interest rate even despite the central bank’s monetary policy goals, thereby reducing investment spending in the economy by other actors. Crowding out in economic thought and modern political discourse Classical economists believe that markets are always efficient, guided by Adam Smith’s invisible hand. Because of this, they believe that government spending is at best net-neutral in the economy, and often has a net-negative effect on economic growth. Thus, classical economists often support a minimalist fiscal policy. This reasoning follows from the above discussion, but it goes further. Government spending must be funded either by taxes taken from consumers and firms, or from government debt. Both of these actions, in the classical view, ultimately harm the economy. In the former case, individuals and firms are made worse off because they must pay higher taxes, so they cut back on spending – this reduces economic activity. We’ve already discussed the interest rate implications of increased government debt. But classical theory provides another reason why this debt might hurt the economy. In the classical view, this debt can cause consumers and firms to cut back on spending because they need to save for increased future tax expenses. This is because consumers and firms expect that the government will raise taxes in the future to pay off their debt, so firms and consumers decide to reduce their spending and save more instead. This eliminates any positive benefit that increased government spending may have had. Crowding out in modern discourse Although classical ideas have come in and out of style over the course of history, they remain influential in economic discourse. In fact, in the modern age, many centrist or right-leaning politicians tend to disapprove of government spending, because they believe it crowds out private sector spending and investment – even if they don’t use the term directly – and that this will ultimately harm the economy. In this way, they tend to agree with the classical economists. The line of reasoning is thus: government spending must be funded by higher taxes, which discourages consumer and investment spending, and slows down the economy. And of course, this article hasn’t yet touched on how the government spends its money! If the government is wasteful, or spends its money on goods or services that do not improve the economy (think of wasteful luxury spending for government officials), then negative effects on the economy are more likely. Essentially, the funds the government borrowed are not used for productive purposes in such a case, but they could still increase the interest rate and risk crowding out private investment. This is another idea that many modern political commentators may use to argue that government spending is wasteful. Students of economics can likely find plenty of examples of arguments against crowding out (and conversely, arguments for government spending) in the news today. Good to Know Curious readers may ask: who does the government borrow money from? The answer may not be initially obvious, since governments don’t go to the bank to borrow money like most other firms and consumers do. One of the major ways that governments borrow money is by issuing financial securities such as bonds. A bond is a financial asset that anyone can purchase. When a consumer or firm buys a government bond, they pay the government money for the asset. Each bond has a maturity date and an interest rate attached to it, and represents a promise of repayment later. For example, let’s say that the French government wants to raise money, so they issue bonds to do so. French investors buy all of the bonds. The sum total of all the money the French government sold the bonds for is essentially the amount of a loan that the French government has taken out. Instead of a bank, the loan issuer in this case is the French population. The interest rate on the bonds issued is the interest rate that the French government must pay back to the public upon reaching the maturity date when the debt payment is due. Of course, in the modern age banks and investment funds tend to buy bonds in great quantities as well, not just individuals. Note that individuals or institutions outside of France could have potentially bought some of the French bonds too, meaning that France would owe some money to foreign entities as well. This is one of the ways you may hear about governments owing money to other countries in the news.
The phrase “crowding out” in economics refers to a situation where government spending (which is part of fiscal policy) discourages (private) investment spending in the economy. This is considered a bad thing, since investment spending is one of the key drivers of economic growth.
Professional Trainings as a Means of Increasing Your Employability
Naturally then, you might wonder how you can further your skills beyond just graduating with your latest degree. Or, you may have encountered situations or job opportunities where you wish you’d had more time to study a particular topic. Professional development courses or skills training are one great method to do so. What is a professional skills training for economists? Professional trainings for economists may be offered by a university or by other organizations, including private companies. Usually for a modest tuition fee, you can take a class that lasts anywhere from a single day to a few weeks. Some of these economics trainings are only offered in person and on-site, but many course providers are increasingly offering online courses so that anyone around the world can join in. These trainings are usually focused around a particular topic, and are designed to give either an introduction to a specific area of economics (for example, macroeconomic forecasting), a useful tool for economists (such as R or Python), or a related field (like data science). Because these courses are designed to help economists advance their skills, some knowledge of economics is usually required. Many courses require participants to already have an advanced degree in economics, or some related field. This is important as the learning environment can be fast-paced, offering an introduction or advanced training in a complicated topic in as little as one week. Common topic areas for trainings There are a number of areas in which economists (particularly fresh Master’s or PhD graduates) can further hone their skillset through these types of opportunities. The following are a few major areas you may consider taking a training course in after your degree: Advanced micro- or macroeconomics: Although every economics degree comes with introductory and advanced micro- and macroeconomics coursework, it’s easy to forget much of this knowledge once you pick a major or specialization within your degree. Advanced microeconomic or macroeconomic courses help reinforce the fundamentals of economics, or can even inspire your research by reminding you how macroeconomists (for example) tackle some problems that you and your microeconomics-focused colleagues don’t think about as often. But it’s not just for refreshing: some of these courses can delve deep into newly emerging research methods, or explain niche economic models that semester courses don’t have time to introduce. Econometrics and statistics: This is an important area containing many critical skills for economists. Additional coursework in econometrics or statistics can be massively helpful in your career and improve your career opportunities, since every economist benefits from a deeper understanding of the models, methods, and theories that power economic thought. Consider taking professional training courses in econometric methods to sharpen your skills. This can include topics on statistics, time series analysis, managing panel data, niche regression models (or advanced, like gravity models), etc. Software tools: R, Stata, Python, SAS, SPSS, Eviews and dozens more: the statistical software tool options for economists are as myriad as they are complex. It’s likely that as an economist, you will need to learn at least one of these tools well in order to conduct data analysis. Multiple proficiencies will be a plus as different employers or universities may utilize different tools. Professional training courses that help you become more savvy with one or more of these tools can therefore improve the quality of your work and potentially save you thousands of hours of troubleshooting over the course of your career. Data Science topics: Economists will find many topics in data science interesting and helpful for their research, and more widely for their career. Courses in data science can help economists work more effectively and conscientiously with large datasets. Further, these courses can also help prepare economists for the cutting-edge technology and research methods that will impact how economics is researched in the future. For example, economists and data scientists are already using machine learning algorithms to forecast, and may increasingly be using large-language models (LLMs) to analyze economic data. Other elements of data science (such as bootstrapping and decision tree models) have already made their way into the field, so it can be helpful to become familiar with them. Broadening your horizons: Did you finish an economics degree, and wish you had time to take more courses? Maybe you did your Master’s of Economics and specialized in quantitative macroeconomics, but wish you had time to take that cool class on energy economics. Professional training courses are a great way to do just that. Specific areas of focus like behavioral economics, accounting, applied economics, or real estate can all provide helpful knowledge and context for economists who work in related fields. Interested in some opportunities? Check out further professional training listings on our website. Header image credit: Rawpixel.com via Shutterstock (licensed image - copyright)
Economics is a massive field with many sub-disciplines, and it’s impossible to master the whole lot of it from just one Master’s degree or even a PhD.
Climate change is at the centre of public discourse, and a degree in economics can equip graduates with tools to analyse the challenges it presents and to find effective solutions and policies in response. In this article, building on the Royal Economic Society’s climate summit, we share a few thoughts on how to embed discussion of climate change and environmental sustainability into economics pedagogy. Climate change can sit at the heart of the economics curriculum Many economists see the environment as an essential part of the economic system. Indeed, CORE Econ defines the discipline⁠ “as the study of how people interact with each other and with their natural environment in producing and acquiring their livelihoods, and how this may change over time and differs across societies”. Considering the central role of the environment within real-world economies, the study of climate change and sustainability should be integrated throughout the economics curriculum and not relegated to optional units in the final year. This approach can embed the pressing societal issues our world faces within the subject, helping to motivate students and support their learning. Students studying CORE Econ are regularly asked at the beginning of their programme about what they believe are the most pressing problems that economists today should be addressing. In 2021, climate change and resource challenges featured strongly in answers from students across the world. We also need to consider how to embed climate change in students’ studies. Indeed, some of the work in environmental economics is technical and advanced – think for example of integrated assessment models or the valuation literature. Nevertheless, the research often has very straightforward intuition. For example in microeconomics, public goods, externalities, co-ordination problems, prisoners’ dilemmas and the tragedy of the commons can all be introduced through the lens of climate change. Similarly, in macroeconomics, we can discuss policies such as green new deals and stimulus packages that are becoming increasingly common in political discourse. While the models that students see as first year undergraduates are often simple, they offer students the chance to gain deeper insights, and ask important questions. These could include: what is the optimal level of pollution? Or what determines the optimal carbon price? Once students have developed sufficient empirical and theoretical foundations through their degrees, these ideas can be revisited in more depth in later years. Using real-world examples as a launchpad for learning is not new. Case studies and problem-based learning underline the pedagogical value of starting with a particular scenario (a case) and then thinking about how discipline methods can help to understand it (see for example Volpe, 2002). This approach can be applied to climate change and environmental sustainability, whereby students would learn micro and macro-economics through the lens of environmental challenges. This pedagogical method engages students and can facilitate deep learning (see for example Basu, 2021). For example, economics has a lot to say about the most efficient ways to reduce emissions, mitigate the costs of climate damages, the economic impact of strategies used to reduce emissions and lower risks from climate emergencies, and more. Consider using a real-world example from your area, such as imposing a carbon tax or building clean energy sources (such as windmills or nuclear power facilities) to host a classroom discussion (or assign empirical work – more on that in the following section). A chapter in the newly published Sustainability Handbook by the Economics Network shares various ideas and examples of how to motivate teaching through environmental challenges. Empirical units can be enhanced by discussions of climate change Using real-world data relating to environmental sustainability and climate change is another way in which these issues can be embedded in economics programmes. This approach can motivate students, help to develop empirical techniques and employability skills and provide framing opportunities to help students to apply economic reasoning. There are a range of data sources that can be linked to climate change: Basic climate relationships such as the link between CO2 emissions and the rise in average global temperatures (global warming) can be identified using data from OECD, Our World in Data, United Nations and NASA Global Climate Change. Climate attitudes and perceptions are captured in large scale surveys such as Eurobarometer and the British Social Attitude Survey. This can aid discussions in the classroom about the socially optimal amounts of intervention or discussing the challenges of intervention. Household datasets in most countries have information on spending, work, and health, which can be linked to the environment and climate change (see for example the OECD Household Surveys, EPIC). The CORE project has prepared tasks on measuring climate change and the willingness to pay for climate change mitigation using real world data. Instructors could, of course, construct their own examples for students based on the technicalities they would like to focus on. Assessment can be authentic, and focused around climate change Climate change offers an opportunity to embed authentic assessment into the curriculum –encouraging students apply the economics they have learned in various contexts. For example, assessments could include: Coursework policy reports to inform, for example, local or national governments on an environmental question. This could include an economic evaluation of the expansion of fisheries, increasing on- and off-shore wind-energy, introducing a ‘meat tax’ to reduce carbon emissions, etc. An empirical project set around environmental data sets. For example, finding the impact of a carbon tax in a specific market using OECD data. Exam-style short answer questions where students interpret research findings for a given scenario. Students sometimes struggle with making new connections between economic ideas and real-world applications, so it is important that scaffolding is provided. Educators should ensure constructive alignment between the learning outcomes, the assessment, and what happens in the classroom. Challenges to embedding climate change There are a number of challenges to embedding climate change and sustainability within an economics curriculum that need to be considered. 1. Climate change deniers may challenge the classroom experience Just as in any area of life, there are some individuals who challenge the dominant paradigm, and climate change is not immune to this. As such, instructors may encounter climate scepticism of both the extent of the problem, and the possible solutions. Scepticism and pluralism of ideas in higher education provide lots of opportunities for exploring issues in more depth. For instance, they provide an opportunity to discuss empirical evidence and explore causality of relationships. They also offer opportunities to discuss opposing normative views, and analyse important questions such as whether developed countries, or developing countries, or all countries, should seek to de-carbonise, and the costs associated with that. 2. Be aware of climate anxiety As with any topic that has the potential of having negative impacts in years to come, there is a chance that teaching climate change may provoke anxiety in students. Climate anxiety is the fear that people experience about the climate crisis, and it is soaring. Research suggests that climate anxiety can affect mental, emotional and physical health. But at the same time, it is associated with guilt and feeling responsible for climate change, which increases interest in studying and discussing the topic (see for example Hickman et al, 2021). While novel for some economics instructors, dealing with sensitive topics that students may have personal associations with is not new in higher education. Economists can learn techniques for holding classroom discussions on such topics from other disciplines such as psychology, gender studies, medicine, education, or creative arts. The creation of an inclusive learning environment, feedback mechanisms, and clear guidelines on how to communicate and debate become important when planning lessons about sensitive topics. The evidence on content warnings is mixed, but instructors may want to consider the use of them, as well consider providing flexibility and options around assessments as a way of mitigating the risk of anxiety. Summary Teaching about climate change economics and environmental sustainability within the economics curriculum is arguably a civic duty in a discipline that engages with major societal challenges. Economics has a lot to offer both in terms of analysing the past and present, and proposing effective solutions for the future. Educating students to help them develop the hard and soft skills that they need to shape the debate around environmental sustainability does not only foster employability, but is also likely to increase students’ engagement in their learning. This article was produced in cooperation with the Economics Network, the largest and longest-established academic organisation devoted to improving the teaching and learning of economics in higher education. Learn more about the Economics Network here. Header image credit: Pixabay.
In 2019, the University of Bristol became the first UK university to formally declare a climate emergency. In the following year, a further 36 institutions in the UK followed suit. Beyond their own climate research and agendas to achieve carbon neutrality, universities play a key role in educating their students and the public about the climate crisis.
The Author Irving Fisher is a revered mathematical economist and is considered by some to be "the greatest economist the United States has ever produced" (Schumpeter, 1997), despite his record of promoting harmful ideas (Fisher was known to be a proponent of eugenics, and endorsed racist ideas). Nevertheless, his books and reports in economics have been praised for their clarity and ease of understanding. Known in economics for his inveterate outlook, Fisher is credited with championing a range of reforms to the monetary system, including the compensated dollar, price level stability rule, 100% Money, Stamped Money Prohibition, and government-funded medical care, among others. Fisher’s inspiration for writing the book: losing in stocks In the 1920s, Fisher computed a stock market index that was regularly reported and published in reputed papers. On October 15, 1929, the New York Times quoted Fisher's statement at a meeting of the Purchasing Agent Association. The Times believed that Fisher's attitude "fell into almost unqualified optimism". A few days later on October 24, also known as Black Thursday, the stock market crash of 1929 (Bordo & Rockoff, 2011) proved the Times right and Fisher very wrong. The Great Depression had begun. Fisher's wrong prediction has become legendary. But rather than let it keep him down, the debacle influenced Fisher to reflect on his predictions and to write the book "Booms and Depressions". It went on to become the holy grail for research into business cycle fluctuations, debt cycles, and economic downturns. Book Overview In the book "Booms and Depressions", Fisher compiles nine main factors that caused the depression and accelerated its adverse effects, with over-indebtedness as the first main factor. The other factors include volume of currency, price level, net worth, profits, production, trade and employment, and optimism and pessimism. Over-indebtedness is when outstanding debts (whether they are individual, corporate, or national) are sizable relative to other economic factors such as assets, income, gold, and liquidities. In his book, Fisher affirms that all other factors play an auxiliary role compared with two dominant factors: "over-indebtedness to start with and deflation following soon after". Though other factors may be more evident in specific episodes, their role is often subservient to over-indebtedness and deflation, acting as effects or symptoms of debt vulnerability. Debt also amplifies the deleterious effects of overinvestment, overconfidence, and over-speculation. Fisher also states that the money market and debt market are closely tied. The volume of currency is measured not only in the deposits sense, but also as credit currency created by “the pen and ink of the banker”. This currency originates and terminates in the banking entries, which is balanced out in regular times by an alternate entry, but gets wiped out in recessions as people and firms struggle to repay their debts. Due to this tendency, the adage "one man's debt is another asset," as advocated by (Krugman, 2011) does not always hold up. Moreover, Fisher provides a general understanding of the relation between real debt and the price level which is crucial to gauge the economy's direction. In simple words, if the price level doubles, the real value of debt halves and if the price level halves, the real value of the debt doubles. Inflation and deflation thus have a contrasting effect on the real debt and its subsequent impact on the real economy. While one may argue that deflation will increase the value of money, it also increases the value of debt. This makes paying off debt difficult, and decreases spending and investment at the same time. A similar indication is given by (Minsky, 1992) who argues that “distress selling” affects the economy by reducing asset prices. In the absence of refinancing opportunities and impaired cash flow from operations during a recession, firms are forced to sell assets (sometimes at large discounts) to pay their obligations. Distress selling and assets falling in value recursively feed on each other, exasperating the initial shock of deflation. Fisher deduced the following chain of consequences in how the nine factors interact. It starts with shock to the system affecting either the interest rates or the productive or earning capacity. The after-effect of the shock forces a company into debt liquidation and distress selling, which results in contraction of deposit currency as bank loans get paid off. This consequently slows down the velocity of circulation. What follows is a fall in the level of prices, which results in a fall in the net worth of business. This hastens bankruptcies and results in falling profits, reduced output, and declines in trade and employment. All these factors usher in a pessimistic sentiment and loss of confidence, which leads individuals and firms to favor hoarding money. This results in a further reduction in the velocity of circulation. The market forces attempt to rebalance the money demand with the supply by shifting the interest rate. In major instances, we notice a fall in the nominal, or money, rates and a rise in the real, or commodity, interest rates (Fisher, 1933). The book’s reception among economists Fisher’s observations in the book have been supported by the likes of many well-known economists over the years. These include Ben Bernanke, John Kenneth Galbraith, Charles Kindleberger, Milton Friedman, Hyman Minsky, Paul Samuelson and Christina Romer, all of whom have commented on the work in their books, papers or speeches. The admirable quality of the book lies not only in its vivid explanation of the Great Depression but in providing a framework for analysis of future crises. This wisdom of this book is invoked time and again as new financial and economic crises emerge. Since its publishing the book has been cited by highly influential papers, reports and other books on investment management and the financial crisis. In that spirit, we can compare the recent economic downturn to the Great Depression to show that many economic factors identified by Fisher are moving in the same manner as before and after the Great Depression. The first significant factor is the debt. Reports from the Institute of International Finance show that the global level of debt hit an all-time high record in 2023, with roughly 80% of that debt buildup coming from mature markets such as the US and France. This is echoed by reports from the World Bank, showing that the world has been in a “fourth wave” of increasing debt, warning that it could end in crisis. While the role of deflation is debatable (it prevailed in the starting months of 2020 only to be taken over by inflationary pressures), this appears to be a time where deflation would have devastating consequences and likely lead the world into another debt crisis. Among the other factors, the interest rate seems to be the defining variable for future recovery. A rise in the interest rate will shift the dynamics of the price levels. Economists are divided on whether the stimulus and accommodative monetary policy that was used to deter the COVID crisis will result in inflationary or deflationary trends in the long term. The presence of inflation and low-interest rates has stabilized the financial environment, but the trend may soon reverse as central banks raise interest rates. Other factors such as the volume of currency, corporate profits, and velocity of circulation have also moved in the same direction as Fisher predicted, though with less intensity. That’s due to the unprecedented government and central bank support which has prevented debt liquidation and distress selling thus far. The vital question to ask here is, “for how long?”. Despite the apparent recovery, evidence from past recessionary episodes provides a sense that the prosperity may be short-lived. Fisher’s chain of events may have been postponed, but its possibility not annulled. Book Details Booms and Depressions: Some First Principles Publisher: Adelphi Company, New York ISBN 1453697640, 9781453697641 Buy on Alibris (US) Buy on Amazon (international) References Fisher, I. (1933). Debt-Deflation Theory of Great Depressions. Econometrica, 337–357. https://doi.org/10.2307/1907327 Krugman, P. (2011). Debt Is (Mostly) Money We Owe to Ourselves. The New York Times. https://krugman.blogs.nytimes.com/2011/12/28/debt-is-mostly-money-we-owe-to-ourselves/ Minsky, H. P. (1992). The Financial Instability Hypothesis. The Financial Instability Hypothesis, 74, 1–10. https://doi.org/10.1117/12.774256 Schumpeter, J. A. (1997). Ten Great Economists. Ten Great Economists. https://doi.org/10.4324/9780203202371 Header image credit: Sweetaholic on Pixabay.
The 1932 book "Booms and Depressions" by Irving Fisher, along with his 1933 Econometrica paper "The Debt-Deflation theory of Great Depression" earmarked the start of a new era for modern macroeconomics and financial literature. This article reviews the book in light of the current economic and financial scenario.