Utility is an important concept in economics, because neoclassical economic theory is based on the premise that rational individuals maximize their utility. This implies that all (economic) decisions and interactions can be analyzed by studying the utility maximization problem of the people involved. This is usually described by a utility function, i.e., a mathematical function that assigns a value to the level of happiness an individual experiences when consuming a certain bundle of goods and services. This function represents the preferences of a consumer over a set of alternatives. Commonly, we assume that utility can be measured in monetary units, meaning that it is a cardinal concept for us. The total utility of consuming a good is equivalent to the amount of money that would give the consumer the same level of happiness. For example, the level of happiness or satisfaction you obtain from eating a chocolate bar can be measured by the amount of money that would give you the same level of happiness. Cardinal utility means that the number we associate with the utility of the consumption of a good has a meaning and we can use it for comparisons. For example, if the consumption of 1 chocolate bar gives me a total utility of 1 and the consumption of 1 piece of cake gives me a total utility of 2, then we can conclude that not only do I prefer cake to a chocolate bar, but I like cake twice as much as a chocolate bar. A related concept is ordinal utility- see the Further Reading section below for a description. <11an>limit:3;categories:Master's Programs;disciplines:Economics</11an> When studying economics, you cannot get around the term marginal utility, which describes the increase in happiness or well-being from consuming one additional unit. The difference between marginal and total utility is that the first term only measures the change in happiness gained from the last unit. The latter term meanwhile refers to the overall level of happiness or well-being derived from consuming a certain quantity. This means that the total utility of consuming a certain quantity is equivalent to summing up the marginal utility of all units. Marginal utility can be positive or negative depending on whether consuming one additional unit increases or decreases someone's amount of happiness. If the marginal utility of the last unit is positive, then total utility is increasing. If it's negative, total utility is decreasing. Let us look at an example to better understand the difference. In the table below we can see the total as well as the marginal utility that an individual, let us call her Anne, obtains from consuming a certain number of cups of coffee. Consuming one cup of coffee gives Anne a total utility of 5, and as this is the first cup, 5 is also the marginal utility of the first cup. So, the marginal utility of the first cup is equal to the total utility at one unit consumed. Number of cups of coffee 0 1 2 3 4 5 Total utility (measured in monetary units) 0 5 7 8 8 5 Marginal utility (of the last cup) 5 2 1 0 -3 Drinking two cups of coffee gives Anne a total utility of 7, so her marginal utility is equal to 2 (the change in total utility from the first to the second cup). In other words, the second cup of coffee still increases Anne’s happiness or well-being, although the increase is smaller than from the first cup. For the fourth cup, the marginal utility is equal to zero and so we see that the total utility from the third to the fourth cup does not change. Anne’s total utility of consuming five cups is lower than that of consuming two, three, or four cups. This means that the marginal utility of the fifth cup is negative, since Anne has had enough coffee and doesn’t want more. This can be explained in economics by the law of diminishing marginal returns. Further reading Some economists argue that (total) utility should not be interpreted as a cardinal concept, but rather on an ordinal scale. Ordinal utility means that the value associated with the utility of the consumption of a good can only be used to make comparisons telling us which consumption bundles are preferred to others, but nothing more. For example, if a chocolate bar gives you a utility of 1 while a piece of cake yields a utility of 2 then according to ordinal utility we can only infer that you prefer cake to a chocolate bar. The actual numbers cannot be interpreted, i.e., we cannot say that a piece of cake makes you twice as happy as a chocolate bar. G. Debreu, in Representation of a preference ordering by a numerical function, established the conditions under which a preference ordering can be represented by a utility function. You may already have seen ordinal utility in the form of indifference curves. All consumption bundles that are on the same indifference curve give the individual the same total utility. Consumption bundles on higher indifference curves are preferred, but the exact difference in the total level of utility is not interpretable. Good to know The consumption of a good that increases happiness has a total utility that is positive. Some goods, those that actually reduce utility or give you disutility are called "bads". For example, air pollution is clearly a bad. And here we encounter a difficulty. How can we measure the decrease in utility a person experiences from having to consume polluted air? To measure the disutility of a bad, we can ask an individual how much he or she would be willing to pay in order to not have to consume it. Alternatively, we can ask how much money we would have to give to the person consuming the bad in order to keep his or her utility unchanged. This is one way to solve the problem of externalities.<o:p></o:p>
Total utility refers to the overall level of happiness or satisfaction that a consumer experiences by consuming a certain amount of a good or service. While marginal utility measures the change in utility from consuming one additional unit, total utility measures the level of happiness associated with the consumption of a certain quantity of the good.
Many decisions that we take will not only have immediate (financial) consequences, but will also lead to future expenses or revenues. For example, if you take out a loan or a mortgage you receive a one-time payment today from your bank and in return you will have to pay back the loan plus interest in monthly installments. An insurance company will receive monthly contributions from their clients but has to pay in case of an accident. If a taxi driver buys a new car, he or she will have pay for the car today but receive a monthly income in the future by using the car to transport clients. Whenever decisions lead to future streams of payments, the NPV can be used as an instrument or measure to help decide whether or not to invest in a certain project or which of several alternatives should be chosen. That is, when the bank decides whether to grant a loan they will need to compare the value of the loan that you receive today, to the sum of monthly instalments it will receive to take this decision. To do so the bank has to determine today´s value of future payments. This is also often referred to as the time value of money. The NPV is a rather simple formula that allows us to compare future expenses or revenues to current expenses and revenues. Consequently, companies that have to choose between several projects they may invest in can use the NPV to determine if an investment is potentially profitable or not and which of several alternatives is the best one. The net present value of a stream of payments is defined as \[NPV = \sum_{t=0}^{T} \frac{R_{t}}{(1+i)^{t}},\] where \(T\) is the total number of payments, \(i\) denotes the interest rate and \(R_{t}\) is the payment at time \(t\). Let us look at an example to understand how this formula can be applied. Suppose a firm is considering to invest into a new technology which would require an initial payment \(R_{0}\) of \(30,000\). This technology is assumed to increase sales and generate a yearly extra revenue equal to \(11,000\) for the next 3 years. The interest rate on the capital market that could be earned if the money was kept in a bank account is 3 \[NPV = -30,000+\frac{11,000}{1.03}+\frac{11,000}{1.03^{2}}+\frac{11,000}{1.03^{3}}\] \[NPV = -30,000 + 31,113.7 = 1,113.7\] The net present value compares the total expenses of the project (30,000) to the sum of the future revenues (11,000 in 3 consecutive years) taking into the interest rate and thereby measuring future payments in current terms. For example, at an interest rate of 3% €11,000 in one year is equivalent to €10,680 today, because if I deposit €10,680 in a bank account today and receive 3% interest per year, I will have €11,000 in one year. The interest rate (or discount factor) helps us to compare money at different points of time, because €100 today is not the same as €100 next year. Think about lending a friend €100 today. If he or she asks you whether you would like to have your money back tomorrow or in one year, what would you answer? Most of us would clearly say that we want the money back by tomorrow. Money that you have today is worth more than money that you will obtain in the future for several reasons: First, you could invest the money and gain interest (e.g., by depositing the money in your bank account). Second, inflation decreases the value of money and the amount of goods and services that you can buy with € 100 in a year's time is not the same as the amount you can buy today. Third, uncertainty plays an important role, because within a year many things can happen. For instance, your friend may lose his or her job and be unable to pay you back. For all of these reasons you would most likely only lend a greater sum if you are compensated for the risk you are taking. That is, you would ask to be paid back with interest so that the value of 100 € in one year is at least the same as the value of € 100 today. How is the NPV used? If the NPV of an investment is positive, this means that the future streams of payments measured in today´s terms exceed the initial investment. A NPV of zero implies that by making the investment today you will neither make a profit nor a loss. Of course, a negative NPV value means that the initial payment exceeds the future income streams. Please note that while for the examples we assumed that you make an initial payment and receive a future income stream, the NPV can equally be used to measure the opposite. That is, you can also calculate the NPV of a payment that you receive today and compare it to the future expenses (e.g. paying back a loan in monthly instalments). The NPV is applied by managers or financial analysts to decide whether a firm should invest in a certain project. For the simple example given above, should the firm invest in the new technology? The answer is yes, because the NPV is positive. In general, it is recommended to invest in a project if the NPV is positive and to reject a project if the NPV is negative. Sometimes, firms do not decide between investing into a certain project or not, but they have to choose between several alternative projects. In this case the firms can compare the NPV of the different projects and choose the project(s) with the highest NPV. Further Reading The NPV of an investment crucially depends on the choice of the interest rate (or discount factor) that is used to discount or transfer future payments in their equivalent value today. In economics opportunity costs often determine the discount factor, that is, the interest rate applied in the formula is the interest that could have been earned if the money would have been invested in a different project. Depending on the type of investment decision, the interest rate may also be calculated differently. Huffman, Maurer and Mitchell (2019) analyse how differences in discounting among the elderly affect economic behaviour and decision making. They find that the stronger future payments are discounted, the lower is the wealth of the individuals and the less people invest in health and planning for end of life care. Good to know The NPV is fairly simplistic and decisions about investments are usually based on several criteria and not only the NPV of the project. For the NPV to be meaningful it is also important that the interest rate and the future payment stream can be predicted with accuracy. The interest rate often fluctuates and if the project is financed using a variable rate this will affect the NPV. Similarly, future revenues (or expenses) that determine the payments \(R_{t}\) are often characterized by uncertainty and therefore based on estimations themselves, which may make an exact prediction of the NVP of a project difficult in practice.
The net present value (NPV) is used in finance and economics to describe or measure today´s value of a stream of future payoffs or payments.
You may also have a steady partner, or are thinking about settling down in the next few years, which opens the possibility of starting a family, if you haven’t already. The game is about to change. Whether you are already working or are applying for a job, you have some new things to think about and multiple, often contradictory priorities to balance (welcome to parenthood). For the sake of simplicity, let’s break this down to: parental leave; childcare; working time; employer/employee relationship; finances; and stress-levels. Apart from the stress, the rest is to some extent directly affected by where you live and the laws/benefits available, where you work or are applying to work, and the conditions and attitude of your (future) employer. The stress, in turn, influences and is influenced by the others. Sound complicated? It is a bit, but you’ll get there. Most parents do. Here’s a rough guide. Looking for a job? Check out our job listings Parental Leave Start thinking about how long you and your partner anticipate taking off work, because your childcare plan, and following that your work/career plan, will invariably be based around this decision. You’ll need to familiarise yourselves with your rights as an employee, which vary considerably from country to country, or in the case of federations like the US from state to state. In most countries maternity leave is considerably more generous than paternity leave, but check national guidelines for where you live. Typically there is a distinction between parental leave and parental benefits. You may be entitled to take several years off, while retaining your job, but any income from the state is normally somewhat less than your normal salary, and for a limited number of months only. Most people receive their parental benefit at the same time as taking their parental leave, to cover the drop in income. But this doesn’t always have to be the case, and there can even be benefits, for example in tax savings, by decoupling the two and spreading your income over different financial years. It may sound obvious, but whether or not you consider going to work a net cost or a net benefit, there is also an inverse in the form of spending more or less time at home with a baby or small child. For some this sounds great, whereas others would be hard pressed to think of a greater torture. There is no “right” answer. Again, welcome to parenthood. The best advice is to inform yourself as much as you can to reduce the information gap about what each option really entails. With this, you can at least attempt to assign a realistic value and cost in relation to each of your options, in terms of finances, personal goals, and career goals. Read up, but most importantly talk to your partner, friends and family, and do some honest introspection to decide what is best for you, your family and your child. Childcare Having thought about how much time to take off-work, you also need to consider how much time you need to take, inversely, “off-children”. If both of you expect to work at least part time, some form of childcare will be necessary. If you anticipate using organised childcare (nannies, childminders or nursery school/kindergarten), look into that early on, especially if you expect to need it in the first two years of your child’s life. Waiting lists in some cities can be a year or more for in-demand nurseries: you really do get people reserving places for children that are not even conceived yet. That is extreme, but it is still worth finding out from friends, family, or colleagues what the situation is like where you live. And then the money. Depending on where you live, pre-school care can range in cost from almost nothing to most of your monthly salary. If you are sending your kids to nursery for the social benefit and/or because you need to return to work, maybe a high childcare cost is acceptable. Spending much or even all of your income on childcare may sound preposterous, but factor in the value of whatever you will do with your child-free time (work, meet your friends, sleep) and it begins to seem reasonable. However, if the cost is too high, it may make more financial sense to take a longer break from work, or share childcare with your partner, rather than working your socks off for a take-home monthly income that, after childcare costs are deducted, comes to a grand total of somewhere in the vicinity of zero. Finally, but importantly, do family or friends present you with options? If there are grandparents in the picture, perhaps they are up for taking the kids a few hours or days each week. Some families pool childcare responsibility with brothers, sisters, cousins or neighbours. Whatever you can organise, the time made available to you will give you precious working time, and perhaps even-more precious free time. In any case, once you have at least an approximate idea of your plans for parental leave, and a feasible plan for childcare, you can come back to the topic of that job... Working Time and Employer/Employee Relationship Many companies offer flexible working models, or offer employees reduced hours. Especially in the post-corona age, many managers will have had a positive experience with their team’s working remotely and working reduced hours. First indications are that more companies are likely to be more open to non-traditional working models than they were pre-2020. The BBC, for example, highlights some high profile examples which indicate that remote and flexible working models might be here to stay after the COVID-19 pandemic. If you already have a job, talk to others in the company to find out whether family-friendly working models are widespread, and so what kind of options might be available to you, before you approach your boss. If you are only just applying, use the application process to find out your options. Many employers have transparent policies when it comes to working conditions for parents. If not, think about if and how to raise the topic during the interview stage. Apart from your legal rights and official company policy, key to any adjustment in your working schedule is the attitude of your manager(s). A sympathetic manager may value the motivation of young parents to work hard and fulfill the responsibility they feel to provide for their children, and therefore be more understanding. Managers may also appreciate the ability of parents to focus, and use their (limited) time more effectively than they might otherwise. Many parents transfer skills they develop as parents to their work environment, for example exhibiting better organisational skills than their long-gone childless selves could ever have dreamed of. Other managers, on the other hand, may be agitated by the work-ethic of parents, noting the multiple and extended periods of leave, occasional no-shows or sudden departures from the workplace, long phone calls with anxious partners or concerned teachers, and a general feeling that work is not their employee’s top priority. If this is your manager, your decision will be between allaying this feeling, keeping your “parenting” out of the office and wearing a different hat when you enter the workplace, or looking for a new job. Working out how to balance your work with your family life, or making a decision on whether a job you are applying for is even going to fit with your current life situation, may well depend on what kind of attitude predominates at your (potential) place of work. Figure this out, and not only will your work benefit, but your family life and stress levels too. And speaking of stress... Parting Starting Advice: Manage Stress-pectations If you have children, there is going to be stress in your life. You have responsibility for another human being, financially, emotionally and physically. These things were stressful enough when it was just you. Assuming the other parent is around, they will, at times, also struggle with those worries. So on top of your own concerns at home and at work, you will probably need to support them more, too. On top of that, you will likely feel annoyed at having to do so, and at yourself for feeling annoyed. It just keeps adding up, or more accurately, multiplying. Factor in some regular work stress, or stress applying for jobs, combined with the additional stress of being tired, less effective, and sometimes less available than you normally would be for your workmates, and you will start to get the picture. If you think you can balance everything without going through a learning curve, think again. The best advice in short is to manage expectations: both your own expectations for you and your partner, and the expectations of your colleagues and managers. Expect there to be periods of high-pressure, and multiple bumps along the road in your relationship, working-effectiveness and self confidence. If you expect a rocky, winding road, you will be better able to navigate it. Work out what you can realistically manage in terms of time off work and time with children. Think about your own expectations and set some clear, realistic goals. At first this may be as simple as getting dressed and having a shower at some point during the day, or getting through a four hour working day without crying. Longer term it may be that you can take on one area of your work and fulfill it satisfactorily, or that you organise your week well enough to take part in a weekly team meeting, building up to a more regular, reliable workload. Communicate with your partner. Do you both have the same expectations of each other when it comes to looking after the kids, doing the housework, winning the bread? Most couples experience tension in the first year or two after expanding their families. That’s okay, but you can reduce the short-term stress, the pressure longer term and reduce the risk of damage if you stay more or less on the same page. Finally, make clear to your colleagues and bosses what your situation is. If you expect prolonged periods with reduced availability, then communicate it. It may seem awkward at first to reject responsibility at work, but if you try and take on everything you were doing before too soon, you will do it poorly and impress no-one. Instead, don’t over-promise: take on less, but do it well. Show that even if you are working fewer hours or sitting out on a couple of projects. you can work effectively, perhaps even more effectively than before. With a bit of patience while you navigate the inevitable bumps in the road, and perhaps a reduction in your career speed while you handle the chicane presented by your adorable but non-sleeping children, you and your partner can, if at varying times and to varying extents, position yourselves to accelerate out of the curve empowered, enlightened and with a new sense of purpose. Perhaps your definition of career success is a little different than it used to be, but whatever it means to you, having a family does not have to put it out of reach.
You are educated, qualified and consider yourself reasonably intelligent. You have handed in countless papers, proposals, and at least one thesis. You probably have some experience under your belt, maybe already landed a pretty good job with good prospects. You are confident of your ability, ready to work evenings and weekends, and keen to impress.
Our Economies Prioritise Male Interests. They Must Be Changed
Many operate at the highest levels of governance, where economists comprise an integral cog within the policy-making machine. From this lofty position, their male experience, along with that of their political counterparts, permeates the legislative process, and consequently, male interests - intentionally or otherwise - are formally prioritised and coded into the law. For despite claims to the contrary, no economic decision can be gender neutral; the diverging roles men and women play in the economy make it impossible. And herein lies the problem: fair economic policy is predicated on recognition of this fact. Disappointingly, few policymakers seem capable of doing this, and more disturbingly, some actually seem unwilling. As a result, discriminatory economic policy continues to be passed. Whether tax breaks that benefit rich, property-owning men, or public service cuts that encumber single mothers, the pattern of prejudice is clear: when it comes to the economy, women tend to lose. The sexism of austerity Austerity politics, implemented across much of Europe following the Great Recession of 2008, embodied this bias in its most brazen and destructive form. Borrowing from the same phrasebook, governments justified its rolling out using cynically collective language. ‘Everybody must live within their means’, they implored, warning that ‘the pinch would be felt by all’. These attempts to engender a sense of national unity, an all-in-it-together camaraderie, masked the grim reality that women would shoulder most of the financial burden. Irish reduction of child benefits; Portuguese slashing of family allowance; Montenegrin cuts to family assistance - they would do so everywhere. <11an>limit:2;categories:jobs;disciplines:Economic Thought & Methodology (JEL B)|Labor and Demographic Economics (JEL J)</11an> In the UK, where austerity was rigorously imposed, the House of Commons Library found that 86% of the financial burden between 2010-2017 fell on women, and cuts were estimated to have cost them £79bn, compared to a relatively paltry £13bn for men. The distribution was so unequal that a 2018 UN report on poverty described the UK’s austerity-hit welfare system as ‘so sexist it may as well have been compiled by a group of misogynists in a room’, and branded it ‘a disgrace’. And this was no anomaly; Europe is replete which such stories. Spain’s sweeping austerity programme was another that carried a particularly gendered sting. To the sociologist, Inés Campillo Poza, the effects were flagrant: they ‘had a far greater impact on women’ and caused the ‘deepening [of] imbalances already present prior to the crisis.’ Along with the expected cuts, pay freezes and suspensions of investment - which Poza concluded ‘primarily affected women’ - the country also, rather symbolically, closed the Equality Ministry, and slashed the gender equality budget from €43 million in 2008 to €19.741 million 2017. In neighbouring Portugal the government showed similar callousness. A 2018 UN report entitled The Impact of Economic Reforms and Austerity Measures on Women’s Human Rights summarised in depressing detail how Portuguese women were ‘particularly affected by the cumulative effects of crisis, fiscal policy and austerity measures’. Such prejudice it saw as evidence that the government had ‘neither conducted an assessment on the gender equality of such measures, nor developed a strategy to balance inequality’. The damage listed in the report was all encompassing. From reduction of public spending in health and education, and raising of VAT, to the restriction of the Guaranteed Minimum Income scheme, it was primarily institutions and initiatives on which women heavily relied that were the worst cut. Discriminatory changes to taxation then compounded these problems. We care not It’s this reliance on public services - the provision and for employment - that made women so vulnerable to austerity. Indeed, investment in the sector is critical in the fight for gender equality. Its decimation, thus, has been devastating, particularly in the area of social care. On that front, Ireland, Spain, Greece and the UK have been singled out for failing to fund their social care systems, the sacrifice in each instance made on the altar of ‘public spending cutbacks’. By way of context, a study from the Economic and Social Research Institute (ESRI) in 2019 found that a quarter of lone-parents in Ireland reported unmet childcare needs. While in Spain, 22% of families were similarly deprived. That Europe’s population is ageing hasn't helped either. In the UK, analysis by Age UK found that in 2018 1.2m people over 65 were estimated to have had unmet care needs. The damaging effects of these deficits for women have been severe. Not only do they make up 70% of the dwindling social care workforce in Europe, and are both overworked (if still in a job) and underpaid, they’re also, as researcher UN researcher Magdalena Sepúlveda has shown, more likely to require care themselves, which, owing to the cuts, they’re less likely to have access to. Responding to the need, women themselves have assumed much of this responsibility that was once the state’s, giving unpaid and informal care, often at great personal cost. In fact, the increase in unpaid care has been so large a 2016 UN report found a quarter of EU women weren’t working because of additional ‘care and other family responsibilities’, to say nothing of the emotional labour exerted. This development speaks directly to a warning given by the European Women’s Lobby that the ‘shift from public care services to unpaid care work within the household poses a severe threat to gender equality in Europe’, which, if left unchecked, could usher us toward a ‘return to more traditional gender roles’ - risking years of social progress. Backward steps are also being taken in terms of equal pay, where, according to the 2016 study Austerity and Gender Wage Inequality in EU Countries, austerity has put at risk ‘the relatively little progress achieved in Europe so far’. In 2018, across the 27 EU member states, women on average earned 16% less than men. In Germany alone, the Federal Statistics Office found it was 21% less. Besides its obvious injustice, it’s sharpened the gendered impact of countless other issues, like the Europe-wide affordable housing crisis, which has left 1 in 10 EU citizens overburdened with housing costs. A 2018 investigation by the Women’s Budget Group (WBG) found that in the UK, the average cost of rent takes 43% of a woman’s median earnings, while taking just 28% of a man’s. And to varying degrees, this trend is a feature of European life. It means that job loss carries a disproportionately greater financial risk for women, and can force them to remain in employment that’s unfulfilling, unfairly remunerated, or where treatment is bad. Spearheading change Austerity has hyper-charged a bias that has long existed, and in doing so laid bare the egregious extent to which our economies favour men, who set their rules, remain their chief beneficiaries, and suffer least when they flounder. And actually, the job they’re doing isn’t a particularly good one. In much of the West, inequality, not only between genders, but regions and generations, is rampant. Indeed, it feels uncontroversial to say our economic systems are not serving us as they should. The question is: what do we do about it? In an attempt to answer this, it’s useful to remind ourselves of the UN’s declaration that ‘non-discrimination and equality constitute a fundamental aspect of states’ human rights obligations’. As the above has shown, these obligations are currently being flouted - a failure that provides an obvious starting point. States must adopt a human rights framework to audit economic policies, and the differing roles men and women occupy in the economy need recognition. In this light, honoring non-discrimination and equality principles should be immediate obligations when implementing macroeconomic policies - they should be guaranteed, it should be standard practice. How likely this is given the current gender complexion of the discipline remains questionable: as Nobel Laureate Esther Duflo has bemoaned, ‘there are not enough women in the economics profession, period’. That being said, efforts to change things are well underway, the aforementioned WBG think tank, among others, leading the push for the creation of - in its own words - a ‘caring economy that promotes gender equality’. Its analysis is guided by the simple mantra: who stands to benefit? The question is a bold one, and one bound to ruffle feathers. We must all ask it more stridently. For if we fail to do so, and economics remains disproportionately in male hands, hopes of a fairer future will likely be futile. The current custodians have shown they are content presiding over a system that preferences their own interests, seemingly irrespective of the costs. We can't allow this. The economic discrimination against women must end. Enough damage has already been done.
In the collective consciousness, the economist exists as a middle-aged man, bespectacled and clad in a suit, whose unhealthy pallor betrays a hermit-like lifestyle led in the confines of a library. Of course, this image isn’t a particularly fair reflection of the discipline, or its practitioners. Some, for instance, will be aware that in the last few years a number of economists have experimented with contact lenses. Nevertheless, the stereotype remains instructive: the large majority of economists are men, and given the positions they hold, and influence they exert, such homogeneity is a cause for concern.
Public Economics & Economic Policy (JEL H)
The Case for Income Tax Reform in the US and UK
Always one of the key issues between left and right, the debate over higher tax rates has again seen some action over the last few years in both the UK and the US. The Labour Party in the United Kingdom proposed in 2017 a 50% tax rate for those earning over £123,000 and a 45% for those earning over £80,000, with the plan that the top 5% of earners pay a little more to fund the country and relieve the burden on the poor. Currently there are four brackets in the UK, including one for personal allowance. From £12,501 to £50,000 you pay 20%, from £50,001 to £150,000 you’ll pay 40%, and anything above that 45%. Their relatively moderate proposals resulted in a barrage of arguments for and against. And the issue blew up in America at the beginning of 2019, too, when Alexandria Ocasio-Cortez suggested that a 70% income tax rate on incomes over $10 million rate might not be too bad an idea. As might be expected, conservative politicians pushed back hard against the idea, Rep. Steve Scalise, for example, tweeting that the Democrats would ‘take away 70% of your income and give it to leftist fantasy programs’. Grover Norquist, head of Americans for Tax Reform, compared it to slavery, tweeting ‘Slavery is when your owner takes 100% of your production... Ocasio-Cortez wants 70%... What is the word for 70% expropriation?’ <11an>limit:2;categories:jobs|courses|conferences;countries:Italy|United Kingdom|United States;disciplines:Financial Economics (JEL G)</11an> On the surface these tweets show either a total misunderstanding, or worse, a deliberate misrepresentation, of how marginal taxation works. Ocasio-Cortez’s proposed tax, for example, would only tax 70% on every dollar a person earns over $10 million, which is not exactly the majority of Americans. And less than four percent of Britons earn over £100,000, meaning very few would be liable for Labour’s proposed tax bracket increase. This is how progressive tax brackets work: you pay more tax only on money earned that falls within the new bracket; any percentage increase doesn’t apply to every dollar or pound you earn. Nonetheless, there is a debate to be had around higher top rates of taxation and, more generally, comprehensive tax reform. Nothing is certain A common argument against a higher top tax bracket is that it won’t mean that the richest will pay more, but that they will retire earlier, figure out ways to keep their income from being taxed, and ultimately end up paying less. (In the 1970s in the UK something similar happened, the tax avoidance industry exploding due to extremely high upper tax rates.) Moreover, experts such as investment adviser Mark Dampier argue that traditional alleviations on tax, such as a decrease in VAT, won’t be felt by the regular person on the street while buying their shopping (whereas it would be felt by a rich person buying a yacht, for example). Instead, a simplification of the tax system and a raising of personal allowances will make much more of a difference to your average Joe Bloggs, in comparison to a redistribution of taxes on the rich which may not make that much money anyway if they can find ways of not paying. Dampier’s criticism was in response to the UK Labour Party’s aforementioned proposed tax rate increase. Since Ocasio-Cortez’s proposal, too, other big names have come out suggesting it’s a bad idea. Bill Gates argued in an interview with the Verge that in America, the highest earners gain their money through selling assets, rather than through their income: ‘the top 400 earners in the US,’ he argued, ‘are only paying something like a 20 percent tax rate.’ This means the higher tax rate won’t affect them as much of their money isn’t earned through their incomes anyway, and those it would affect would simply move their money around so they won’t have to pay. Other arguments have a more political, and less economic, basis. A flat or flatter rate tax system, in which everyone pays the same or more similar rates of tax, is sometimes argued to be fairer for the simple fact that everyone is treated the same. Moreover, some say a lack of differing tax rates encourages the poor to work harder and to earn more money, striving to reach the top. After all, being able to make of yourself anything you wish was what underpinned the Thatcher-Reagan political reforms of the 70s and 80s; it stands to reason, then, that the way they taxed the population would change in line with these policies. On a more basic level, fewer tax brackets also means simplicity in the overly-bureaucratic process of state finance. And yet, taking all of the above into account, history tells us that fewer tax brackets and lower higher rates is the exception, not the rule, and that the policies of the 80s did not make our societies more equitable. In Eisenhower’s day, the top tax bracket was 91%. In the 60s, the top rate dropped to 70%, before Reagan slashed it even further to 50%. The number of tax brackets in the US steadily decreased also, from 33 in 1965 to 7 today. The results of this decrease in both brackets and the top taxation rate (though this of course wasn’t the only cause) were steadily rising inequality, and a higher proportion of wealth being in the hands of the rich, particularly since the mid-80s - something anybody could have predicted. Currently, the richest 0.01% of Americans control around 11% of the country’s wealth, and the top 0.1%’s share of national wealth roughly equates to that of the bottom 90%. This is significantly less equal than in the 60s and 70s, as reported by Vox in 2015. It’s perhaps no surprise, then, that many of the world’s wealthiest and economically equal countries have higher top rates of tax. Denmark and Sweden have top tax rates of around 60% and 56% respectively, two of the most prosperous countries on the planet. (Admittedly, they have a relatively flat taxation system, meaning many people get taxed at such high rates, not just the rich.) Germany has a progressive tax system, with the rate increasing after the personal allowance limit of €9,169 linearly as your income increases up to 42% when you earn €265,327, before jumping three percent to 45% on all income after this. The system also means that a taxable income will never result in lower net income. Other - better - systems exist, and it’s evident some kind of tax reform is critical if we are to make society fairer. But what’s the best way to go about this? Will more tax brackets help? Or is simply a higher top bracket rate necessary? Except death and taxes 70% sounds like a huge increase in the top rate of tax, but some argue it’s not quite enough. A 2012 paper from MIT by Peter Diamond and Emmanuel Saez argued for a top bracket of 73% on incomes over $400,000. The main argument for this was that after a certain amount, an extra dollar doesn’t make a dent in a rich person’s bank account, but for a poorer person, those few bucks could mean the difference between eating or going hungry. The paper’s authors calculated that any tax rates higher than 73% lead to people working less and evading tax. And there’s a social argument for higher taxation, too: many talented people currently move into legal or financial roles, because they can earn more money. However, if taxes were high over a certain rate, these roles would be less appealing, because you’d keep less of that money. Evidently a second part of this would be to make currently lower-paying jobs, such as teachers and academics, more enticing, with higher pay and better benefits - not something necessarily related to tax. (That being said, it isn’t inconceivable that revenue generated from higher top bracket tax rates could be redistributed to make civil servant jobs more financially appealing.) The social benefits of having a bunch of talented bankers and lawyers, especially if the lawyers simply work for the bankers, are incomparably small compared to those of having extremely brilliant teachers and academics. Consider, moreover, when a company decides what it does with its revenue. With high brackets in place, instead of giving those at the top huge incomes and bonuses which simply get taxed away, that money gets sent downwards, invested back into the company, which includes in workers who normally would never see it. And so it was in the 1960s: bosses earned significantly less than today, and more money was invested into businesses at the lower levels, partly because of the influence of unions but also due to higher top tax brackets which meant paying bosses astronomical sums made no sense. As argued in a The Week article by Jeff Spross, when this system began to change in the late 70s - combined with union collapse and increasing unemployment - the US saw money rocket to the top of the chain, and inequality increased massively. Naturally the reasons for economic prosperity are complex, but in the years in both the UK and the US when tax brackets were more numerous and rates of taxation at the top higher, economic growth was greater and continued for longer, and living standards were higher. There are other obvious social reasons for higher taxes, too. Ocasio-Cortez’s suggested tax rates rise was directly related to the Green New Deal, a plan put together by young activists in the Sunrise Movement to combat climate change. It consists of a program of investments into renewable and clean energy, which, it argues, will make the economy environmentally friendlier and simultaneously juster. The money that will go into alleviating climate change isn’t money that will be spent, but rather invested; it’s clear from much research that investment in renewable energy is essential not just for saving the planet but also for helping to keep the economy afloat and fixing inequality. Indeed, without it, there won’t be an economy left. Worryingly though, some, such as Nobel Laureate Peter Diamond, have suggested the 70% suggested by Ocasio-Cortez is too little to fund the Green New Deal, arguing the top bracket must be much higher to raise the funds necessary to save the planet. Taxing reforms An important and yet often ignored part of this debate is that tax reform can’t just consist of raising rates and including more brackets. It must also focus on making the system itself less complicated, less bureaucratic, and less easy to fiddle. It needs to come down hard on tax avoidance, as well as closing loopholes and placing restrictions on the movement of capital to make tax evasion, often in that grey area between morally wrong but legal, more difficult. The common argument that fewer tax brackets equals a simpler and fairer system is disingenuous. Working out which tax bracket one falls into takes very little time and some simple maths. The difficult part is actually working out your income and declaring your tax, at least for self-employed workers or those working in complex systems such as in the US. The solution is surely threefold: simultaneously raise the highest tax bracket rates to increase government revenue, improve the system to make it significantly harder to evade and avoid tax, and increase the amount of tax brackets in order to lessen the leaps between incomes, thus making the progression fairer. These solutions aren’t mutually exclusive; indeed, it’s essential they are implemented in tandem with one another, else reform will fail. Some polls suggest the majority of people in the UK support a higher rate of taxation, showing public opinion is moving away from the received wisdom of neoliberal politics. Unfortunately, as the backlash to Labour’s and Ocasio-Cortez’s suggestions shows, some politicians are unwilling to have a considered debate on the topic, preferring instead to make misleading comments that miss the point and fail to grasp the nature of tax reform. Until they can sit down and discuss this broken system in a reasonable manner, taxes will remain as they are: inadequate and unfair. Image Credit: supawat bursuk on Shutterstock (licensed image - copyright)
Whether someone believes in higher rates of tax or not can tell you a lot about their political views. As a general rule, conservative politicians - at least since the 80s - have favoured fewer tax brackets and relatively lower rates of tax. The argument goes that this encourages people to work harder because they keep more of their money, which means more money remains in the economy; eventually it will trickle down to those not so rich. On the other end of the spectrum, more left-wing politicians argue that higher taxes on top earners are an effective way of raising government revenue for public services which help out those who need support, and that a few more dollars or pounds taken off of someone who earns astronomical sums already is a drop in the ocean.
Macroeconomics and Monetary Economics (JEL E)
It’s not enough However, despite such pledges, the panoply of bailouts, furlough schemes, and loans are failing to reach all those in need. It’s a familiar story: the effects of the crisis are driving a wedge into societies’ already pronounced divisions, entrenching and exacerbating them - they will soon be untenable. In the US, it’s ‘women, particularly women of color, communities of color, and impoverished Americans…[that] are bearing the brunt of the economic downturn’, according to data from Vox. In spite of the largest relief package in history, the so-called ‘left-behind’ are being cut further adrift. Research from the International Labour Organisation (ILO) makes for similarly depressing reading. They have estimated that the ‘lost labour income [as a result of the virus] will result in an increase in relative poverty for informal workers and their families… of almost 52 [percentage] points in high-income countries and 56 points in lower and low-income countries’, confirming the unequal distribution of the economic fallout. Over 2 billion people work informally worldwide and if they, and other vulnerable demographics, are to be protected, more is needed, more invention is due. Without additional support, societies will destabilise, leading to, as Kanni Wignaraja, UN Assistant Secretary-General, has warned, ‘a heightened risk of societal conflict’. Introducing UBI ‘This may be time for a universal basic wage’, contemplated Pope Francis in his Easter Address in April, observing the economic destruction around him. And the Pontiff may be right. No longer fringe, the case for UBI is as strong as it’s been, its popularity soaring. A 2018 poll of 28 European countries showed that 68% of Europeans are in favour of direct no-strings-attached cash payments to citizens. Since coronavirus has cruelly exposed the precarity that underpins so many people’s lives, the harsh hand-to-mouth reality, one would now expect that figure to be even higher. And this really is UBI’s greatest selling point: the stability it ensures, both psychological and material. The guarantee that no matter what happens, be it a change in work, temporary unemployment, divorce, or even a global pandemic, a modest income will always be there to break your fall and provide a baseline of security. Its benefits scale up to societal level too. Crises always risk societal cohesion, and although coronavirus has, in some areas, elicited a collective spirit, the economic downturn will be crushing, and threaten these bonds. As we know, deprivation often leads to accusation, a combustible situation readily exploited by the far right. UBI offers protection from this, and would insulate people against the worst of any economic turbulence, helping neutralise social tension and stem the need for scapegoats. It promises, in the words of its most famous champion, Rutget Bregman, what all people desire: ‘a life of dignity’. Increasing demand More immediately, and crucial to economic recovery, it would address the crisis of demand, felt everywhere. While many economies begin the process of ‘unlockdown’, there are fears that economic behaviour will take some time to return to normal, that a combination of health anxiety, reduced income, and greater inequality will contribute to a sustained decline in aggregate demand. This will compound economic hardship on a microscale that plays out as follows: despite being allowed to open, restaurants won’t fill up, meaning less profits; this will force employers to let workers go, which, in turn, will further reduce demand, as fewer people working means less money being spent in the economy. And the cycle continues. Although UBI cannot directly address health fears, it could disrupt this spiral into deep recession. Economists, Adrien Auclert and Matthew Rognlie, have shown that cash in the hands of the rich tends to be saved, and that greater inequality correlates with lower aggregate demand. UBI, or some kind of income guarantee, would counter this, putting money into the pockets of the people most in need, and on whose spending habits the health of the economy is dependent. Research from the Roosevelt Institute supports this argument, demonstrating that UBI, regardless of whether funded by debt or taxation, is an effective way to grow an economy and expand the labour force. With global GDP set to contract by 3.9% in 2020 according to Fitchratings, it’s perhaps no surprise that UBI is attracting such high-profile advocates. To the naysayers Questions of expense accompany any discussion of UBI, and people are right to query: giving citizens free money sounds expensive. Its expense, though, shouldn’t be considered in isolation and must be contextualised, made relative to the economic resources available to states, which, as the coronavirus has shown, are extensive. When deemed necessary, governments have had no issue bankrolling stimulus packages, furlough schemes and bailouts, running up deficits previously thought untenable. No one batted an eyelid. Why should UBI be any different? Even putting countries’ impressive borrowing capacity to one side, UBI still makes financial sense. US economists have calculated that a negative income tax, which guarantees a level of income just above the poverty line (in effect, a graded basic income, not universal) would only cost the US $336 billion. For perspective that’s just 1% of US GDP or about half the military budget. The same researchers then estimated the cost currently incurred by child poverty - including higher healthcare expenditure, increased crime rates, etc. - which they found was $500 billion. Their conclusion is clear: it costs more to sustain child poverty than to eradicate poverty altogether. Interestingly, they believed their findings were relevant not just to the US, predicting similar data for much of the developed world, adding, finally, that funding could be aided by removing fossil fuel subsidies and tweaking unfair tax systems. Far from a utopian pipe dream, UBI appears to be well within our grasp. The iron is warming On top of UBI’s money-saving (its simplicity would likely save billions on paperwork and bureaucrats) and poverty-alleviating attributes, it’s what it stands for which could be of most value. For UBI honours labour that typically goes unpaid, such as that done by parents and carers, labour that society could not function without, and which for too long has gone underappreciated. With coronavirus forcing a reappraisal of the current social settlement, it could be on the sentiments of gratitude and egalitarianism that the new, post-corona world is built. Implementing UBI would make a fine first step
Necessity is the mother of invention, so the old proverb goes. And with coronavirus spreading through countries, deep economic recession clambering at its coattails, the collective need has rarely been higher. In just four months, almost 300,000 lives have been taken worldwide, and lockdown, in its various forms, is threatening untold livelihoods - as of May 9th, 33 million jobs have been lost in the US alone. True to the saying, some invention has been forthcoming as incumbents have scrambled to protect their citizens and economies. The UK’s Chancellor, Rishi Sunak, for instance, has shown great ideological flexibility, committing to stimulus packages so large they’d make the most ardent of socialists blush. And similar developments can be seen across the world.
Will China Become the World’s Largest Economic Superpower Because of Coronavirus?
China’s bid to become the world’s economic superpower has been a long time coming. Following the economic stagnation and isolationism of Chairman Mao’s leadership fifty years ago, China has developed a sophisticated high-tech economy that is the envy of many in the Western world. A key part of this was a massive infrastructure drive: China owns more high-speed rail than the rest of the world put together, and has the busiest, largest ports and container storages on the planet. Middle-class growth is also tangible with home ownership on the rise, and in recent years, statistics from McKinsey show that Chinese tourists were the world’s highest spenders per single trip. Concerning the virus’ impact on the global economy, what is certainly not lacking from commentary is the price fluctuations of oil, decreased agricultural output, decreasing exports, and unemployment figures. From this, one may well form the opinion that the coronavirus pandemic has also negatively affected China’s prospects of taking pole position in the economic race. In reality we may be on the cusp of a reordering of economic superpowers. Despite China supposedly losing the recent trade wars against the US, the COVID-19 pandemic could be the final big push that catapults the Chinese economy ahead in the world order. Click here to browse our economics job listings Chinese economy recovers ahead of other countries The economic ramifications of lockdown are clear even to the layman. Fiscal packages and bailouts have been the most common ways Western countries have responded to the crisis, while, China’s strict reaction to the pandemic, which has succeeded in controlling the spread of the virus, lies in its ability to firmly curtail people’s freedoms and, as a result, the economy. Its centralised government has a capacity that extends beyond most western democracies, enabling it to act swiftly and enforce measures well. It has capitalised on both. Since March, 33 million people have lost their jobs in America, dwarfing the unemployment fallout the coronavirus has caused in China, which contributes further to China's advantage. This has compounded the economic gains it has made since the turn of the millennium. These gains were achieved because of huge development in infrastructure and foreign investments, for example, The Belt and Road Initiative (a global development strategy adopted by the Chinese government in 2013 involving infrastructure development and investments in nearly 70 countries and international organisations). It is also the largest economy in terms of Purchase Power Parity since 2014, although it still lies behind the USA in GDP, according to World Bank data. What is happening to the Chinese economy as a result of the Coronavirus is not the shrinking of the economy, nor decreased domestic and external demand. Factories and shops are opening ahead of other countries; as a result, China won’t get hit as hard as the United States. But it’s not just that businesses will have to remain shut for longer. It’s also which businesses. The US economy is far more reliant on the service industry - shopping malls, restaurants, hotels etc. - than China’s, and it is this industry that is more affected by social distancing measures. China is further advantaged by the size of its agricultural sector, which is ten times larger of the USA’s and an area of the economy far less hit by social distancing. The pandemic, therefore, will affect the world’s largest economic power far more than its rising star. <11an>limit:2;categories:jobs|courses|conferences|Professor;disciplines:International Economics (JEL F)|Economic Development, Innovation and Growth (JEL O)</11an> Speculation or logical conclusion? Due to the 2008 financial crisis and now the coronavirus pandemic, the primacy of the American economy is being threatened by the rocketing economic expansion of China. As of May this year, the American economy has not spiked to the 24% rate of unemployment seen during the Great Depression of the 1930s, but the figure it is currently at - around 14% as reported by the Guardian - is likely to increase. Less than half of all working age Americans are estimated to earn a wage in May 2020, in an economy, according to the Business Insider, where consumption contributes to nearly 70% of GDP. Compare this with the Chinese unemployment figure of just 5.9%, and it becomes clear that its recovery is several steps ahead. Chinese construction, oil refinement and power plant activity have all begun to normalise, and on top of this, China was already on the way to recovering from the brief trade war with the US which ended in a bilateral trade deal that leaves China in a good position, and could precipitate the US redirecting protectionist policies towards Europe. It is for these reasons that China could very soon take the top spot as the world’s largest economy - not least because of this pandemic.
The ascension of the Chinese economy to global preeminence is not without precedent. China was, after all, one of the largest economies in the world from the Song Dynasty (c.900 CE) until the 19th century’s ‘Great Divergence’, when European industrialisation facilitated the long period of Western economic dominance that generations alive today know all too well.
Economic Development, Innovation and Growth (JEL O)
The Best Books on Environmental Economics
However, the problem is far from solved, and how to balance the economy with climate change policies is a question that still awaits an answer. At the very least, most people currently have a lot of time to read; and what better issue to read about than the most pressing of our time? INOMICS is an Amazon Associate, meaning we are a part of their affiliate program. This article contains affiliate links, which means we may earn money through any qualifying purchases made after you click through. However, this is not a sponsored post. 1. Stephen Smith - Environmental Economics: A Very Short Introduction Another in the excellent bite-size series from Oxford University Press, this edition focuses on giving a brief overview of the field and asking some important questions to get you thinking about the topic. Designed (as the title suggests) as an introduction into the topic, Smith outlines pollution control, environmental damage and its reduction, and global climate change policies, giving some answers as to how governments should balance their economic duties with the responsibility to protect the environment. Including questions like whether the economic costs of controlling environmental damage are viable, whether some environmental damages are necessary and even desired, and how we can assess the impact environmental damage has on humans, this book offers a great (and very short) springboard into the topic of environmental economics. 2. Frank Ackerman and Lisa Heinzerling - Priceless: On Knowing the Price of Everything and the Value of Nothing Can you assign a monetary value to things like the environment and health? Many economists have tried to do this and, while it sounds rather cold and calculated, it’s often how governments decide what’s important to them. The problem is, our moral compasses are often ignored when numbers are the way we try and solve the problems we face. In Priceless, Ackerman and Heinzerling argue that the cost-benefit analysis which defines how many societies are run is hugely detrimental to the environment, and that issues such as climate change and health should be dealt with using democratic, moral values, rather than numbers. That being said, should we avoid all risks, for fear of something bad happening? Some of the analysis in Priceless seems to imply that certain things are simply too risky to take on, and they cause people to be anxious, fearful, and depressed. The book often blames the nameless ‘company’ (much like in the Alien series), and the book has been criticised for encouraging cynicism and an anxious view of progress. Nonetheless, an interesting read which poses some important questions. 3. Tim Jackson - Prosperity Without Growth: Economics for a Finite Planet Economic growth has long been touted as the solution for all problems, as the most important indicator of success in modern society. Recently, though, this idea has been challenged: particularly the Green parties of Europe have argued that endless growth is detrimental to a number of things, not least the environment. In Prosperity Without Growth, Jackson argues that economic growth in developed nations should stop, that growing consumption doesn’t improve the happiness levels of citizens, and, most importantly, that the world’s ecosystems will be destroyed unless we take a different view of progress. Jackson argues that humans can prosper while taking into consideration the limits of a planet which has very obviously finite resources. Current evidence suggests that the level of current economic activity isn’t sustainable, meaning, if we decide our planet is important, it needs to be decreased. A revolutionary read which turns fundamental ideas of economics on their head, and was based on a report Jackson wrote for the Sustainable Development Commission in the UK, which was the most downloaded in 2009. 4. Paul Hawken - The Ecology of Commerce: A Declaration of Sustainability Hawken’s book confronts the conflict between businesses and environmental protection by making the argument that businesspeople need to transform commerce and make it sustainable. His book is premised on the fact that business, as it currently functions, is contributing to our exceeding the limits of what our planet can offer us, and in the process destroying the ecosystems we need to survive. Writing ‘the promise of business is to increase the general well-being of humankind through service’, he contends that the general rule that businesses exist to make money needs to be contested, and that through innovation and creativity, commerce can be reformed to serve the needs of the planet while also serving the needs of its customers. But how? At the forefront of his idea is that businesses must manage their waste more effectively so it all is reused or recycled, and that the energy businesses use must rely solely on solar power and hydrogen. Governments can’t do this, he argues: businesses must take the lead, driven by an incentive shift from commercial gain in the short term to a wider view of ecological sustainability. A very business-centred approach that offers important ideas while perhaps not taking into account the dramatic system change which needs to take place to save the planet. 5. Jonathon Porritt - Capitalism: As If the World Matters The current world is predominantly capitalist, particularly in those states which produce the most greenhouse houses. Even countries like China which have strict socially authoritarian governments have made moves towards a capitalist economy in the last few decades. In Capitalism, Porritt addresses the question of whether this economic system is at all able to deliver the change we need to see to save the environment - can it offer us a sustainable, green future? Porritt believes it has to be able to, even though our and politicians’ faith in the system has been shaken, because it’s the only system we really have. While analysing capitalism and the role of businesses within it, the author also discusses the challenges that face the environmental movement and makes the argument that rather than emphasising the bad things that will happen if we don’t go green, it should be focusing on the (economic) positives of becoming sustainable. Porritt argues capitalism offers the best middle ground for personal well-being, economic growth, and sustainability - and anyway, we don’t have any other choice. A bit of a status-quo read that may ruffle the feathers of those who believe overall system change is the only solution. 6. Naomi Klein - This Changes Everything: Capitalism vs. The Climate In stark opposition to Porritt’s analysis, Klein writes that the status quo is no longer viable and to protect our world, radical change is needed to our economic system. She argues that climate change isn’t just another issue which needs to be dealt with by politicians, but the wake up call we have needed which tells us that our systems are failing both us and the planet. Looking at how solving climate change can help us fix some of the problems that are at the forefront of modern society, such as widening inequality and democracies that only sort-of work, Klein builds a compelling case for why the capitalist market isn’t the solution to our problems and how current environmentalist movements are too defeatist. The climate crisis, while urgent and something we have very limited time to fix, acts also as a ‘gift’ - a way to rebuild our broken relationship with nature and totally change the way we live and interact with one another. A good companion to other, more capitalist-based solutions to the crisis, and one that offers a radical alternative. 7. Charles D. Kolstad - Environmental Economics Looking for a textbook that focuses solely on environmental economics, getting straight to the point? Kolstad’s Environmental Economics does exactly that, assuming knowledge of micro- and macroeconomics from the off. While not offering newer ideas for the study and analysis of the environment in relation to economics like the other books on our list, this work will, however, give you a comprehensive overview of what the field looks like right now. The book is split into four sections, dealing with (respectively): the definition of the field; market failures; the role of government regulation; and the demand for environmental quality. Kolstad takes an international/global approach to environmental economics, acknowledging that the discipline cannot work in isolation within states. That being said, he doesn’t ignore the differences between how countries use this field of economics to deal with (or not deal with) the environmental catastrophe we are facing. Perfect for undergraduate students who want to specialise in this field.
In our current state of isolation, it’s important not to forget about some of the other issues which still beset the human race, not least climate change. Due to the fact that so fewer people are travelling both around the world and domestically each day, the levels of greenhouse gases being emitted are far lower than they have been in recent years.
Agricultural and Environmental Economics (JEL Q)
A market is said to be perfectly competitive if (among some other conditions) the following assumptions are satisfied: Homogeneous good The good which is being traded in a perfectly competitive market is a homogeneous good. This means that all units of the good are identical from the perspective of the consumers independently of who sells the good and where. In other words, consumers do not care from whom they buy the good. The goods sold by two competing sellers are the same in the eyes of the consumers. This has the important implication that consumers will always buy the good from the seller offering the good at a lower price. Examples of homogeneous goods may include gasoline or bottled drinking water. Many buyers and sellers Another requirement for competition to be perfect is the number of sellers and buyers in the market. In a perfectly competitive market, there are many sellers interested in selling the (homogeneous) good and many buyers interested in buying the good. Price-taking In a perfectly competitive market both buyers and sellers are price-takers. No individual seller or buyer can influence the price at which the good is being traded. Let us have closer look at why this is true: Suppose all sellers sell the good at the same price (the market price), e.g. suppose all gasoline stations sell 1 liter of gasoline for €1. What will happen to a seller who charges a higher price, say €1.1? In a perfectly competitive market he or she will not sell anything. If consumers can choose to fuel their car at €1 per liter or at €1.1 per liter, naturally everyone will go to the cheaper gasoline station. As long as there are enough sellers to satisfy the entire market demand, a single seller who unilaterally decides to charge a higher price will not be able to sell anything. A similar reasoning applies to individual buyers, who are not willing to pay the market price and ask for a lower price. In a perfectly competitive market, a buyer can decide whether he or she wants to buy at the market price set or not at all. If the firm cannot sell at the market price to one specific buyer, there are still many other buyers who are willing to pay the market prices. Therefore, no single buyer and no single seller can influence the market price. No entry and exit costs In a perfectly competitive market firms can freely enter and exit the market. Perfect information All market participants possess all information that is relevant for them to take a decision. An example of imperfect information is asymmetric information where one side of the market has information that is relevant to the other side of the market. For example, in the market for used cars, the sellers typically have more information about the state of the car (whether it had accidents, etc.) than the potential buyers. Perfect information ensures that all buyers and sellers know everything they need to know about the characteristics of the good, their utility functions, cost structures, and so forth. How is the market price in a perfectly competitive market determined? The market price (also called market-clearing price) is the price at which market supply is equal to market demand. At this price all sellers are able to sell as many units as they want to sell at this price and all buyers are able to buy all units they want to buy at this price. Graphically the equilibrium in a perfectly competitive market corresponds to the intersection of the supply and the demand curve. In the short run the supply is determined by the marginal costs of production, and hence the market price is equal to marginal costs. The idea of a perfectly competitive market is that each individual seller only faces a very small part of the entire market demand. Therefore, the demand faced by a single seller is perfectly price-elastic and as soon as the seller charges a price above the equilibrium price all of his or her consumers will switch to a different seller. At the market price each individual seller can sell as many units as he or she wants to, but at a price slightly above the market price he or she cannot sell anything. Profits in a perfectly competitive market are equal to zero. In the short-run, firms price at marginal costs and therefore profits are zero. In the long-run, free entry and exit ensures that firms enter as long as firms make a positive profit, thereby driving profits to zero. Further reading The definition of perfect competition dates back to around 1900 and is attributed to León Walras. In 1954, economists Kenneth Arrow and Gerard Debreu showed in their paper “Existence of an equilibrium for a competitive economy” that an equilibrium in a perfectly competitive market exists. By doing so, they further formalized Walras' original description. Good to know You may have already guessed that many markets in real life are far from perfect. Sellers and buyers have market power, goods are rarely perfectly homogeneous, not all market participants have perfect information about goods, and so on. So how come that the concept of perfect competition is so important in economics? Perfect competition allows us to study what would happen in a perfect world and then compare this theoretical outcome to market forms that are more realistic. Like this we are able to compare different market allocations and formulate suggestions and recommendations for policy makers to improve efficiency.
Perfect competition describes a market structure in which many sellers and buyers exchange a homogeneous good and no individual can influence the market price, i.e., buyers and sellers are price takers. In a perfectly competitive market total welfare (that is, the sum of consumer and producer surplus) is maximal. As there is no deadweight loss, the equilibrium allocation in perfect competition usually serves as a benchmark to measure the welfare loss associated with market structures that are not perfectly competitive (e.g. because one side of the market has market power).
It is an instrument of market regulation that governments may use to ensure that firms do not abuse their market power by charging consumers excessively high prices. Particularly for goods that are considered a necessity (such as utilities like water and electricity) the government may establish price ceilings to protect consumers. In cases like water and electricity, society may not be efficiently served if these utilities were left to a competitive market, so price controls can help. Price ceilings are also sometimes used temporarily in exceptional situations such as during times of war or famine. For example, during the COVID-19 pandemic some countries established price ceilings for hand sanitizer after observing extreme increases in the price for this product. What is the impact of a price ceiling on consumers and producers? Let us consider a perfectly competitive market where market demand is given by \(q_{D}=10-p\) and market supply is \(q_{S}=2p-2\). The market price in this unregulated market is equal to 4. Now suppose that the government fixes a price ceiling at \(\bar{p}<4\). As this price is lower than the market price, some customers who were not able to buy at the market price would now likely buy the good. The quantity demanded increases to 8. The quantity supplied, on the other hand, decreases, because at a price of 2 it is less profitable to sell the good. Quantity supplied decreases to 2 units. As the quantity demanded now exceeds the quantity supplied, there is excess demand. This scenario is illustrated in the figure below. In the case of a price ceiling below the market's equilibrium price, producer surplus decreases (in the figure: the triangle described by the area below \(\bar{p}\) and above the supply curve). Consumer surplus may increase or decrease depending on the demand function and the height of the price ceiling. Total welfare decreases, due to the decrease in the quantity exchanged. The shaded orange area is the deadweight loss that can be attributed to the price ceiling. Figure 1: Welfare loss and excess demand caused by a price ceiling Price floor A price floor is the opposite of a price ceiling: it is the lowest price that can be charged by law. The most well-known example of a price floor is the minimum wage. A price floor is another instrument of market regulation that governments may use. The most well-known example of a price floor is the minimum wage. In markets where the demand side has market power and as a consequence can force the supply side to offer their good or service at extremely low prices, it can be beneficial to set a lower limit. This is the case in the labor market, where workers determine the supply of labor, while the firms determine the demand. In this example, the wage is the price of labor. It can be difficult and very costly for workers to refuse employment to drive up the price of wages, which is normally how a market would reach equilibrium. The intention of a minimum wage is clear: The government is trying to prevent firms from exploiting the workforce by offering low wages. But why are some economists skeptical about the benefits of minimum wages? To answer this question, we can again use our graphs of supply and demand to analyze how a minimum wage affects the labor market. Suppose supply is given by \(q_{S}=2p-2\) and demand is \(q_{D}=10-p\). The equilibrium allocation in this market (without government intervention) will be a price of 4 and a quantity of 6. If we interpret our market as the labor market, we could say that 4 is the hourly wage in equilibrium. Now suppose the government decides to set a minimum wage. If this wage is below 4, the market allocation will not change as firms are already paying a wage above the minimum wage. But what will happen if the government sets a minimum wage equal to 5? Firms will want to hire 5 workers at this minimum wage, while in total 8 workers would like to work at this wage. The difference between the quantity supplied and demanded (the excess supply) are the workers who do not get a job, and are therefore unemployed. That is why some economists argue that we have to be careful when setting a minimum wage as this may increase unemployment. In general, a price floor above the market price will harm the demand side, that is, consumer surplus decreases. In the figure it is the area that corresponds to the triangle above \(\underline{p}\) and below the demand curve. Producer surplus may increase or decrease depending on the supply function and the price floor. Total surplus decreases, because the quantity exchanged decreases and there is a welfare loss, also called deadweight loss (DWL) described by the shaded orange area in the figure above. In a perfectly competitive market, total surplus is maximized and any price regulation will cause efficiency to decrease. Perfectly competitive markets usually do not need to be regulated, but if one side of the market has market power (e.g. if the seller is a monopolist), price regulations may actually improve efficiency and decrease welfare loss. Further reading In the simple model of a perfectly competitive labor market, a minimum wage that is higher than the equilibrium price (or wage in this case) causes unemployment to rise and decreases efficiency. But, many markets are not perfectly competitive, and government interventions such as price regulations may improve efficiency. Cahuc and Michel (European Economic Review, 1996) show that minimum wage legislation may foster economic growth, because low demand for unskilled labor may create incentives for workers to build up more human capital. Good to know The International Monetary Fund advises all countries to use price controls if this helps to “guarantee the functioning of essential sectors.” During the COVID-19 pandemic in 2020 various countries did so, setting price ceilings for different goods. Some countries established price caps for essential goods such as masks, hand sanitizer or toilet paper. Price ceilings during “normal” times are sometimes used to regulate markets for goods such as medication or utilities. On December 19, 2022, the European Union introduced price controls on gas due to the energy crisis, which is another example of an (arguably) efficient use of price controls. The energy crisis, caused by supply chain disruptions and the war in Ukraine, caused concerns about the increasing prices of heating for people’s homes. The EU’s agreement sets a price limit on gas if it exceeds a certain point for more than 3 days, which limits how expensive heating will be for EU citizens during the winter. This can be economically efficient if the deadweight loss from regulating the price of heating is outweighed by the increased utility to consumers, who enjoy health and wellness benefits from additional warmth during the winter.
A price ceiling, also called price cap, is the maximum price that a seller is allowed to charge for a particular good or service by law.
How COVID-19 Could Change the Role of Government
Countries have implemented ‘war-like’ economic measures, requested ‘war-like’ solidarity, and Emmanuel Macron has even declared France ‘at war’. Its rallying qualities aside, the analogy touches on something salient: wars change the role of government, sometimes, in the case of the post-war consensus, radically. COVID-19 could do the same. Responses to the pandemic have shown that nothing is permanent about the current distribution of resources. To the contrary, things can be overhauled, and fast. Just turn on the news: state power is serially showcased, and it’s changing the way we perceive government. With the extent of its capacity laid bare, what can we expect - or even demand - of the governments of tomorrow? Governments prove their might The remarkable has become the routine. Across the world, legislation previously dismissed as profligate, pie-in-the-sky politics is being rolled out, unopposed, often at record speed. In one preventative measure, the city of London effectively ended rough sleeping by providing hotel rooms for the next 12 weeks to all those in need. When unveiling the initiative, London Mayor, Sadiq Khan, magnanimously explained ‘rough sleepers already face difficult and uncertain lives and I'm determined to do all I can to ensure they, along with all Londoners, are given the best protection possible.’ While the intervention itself is a good one, one may have doubts about Khan’s framing. Where exactly was the ‘best protection’ before? The number of those sleeping on the streets in the capital has quadrupled in the last ten years, and the Office for National Statistics (ONS) reported that in 2019, 726 people died without shelter (a rise on the previous year) in England and Wales, a fifth of them in London. A month ago, the issue was too expensive to solve. Today, the problem doesn’t exist. The resources were found and distributed accordingly. In 12 weeks time, if containment is achieved, will those same resources be withdrawn? A common retort is that these are extraordinary times, requiring extraordinary measures. But with respect to Khan’s intervention, is it all that extraordinary? Finland piloted a similar program before COVID-19 struck, and besides respecting human dignity and fulfilling the universal right to shelter, state figures show it actually saved money, reducing long-term health and policing costs. The only difference was will: the Fins wanted it; Khan’s hand was forced. But whatever the motive, the effects on how government is viewed could be similar. By acting so decisively, it’s seen as an assertive agent of positive change, possibly reframing popular expectations. People may wonder: if it can end homelessness at the drop of a hat, what else can it do? Leopards and spots Across the pond, things are no different, the US government showing even the most recalcitrant leopard can change its spots. Responding to the moribund American economy, congress passed a historic two trillion dollar stimulus, which contained a direct cash transfer. (That a Republican president put his name to a bill containing direct payments to citizens beggars belief). Under the plan, single Americans stand to receive a one-off payment of $1,200, married couples $2,400, and parents $500 for each child under age 17. Republican Senator, Mitt Romney, praised the bill, especially the inclusion of the transfer, explaining that ‘while expansions of paid leave, unemployment insurance, and SNAP benefits are crucial, the check will help fill the gaps for Americans that may not quickly navigate different government options’. His observation is right. Expanding benefits is necessary, and a direct cash transfer will ease both the financial woes and stress caused by bureaucratic backlog. Like Khan, though, the issue is the implication that the need is only recent. In reality, the need for expanded social security is anything but new; just ask America’s 57 million freelancers. Often categorised as employers, a large number lack access to unemployment insurance - a deprivation made more severe by the unpredictable nature of their work. Calls for adequate protections have largely fallen on deaf ears, American orthodoxy favouring market forces over government intervention. That is, of course, until now. On March 27th, in a hastily negotiated package debated for less than two weeks, congress abruptly answered these calls. Under the proviso, freelancers and gig workers are now entitled to half the average unemployment benefit in their state, topped up by an extra $600 per week. But for how long? With almost 80% of all Americans living paycheck to paycheck, will all these protections be withdrawn once COVID-19 passes? Or, having seen the government flex its financial muscles, will people demand their preservation, maybe even their expansion? <11an>limit:2;categories:jobs|courses|conferences|Professor;disciplines:Politics|General Economics (JEL A)</11an> Harness the change. The world needs it Transformative policies are now out of the bag, and the more they affect people’s lives, the harder they may become to wrestle back in. Certainly, the optics involved in returning them will be ugly. Attempting to do so may also be unwise, as large-scale government intervention is likely to provide a useful blueprint - in form, if not content - for future climate action. There are technological obstacles still to overcome. But the climate crisis is ultimately a political problem that will require political solutions. That is an oversimplification. But it is true that state intervention is needed on a scale associated with wartime, and with no precedent in living memory this has often seemed intangible - no longer true in a post-COVID-19 world. Governments have proven their potency, having all but stopped the running of their economies, leaving them waiting, obediently, for the next instruction. Could this control - this decisiveness - survive COVID-19 and be transposed on to the climate crisis? Climate advocates will hope so, and some, like those in the European Commission, have already touted a Green Deal as the framework for an economic recovery, asking when, ever, has there been a better time for energy transition? An uncertain future The reaction to COVID-19 is evidence that the future course can be changed - it’s neither inevitable nor pre-determined. Plotting it, though, will be fraught, requiring a delicate balance between authoritarianism - a path down which some countries look likely to travel - and government control. With each passing day we see further glimpses of what’s possible, intervention demonstrating that extreme inequality, homelessness, indeed, much of what blights society, is the result of political prioritisation that can be reversed. It's a lesson of critical importance and one we forget at our peril. Header Image Credit: Paolo Bona on Shutterstock (licensed image - copyright)
As COVID-19 has spread globally, access to the outside world has shrunk, made increasingly off-limits by government lock-down, observable now only through glass. Our digital lives have expanded to fill the void, evenings previously spent with friends now passed plugged into laptops, obsessing over the latest figures, bailouts and newly-imposed restrictions - time blurs. Amid the chorus of leaders justifying ever more draconian measures, one thing has been hard to miss: the invocations of war.
If and how a firm can successfully price discriminate depends crucially on the information that the firm has about its customers and on the possibilities of the consumers to engage in arbitrage. Note that it is not price discrimination if price differences reflect differences in the costs of serving those consumers. Price discrimination is usually studied in a monopoly, though oligopolies and even regular markets often exhibit price discrimination as well. We distinguish between three different types of price discrimination: First degree price discrimination First degree price discrimination is also called perfect price discrimination. From the perspective of the firm this type of price discrimination yields the highest possible profit. To perform first degree price discrimination the monopolist needs to know the exact willingness-to-pay or demand function of each of its consumers and it has to be able to perfectly distinguish the customers from each other (i.e. no customer can lie about his true willingness-to-pay). If these conditions are true, the monopolist can charge each consumer exactly their maximum willingness-to-pay for the good. Remember from the demand curve that each consumer has a different willingness to pay, or preference, for goods. Clearly, if the monopolist charges every consumer their exact willingness-to-pay, individual consumers will be worse off than without price discrimination because consumer surplus in this case is zero. That is, by perfectly price discriminating, the monopolist captures the entire surplus. But, this is still a Pareto efficient outcome even though consumers are worse off individually. The quantity exchanged will be the same as in perfect competition which means that there is no efficiency loss or deadweight loss if a monopolist can perfectly price discriminate. Certain consumers end up paying more than they would have under perfect competition, and the surplus they would have enjoyed goes to the monopolist instead. But, total utility from the market remains unchanged (it’s only been redistributed to the monopolist), which makes this situation still Pareto efficient. Perfect price discrimination is rare, because firms rarely possess perfect information about the exact willingness-to-pay of each customer. Additionally, the possibility of arbitrage might prevent the monopolist from discriminating between consumers. Arbitrage means that the consumers can exploit the differences in prices. There are two possible types of arbitrage that may prevent price discrimination: First, consumers may be able to resell the good to other consumers. Consumers who can buy at a lower price would do so and then resell the good to consumers who were supposed to pay a higher price. Second, consumers may pretend to have a lower willingness-to-pay than they actually do. That is why for first-degree price discrimination to work, the monopolist needs to know the exact willingness-to-pay of each single customer personally. Now you may wonder whether there are even situations in which first-degree price discrimination is possible. One situation in which perfect price discrimination may be possible is when the exchange of the good involves bargaining or haggling between the buyer and seller (e.g. on a flea market). A skilled seller may be able to sell his or her goods at a price that is very close to the maximum willingness-to-pay of the consumer. Another example is when determining the price of a completely new good or service, where the potential buyers have difficulties evaluating the product due to lack of experience. In this scenario a monopolist might be able to extract the entire consumer surplus. Think, for example, about a firm who is going to buy a completely new piece of software or use a novel technology to reduce production costs for the first time. This firm probably does not yet know how this change will impact profits and costs, and has limited experience with the technology, so may not know what price meets its needs the best. Second degree price discrimination In the case of second-degree price discrimination, the firm knows that it has different types of customers (because of a market survey or experience) and knows the willingness-to-pay or demand function of each type of customer. But, in contrast to third-degree price discrimination, the firm cannot distinguish between consumers of different types and therefore cannot charge a different price to each group. To maximize profits, the firm will offer different options and let the consumers decide themselves which of the options to buy. The prices are designed in such a way that consumers of different types will choose different options. An example are quantity discounts. We all have already come across offers such as “Buy 3 for the price of 2”. Why does it make sense for the firm to offer such deals? This makes sense if the firm knows that some consumers usually like to buy one unit, but that by offering the third unit “for free”, they might be encouraged to buy the second unit. Other examples of second-degree price discrimination include sales (a famous one is Black Friday), bundling or tying. Third degree price discrimination Third degree price discrimination is used to describe the common practice of charging a different price to different groups of customers, for instance offering a student discount. The firm faces different groups of customers and knows the aggregate demand function of each group. Customers might be grouped according to age, occupation, gender, location, religion, language, etc. The firm can tell its customers apart by using a signal. For example, in order to benefit from a reduced price for students, you normally have to present your student ID. Then the firm simply charges a different price for each group of customers. The mark-up that the firm charges will be higher in groups with a lower price elasticity of demand (more inelastic). Third degree price discrimination is the preferred option for the firm if they cannot discriminate within a particular group. So even if the firm knows that some students are more price sensitive than others, it cannot charge a different price within the group of students, because it cannot tell them apart and therefore the students might engage in arbitrage. Charging different prices to different groups of customers only works if customers who obtain the lower price cannot resell the good to customers who should pay the higher price. When you think about examples of third degree price discrimination, you'll soon realize that in most of them reselling isn't possible. For example, if you get a reduced price entry into a museum, you have to present your student ID when buying the ticket and also when entering the museum. This means that you cannot buy the ticket at a reduced price and resell it to a non-student, because he or she wouldn't be allowed to enter with the reduced-price ticket. The monopolist's profit with third degree price discrimination is higher than without price discrimination. Consumer surplus may increase or decrease. Consumers who are more price sensitive are better off with price discrimination, because they will get a lower price than otherwise (the student discounts, for example). But consumers who are less price sensitive will be worse off, because they will pay a higher price with price discrimination than without. Further reading Price discrimination is very common in practice; we observe it every day in the supermarket, when buying tickets to concerts or museums, when buying a plane ticket or booking a holiday. In fact, most companies price discriminate somehow. One important question is whether discrimination in prices targets the same groups that face discrimination in other aspects as well, e.g. people of color, women, people with disabilities or certain religious beliefs, etc. Price discrimination is usually not illegal, but it can be if it’s based upon characteristics of buyers that are illegal to discriminate against like these. For example, Goldberg (1996) studied dealer price discrimination in new car purchases and found no evidence that the buyers' characteristics determine dealer discounts, but rather the characteristics of the car and the purchase itself. Good to know We all know how tedious it can be to book a plane ticket with a low-cost airline. The fare that you see in the search engine rarely reflects the price you will end up paying, because you have to pay extra for literally everything: Luggage (hand luggage and checked luggage separately of course), a preferred seat (includes sitting next to your travel companions), food, credit card fees, insurance, and so forth. Who do you think came up with this type of pricing strategy? Some clever economists, who know that different consumers have a different willingness-to-pay for different services and therefore additional consumer surplus can be extracted by designing the prices in a clever way. If you assign people traveling together to seats in different rows, many of them will be willing to pay some extra money to be able to sit next to each other.
Price discrimination is a pricing strategy in which firms charge different prices for the same physical good or service to different consumers or to the same consumer. By doing so, firms can increase their profits compared to selling each unit of the good at the same price.
But are we too generous with our trust? Recent developments in places as far-flung as Hungary and the Philippines remind us that there’s a second history, running parallel to improving approval ratings, of governments using crises to enhance and consolidate their power. It’s a darker history, and one we would do well learning from. Alas, there are concerning signs it’s set to repeat itself. Tailored to tyrants In many ways, the current moment is primed for exploitation. If health systems are to withstand COVID-19, it’s essential that strict restrictions are placed on public life, civil liberties reduced, and, to enforce it all, state power extended. In concert, this is music to the authoritarian’s ear; a description of an idealised society. It's a world in which power-grabs can be carried out publicly, legitimised by rousing cries of unity, and all anxious voices comforted by the knowledge that everything is in the ‘national interest’. It's, above all, an opportunity. Indeed, short of war, no other emergency comes close to matching the ubiquity of COVID-19’s fallout. Consider, for example, terrorism. Terrorist attacks can scar populations and cause great economic damage, but in scale, they pale in comparison. They tend only to hit a contained area which limits the economic impact, and, despite being designed to scare, the panic created is also less widespread. A pandemic, on the other hand, knows no boundaries, equalising the terror and economic damage it wreaks, the village dweller suffering in similar ways to the city-based socialite. And this is key: while fearing for health or financial well-being, people are at their most compliant, their most likely to surrender their freedom. What further sets COVID-19 apart is that the consensus response is to stay indoors. In other emergencies - during war, after a natural disaster, or following a terrorist attack - agency can be claimed by citizens, armies can be joined, humanitarian aid contributed, or marches defiantly attended. In stark contrast, under lock-down people are, by-and-large, left impotent, reliant on their leaders. Apart from online, there’s no means to congregate in protest, a Twitter storm the most threatening collective act. Few would say it packs the same punch. They've wasted little time Nowhere in Europe has this situation been more obviously seized than in Hungary, where an already strong governing hand looks now to have an unassailable grip. In response to the crisis, Prime Minister, Victor Orban, has passed legislation that has prorogued the legislature, permitting him to rule by decree, and suspended all elections and referenda. Most alarmingly, no sunset clause has been set. To say that Hungary is now a dictatorship is no exaggeration; it’s analytically accurate. With the last window dressings on his ‘illiberal’ democracy gone, Orban is now a dictator in the European Union. He can unilaterally change any existing Hungarian law and imprison people for spreading ‘false’ information, a phrase terrifyingly, and intentionally, vague, lending it a versatility that could easily be turned on political opposition. This is threatening a beleaguered EU already struggling to cope with COVID-19. For in truth, it has few options. Many point to Article 7, which if invoked would suspend Hungary’s EU membership. But for this to pass unanimity among the EU27 is required, and as has happened in the past, Poland will likely veto any moves against Hungary, leaving an impasse. There’s logic behind Poland’s support, too. Polish President, Andrzej Duda, is also looking to benefit from the current situation. Having hollowed out much of Polish democracy, the ruling party is now refusing to cancel the early May presidential election. With the country under lock-down, opposition parties are unable to effectively campaign, and one of the only remaining channels left in which to do so, television, is monopolised by Duda. There could also be a further motivation: polling shows that higher turnout would threaten Duda’s chances of victory. Insisting that it goes ahead in a moment that would significantly decrease turnout looks very much in his political interest. But these trends are far from exclusive to Europe. In Israel, disgraced Premier, Benjamin Netanyahu, has also spied an opportunity. Currently facing a range of criminal charges that include breach of trust, accepting bribes and fraud, he’s used the pandemic as a pretext to close the courts - postponing his own trial in the process - and suspend the Israeli Parliament, allowing him to lead without oversight. Prior to the crisis, his political career looked all but over; no longer. Turkmenistan, which still implausibly claims yet to have contracted one case, has banned the use of the word ‘coronavirus’. Its utterance now carries with it a hefty fine. In the Philippines, President, Rodrigo Duterte, much like Orban, has outlawed the distribution of ‘false’ information, his violent past making the vagaries around what constitutes ‘false’ incredibly worrying. And just this week, Hong Kong has been accused of using the crisis as cover to arrest pro-democracy candidates ahead of elections in September. The trend, like the virus, is dangerously pervasive. Post-COVID-19 Although difficult to imagine, doors will eventually reopen, and we will be freed from our current imprisonment. The question is: what kind of world will we find? It will be a different world, no doubt, one wracked by suffering, recession, and impoverishment; that, at least, seems assured. But what of freedom? Once the disease is contained will seized power be relinquished? Or will clenched fists remain clamped shut? These questions are not just for Hungarians, Israelis, and Filipinos, either. Time and again, history has shown how reluctant leaders, even of democracies, can be to lift a ‘state of emergency’ and return the powers they grant. France lived under such a state for two years between 2015-17, with many complaining of the undue power it afforded the government. As things return to normal, citizens must, wherever possible, hold their representatives to account. They have to be vigilant. The virus has already taken too many lives, we must do our utmost to ensure that it does not take our freedom too.
As the world is ravaged by COVID-19, governments everywhere are enjoying burgeoning support. A glance at approval ratings finds presidents, prime ministers, even autocrats, overwhelmingly popular, in some instances irrespective of their actual performance. Of course, this is unsurprising: there’s long been a history of populations coalescing around established leaders in times of crisis. Amid uncertainty, we find their increased visibility reassuring. Speaking to the nation they look competent and confident; we feel inclined to trust them, and more often than not, we do.
The advantage of depicting an economy in this way is to allow comparisons of different allocations and to determine their relative efficiency. Consider the following example of an economy with two individuals, Adam and Eve, and two items, dates and milk. The total number of dates in the economy is represented by the horizontal length of the box; the total amount of milk is measured by its vertical length. In the bottom-left corner \(o\), Adam has nothing while Eve owns/consumes all of the dates and milk. In the opposite top-right corner \(o'\), Adam possesses everything in the economy while Eve has nothing. The indifference curves \(A_{1}\), \(A_{2}\) and \(A_{3}\) represent Adam’s preferences over dates and milk, with higher utility on \(A_{3}\) than \(A_{1}\); analogously, indifference curves \(E_{1}\), \(E_{2}\) and \(E_{3}\) represent Eve’s preferences over dates and milk, with higher utility on \(E_{3}\) than \(E_{1}\). Figure 1: Edgeworth Box example The points \(X_{1}\), \(X_{2}\) and \(X_{3}\) show three different allocations of dates and milk between Adam and Eve. At \(X_{1}\) Adam is on his indifference curve \(A_{1}\) while Eve is on her indifference curve \(E_{3}\). However this allocation is not Pareto-efficient because both Adam and Eve could be made better off (achieve higher utility) with another allocation anywhere within the grey shaded area bounded by indifference curves \(A_{1}\) and \(E_{3}\). In contrast, the allocation at \(X_{3}\) where indifference curves \(A_{3}\) and \(E_{1}\) touch tangentially is Pareto-efficient because neither Adam nor Eve can achieve higher utility through a different allocation without reducing the other’s utility. Note however that at \(X_{3}\) Adam has significantly more dates and milk than Eve while the converse is true at \(X_{1}\). The fact that \(X_{3}\) is an efficient allocation says nothing about its fairness. Indeed, a point closer to the middle of the Edgeworth box, such as the allocation at \(X_{2}\), may be deemed more equitable than either \(X_{1}\) or \(X_{3}\) as the dates and milk are more evenly spread between Adam and Eve. By reasoning similar to that at \(X_{1}\), the allocation at \(X_{2}\) is not Pareto-efficient; it can be improved upon without harming either individual in the economy. The set of Pareto-efficient allocations can be revealed in an Edgeworth box as a “contract curve” that runs between the origin corners (\(o\) and \(o'\)) through all of the points where indifference curves meet tangentially. This curve is depicted by the green line in Figure 2; every point on this line represents a Pareto efficient allocation where the indifference curves for both individuals are tangent to one another. Note that while each allocation on such a curve is efficient, it is not necessarily equitable! Figure 2: Contract curve depiction in an Edgeworth Box Further reading: The classic trade-off between efficiency and equity has long been a major point of contention in political economy. Koichi Tadenuma uses Edgeworth boxes to show how prioritising equity over efficiency can sometimes deliver more socially desirable outcomes, see his article, “Efficiency First or Equity First? Two Principles and Rationality of Social Choice” (Journal of Economic Theory, 2002). Good to know: Edgeworth boxes are a useful tool when considering the trade of two finite resources between two distinct economies. Utility in both economies can be shown to increase as trade allows the economies to achieve more efficient and equitable allocations of the resources than is possible in a state of autarky. Proponents of free trade may also argue that larger Edgeworth boxes can be achieved through exchange as the exploitation of each economy’s comparative advantage in production should lead to a greater overall availability of goods and services.
An Edgeworth box (named after Irish philosopher and economist Francis Ysidro Edgeworth, 1881) is a two-dimensional representation of a simple, closed economy consisting of two individuals and two items (or resources) that are finite in supply. Any feasible allocation of the items between the individuals is included as a dot in the box; the individuals’ preferences over the items are represented through indifference curves.
The application of this functional form in measuring production is owed to the mathematician Charles Cobb and the economist Paul Douglas, after whom it is named. They originally used it to consider the relative importance of the two main input factors, labor and capital, in manufacturing output in the USA from 1899 to 1922. The general form of a Cobb-Douglas production function for a set of \(n\) inputs is \[Y=f\left(x_{1},x_{2},...,x_{n}\right)=\gamma\prod^{n}_{i=1}x^{\alpha_{i}}_{i}\] In this formula \(Y\) stands for output (as measured by, for example, GDP), and \(x_{i}\) for input \(i\). Meanwhile \(\gamma\) and \(\alpha_{i}\) are parameters determining the overall efficiency of production and how output responds to changes in the input quantities. In their original model, Cobb and Douglas restrict the output-elasticity parameters \(\alpha_{1}\) and \(\alpha_{2}\) to the range \(\alpha_{i}\in\left(0,1\right)\) and to sum to one, which implies constant returns to scale. Reading the above equation might be challenging for new students of economics. For help interpreting economic formulae, see the linked article “A quick guide to math symbols in economics”. Reading this equation is straightforward once the symbols are all identified; the Cobb-Douglas function is the product of multiple xi (specifically n of these xi), each raised to the αi power, and the resulting product is multiplied by the parameter 𝛾. Applying Cobb and Douglas’s model to the production of a two-factor economy (using inputs x1 and x2) simplifies the above expression. The resulting function becomes \[Y=\gamma x^{\alpha_{1}}_{1}x^{1-\alpha_{1}}_{2}\] where \(x_{1}\) and \(x_{2}\) stand for labor and capital, respectively. Note that the two exponents simplify to α1 and (1 - α1) because Cobb and Douglas assumed they must add to one (again, showing constant returns to scale). Another common representation of this formula that macroeconomics students may see is: \begin{equation*}\mathit{Y} = \mathit{A}\mathit{L}^{\alpha}\mathit{K}^{\beta}\end{equation*} where L represents labor, K represents capital, 𝛼 and 𝛽 are efficiency parameters as above, and A represents productivity-enhancing technological progress (just as 𝛾 above). Taking the natural logarithm of both sides of the first equation yields \[\ln{Y}=\ln{\gamma}+\alpha_{1}\ln{x_{1}}+\left(1-\alpha_{1}\right)\ln{x_{2}}\] such that for data on output, labor and capital, the parameters \(\gamma\) and \(\alpha_{1}\) can be estimated using Ordinary Least Squares, a common method used in regression analysis. Based on their data, Cobb and Douglas found a value of 0.75 for \(\alpha_{1}\) in the US. This implies that labor accounted for three quarters of the value of US manufacturing output (capital accounting for the remaining quarter) from 1899 to 1922. Their estimate for the efficiency parameter \(\gamma\) is 1.01. Since it is greater than 1, this reflects the positive effects of "unobservable" forces (like technology growth) on production through the combination of labor and capital. The multiplicative nature of a Cobb-Douglas production function, assuming positive values for \(\alpha_{i}\), means that the inputs are complements in production. In the standard model of labor and capital, increasing the amount of capital increases production both directly and indirectly through its impact on the productivity of labor. Or, stated mathematically, the cross-partial derivative of production output \(Y\) with respect to labor \(x_{1}\) and capital \(x_{2}\) is positive. Furthermore, due to the assumption that \(\alpha_{i}\in\left(0,1\right)\), the second-order partial derivatives of production output with respect to labor and with respect to capital are both negative. This suggests diminishing marginal returns for each input. This means that simply adding either more labor or more capital (but not both) to the production process increases output, but at a diminishing rate. Additionally, the elasticity of substitution between the inputs is constant and equal to one due to the functional form. A two-input Cobb-Douglas production function can be represented graphically in the form of isoquants: combinations of both inputs for which the output is constant. There are four such isoquants in Figure 1 for the (constant) output levels \(\overline{Y_{1}}\), \(\overline{Y_{2}}\), \(\overline{Y_{3}}\) and \(\overline{Y_{4}}\). The further the isoquant from the origin, the greater the level of output \(\overline{Y_{4}}>\overline{Y_{3}}>\overline{Y_{2}}>\overline{Y_{1}}\). Which precise combination of the inputs \(x_{1}\) and \(x_{2}\) is optimal for production is determined by the budget available to the producer as well as the cost ratio of input \(x_{2}\) to input \(x_{1}\). These factors can be included in the graph in the form of an isocost line (see the article on elasticity of substitution). Figure 1: Cobb-Douglas production function isoquants Cobb and Douglas themselves acknowledged that their production function does not rest on solid theoretical foundations, nor should it be understood as a law of production. It merely represents a statistical approximation of the observed relationships between production inputs and output. Nevertheless, its simple mathematical properties are attractive to economists and have led to it becoming a standard model used in economic theory over the past century. Further reading For the background and an overview of the main properties of Cobb-Douglas production functions, see in particular sections 6, 7 and 8 of Cobb and Douglas’ original article, “A Theory of Production” (The American Economic Review, 1928). Good to know The Cobb-Douglas functional form is not only used in the theory of production but it has also become standard in microeconomic consumer theory. There it is applied as a utility function, where \(Y\) becomes \(U\) for utility. The \(x_{i}\) then represent items of consumption. When the utility function is maximized, subject to a budget constraint, the values for \(\alpha_{i}\) indicate how the individual will optimally distribute their budget among items.
A Cobb-Douglas production function models the relationship between output and production inputs (also known as factor inputs). It is used to calculate ratios of inputs to one another for efficient production, and to estimate technological change in production methods. It’s a commonly used economic model that is very flexible, and as such is often one of the first models students of macroeconomics will learn (though it’s also used in microeconomics, too).
Econometrics, Statistics and Quantitative Methods (JEL C)
INOMICS is a member of the Amazon Associates affiliate program and the Apple affiliate program. This article contains affiliate links, which means we may earn money through any qualifying purchases made after you click through. However, this is not a sponsored post. Business Simulators 1. Capitalism This classic business simulation game and its well-reviewed sequel Capitalism II allow you to live out your wildest dream: running the most successful business in the world. As CEO, you’ll have to avoid bankruptcy, fight off competition, and make sure you don’t get bought out. But don’t expect this journey to be easy - Capitalism has been ranked as one of the most difficult games ever. While the game’s beginning is not the most realistic for most of us - you can start your journey with capital of two hundred million dollars if you want - it offers an insight into how one could start a new company, providing semi-real simulations of markets and the cutthroat world of business. At the game’s outset, you can either start totally from scratch or "inherit" a business such as an agricultural company. Typically, your goal will be to dominate a certain percentage of market share within a certain time period. An expansion named Capitalism Plus released in 1996, introduced random events such as riots and technological breakthroughs, making the already-complicated game even more difficult to play. So have fun failing at your first business - thankfully, at no risk whatsoever. 2. Virtonomics Virtonomics an economics video game that is used in schools and on university campuses to help students learn the ins and outs of business markets. Both entertaining and educational, this massively multiplayer online game is similar to Capitalism in that it simulates the processes of building a business in a competitive environment. With totally open-ended gameplay and the ability to play forever if you want to (though we don’t necessarily recommend that), the turn-based game allows players to compete against not only other players but also the computer. Further, you can pick whichever market you’d like: agriculture, retail, marketing, you name it. What better way to spend your time playing a game than improving your business acumen and learning something about economics at the same time? City Builders 3. Pharaoh The sequel to Sierra’s lauded Caesar, this game was a huge success, adding new features to Impressions Games’ intricate city-building interface. Here you take control of ancient Egyptian societies, attempting to keep your citizens happy while producing enough raw materials to trade and improve the conditions of your workers. Military battles are fought in real-time with the choice between archers, soldiers, and naval vessels, and many missions require the building of monuments including the fabled pyramid. Economists will be especially intrigued by the monetary system, which is pretty tough. You’re allowed to go into debt in order to build your city, but each year you remain in debt lowers your Kingdom Standing. If this rating becomes too low, the Pharaoh will send his troops to obliterate all of your hard work. Money can be made on certain levels by mining gold deposits, but these are often located on unfavorable terrain; if your city isn’t lucky enough to have these, you’ll have to create goods like beer and pottery, open up trade routes, and pray that droughts and floods don’t hinder your ability to sell your wares. Best of luck! 4. Cities: Skylines One of the most successful city building games ever, released to compete with SimCity (which bombed, leaving space for this game), Cities: Skylines introduced an intricate but simultaneously easy-to-understand concept of how to build a large city from just a small plot of land. You’ll start off with a small budget and a tiny plot, and have to expand into a village, a town, and a city. Your ultimate aim: create a metropolis the size of New York City. As you work your way through the game, you’ll unlock new buildings and features, as well as the ability to designate parts of the city as districts. Along the way you’ll have to invite workers and provide them with jobs, which then will give you revenue, with which you can improve the city, and so forth. The city eventually becomes very complex, with transport links operating from one end to the other, different road types to reduce noise pollution, the ability to force certain districts to only offer one kind of industry, and much more. Using your economic expertise (as well as architectural and design skills) you’ll be able to manage your city's finances, infrastructure, and economic planning, until your city runs like a well-oiled machine. Theme Park Managers 5. Theme Park World Following the success of Theme Park, Theme Park World lets you build your own - well - theme park. The player takes control of a relatively simple business model: expand the park, research new attractions, remain profitable, and win keys which open up new levels and rides. You’ll also have to hire staff to maintain the parks, including cleaners, mechanics, entertainers, and guards. All of these employees are important to keep visitors happy, prevent thefts and other crime, keep the park clean, and make sure none of the rides break down. Once you’ve made enough money, you can start to upgrade your rides and train your staff, making the latter more efficient, and the former more fun! Once you’ve done all that, and your coasters pay for themselves, use the in-game currency of Golden Tickets to jump down into first-person mode and walk around your own park, even going on some of the rides you’ve created yourself. 6. Roller Coaster Tycoon A PC classic, Roller Coaster Tycoon puts you in the shoes of a theme park designer tasked with saving a series of increasingly hopeless theme park businesses. Each level gives you a new park in a new area, a set of objectives for how to save the dying business, and a pat on the back, leaving you to figure out how best to save the business on your own. In order to succeed, you’ll have to manage the happiness of your guests, find out which rides suit their tastes the most, adjust ticket and concession prices, hire staff to maintain your properties, spend money transforming the landscape, place food stalls and rides in the best possible locations to encourage spending, balance your monthly budget, and more. Become profitable by each scenario’s deadline, and you’ll have succeeded in saving the park! Of course, there’s also a sandbox mode which lets you build your own park from scratch with no time limits or pressure, so it can be quite relaxing and fun to build your own dream park. While the game linked here is the original, the success of Roller Coaster Tycoon spawned many sequels and spin-offs in similar ventures, like Zoo Tycoon. Society-building Strategy Games 7. Civilization VI One of the most famous and widely loved strategy series of all time, Civ (as it’s commonly known) allows you to choose a historical leader, create a civilization and control it all the way from an early settlement to a highly developed, industrialized world power. Whether you choose to dominate the world through military might, technological or cultural superiority, or diplomatic acumen is up to you. While there’s a mode to play against the computer, you can also play against your mates, making it a fun, turn-based competitive game as well. Civ features multiple strategic layers to consider, such as militarism, scientific research, and politics, which creates complex and long-ended gameplay. You’ll have to deploy your economics knowledge to make sure your raw materials are used correctly, your neighbors are happy and will trade with you (or avoid declaring war on you), and you’re able to continue making improvements to your cities. Newer installments, such as 2016's Civilization VI and its expansion pack Gathering Storm from 2019, include features such as the introduction of natural disasters, as well as new leaders and civilizations to control. So head in, pick your civilization, and take over the world. Miscellaneous 8. Animal Crossing: New Horizon Perhaps not the first game you think of when it comes to economics, but the latest installment of the Animal Crossing series for the Nintendo Switch, New Horizons, is special for its in-game currency of Nook Miles and the ability to craft tools, pay off your home loan debt, and furniture. The basic concept of the game is that you purchase an island on which you create a community of anthropomorphic animals. You collect items and materials which you can craft into decorations and tools, and slowly build up the infrastructure of your little slice of the world to attract more denizens and build your own paradise. The latest installment allows multiple people to play together or simply visit each other’s islands, and includes new weather conditions, as well as seasons which adjust to which hemisphere the player is in. Part of a beloved series, the game has received overwhelmingly good reviews. So get to your island and start figuring out how you’re going to make enough money to craft those decorations! 9. Real-Time Strategy Classics While not for the faint of heart, real-time strategy (RTS) games are an interesting choice from an economic standpoint. In these types of games, players compete against the computer or each other to build a functioning wartime economy while doing battle. Economic growth and efficient allocation of resources are absolutely critical for success in an RTS. For example, in the sci-fi Starcraft II, players must balance two resources - minerals, which are widely available and easily mined, and gas, which is rarer and takes a longer time to mine. Minerals are used to build most structures and economic workers for your bases, which increase your income and allow you to grow your economy quickly. But, to research important upgrades and build advanced military units, gas is needed. Even in this simple framework, the best players are set apart by mastering the balance of how many workers to build while having enough military units to defend, how to allocate workers to each resource, and optimizing when to switch workers around among resources. Other popular RTS games, like the historically-inspired Age of Empires IV, include even more resources to manage: wood, gold, stone, and food. For even more complexity check out the fantasy setting of Warcraft III, which famously includes ongoing upkeep costs for your military, throwing even more consideration into a fast-paced game. 10. Kerbal Space Program Have you ever wanted to manage the funding, research and development, and general management of a space program? Are you willing to take responsibility for the lives of cute, enthusiastic alien astronauts (the titular Kerbals)? Look no further - Kerbal Space Program (KSP) is the game for you. KSP’s Career Mode is the biggest draw here for an economist. You must complete contracts to generate funds so that you can grow your space program, but funding isn’t the only resource to manage. Reputation increases the amount of contracts your program attracts, and the size of the rewards that come your way, allowing your program to grow more efficiently. “Science” points, meanwhile, increase your selection of rocket parts. Since you’re not only the program manager, but also the designer of all of your program’s spaceships, you’ll need plenty of science to ensure you have enough realistic parts (using physical statistics based on real life space programs and real physics to determine if your rockets succeed or explode catastrophically) to complete your missions. With all of these choices, we hope you find a video game with economics themes that scratches your gaming itch.
So you’ve decided it’s time to take a break from all the hard studying you’re doing during your economics Master’s or PhD program. Why not spend time playing a video game which will help you accrue business acumen, improve your real-world economics knowledge, or reflect economics concepts in its gameplay? Sound too good to be true? Thankfully, there are some games which offer just that.
Picture the scenario. You begin the day rolling out of bed in the afternoon, throwing on some casualwear, saying to yourself “today I will finish that, read this and write up this”. Three hours later, however, what has happened? Social media is updated with your latest thoughts, the coffee cup has been refilled twice, and the dusty bookshelf has been reorganised colour coded. Staring out the window with an empty notebook, you ask yourself, ‘where did I go wrong’? Don’t worry - we’ve all been there. Follow this step by step guide, and you’ll be a star study-at-home student in no time! Check out our Advice section for more helpful tips for economists 1. Start good routines It’s super important to set yourself a time to wake up, eat a healthy breakfast and start to study. It’s tempting to wear pyjamas all day if you’re not leaving the house for anything except to pick up emergency Oreos. But you’ll feel much better if you take care of yourself with a normal clean-cut routine at home. Shower, get dressed, brush your hair and you’ll feel a million times more motivated every day. Easy. Studying from home also gives you the opportunity to work whenever you want. Every student has their own peak time when they concentrate best. Some people are night owls, while most are early birds. Make the routine work for you, pick when you are most productive, and work when your brain is most alert, so that you’re able to process and retain the information you are studying. 2. Study space The bed is not the best option. It may beckon you with comfy pillows, but rest assured, it never works out. Reading flashcards from the duvet isn’t going to associate the space with the right activity. Sitting at a table in a good chair can make or break your productivity. How can you stay focused on that tough statistics problem if you’re distracted by your aching back? Working in bed promotes bad posture, which not only decreases concentration but can also give you back pain in the long term. Pick a good study space away from the bed and other distractions wherever possible. It’s okay to use the kitchen even. Just beware of the snack attacks! Try to study on a surface that is not used for mealtimes too, even if it’s the other end of the dining room table (to associate it with being a workstation, and keep the activities separate to maintain focus). 3. Order from chaos Having a tidy work area helps to stop procrastination. Think about it: it makes sense. Tidying is never enjoyable, and if your mess is interrupting you completing your study, it’s hard to be motivated. The more time you take to find your favourite highlighter, the more time it will take you to finish your work. Study smart. Keep things organised and use folders. You might have a lot of chaotic notes too, so to help, only put out the things you need for the subject you are studying that day. Removing distractions can be as easy as making your study space a tech-free zone. Turn off your phone or block all notifications, because as we all know, spending three hours on TikTok and Insta is not getting you closer to academic success. Successful economists motivate themselves, and great students will push themselves to engage with the study programme and complete as best as they can their assignments. 4. What to take from a study session Being productive is hard in a low-pressure working environment without teachers to explain things to you. Give yourself and your study time direction by setting attainable goals. Some people work best by asking questions before, during and after a session, such as: What am I about to learn, and how does it fit into the bigger picture? Are there key words or ideas I need to note down? Why are these important? What do I need to review in more depth next time? Sometimes, explaining to a friend or family member what you’ve just learnt is the best way to show you’ve understood a concept clearly. If no one is around to talk (or video call), setting yourself the task to put pen to paper and paraphrase the things you’ve just read is useful too. 5. The mental block When your mind is completely uninspired, it can be hard to see how to make progress with your studies. Some people swear by the lava lamp, Rubik’s Cube, stress ball or fish tank. Another idea is to find short podcasts that are relevant to your topic. They can help re-centre the mind, and allow you to get back on to things like crunching economic historiography. Taking breaks is not a sin, but you need to be brutal in the timings and make sure you study too. As INOMICS has previously discussed, excessive screen use from social media can prompt feelings of anxiety and agitation, so moderation is key, and we recommend taking it away from your study time entirely. What is infinitely better for your learning, and to combat depression as a result of too much isolation, is to video call your classmates or teacher, to discuss the topics you’re struggling with, and share your thoughts when you know your knowledge is stronger. Regular communication with your peers while studying from home boosts morale. Also, when we are inside more, in darkened areas, our melatonin levels are higher. This is the chemical in our body that makes us sleepy. So, try to work as close to natural light as possible! Working near a window or in a light space will preserve your sanity, as seeing the outside world a little will keep your body more awake! Got any more tips for studying at home during the corona pandemic? Email our editor at jamesa@11academianetworks.com. Image credit: My Gre Exam Preparation
With the coronavirus making studying from home the new norm, it’s imperative we look beyond the frustrations of no longer having face-to-face contact and find a routine to keep our brains alert, and educational progress on track. Yes, it’s a difficult time, but INOMICS is here to help.
Whether America will see a wealth tax in the foreseeable future is moot - certainly, vested interests will leave no stone unturned in its attempt to thwart it. Nevertheless, it’s now part of the conversation, and its growing popularity among the public suggests it’s here to stay. But why now? How do we explain the ‘resurgence of interest in tax policy research’ that wealth taxation proposals have helped spark, and the American Economic Association (AEA) has so excitedly observed? Gaining popularity In many ways, its popularisation is surprising in how slow it’s been, for extreme wealth inequality, which it explicitly targets, has long been a sad fact of American life - and current trends offer little reason for future optimism. Over a decade ago, President Obama described it as ‘the defining challenge of our time’, hoping, implicitly, that his tackling of it would become his defining success. Despite these aspirations his administration did little to affect the underlying economic factors that contributed to its spread. That’s not to say no progress was made; it's rather to recognise that tweaking income tax rates and gently increasing tax subsidies for low-wage workers, while praiseworthy, were insufficient to reverse the effects of decades of regressive tax policies and deregulation. Consider: between 1995 and 2016 the net worth of the top one percent almost tripled, the middle class’s barely budged, and the bottom ten percent - those most vulnerable - saw theirs shrink. Clearly, the social mobility that Americans hold so dear, and upon which their collective sense of self rests, has ground to a halt - and conservative adjustments to taxation have failed to reanimate it. Wealth taxation presents a bolder approach; it's found appeal for that reason. <11an>limit:2;categories:jobs|courses|programs;disciplines:Financial Economics (JEL G)|Public Economics & Economic Policy (JEL H)</11an> Its champions Building on the work of Thomas Piketty, who catapulted the idea of wealth taxation into the mainstream, fellow French economists, Gabriel Zucman and Emmanuel Saez, have become its most public advocates. The pair came to prominence with the publication of their 2018 book, The Triumph for Injustice, which disputed the accuracy of previous estimates of inequality, claiming they had underplayed its existence. By their estimates, the top tenth of one percent of Americans (fewer than 250,000 adults) held 19.3 percent of all wealth in 2018. Their conclusion, like Piketty’s, was that wealth has to be taxed. The book sent shockwaves through policy circles, galvanising the left. Its key messages were assimilated into the tax reforms of both Warren and Sanders, the senators claiming their respective wealth taxes would earn $3.75 and $5.35 trillion over the next decade. What the critics say In a society so fiercely individualistic and inherently sceptical of government intervention, such proposals have predictably come up against staunch opposition. Of the criticisms levelled, there are a number that reappear, around which rebuttals tend to coalesce. The most popular of these is that it’s been tried before, and it failed. Critics like to recall that in 1990, twelve members of the Organisation for Economic Cooperation and Development (OECD) had wealth taxes, and now only three remain - both Germany and Sweden among those that rejected it. If, as Larry Summers contends, ‘the most egalitarian European societies’ can’t make it work, what chance do the Americans? Browse our job listings for economics opportunities In defence Ignoring that in most instances the tax was removed by conservative incumbents, this interpretation is still superficial. For one, Europe, unlike America, allows for tax competition, meaning a rich, tax-averse business person in Paris, need only cross the border to Belgium to avoid the grasping French taxman. This was a huge problem - while in operation the rich had little issue resettling, and EU member states have never taxed their nationals living abroad. America would not face this problem, as US tax responsibilities aren’t so easily escaped - certainly, moving to Canada would offer no refuge. For unlike any other nation, Americans remain answerable to their revenue service, the IRS, wherever they live, and only become exempt if they renounce their citizenship. As a disincentive to do so, under both Warren and Sanders’ proposals renunciation would accrue an exit tax of 40 percent on net worth. Enforcement for the US would be less of a problem, too. The Europeans have tolerated a high-level of tax evasion as leaks like the Panama Papers have shown, and were never able - or willing - to legislate meaningfully against it. In contrast, America has been far more assertive. The Foreign Account Tax Compliance Act, for instance, demands all foreign financial institutions send detailed information to the IRS about the accounts of Americans each year, or face sanctions. Almost all cooperate, and tax is duly collected. The European failure also owed much to the number of exemptions and deductions that were added, which eventually rendered it non-functional. Each year, as pressure applied by the rich grew, items that had previously ‘contributed to wealth’ were struck off. Paintings were exempted, main homes received reductions, etc. In large part, this was because the tax began at around one million euros, meaning many had to pay it, which led to a greater level of pushback, and eventually a longer list of exemptions. America need not fall into this trap. Warren and Sanders’ proposals show that to be lucrative, it’s only necessary to target the super rich, the 0.01%. This demarcation would help maximise support and minimise opposition. Is it workable? Is it worth it? Outside of comparisons with Europe, many question the policy’s basic workability. How, for instance, is taxable wealth calculated? With money wrapped up in art and real estate, tracking and then calculating wealth would be a difficult and time consuming task, likely involving thousands of civil servants. It overlooks, however, the form that the wealth of the super-rich increasingly takes: stocks in publicly traded corporations which often they themselves have founded. Amazon founder, Jeff Bezos, for example, has an annual salary that earns him a reported $81,840, while his net worth stands at $156 billion. His wealth derives largely from his stocks in Amazon. Taxing these untapped financial assets would raise billions, and relieve some of the pressure, financial or otherwise, in locating and valuing art, real estate, or whatever form wealth takes. And if a few Monets are left slightly undertaxed, so be it. Now’s the time Others remain unconvinced that the concentrations of wealth claimed by the likes of Piketty, Zucman, and Saez even exist. Which itself raises an interesting point. The best way to ascertain whether a wealth tax is necessary is to impose a wealth tax, as it’s the best possible source of wealth data. If the wealth is there, in the quantities and concentration believed, it will be taxed, hugely increasing government revenue. Free childcare, tuition, and healthcare, policies that hit at the heart of inequality, would suddenly become feasible goals. Society could be transformed. If it’s not there, the tax can be repealed - but at least we would know. With support among the public growing, crossing party lines, is this not reason enough?
The emergence of Joe Biden as the unassailable front-runner in the Democratic Primary belies a contest that at various turns broke new ground. From its unprecedented field, larger and more representative than ever (save the brief participation of two billionaires), to the remarkable resuscitation of one moribund campaign, the departure from custom was clear. Nowhere was this more obvious than in policy, where the inclusion of senators, Elizabeth Warren and Bernie Sanders, dragged the conversation leftwards into distinctly uncharted territory. While all candidates acknowledged America’s extreme inequality and the need for better healthcare, social security, etc., divergence came in the prescribed means of redistribution, and unusually discussion extended beyond familiar calls to raise income tax for the rich. Most liberal of the proposals was a wealth tax: an annual tax on everything an individual owns. Its mere suggestion confirmed an improbable rise of a policy that until recently was dismissed as fringe and anti-aspirational.
Fiction might not be the first place you turn to to get your hit of economics, but it can be surprisingly revealing, especially in helping one consider how economics overlaps with other issues in the real world, like politics, family, technology, and ideology. And what better way to spend your time while in coronavirus isolation than reading a load of great fiction from the world's most famous authors, and getting your daily dose of economics to boot? Check out our Advice section for more helpful tips for economists INOMICS and our parent company 11 Academia Networks are Amazon Associates, meaning we are a part of their affiliate program. This article contains affiliate links, which means we may earn money through any qualifying purchases made after you click through. However, this is not a sponsored post. 1. Jane Austen - Pride and Prejudice Forward-thinking for its time and still with enough humour to keep it entertaining today, Austen’s classic weighed up the economic pressures of nineteenth-century society against the importance of marrying for love. Its opening line, since extremely famous (‘It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife’), sets up the plot for the rest of the book: that Mr Bennet must marry off one of his five daughters in order that his inheritance be passed on to his children, helping them avoid destitution. Economists will appreciate the importance money plays in the novel, as well as the touching moral that love should and will overcome all. 2. George Orwell - Keep the Aspidistra Flying Orwell’s searing critique of the middle- and upper-classes, and treatise on socialism and its many hypocritical followers holds weight to the present day. Keep the Aspidistra Flying catalogues the woes of a man failing to rebel against a monetary culture that seems to suck in all around him. Based on Orwell’s own experiences of working in bookshops and purposefully living on the streets to get a taste of what it was like to be a rough sleeper in the 1930s, this accessible novel tells a defeatist tale of how difficult it is to live in a world in which money rules and how degrading the social conventions of the time could be. Anyone attempting to make a living being a writer will be particularly enticed by the (mis)fortunes of the struggling artist Gordon Comstock, whose second biggest problem after poverty is his inability to finish any project with a sense of satisfaction while attempting not to sell out. 3. Arthur Miller - Death of a Salesman The only play on our list, but well worth reading (as well as seeing, if you can find a production somewhere), Miller’s 1949 classic plays on the idea of the American Dream: making it off your own back. Willy measures his and his family’s happiness in terms of how successful they are and how much money they have, pushing his son Biff to be as ambitious as he can be. Does money make us well-liked and therefore happy? It seems unlikely from what we know of how happiness works, and yet this societal pressure, from which the world still suffers, is exactly what Miller criticises through the lens of the relationships Willy has with his family and friends. A biting criticism of the American money-focused way of life, Death of a Salesman is also a touching family drama and remains thematically relevant today. 4. Aldous Huxley - Island The companion to Huxley’s more-famous Brave New World and his last novel, Island is a utopia Huxley actually believed in. Influenced by Pyotr Kropotkin’s anarcho-communist ideas and the economic principles of Georgism, economists will have a field day dissecting the island’s society and economy. Later themes in the book include the use of drugs to achieve spiritual awakening, freely-available contraception to enable sexual freedom, and group living to maximise the upbringing of children. Unfortunately, this almost-perfect society is constantly beset on all sides by the tyrannies of capitalist, imperialist states that just won’t leave it in peace. A romanticised vision, perhaps, but a must-read all the same. 5. John Steinbeck - The Grapes of Wrath One of the great American realist novels of the twentieth century, Steinbeck’s enduring tale of the hardships of the working-class during the Great Depression remains a compelling and accessible read nearly a century after the events depicted. Following the troubles of a tenant family which is forced to leave its hometown, it catalogues their journey to the West Coast in order to find a new life. Widely read in schools and seen as one of the Great American Novels, economists will be drawn to its realistic depiction of the monetary strife that beset many during the Great Depression, and serves as food for thought in our current age of economic hardship and inequality. 6. Frank Herbert - Dune Of the science fiction classics, Dune sticks out near the top of the list. One of the best-selling sci-fi novels ever and the winner of many awards, Herbert’s first in his six-book saga even inspired the names of some of the features of one of Saturn’s actual moons, Titan. Set in space and taking its cues from feudal life, families are made stewards of various planets in an interstellar empire. The novel layers themes of politics, economics and technology to create an intricate world based around the importance of a drug called melange which is essential to the ruling of the empire and to space travel. Important for its thematic approach to the decline of empire and its parallels to modern-day imperialism, Dune was praised as much for the truth of its analyses of the modern world as its realistic world-building and imagination. 7. Ayn Rand - Atlas Shrugged The Nickelback of philosophical literature, Rand’s self-proclaimed magnum opus is simultaneously hated by many literature-lovers and loved by conservatives. Essentially written to outline Rand’s philosophy of Objectivism, Atlas Shrugged details an American society in which businesses are suffering badly through extensive government intervention. A staunch promoter of individualism and the idea that the main purpose of life is to maximise one’s own happiness, Objectivism and Rand’s work have been popular among libertarians, although academic philosophers have mostly rejected her ideas. Still, as a novel which has influenced much, from politicians to the 2007 video game Bioshock, it’s a worthy contender for our list.
There are plenty of books which are important for economists to read in the non-fiction department, from the very popular to the extremely academic. But what of fiction books - novels, plays, and the like? It's important not to forget that even stories which aren't 'true' in the dictionary definition sense of the word can tell us a lot about the realities of the world.
What Impact Has the Coronavirus Had on Higher Education?
Similarly, universities have begun shutting up shop, not willing to risk large swathes of students being affected by the virus. So what does this mean for students who are unable to study, and what are some of the potential workarounds? Universities close their doors Across many countries, universities and importantly their libraries have been shut down. In Berlin, for example, all Freie Universität libraries shut down officially on the 16/03/20 for an indeterminate period, some having already closed during the week before. In Italy, universities have already been closed for some time, as have major universities in the USA. It is surely only a matter of time before this happens broadly across most of the world, assuming the virus isn’t brought under control soon. Currently, many universities are on study break, meaning a few weeks during which there are no seminars, lectures or tutorials, allowing students to write their essays or do exams. With libraries shut, leaving students unable to find the research materials they need, deadlines for essays and exams will have to be pushed back to allow time for these students to still do their research. Moreover, with universities closed, many students who need to speak to their professors and tutors for help with their essays won’t be able to, at least, not in person! This causes problems for students who need to talk through their ideas with their supervisors, like, for example, those writing Bachelor’s or Master’s theses. With nobody to turn to for advice, many will cease to write until they are able to talk to the people advising them on their chosen topic. The economics of the virus There is an economic impact of the coronavirus on institutions, too. At the beginning of February when Australia began closing its borders, many Chinese students had gone back to their home country for the semester break, which over this period lasts around three months. Due to the travel ban that was put in place, many of these students were unable to return to continue their studies. The financial costs of this show just how reliant many universities are on international students willing to pay vast sums of money for their education: schools across Australia were expected to accrue costs of up to A$8 billion due to tuition fee refunds, accommodation costs and the reorganisation of teaching calendars. These economic costs will also affect universities in other countries, particularly those which have mandatory tuition fees. Furthermore, IELTS and TOEFL, two of the main providers of English proficiency tests, have also stopped working in China, which will drastically hinder the ability of newer students who need to show they can speak the appropriate level of English in order to study in that language. This will mean subsequent intakes of students especially from China but also all over the world will be lower as fewer students are able to provide the certificates they need. Abroad semesters and university meals Another problem has been students studying outside of their home university’s country. Many partake in a semester abroad to widen their cultural and philological understanding, and plenty go to China and Italy to do this, two of the regions hit hardest by the virus. In both instances, students were forced to fly back or, when the quarantine in Italy began, left of their own accord despite the travel restrictions. Aside from the fact that this may mean the virus spreads further outside of those respective countries, it also spells the end of a semester abroad which likely had not yet ended, an upsetting revelation for those who enjoy the excitement of studying somewhere else. And what of those students who rely on meal programs at university, something particularly common in the US? These students, who pay not only for their accommodation but also for their food through the university, may no longer be able to afford food as everything is normally provided at discount rates by their school. What are the solutions? The main way this crisis of higher education can be averted is by universities switching to online learning. Universities are already starting to do that, urging professors and seminar leaders to make sure all learning materials are online and easily accessible to all students. Obviously communication must also move to email or, if tutors allow, apps like WhatsApp which allow group functions, meaning everyone can be simultaneously notified of updates instantly. Seminars and lectures can potentially be recorded and distributed among students, and if supervisors are needed to help with term papers, that could be organised through things like Skype or even a simple telephone call. At the same time, students and university staff alike need to appreciate that in this confusing, quarantined time, nothing is going to run as normal. Professors and lecturers need to offer their students adequate attention over email to make sure their needs are met, as well as being lenient with deadlines for essays which it may now not be possible to write. On the other side, students need to be patient with supervisors and leaders who may have hundreds of students to respond to, and who may be sick themselves but still trying to work. With a little understanding and a little effort and investment into digital technologies, universities and students will be able to offer all they can to keep higher education alive during this difficult time, and ensure students get the most out of their education which, in many cases, they pay a lot of money to have. As for the other more minor problems, those who have had their abroad semesters cut short are unfortunately unlikely to receive any help from universities, which have enough on their plate right now. Those meal programs which no longer run may, however, be replaced by ‘grab and go’ meal programs offered by universities, though as buildings shut across Europe and the United States, it remains to be seen whether these programs will be put into place, and if they are, for how long they will run. As for admissions and the tests needed, there is no chance of getting hundreds of students into a hall to finish their exams: the only solution is that students wait until the virus outbreak has been contained (or a vaccine has be found!) and the next university intake begins, something that will affect both their lives and the economic interests of universities. Hopefully universities offer at the very least online practice tests and exercises so students can stay abreast of what they can expect when exam halls do open again. Until then, it looks like many students will be cut off from any physical contact to their university. In the meantime, it’s an opportunity for students to use their free time and make plans for catching up on their studies in the summer, for example during summer courses. Check out here the list of our recommendations for summer schools in the summer 2020.
As the spread of the coronavirus continues across the world, many questions remain unanswered, not least what is going to happen to those thousands of students whose universities have also been affected by the pandemic. Schools, offices, museums, restaurants and bars are being closed across the world, and curfews are in place in particularly affected countries.