The Filter^

Britain's Trillion Pound Horror Story

As econonomic documentaries go, this was one of the best I've seen in the UK. Once people recognise that it was deliberately polemic, serving to balance out existing biases in the mainstream media (as opposed to provide a grounded, impartial account), I think it should be added as a staple of economics courses up and down the country.

In terms of improving economic literacy through the use of metaphors I think it was highly effective - even The Guardian commentator conceded that "it brought the economic theory brilliantly to life". Using a running bath to show that there's still more public debt being added than is being removed through Osbourne's "cuts" was excellent. Showing an ailing patient and trying to remove blood from one arm only to pump it into another (spilling some on the way) was useful. I even thought the lobbying children - driving home the point that the debt burden is a future taxation and therefore deeply undemocratic, was effective. And indeed exposing politicians for not knowing the difference between the budget deficit and the public debt, was hilarious (and tragic).

Of course there were problems. The interviews with Brendan Barber and Alistair Darling came across more as Ali G style stich ups than revelations. I'm not convinced that public sector spending is now larger than the private sector, and I think a fair rejoinder would be to at least acknowledge that Labour's public spending record might make the debt burdon easier to pay. Debt isn't a problem in and of itself - it depends on what you are using it to fund. If it's comsumption (as much of it undoubtedly was) then indeed you have a problem. If it's investment, then that's part and parcel of economic growth. When Durkin showed how the salaries of front line services are a small fraction of overall spending, he might have pointed out that it is because so much of Labours's spending splurge went on salaries rather than capital investment that we will struggle to pay it off.

And of course it featured Kelvin McKenzie. And for that reason alone critics have a fair criticism.

Class poll: name 3 economists

On the first day of class I asked the students to list 3 economists.

I kept the instructions deliberately vague, such that the answers would be "the first 3 to come to mind" rather than "who do you consider to be the most famous", or "who do you think the rest of the class will think are the most famous", or "what will impress the Professor the most..."

Given that many students (this is a one-year general management post-graduate course) have never studied economics before, but all come from good prior universities from across Europe, I thought the results would be mildly interesting. Here they are:

More on Comparative Advantage

I'm enamoured with Matt Ridley's exposition, but consider an alternative:

-- It takes Og 3 hours to catch a fish and would take 4 hours for him to gather some fruit,

-- While it only takes Iga 1 hour to catch a fish, and 2 hours to gather some fruit

Q1: Who has a comparative advantage in fish, who has a comparative advantage in fruit?
Q2: Are there any gains from trade?
Q3: Does this example disprove the Ricardian model?

Scenario training

As part of one of my courses I lead a workshop on "scenario building" - an established management technique that has immense parallels with Austrian economics. Here's an interesting post by Bryan Caplan describing Tetlock's use of scenarios with politicians. The problem is that scenarios are not a method for assigning probabilities - they're a tool for imagining and preparing for radically (i.e. "Knightian") uncertain events. I can't tell if the problem lies in Tetlock's study or Caplan's interpratation, but is a classic example of ships passing in the night.

See also The Economist, here and here.

The subsistence fund visualised

I've just found the documentary version of "Guns Germs and Steel" (they're all on YouTube). Note the answer to the question: "How was there enough grain to fill a granary?"

• Stayed close to water sources
• Planted fields of wheat and barley around them
• They brought the resources *to* the village (including domesticated animals)

Here's the rub:

• Because the farmers could store grains, they could devote some of their time to making tools
• Their "savings" provided a subsistence fund to permit investment
• This lengthens the structure of production (you can't consume a knife - the only purpose it serves is to make it easier to produce consumer goods)

Part 5/18 6 min 52 sec - a growing population can support specialists to develop new skills/technologies (e.g. plaster from limestone - and using fire enabled people to subsequently to make steel)
"New Guinea never developed advanced technology" - still using stone tools. They couldn't develop metal tools because they didn't have sufficient farming capability to generate enough surplus to provide for the specialists that would develop new technologies.

Here's an article from The Economist:

To settle down in one place requires a reliable food supply, so the discovery of granaries is no surprise. Pits that might (or might not) have held grain have already been found, but the latest discovery is on a far grander scale. It helps confirm what had previously been suspected—that it was a technological change to the gathering half of the hunting-and-gathering lifestyle that propelled the domestication and cultivation of crops

This is the basics of economic specialisation and trade - and it's fascinating to see emerging anthropoligical evidence.

"Planning is everything, plans are nothing"

If you know me reasonably well, you know I like to plan. Correction: I like the mental clarity that comes when planning. Behaviour gap have a wonderful article on the distinction between the two:

Think of this as the difference between a flight plan and the actual flight. Flight plans are really just the pilot’s best guess about things like the weather. No matter how much time the pilot spend planning, things don’t always go according to the plan.

In fact, I bet they rarely go just the way the pilot planned. There are just too many variables. So while the plan is important, the key to arriving safely is the pilot’s ability to make the small and consistent course corrections. It is about the course corrections, not the plan.

I try to spend as much time planning my financial security as I would spend planning a summer holiday. Do you?

San Francisco 1905

Hayek vs. Keynes at Buttonwood

Note Mervyn King in the audience! A couple of times in the last month students have sent me the original rap video unaware that I'm a student of Russ Roberts. I'm confident that this video will be seen as a major cause of the second revival in Austrian economics.

The Economics of Seinfeld

It is the simplicity of Seinfeld that makes it so appropriate for use in economics courses. Using these clips (as well as clips from other television shows or movies) makes economic concepts come alive, making them more real for students. Ultimately, students will start seeing economics everywhere – in other TV shows, in popular music, and most importantly, in their own lives.

via www.yadayadayadaecon.com

A fantastic resource!

Consultancy firms: Free thinking | The Economist

Producing free research especially helps young consultants prove their worth, both to clients and to others within the firm. Christopher McKenna, a historian of consulting at Oxford University, says clients may balk at paying handsomely for a “young punk” of a consultant. A young punk who has written an impressive paper is a different matter. Spots for year-long stays at the consultancies’ in-house think-tanks such as the McKinsey Global Institute, BCG’s Strategy Institute and the IBM Institute for Business Value are fought over fiercely.

via www.economist.com

As of next year the course I direct (in London) will require students to write a thesis. One of our main challenges is to switch the mindset away from being a "student" and towards "young professional", so a thesis runs the risk of harking back to undergratuate research. For me the model needs to be consultancy reports.