I can’t help feeling just a tad frustrated by the ‘Ding, Dong’ nature of the coverage of the Thatcher legacy this week. It all seems a little superficial and lacking in the analytical skills we try to teach in economics. There has been plenty of descriptive coverage of Thatcher’s economic policies with very little attempt to evaluate the consequences of these policies. Assertion has masqueraded for analysis. Much was made of the conviction politics which characterised the Thatcher years. There was little attempt to question whether this conviction delivered results.

It was because of this sense of dissatisfaction that this week’s Extension Economics class tasked students to explore some of the key economic policies of the Thatcher years – monetarism, privatisation, deregulation, labour market reform as well as a challenge to assess macroeconomic performance from 1979 – 1990. Of course, there are ‘counter factual’ problems – we just don’t know what would have happened in the absence of Thatcherism. So, I look forward to hearing students’ assessment of the Thatcher years which will feature on the blog as well as in two BusEcSoc meetings on 18th April (the case for) and 2nd May (the case against).

I can confess here that, were it not for the election of the first Thatcher government, I would not have become engrossed by the study of economics back in 1982. This was a year after 364 academic economists condemned Thatcher’s monetarist experiment in a joint letter to The Times. Looking back at this letter helps to fill the gap in the current coverage of the Thatcher economic legacy – you can get a flavour for this in a recent posting on the Royal Economics Society website here. There are a couple of other truly thought-provoking assessments of the Thatcher economic legacy which I can recommend – one from Paul Krugman here and the other from Simon Wren-Lewis here.

The passage of time has certainly not dimmed the controversy with which Margaret Thatcher’s period as Prime Minister is viewed, if yesterday’s media coverage of her legacy is anything to go by. There can be no doubt that both the political and the economic landscapes of Britain were radically changed by the Iron Lady. But what exactly is her economic legacy? Monetarism, privatisation, deregulation – just some of the economic policies which characterised her period in government.

Plans are afoot for a major focus this term on the economic legacy of Margaret Thatcher. I am sure that both the blog and BusEcSoc teams will rise to the challenge, despite imminent AS and A2 examinations.

Watch this space. You will not be disappointed.

Perhaps you might want to kick off the term with your own assessment – just add a comment below.

Contrary to his later beliefs, in his teenage years Hayek was a socialist. His viewpoint changed when, at the University of Vienna, he was introduced to the Austrian School of Economics. This institute formed the bedrock of his early work. Whilst working at Vienna as a professor, he published his first work titled “Monetary Theory and the Trade Cycle”. In the book, Hayek expanded on the Austrian School of Economics theories by developing the idea that prices of goods and services, including interest rates, are information signals vital to independent plans of consumers and producers. In conclusion, the book tells that in a fulfilling economy prices convey knowledge and for the economy to function properly, that knowledge must not be distorted by Government intervention.

He later moved to England to teach at the London School of Economics. It was here that he came up with his theory of spontaneous order. Spontaneous order allows prices to fluctuate without interference. It is the prices and profits that are the information portrayed to a market, not one central planner or Government. In his view, no central planner could gain enough knowledge to create the same order that occurs spontaneously in a free market.

At the time, the public disagreed with his views. This, however, did not stop Hayek. He continued to extend on Mises’ views that socialism was technically impossible. Hayek tells how malinvestment happens in economies under socialist leadership as the ‘knowledge of time and place’, as well as personal information about consumers, cannot be calculated by one central organisation. Hayek argues that a free market efficiently and effectively makes these calculations every day.

In 1944 he was made a fellow of the British Army, and in the same year he published his second book, ‘The Road to Serfdom’”. Within this he makes the claim that even mild government interventions could lead to a totalitarianism state. This is down to the fact that even small local planning leads to unintended consequences that require even more planning. A snowball effect then occurs and eventually a central planning or totalitarian state is formed. Due to this book, Hayek is widely known as the most prominent classical liberal scholar in the world.

In the UK, Labour were re-elected and began to move in the opposite direction to Hayek’s suggestions. He eventually moved to the University of Chicago, to join the committee of social thought. When asked why he replied with the quote:

“An economist who only knows economics really doesn’t know very much.”

In 1974, Hayek was awarded the Nobel Prize for Economics. In the 1980’s, both Margaret Thatcher and Ronald Reagan used Hayek’s theories. Reagan would bring inflation and unemployment under control.

Friedrich August von Hayek died in 1992. His life had essentially come full circle, through 2 distinct half centuries in which his reputation had risen, then fallen, and finally risen again even more strongly. He had seen his ideas of free markets and human liberties go from ridicule to being the centrepiece of social thought. This is Hayek’s legacy.

All students in Year 8 (Shells) will be participating in the National Enterprise Challenge on Tuesday 14 May.

At stake is a place in the national final in London for the winning team.

Details to follow early next term, but in the meantime listen to a message below from the man himself – Lord Sugar.

http://youtu.be/DFH0_Ea6M3A

About The Author

Paul Collier is a Professor of Economics at the University of Oxford and the Director for the Centre for the Study of African Economies. He specialises in the study of political and economic dilemmas faced by poor nations that hinder their development. His book “The Bottom Billion” gives us a good insight into the ‘traps’ that hold back economic growth and development in less developed nations (particularly in Africa) and what can be done to solve the problems.

About The Book

The book argues that financial aid alone will not help the world’s ‘bottom billion’ people who live in poverty in a group of nations that he calls “Africa +”. These countries are the poor African countries as well as Haiti, Laos, Burma and other central Asian countries who have actually seen economic and living conditions deteriorate rather than improve (even in the ‘golden age’ between the end of the Cold War and 9/11).

He argues that, historically, the world was split between the “top billion” (the richest billion people generally living in highly developed nations) and the poorer five billion. Collier claims that nowadays, the ‘lower’ five billion are seeing conditions improve due to steady economic growth (such as that experienced in the BRICS nations), yet a “bottom billion” co-exist with the 21st century in a state of 14th century civil war, plague and ignorance. Collier presents four ‘traps’ that are hindering economic growth in ‘Africa +’:

• Being Landlocked, especially if you’re neighbours are poor
• The abundance of natural resources (surprisingly)
• Conflict
• Bad Governance

“Civil war is much more likely to break out in low-income countries: halve the starting income of the country and you double the risk of civil war”

The book describes the problems associated with these traps and offers solutions to escape these traps. At one point, it even goes as far to say that developed nations may have to send in troops to support democratic regimes, as Britain did in Sierra Leone in 2000, to assist the fragile process of economic development.

My View On The Book

I think it’s an excellent book for describing, in exceptional detail, the problems facing poor economic growth in the ‘bottom billion’. He uses lots of facts and statistics to support his arguments; for example:

• On average, all low-income countries face a 14 per cent chance of falling into civil war during any five-year period. A bottom billion country is also 50% likely to re-enter a civil war within 5 years of one ending.
• In Chad, hundreds of millions dollars worth of aid was donated in order to improve healthcare – 99% of this disappeared before reaching any form of healthcare.
• For every 1% of economic growth in one country, the neighbouring country’s economy grows by 0.4% (on average); however, this figure is 0.7% for landlocked countries.

It is true, however, that some of the solutions to the ‘traps’ offered by Collier are fairly radical actions and are unlikely to occur on a big scale any time soon, such as military intervention in African nations. (Having said that, France, with the help of UK resources, is currently supporting the Malian government militarily in order to stop a civil war and extremism from damaging political stability.)

“The Bottom Billion” is extremely relevant to A-Level Economics students who must study development as part of the A2 course. I would certainly recommend that A2 students read Collier’s book.

The GCSE Business and Economics students enjoyed a fantastic and inspirational trip to Salford Quays last October to hear from four highly successful entrepreneurs. Along with other schools from the North West, they listened to a presentation from Fraser Doherty, the founder of the iconic Scottish brand SuperJam. Fraser started producing jam from his parent’s kitchen at the age of 14; selling to farmers markets and now supplies all the major supermarkets in the UK, turning over £1million a year. The students were impressed with Fraser’s vibrant and confident presentation and a few of them got to speak to him afterwards. We also enjoyed hearing from the founder of WedgeWelly and how success on Dragons’ Den and their partnership with Theo Pathitis helped them achieve an 800% increase in turnover.

We also enjoyed our own success in the Student Enterprise Challenge. Four teams from The King’s School entered the competition by designing a new and innovative product for the healthy living market, aimed at teenagers 14-19. Two of our teams, Jooci and Superfruit, were selected on the day as finalists and got to pitch their idea to the entrepreneurs and in front of an audience of around 400 people. The judges were impressed with the 30 second advert and pitch from both groups and Jooci walked away with 1st prize and £100 prize money. Team members Zoe Rigby (4ET), Isabel Dawson (4ET), Sophie Drew (4PN), Harry Strudwick (4EH) and Natalie Tomlinson (4PN) were proud of their achievements and have been inspired to think about setting up their own business in the near future.

We managed to catch up with some of the winning team to bring you this short interview.

The appointment of current Governor of the Bank of Canada, Mark Carney, as the Governor of the Bank of England from June 2013 has been seen, almost universally, as one of the smartest moves made by Chancellor George Osborne since he and the Coalition Government took power in 2010. In a matter of days, the arrival of Carney has been seen on par with the Second Coming, perhaps somewhat driven by the desperation with which people have been searching for some positive economic news amidst reports of sluggish economic recovery and stubborn mortgage lending rates.

But should Carney’s appointment really be seen in such a shining light? Should we really hold such optimism as a result of this single appointment? To answer these questions, we need to consider who Carney is, what his track record has been with Canada and what he aims to accomplish with the UK.

Carney is, undoubtedly, a smart and accomplished individual. Having completed a degree in Economics from Harvard, as well as a Masters and a Doctorate from Oxford, his academic credentials are impeccable. He spent thirteen years working with Goldman Sachs, during which time he built up a formidable reputation, climbing through the ranks into a senior position working in several key external appointments including managing South Africa’s post-apartheid venture into international bond markets and helping advise the Russian government during the 1998 financial crisis.

His appointment as Governor of the Bank of Canada in 2008 during the midst of the financial crisis was a risky move, but he is now widely acknowledged as having played a major role in helping shield Canada from the worst effects of the global financial crisis. His policies included providing substantial extra liquidity to the financial system, and a controversial decision to keep interest rates at rock bottom for his first year in power. His efforts didn’t just help the Canadian financial system survive, but actually allowed Canadian banks to almost thrive in the crisis, allowing the financial institutions to capitalise on opportunities which American and European banks couldn’t given the circumstances.

He is seen as a keen inflation targeter and relatively ‘hawkish’ and tighter in his approach to policy. This attitude might signal to the markets that monetary policy will begin to tighten, which would immediately have implications for sterling. Any strengthening of the currency that could be laid at the Governor’s door would be widely considered unwelcome to hopes of recovery and jobs, especially when the Coalition is trying to rebalance the economy towards exports and investment. The UK has to use its independent currency to its advantage and that means keeping it weak – it’s one of the most important mechanisms by which the stimulative effects of quantitative easing are transmitted to the economy.

So what does Carney’s appointment spell for the UK? Certainly, we shouldn’t be expecting miracles. If anything, the months immediately before and after he takes office in June 2013 are likely to be some of the toughest in recent memory, with some analysts predicting that the UK could face the loss of its AAA credit rating. But it seems that Carney’s blend of boldness and clarity coupled with the typical monetary conservatism bred in the rightward-leaning political battleground of Canada could see his five-year tenure bring a new lease of life to the British financial system.

As of December 2012 the Bank of England will have committed to a total of £375bn of so-called “quantitative easing”. But could this money have been better spent somewhere else?

Usually the central bank (in the UK’s case, the Bank of England), when times get hard, will lower the interest rate at which it makes money available to commercial banks – this encourages commercial banks to make their loans cheaper, raising the demand for loans for consumption and investment. As well as this, low interest rates encourage the general public to spend more as the reward for saving is decreased. Since 2008 the Bank of England’s interest rate has been set at an all time low of 0.5%. Despite this, it seems to have had very little in terms of getting the economy moving. This can be put down to the behaviour of the commercial banks. Although they are receiving cheap money, they are in such huge amounts of debt they cannot afford to pass cheap loans onto consumers and firms. So the Bank of England has turned to Plan B: quantitative easing (QE).

But so far the £375bn of QE seems, like interest rates, to have had limited effect in terms of getting us out of recession. In undertaking QE, the Bank of England ‘creates’ money and then uses this money to buy government bonds from banks or financial institutions such as insurance companies. This makes bonds more expensive whilst also giving banks additional capital. Banks then search for new areas to invest this money (other than in expensive bonds) and, so the theory goes, will decide to lend it out. However, QE has suffered from similar problems to cutting interest rates, as banks are trying to rebuild their balance sheets so are reluctant to lend to consumers and firms.

So what is ‘helicopter money’ and how is it different to QE? As with QE, helicopter money starts off with the Bank of England ‘creating’ money. However instead of using it to buy bonds, the money is given directly to consumers (almost as if it is being thrown out a helicopter) who can then spend it. If consumers were to increase spending then this would increase aggregate demand in the economy, creating jobs and increasing the amount of money in the circular flow of income.

Helicopter money, however, does not come without its disadvantages, inflation being a major issue. If higher inflation is one of the aims of helicopter money then this isn’t such an issue. But why would a central bank deliberately create inflation? Two possibilities exist: inflation may stimulate economic growth, particularly if the economy is stuck in recession, by eroding the real value of debt (both private and public sector); and secondly, to guard against the dangers of falling prices (deflation). Yet, inflation is not without its costs and there is a very real danger that such a policy could lead to inflation which was difficult to control. On top of this, unlike with quantitative easing, it is much harder to reverse the decision to distribute the money if it is done via helicopter money. There is doubt too whether the policy would work. If you give people additional money ‘for free’ then their marginal propensity to consume is shown to decrease (people are more likely to save money when it is just given to them). So there is no guarantee that helicopter money would boost spending in the economy. More to the point, helicopter money is really just a fiscal boost under a different guise. Surely this is the job of governments not central bankers? We have seen enough bailouts to date – a bailout of the government on such a massive scale might not be a sensible policy. Perhaps, the fact that the most recent proponent of helicopter money, Lord Adair Turner, did not land the job of Governor of the Bank of England means that the helicopters have been shot down before they left the ground?

Nevertheless, when the Financial Times considers that thought should be given, at least, to how things might work if the helicopters had to be deployed then this ultimate central banker’s heresy suggests that monetary policy might, at some point, go nuclear.

If you are interested in finding out more about monetary policy’s nuclear option you might like to follow these links and let us know what you think by adding a comment:

FT editorial

Stephanie Flanders’ blog

The Chinese company Broad Sustainable Building (BSB) are planning to start construction next month on the world’s largest building. It is set to reach an astonishing height of 838m or 220 floors and will tower over the existing tallest building, the ‘Burj Khalifa’, which stands at 829.8m. It is estimated that it will cost $400 million to construct, around half the cost of the ‘Burj Khalifa’. BSB aims to complete this mammoth task in just 90 days, constructing the tower at an incredible rate of 5 storeys per day.

The plan is to erect the structure by using a technique known as pre-fabricated modular technology, and will use blocks that will slot together like Lego; this is the secret to BSB’s unique building speed. They demonstrated their strategy recently by constructing a 30-storey tower in just 15 days. It is no surprise that this method has come under a lot of questioning by foreign architects, who claim that the building is just “too big to built with pre-constructed parts.” However, BSB claims that the tower will be able to withstand a 9.0 earthquake and that their method is at the forefront of modern construction techniques.

The impressive structure, nicknamed the ‘Sky City’, will be used mainly for accommodation but will also contain schools, businesses and even a hospital, providing all the features of a modern city within one building and all accessible by 1 of 104 planned elevators. If plans go ahead, and this structure actually comes to fruition, then China is screaming out a clear message to the rest of the world that it is going to be the next global super-power, doing things bigger, better, faster and cheaper than anyone has ever been able to do before. This is definitely a sign of thing to come from China.