A past MERG project still up-to-date...

This project was conducted in 2010 by  Arun Jacob, Soumaya Keynes, Promit S. Anwar, George F. Barton, Philipp Heller, Mahima Khanna, Piotr J. Krupa, James Wan, Jasmine Xiao, Michelle Wenchao Jin, and Xiling Zhou, but is still up-to-date since the crisis is yet not over. 
Hopefully MERG will produce a new edition of Cambridge Perspectives on the Financial Crisis in 2012-2013. I am definitely looking forward to reading it!

Abstract: The Cambridge Perspectives on the Financial Crisis presents a useful opportunity to reflect upon both quantitative methods of modelling and the preaching of different schools of economic thought. This collection articles and interviews by members of the Economics Faculty draws together some of the most important and widely-discussed issues related to the recent economic turmoil. It is remarkable for the scope of the topics researched and the range of approaches used, as it includes macroeconomic, microeconomic, political, and historical perspectives.

Charitable Giving and Religion

What do we know about Charitable Giving? Do gender differences in donations exist? What is the role of Religion? And why do people give out money after all? 

This project was carried out by Maria Balgova last year under the direction of Dr. J. Fruehwirth. 

Here is a Presentation and a Literature Review

What is the Effect of Public Sector Pay-Regionalisation on Local Economies?

Paper:

What is the Effect of Public Sector Pay-Regionalisation on Local Economies?

Authors: Christopher Belfield, Ksenija Osmjana, Joyce Ong Pei Wen, and Christian Wolf 

Date: May 2012

Abstract: This paper looks at the Chancellor's proposition to regionalise public sector pay. Using private sector as a benchmark for regionalisation, we carried out quantitaive and qualitative analysis of this plicy. Using 1.5 multiplier, annual savings to the government were calculated as 0.22%, while annual fall in national GDP 0.33%. Some regions (Wales, Scotland and North West) are likely to face considerably large falls in annual GDP due to the policy implementation. If correctly implemented, pay regionalisation may solve problems of labour shortages and poor public service provision, as well as promote entrepreneurship. We propose that pay regionalisation is introduced, but a new payment system should be developed since zonal system would be ineffective due to the pay variation within regions. Additionally, savings form the policy introduction should be used for infrasctructure investment in order to prevent negative effects on the aggregate demand. Finally, effects of the pay regioanlisation are likely to be greater in the short-run and fade away over time.


There is also a Powerpoint presentation. 

Industrial Strategy Research team: cluster analysis

There is a now a new page on MERG blog which contains all the reports and article reviews written by the Industrial Strategy Research team: http://marshalleconomicsresearchgroup.blogspot.fr/p/industrial-strategy.html

Recently we have done some work on clusters. Your comments are very welcomed!

Happy Easter :)

MERG: social event at Peterhouse

No official report, but special thanks to Anil and Joyce, our internal coordinators for organising this Formal Hall at Peterhouse. Thanks to all the MERG members who attended!

Developing an Industrial Strategy for the UK

Dita Eckardt, Jay Lee, Inna Grinis, Victoria Peihang Lu (left to right)

The "Industrial Strategy research team" (Dita Eckardt, Jay Lee, Inna Grinis, Victoria Peihang Lu, Ryohei Nakmura) is working on a project proposed by the New Economics Foundation.

On Monday, February, the 27th, the team attended the launching conference organised by the NEF together with the IPPR at the Livery Hall, Guildhall, in London.

The conference was organised in four parts:
_ 1) Speech by Vince Cable MP, Secretary of State for Business, Innovation and Skills
_ 2) Panel debate: What should industrial policies aim to achieve?
_ 3) Panel debate: What should industrial policies look like?
_ 4) Speech by Iain Wright MP, Shadow Minister for Competitiveness and Enterprise

Here are the main arguments made by the speakers as summarized by the researchers:

1) Speech by Vince Cable MP, Secretary of State for Business, Innovation and Skills

(written by Ryohei Nakamura) 

   He opened his speech with reference to Lord Mandelson’s remark on industrial policy in the past which

-assumed that the Government planners knew better than the market

-ended up supporting expensive losers

   He posits that now the industrial policy is in different context, especially as the result of globalisation, and an outcome after the realisation of the decade of economy based on a wrong model and the belief in financial market self-correction, which led to the disaster in the banking sector.

    He claims that the UK is missing opportunities from global market.

Points made by Vince Cable:

-Government economic strategy is to sort out deficit, achieve creditworthiness, and escape from high public and private debt is economic growth.

-Despite its 12% share in GDP, manufacturing is the key

-Currently Government policies are short-term and passive, what is needed is a long-term, strategic vision Sector policy

-Horizontal policy (tax regime to encourage investment and work)

-Currently Government is scared away by this policy, Government can make more explicit, fully aligned support around strongly trading sector

-Auto-industry as on-going success: councils secure agreements, supply chain, trying to make Britain more welcoming to car manufacturing. Started off from Japanese inward investment but has developed to build confidence in the UK as investment destination (Ford 1.5bn, Nissan in Sunderland, Toyota’s hybrid production in the UK)

Government levers and policies:

-Regulation, public spending, public procurement (already used in Singapore, Korea, Germany)

-After the crisis science has been taken as the centre of economic policy however in practice government intervention at innovative stage to solve market failure is very risky.

-Actions taken: Creating network of science institutions. Maintain support in difficult financial situations (funding increased by 495m since Dec. 2010)

-More of this is needed -Role of public sector spending is significant. It influence and shape the market intentionally or not.

-Need to reduce unnecessary formality in procurement e.g. national infrastructure plan on railway, road, etc

-Strengthening supply chain, removing obstacles

-There exists tension in terms of trade-off between Government policies, for example, in defence, whether to opt for the cheapest weapon, or strategic procurement. Also 50% of energy is supplied by UK firms. -The key in modern industrial policy is a plan for recovery.

2) Panel debate: What should industrial policies aim to achieve?

(written by Victoria Peihang)

Participants:

Sir Geoffrey Owen (LSE)

Charles Seaford  (NEF)

Tim Page (TUC)

Rod Bristow (Pearson)

Sir Geoffrey Owen’s main point was that the ability of the government in predicting which industries will prosper in future is very limited and that this should be left to the actions of the entrepreneurs. That is not to say there is no role for government at all but their role is to provide a broad institutional environment for entrepreneurs. He briefly referred to selective industrial policies in the 1950s and 1960s which did not lead to an improvement in growth performance. In contrast in the 1980s when policies emphasised free market competition the productivity gap between UK and the European countries such as France and Germany narrowed.

 Charles Seaford took a more regional approach to identifying industrial policy objectives. He emphasised that instead of trying to improve labour mobility policy-makers should aim to create ‘good’ jobs around the country. Regional specialisms ought to be identified and regional specialisation is important; regions need to be competitive in the sense that businesses and firms aim to be. Finally government should not be the only agent in shaping industrial strategy; many more players need to be involved.

 Tim Page presented a view that is quite the opposite to Owen’s and somewhat different to Seaford’s. He believed that the government and politicians should be making choices with regard to industrial strategy. Government should support small firms that are competitive and have growth potential so they can grow into medium sized firms, and small firms can also act as suppliers to large exporting firms.

 Rod Bristow spoke about no risk equals no return. He believed that we need to be confident and optimistic about the economy. The UK in the 19^th century led the world through risk taking and now we need to do this again. We need to be bold, set high standards and have higher expectations for our children so they are able to excel.

3) Panel debate: What should industrial policies look like?

(written by Dita Eckardt)

Participants: 

Ian Coleman, PwC
Ha-Joon Chang, University of Cambridge
Geoff Mulgan, NESTA
Tom Crotty, INEOS

Ian Coleman:
- Industrial policy should focus on growth but good growth which implies a broader measure as e.g. GDP per capita
- Policy needs to focus on the creation of jobs across all ranges of skills
- The UK must be considered in an international context (must consider export growth as well as import substitution, old and new areas of strength)

Geoff Mulgan:
- Most generalisations in relation to industrial policy are misleading, i.e. they do not fit the evidence
- Policy should thus be specific;
- Industrial policy needs to address the issue of speculative, predatory investments in finance which crowd out investments in manufacturing;
- Industrial policy should try to mobilise supply and demand not lead to the creation of monopolistic institutions which are "too big to succeed";
- Current debate on industrial policy should not lead to the creation of monopolistic institutions which are "too big to succeed"
- Contrary to a popular belief, industrial policy should not be a policy of risk-reductions but a policy of incentives for more risk-taking in technology, innovation, ideas.

Ha-Joon Chang:
- UK needs a sense of urgency of industrial policy
- Industrial policy cannot be free it is therefore necessary to restrain competition in certain areas
- It is necessary to study other countries in order to come up with UK ind. policy
- There is no such thing as general industrial policy and the UK needs specialisation and particular strategies
- Industrial policy has to be risky, there should be some "willingness to fail".

Tom Crotty:

- The government has to make sure not to encourage competitive disadvantage, i.e. fix the right legislation and policy aims
- UK needs to focus on clean energy
- Risk in new technology developments is huge since (1) it depends on government regulation (2) the financial sector is reluctant to invest here, hence it is the government’s role to step in
- Need to invest in education, especially more practical learning (new apprenticeships)
- The UK needs to get the image of manufacturing right

Questions by the audience:

The financial sector does not meet the needs of the economy anymore. What investments are needed to solve this problem? E.g. a green investment bank?

Coleman:
- The debate should focus on” carrots rather than sticks”
- Policy should not demand the impossible, banks cannot become safer by accumulating more capital and at the same time give out more credit

The financial sector is always viewed as not serving the needs of the economy anymore. Wasn’t growth in the UK economy also facilitated by the financial system?

Crotty:
- The financial sector did indeed perform well until 2008
- Yet, the system did not function properly from 2008 onwards
- It is not possible for the sector to grow at the same pace again
- The sector is not taking sensible risks anymore

What would you do with 10bn GBP of possible investments in industrial policy?

Chang:
- The government needs to get the incentives right before spending money, the problem is that UK companies pay out dividends/profits instead of investing
- The government should make high risk financial investments more difficult

Mulgan:
- The system should point capital to its most productive use which does not work currently
- Part of the answer should be to block bad investments

4) Speech by Iain Wright MP, Shadow Minister for Competitiveness and Enterprise

(written by Jay Lee)

Focus: Industrial policy in manufacturing

-       We need a more sophisticated approach to manufacturing e.g. Rolls Royce generates most of its revenus from engine after-service

-       What the British industry must do/focus on:

n  Reduce use of raw materials (-> sustainable)

n  Health

n  High education standard

n  High premium products

-       Sectors of the future:

n  Health

n  Sustainable technology

n  green energy

n  Pharmaceuticals

-       Current problem:

n  Growth concentrated in far too few sectors and far too few regions

n  Absence of active and consistent industrial policy

-       If you examine other countries, they have active government + competitive business

-       Currently, we have a lack of clear direction from the government. Active government frowned upon in the last 30 yrs. But now is the time to change.

Research projects

MERG is launching 4 projects:

A) Cambridge University, Jane Cooley Fruehwirth (lecturer, Department of
Economics): role of the Church of England in times of recession, looking at
clergy supply (whether it increases during economic downturns) and church
attendance.

B) Public and Commercial Services Union (PCS). This project aims to analyse
the effects that the proposed government policy of pay regionalisation in
the public sector would have in the UK.

C) The New Economics Foundation: Industrial Strategy. This is a project
modelling and analysing industrial strategies aimed at achieving 'good
jobs' that have the right balance between objectives such as income
equality, secure employment, and full employment. The research would be
steered by a task force including amongst others Ha-Joon Chang (Cambridge
University).

D) Building and Social Housing Foundation: UK Housing Research Team. Exact
project to be determined. For more details see:
http://www.bshf.org/ukhpp/?lang=00 Selection for membership of these
research groups will be competitive, and based on performance in a written
composition.


To be considered for selection, please choose your most preferred topic
(A-D) and find an existing piece of literature that you think will be
relevant to the research. Please review this critically and write a
250-word piece on how the paper relates to the topic. Please also rank the
projects 1 to 4 by your order of preference.

The deadline is 6pm on Sunday 12 February. Please send your submission,
including your name, course and year, to mergexternal@gmail.com.

David Rennie, the Economist's 'Bagehot' and 'Charlemagne Correspondent

Thursday, Feb 2, 2012

at the Christ's Politics Society

Redactor: Ksenija Osmjana

 

THE UK AND EUROPE'S CRISIS

In his talk at Christ’s College David Rennie discussed Britain’s current difficult relationship with the European Union.
According to Mr Rennie, entering the European Common Market was a bargain which included benefits but required compromises. Its main disadvantage was the excessive EU regulation, which requires compliance with employment and environmental laws. Its main benefit undoubtedly was the single market, which created jobs and employment.
   Public opinion in Europe is wrong in the sense that it fails to understand that every country has a unique relationship with the EU, therefore each of them has its own reasons to be excited about it or not. Thus, Spain was very eager to enter EU because of its consitution, freedom and human rights that the country missed greately during the fascism years. Germany has its reason to like the European Union as a way to become a superpower, whereas France, despite being a nationalist country, enjoys its position of the horseman riding on the back of Europe. Britain, however, does not have any reason to be obsessed with the idea of EU anymore due to the historic implications. The UK finally entered the EEC in 1973 not because it fell in love with it, but because it wanted to get rid of its sick-man-of-Europe position since Europe appeared to be more dynamic and more successful, which opened great prospects for trade and growth, so much needed to Britain in the post-war era. Nowadays, however, two things went wrong. First, Europe is not dynamic anymore, especially at the time of the eurocrisis. Second, Europe has become a synomim to immigration and Britain is not eager at all to bear its negative consequences.
   David Rennie thinks there is no prospect for the situation to get better, hence it is a perfect time to leave the common market. However, he admits that there is no better alternative. UK is running a huge trade deficit with Europe since 50% of its trade is with EU and 40% with the Eurozone. Britain thinks that this gives her a possibility to dictate its own conditions, which is not true. The EU trade with UK does not constitute such a great proportion and, above all, trade deficit is not the reason for having a right to exert power.
   Single market does not offer anything that could not be achieved through bileteral relationship. However, why would any other country establish an FTA with Britain and give her such a gift? Should UK leave the European single market, much of production, such as Nissan plants, would quickly move to the continent to avoid tariffs. For example, each car imported into the country is subject to a tariff of minimum 10%. Moreover, Britain definitely cannot become another Switzerland because it is is a large free-trade country, which, if walks out of the EU, will cause a great disbalance of power (Germany sees Britain, together with the Scandinavians, to be the counterbalance to the French).
   British are eurosceptics because they assume that better alternatives do exist. In reality, as points Mr Rennie, there are none and EU also realizes that it is only one of our fantasies. Hence, there is no prospect for improvement in the situation, which is likely to stay as it is.

The Cambridge Realist Workshop: Dave Elder-Vass on Towards a social ontology of markets

Redactor: Eoin Brady  

Monday 30 January 2012

Dr Elder-Vass began by claiming that economists spend surprisingly little time thinking about what a market actually ‘is’. The problem of what something actually ‘is’ is the focus of the philosophical field of ontology. Correspondingly, the study of what ‘is’ in the social realm is called social ontology.

Dr Elder-Vass structured his seminar in three parts. First, he discussed an interpretation of ontology. Second, he discussed a social ontology. Finally, he applied this social ontology to markets.

He began by giving an account of causality. In it, events are caused by interacting causal powers. These ‘powers’ are emergent properties of entities. An emergent property is an attribute that a collection of objects only has when it is combined in a particular way. He gave the example of a torch. Together, the bulb, the battery, the lens and the other components give the torch the power to shine. Individually, none of the parts has this property. The power to shine is an emergent property. Put another way, the torch is more than the sum of its parts.

He noted that this philosophy, in which properties are emergent, is not consistent with the view of mainstream economics, which he described as reductionist.

In the second part of the seminar, by applying this model to the social world, Dr Elder-Vass explained his social ontology. His stated goal was to ask the following questions: ‘What entities exist?’, ‘What powers emerge?’, and ‘By what mechanism do they emerge?’

He discussed one of the entities that exist in his model: the norm circle. He explained that this is an example of what sociologists would refer to as a normative social institution. Norm circles are composed of people who enforce the norm’s rules (the people correspond to, for example, the battery and lens of the torch example). He gave the example of a norm circle composed of students who want to uphold the norm of quietness in a lecture theatre. Norm-circle members will shush a noisy student because they have the backing of other group members. This influence gives the group emergent causal powers.

In the third part of the seminar, Dr Elder-Vass looked at markets from a social ontological perspective. He said that his project was to examine the motivation, mechanism and strategies that are present in markets. He stated that exchange is fundamentally institutional. This means that it is not meaningful to think of exchange taking place outside a social context because exchange of property is equivalent to the exchange of property rights. Property rights only exist because of social institutions. As a consequence of this, exchange can only take place in a social context.

Dr Elder-Vass gave an example of a mechanism through which exchange can occur: preferential attachment. This occurs when a buyer’s strategy is to develop an attachment to a seller because of convenience, a social relationship, or risk-reduction. The seller’s strategy is, simply, to seek buyer attachment. The effects of this strategy include a stabilisation of price differentials. For example, a consumer might continue buying shirts from a local retailer with whom she has built up a relationship, rather than shop at a cheaper chain store. This allows a price differential to stabilise.

Dr Elder-Vass concluded by describing an economy as a set of events produced by the interacting causal powers of people, organisations and markets.

His paper can be downloaded here.

The Cambridge Realist Workshop: Ha-Joon Chang on Institutions and Economic Development: Theory, History and Policy

Redactor: Jae Ho Chung, Queens' College

Monday, November, 28th

   Ha-Joon Chang recently gave a talk for the Cambridge Realist Workshop, organised by The Cambridge Social Ontology Group (for more information on the Realist workshop, please look at http://www.econ.cam.ac.uk/seminars/realist/index.htm). Dr. Chang provided a critical examination of the currently dominant view on the relationship between institutions and economic development. First, Dr. Chang pointed out that the dominant discourse suffers from a number of theoretical problems - its neglect of the causality running from economic development to institutions, its inability to see the impossibility of a free market, and its belief that the freest market and the strongest protection of private property rights are best for development. Second, he pointed out that the evidence showing the superiority of liberalized institutions relies too much on cross-section econometric studies, suffering from defective concepts, flawed measurements and heterogeneous samples. Lastly, he argued that the dominant discourse has a poor understanding of changes in institutions themselves, which often makes it take unduly optimistic or pessimistic positions about the feasibility of institutional reform.

   Dr. Chang argued that the dominant discourse suffers from two categories of problems. First, it almost exclusively assumes that the causality runs from institutions to economic development, ignoring the important possibility of reverse causality, i.e. economic development changes institutions. Second, in considering the ‘institutions to development’ part of the causality, the dominant discourse theorizes the relationship in a too simplistic, linear, and static way. Discussions regarding theoretical problems involved many provocative questions such as:

1)      Do better institutions lead to more effective economic development?

2)      Are liberalized institutions better for economic development?

A.      Do institutions that provide greater economic freedom lead to faster growth?

B.       Is a stronger protection of private property rights better for growth?

C.       Is the relationship between institutions and economic development always the same?

    Dr. Chang also noted that there is now a huge amount of cross-section econometric studies indicating a positive correlation between the degree of liberality of institutions and economic growth across countries. He presented several areas where potential problems arise regarding the evidence presented by the supporters of the dominant discourse:

1)      Cross-section versus time-series

2)      Measuring the quality of institutions

3)      Problem of sample heterogeneity

    Dr. Chang also noted that the dominant discourse has a poor understanding of how institutions themselves change. The issue of the costs of establishing and running institutions is ignored, making their proposals for institutional reforms appear more attractive than what they really are. In methodological terms, they are either hopeless optimistic about the prospects of institutional change (the Global Standard Institutions discourse) or unduly fatalistic (the climate-culture school). Dr. Chang argued that only theories taking into account both structural constraints and real human agencies seriously can guide us between these two extremes.

    Dr. Chang concluded that: “institutions have become politically too important to be left to those who believe in these simplistic and extremist arguments.” I strongly recommend his article to students who are interested in the role of institutions in economic development.

 His paper can be downloaded from: http://hajoonchang.net/downloads/pdf/JOIEInstitutionsAndDevelopment.pdf

Quincentenary Lecture by Professor Sir Mervyn King



Redactor: Inna Grinis

Fri, 25/11/2011 - 17:00 - 17:45
St John’s College, Cambridge Quincentenary Lecture
by PROFESSOR SIR MERVYN KING, GBE FBA
Governor of the Bank of England

“The Global Financial Crisis"

   In 30 minutes the Governor presented the emergence and the development of the global financial crisis. His main message was that it is important not to confuse symptoms with causes.

    The latter go as far as the collapse of the Soviet Empire and the disappearance of an alternative to capitalism. From the late 1980s emerging economies started adopting market reforms and focusing on trade surplus growth. Capital flew not from the developed world to the developing one, as common sense would suggest, but the other way round. For instance China accumulated $3 trillion of Treasury bills by 2011.  Unfortunately the recipient countries did not have enough profitable investment projects, and this inflow of cheap money pumped consumption to unsustainable levels, and translated into bubbles in housing and stock markets.

     Mervyn King stressed that imbalances are the major cause of this crisis. In the context of Europe competitiveness disparities have accrued since 1999 with Nordic countries, such as Germany or the Netherlands, running 5% trade surpluses, while the periphery countries accumulated 10% deficits. Someone had to finance these, and until last summer this role had been undertaken by the private sector. The Bank sector debt rose from 100-200% of GDP to 500%. However this could not last forever, and the liquidity crisis began on the 9^thof August with BNP Paribas Investment Partners freezing their three investment funds, and the BCE injecting 94.8 billion euros into the financial system.

    The actual amount of subprime mortgages was not big enough to provoke such a crisis. It was the huge amount of bets on the mortgages - whether they would be repaid or not - that plunged western economies into this crisis. After BNP Paribas’ filial had suspended its three investment funds, it turned out that all the big banks had been involved. The sum of gains and losses should have been zero, but simple economic arithmetic could not work in this case since no one knew who the real gainers and losers were.  Mistrust took place and banks stopped lending to each other. Indeed banks’ leverage dropped from £50 to £20. Governments had to save these banks by recapitalising them, but at the time no one asked whether they could afford doing so. Hence debt was transferred from the finance sector to the public one. 

      The Great Panic has already destroyed 3 million jobs, and, as the Governor said at the beginning of his speech, no one has the ability to forecast the future.