INSIDE:
An exclusive extract from the new Palgrave dictionary What does the department do with your feedback?
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Contents A quick peek at what is in this term’s edition of Equilibrium...
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Global View: What’s going on in the world? China: The iPhone Market Black Market Money: The inescapable rise
Saving Slaves and Shocking Statistics
14 18 Colouring in the Grey Economy
22 24 27 EQUILIBRIUM
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Bitcoin: What colour is virtual currency? Health Econometrics: An exclusive extract from the new Palgrave
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Blackboard Economics: and Lansley’s health bill Feedback: Ever wondered what happens to your feedback? Chat-up lines A handy guide for economists looking for love
The Case for John Kenneth Galbraith
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Editorial
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- Equilibrium editors
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Upsana Bhaumik
Dominic Falcao
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Global View By Ali Phillips
US - 2.5% growth target
What’s happening in the world of economics?
The global recovery is being led by the US. Strong manufacturing growth, falling unemployment and growing consumer credit all leave the US on target to hit 2.5% growth this year. Earlier this month the Fed voted against a further round of quantitative easing. This vote of the dollar and treasury yields that afternoon. Meanwhile, the race for the Republican Presidential Candidate is going strong, with Mitt Romney leading rick Santorum and Newt Gingrich.
Brazils economic output shrank in March, defying government stimulus measures and surprising economists who predicted Latin America’s largest economy would regin to recover from slow growth. (During 2011 Brazil grew just 2.7%. That sat ill with membership of the high-growth BRICs: Russia, India and China managed between 4.3% and 9%). But while consumer demand remains strong, domestic industry is feeling the brunt of the weakness in the economy, as the strong cheap imports, undermining Brazilian manufacturing.
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SPAIN - On the brink Spain’s banking crisis worsened this week, with Moody’s downgrade of 16 lenders. Spain’s domestic situation is more depressing; with poor a poor growth output, unemployment at a record high 22%, funding woes for some banks and a weaker sovereign. The consensus of the markets is that much of this situation could have been avoided. In contrast to the UK, the Spanish government has failed to convince the markets that it can implement a strong austerity package. The Spanish situation has been overshadowed by Greece in recent weeks, but a strong show of intent by the government is needed for any chance of sustained recovery.
5 UK - 50p tax scrapped and pasty VAT The UK has narrowly avoided slipping back into a recession after the econquarter of 2011. Manufacturing output fell sharply in February, possibly due to very bad weather earlier in the month. The announcement of the new budget last in April saw both the Conservatives and the Liberal Democrates take a pounding in the polls. The budget included the scrapping of the 50p tax and the introduction of VAT on pastries.
CHINA - Slowing down? After years of rapid double digit growth, the fear is that China’s economy will slow sharply, in part due to declining exports to crisisracked Europe and a rising bill for commodities such as oil and gas. To avoid this, commentators say, china must rebalance itself toward a domestic demand led economic model. The latest concern. The Chinese economy grew by 9.2% in 2011, and the share of consumption in China’s GDP edged up in 2011 after falling for ten years straight. The need for china to become less reliant on investment and export led growth still remains, however, as of yet, the Chinese are sitting pretty in a sea of global woe.
The 130bn euro bailout of Greece in March included private bondholders write-downs of 53.5%. However, many argue the worst is far from over, with the Spanish government last year, Portugal and Ireland being in a recession, and the Greece situation being far from stable. Most periphery countries are imposing austerity on their economies to get growth in the region. These countries
need to stop focusing on austerity and instead do more to generate growth. This has been much helped by the ECB’s LTRO (Longer Term countries must look for more long term solutions. A big problem with the Eurozone is that it is only partly integrated. Its members have given up economic tools such as currency devaluation and monetary policy. Structural reforms required will take years, and
will not work without the cooperation of the Eurozone’s most important She is reluctant to bear greater reliabilities, and wants to set an example of budget discipline, yet refuses to compromise its competitiveness and has blocked the ECB’s proposal of Eurobonds on the basis of moral hazard. The future of the euro depends on cooperation between all Eurozone countries, and Germany should lead from the front.
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SAVING SLAVES AND
SHOCKING STATISTICS
BY Jennifer Reynolds Doctoral Researcher Department of Sociology
2
7 million. It is the number that propelled me into a research programme to analyse the representations of ber that anyone who has read probably come across. It is a controversial number, and one that is not empirically based, but of argument, let’s say that somewhere between 800,000 (number EQUILIBRIUM
estimated by the International Why, then, would it be necessary Organisation for Migration) and to question and analyse the way 27 million (number estimated by researcher Kevin Bales (2004), current President and founder O of Free the Slaves) from the media G PR S S N the actual number of guru, Oprah WinO L modern-day slaves frey. In 2009, exists. Let’s also Oprah’s website assume that began a campaign those who are called “Save a Slave” where bring freedom people could to the people in donate money these numbers are to help victims of caring individuals. sexual slavery. The
Credit: SFCAHT
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7 website gives the viewer several options including:
$10
...for psychological counselling
$20
...for adult education
$30
...for medical exams and HIV testing
$30
...to keep women safe
$40
...for skills training
$250
related article “Ending ModernDay Slavery” on Oprah’s website. It describes the story of a girl, Long Pross, who was abducted at 13 years old from her village in Cambodia. Her captors forced her to have sex with men, stitchto resell her as a virgin (which costs more). It also describes how, when she asked for time to rest, “her eye was gouged out with a piece of metal” (paragraph 6). The question, in this case, is not whether this happened or whether the details were exaggerated. Rather, it is important to question ourselves, the ones who may be receivers of information from stories and websites such as this. Are we moved to action only if the narratives of human exploitation are as graphic as Long Pross? Secondly, what does it do to our perceptions of an issue
...for legal protection *Source: The Oprah Winfrey Show, 2009
as it provides essential services, but it is because it is important that makes it imperative to do so. From a social constructionist stance (roughly the group of theories describing how certain knowledge and social phenomena are “constructs” of particular groups), assumptions are under-
we combine large numbers with extreme case narratives? It is relatively easy to project that Pross’s story is a typical one for all sex
in our language, in our actions, and as Vivien Burr (2003) writes, “Social constructionism cautions us to be ever suspicious of our assumptions about how the world appears to be” (p.3). Therefore, it is through questioning and analy-
be more problematic than helpful
tocol as: “the recruitment, transport, transfer, harbour1 ing or receipt of a person by such means as threat or use of force or other forms of coercion, of adbuction, or fraud or deception for the purpose of exploitation.” How widespread is what many experts call modern-day 2 slavery? Estimates range from about 10 million to 30 million, according to policymakers, activists, journalists and scholars. According to the United Crime. Ranking behind illegal
3
industry.
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4 $32 billion, according to a 2005 report from the International Labour Organization. Of that number, $15.5 billion is made in industrialized countries In 2006 there were only 5,808 prosecutions and 3,160 convictions throughout the world. This means that for every 800 people victed in 2006. 5
persons but are denied access to
The recruiter in 54 % of human
Initially looking at the website the title “Save a Slave”, while catchy and memorable, seems problematic. The campaign is predominantly directed at a western audience and deals mainly regions in Asia. The danger is the categorization taking place. Pascal Bruckner (1983) writes about this subtle superiority complex in his book Tears of the White Man: “When underdeveloped countries are discussed, the most lurid descriptions are always the most highly prized. There is sadism in pity and an ostentatious pleasure that is derived from the pain of others. Asians, Africans, and South Americans are seen in pathological perspective because we can only talk about them in numbers. They are the masses; we are individuals” (p. 79). The descriptions that Bruckner articulates above are evident in a
Ten Astonishing Facts
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extreme abuse. Additionally in the heading, “Save a Slave”, it may be argued that a hierarchy is conveyed: superiority based on economic standing, which is related to the western countries in which the majority of viewers live. As a viewer, I am someone who is given the power to save another person. I can click on an item,
When underdeveloped countries are discussed, the most lurid descriptions are always the most highly prized. There is sadism in pity and an ostentatious pleasure that is derived from the pain of other. They are the masses; we are individuals.
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PASCAL BRUCKNER
THE TEARS OF A WHITE MAN (1983)
to the victim. In 46 % of the
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victim. Globally, some 600,000 to 800,000 people are traf-
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, according to a 2007 report from
Of that number, more than 70% are female and half are children. The price of a slave: In 1809, the average price of a slave was $40,000 when adjusted to today’s money. 8 In 2009, the average price of a slave was $90, Bales says. 95% of victims experienced physical or sexual violence (based on data from 9 selected European countries). 43% of victims are used for forced commercial sexual exploitation, of whom 98 % are women and girls . 32% of victims are used for forced economic exploitation, of whom 56 % are women and girls. have at least middle-level education.
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I am only one; but still I am one. I cannot do everything; but still I can do something; and because I cannot do everything, I will not refuse to do the something that I can do. - Edward Everett Hale
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as $10 (or approximately £6.29) I do not have to connect. I can say, “that’s so sad” and maybe even cry, but nothing in my daily reality changes. And most likely, I will go on (after a brief pause because it might be awkward to switch subjects too quickly) and complete my tasks for the day. I may go out to eat or to the new movie I’ve been “dying” to see with some friends where we will talk about upcoming holiday trips and shopping extravaganzas. Mostly, we may believe, this is not our problem. If we get involved with the issue we are deemed “charitable” or “good citizens” or “activists”. However, most of us will stop (probably
far) short of giving to the point that would change our lifestyles. After all, it’s not our responsibility to change the entire world and its problems. Often, issues such as human to deal with: the numbers are losing the individuality of the victims. However, losing the
these crimes disservices the exact people that governments, media campaigns, and NGOs purport to help. It’s true that we cannot change the entire world and all its issues by ourselves, but we can as victims with the same eyes as though the story were being told about our close friends: they are more than the crimes commit-
ted against them. They are more than the decisions that they made. They are more than a number. And if we are a good friend, we would do as much as we could to ensure they have the same opportunities as us. mously said, “I am only one; but still I am one. I cannot do everything; but still I can do something; and because I cannot do everything, I will not refuse to do the something that I can do.” So what, as one person, can I do to bring equality and justice to those who are being robbed of the same opportunities? It’s a question we must ask, and I would argue it is more than an occasional donation to a good cause. It must be more, and it must include a transformation of how we see those who are represented in the numbers. ping roles: if we were included in the 27 million, what would we expect others to do to ensure that we were free? Would our lives be worth it? EQ
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VOX
THE STUDENT JOURNAL OF POLITICS, ECONOMICS AND PHILOSOPHY Published termly by the Club of PEP at the University of York
voxjournal.co.uk
Call for Papers VOX – the Student Journal for Politics, Economics and Philosophy – is calling for articles to be submitted for the Autumn Issue 2012, with the broad theme ‘Money’. Articles should be between 1,000 and 1,500 words in length, and fullyreferenced using the Harvard style. If you would like to write on this theme, please e-mail your article to vox@clubofpep.org by the 29th July 2012. You may wish to write on a topic from the list below: economy? The Euro-Crisis: challenges for economy and political union Should the global economy return to the gold standard? developing communities The Banking system: from a lending to a borrowing machine History of money: from a relationship to a commodity Money as institutionalizing inequality Ethics & Money – corruption: does your moral code have a price One step removed – consequences of dealing in ‘digital’ money ____________ (your own idea) You may also pair up with someone else to write a debate for our Market of Ideas section on any of the topics above. Undergraduates, graduates and academics all welcome. All undergraduate submissions will be conisdered for the Vox Essay Award. Back issues are available at: www.voxjournal.co.uk.
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CHINA
The iPhone Market
BY James Daveney First Year Economics
H
ave a look at the picture. I know, right? Seems legit. This picture of a fake Apple store in Wuhan, China represents a growing black market for Apple Inc. products. Whilst I was in China on my Gap year, I noticed fake stores in most of the major cities I visited. A lot of them were faked far most don’t have a China Mobile sign inside the actual store).
of China. The whole black marEQUILIBRIUM
Area: 3.075 million sq km Population: 1.35 billion GDP: US $5.38 trillion per year HDI: 0.687 (101st)
ket for Apple products was blown wide open in August last year, when 22 fake stores were recog-
the products? Surely consumers
and were shut down by authorities. Credit for this mainly went to tourists who uploaded pictures of the stores to the web. This threat to Apple is still ongoing as there are numerous others around the country. The author of a blog post [1] that helped to identify the fake stores said they spoke with some of the salespeople working in the store, “who, hand to God, all genuinely think they work for Apple”. You may be asking by now: how do they get their hands on
they can’t. The owners of these stores have gone to enormous lengths to cover up the fact that what they’re selling isn’t real. There’s some mystery surrounding where the goods come from
the new iPhone 4S and a cheap
they’re sourced from Apple distributors or grey market imports [2]. Annoyingly for anyone that wants to stop this, the grey market is technically legal – even and unauthorised by the original manufacturer. An important dis-
11 tinction: if the good was illegal, it would be selling on the black market instead. There is a darker side to the iPhone in China. Late last an entire counterfeit iPhone factory in Shenzhen. 28 people were questioned by police and seven were arrested. With over 1,000 fake iPhones selling cheaply from this factory, it is big business in China. It’s not happened, and it certainly won’t be the last. Only a few months
was pelted with eggs by a mob – sales were suspended due to safety reasons. Many people had waited overnight to get their hands on the latest device. The fact that a riot was nearly started highlights the popularity of the Apple brand in China. a grey market for Apple goods exists. Many of the people in that mob were actually migrant workers, hired by scalpers (someone who resells the phones for later sale on the grey market. I should point out that China is not the only country to have a grey market for iPhones. A global network is thriving by selling up to 1 million iPhones that bypass Apple’s restrictions [4]. A few years ago in Russia, (when Apple hadn’t even launched the iPhone in the country) there were still an estimated 400,000 iPhones in the
country [5], with Russian websites $1,200 (£758). This is six times the base price in the USA. Today, the market for Apple products in Russia is much the same as it is in China, only it’s on a smaller scale. Additionally, IPhones are certainly not the only product on the grey market in China. Video game consoles are banned in China (since the year 2000 on the mainland). However, retailers are everywhere. When I was in China, I didn’t even realise a ban existed. It was only after doing research for this article that I realised. Technically, video games and consoles are part of the grey market in China, but due to ers can reap from selling banned goods, they still do it seems like the Chinese
“
There are only
“
in Shanghai for manufacturing fake devices – about 200 were found during the raid. According to police, the cost of making the fake iPhones was about $313 (£198) and they were sold for roughly double that [3] (these would be black market goods if they were sold). Regarding the fake stores, it is probable that the owners are just responding to incredibly high demand from consumers. It’s interesting to note that the release of the iPhone 4S was halted by Apple in China. It was due to be released nationwide on January 13th this year, however a Beijing store (one of
to stop selling the games and consoles. Even though there has been a crackdown by the Chinese IPhones - evidenced by the raids on various illegal manufacturers – there, in my opinion, hasn’t been much intervention when it comes to selling via grey market channels. EQ
much to force retailers References Photo courtesy of http://www.randomwire. com/ - report on fake stories in Wuhan, China
[3] www.itp.net/586368 - published September
[1] www.crave.cnet.co.uk/gadgets - July 2011
[4] www.businessweek.com/technology/con-
[2] http://www.bbc.co.uk/news/technol-
[5] http://www.msnbc.msn.com/id/25737644/
article written by Luke Westaway
ogy-14503724 - August 2011 article on fake Apple stores
2011 by Georgina Enzer
tent - published by peter Burrows
- ‘Black market iPhones big in Russia, China’ written in July 2008 by Paul Sonne
EQ
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12
THE RISE OF BLACK
MARKET MONEY
M
oney is a social construct that is accepted as the medium of exchange between market participants. From the dawn of civilization and trade, people have used rare commodity currencies such as gold and silver. Rarity, malleability, portability and divisibility are the features of gold and silver, and were the main reasons why they were used. More interestingly, in some parts of the world, tobacco and seashells were accepted monies that people used as currency! However we live under a globbacked by commodity. We have paper money that is regulated by the central bank. Legal tender laws establish regional territorial EQUILIBRIUM
“ monopolies that forbid the use of foreign currencies in domestic trade. People legally cannot use alternatives, so they must use government money. The government likes paper money, as it is perfectly elastic; the printing presses can be turned on, and the government can increase its purchasing If it costs £1 to print £100 of new notes, they make £99 of seignior-
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BY James Drinkell
this new money and can purchase goods and services at the
the system, it increases the nominal money supply and causes in currency and are forced to use tionary. The purchasing power of reducing the real value of their debt, but for savers, reduces their real savings. What we are going to explore in this short article is when paper
13 money collapses. This is when
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money collapses.
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Detlev Schlichter, an Austrian School economist and author of Paper Money Collapse thinks we are about to
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start of the printing presses by the government will not stop -
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collapses.
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14 government pursues extremely unsound monetary policies. Black market money will arise, as participants want a stable medium of exchange. For those who are fortunate enough to have gold and silver, they will be able to conduct their monetary
tion occurs. A question to ask is how likely? Well, we have to wait and see whether deleveraging and growth in the West happens. If debtors do not reduce their debt and growth stalls, interest rates start to rise because the international the largest economies, leading
they would need to barter until the currency is pegged to commodity. It may seem like a distant possibility but central banks may keep going with loose
the price of bonds. Central banks again have to intervene, printing more money to keep the price of
secured and unsecured debt, and a banking crisis. The money sup-
crashes. Deleveraging of debt is the key to this and whether the painful readjustment process is allowed to happen. A large recession would have to take place to reallocate misallocated resources. Central banks and elected gov-
recession may be the more likely outcome. EQ
Case Study
ITCOIN What colour is virtual currency?
Equilibrium editor
B
itcoin. The currency of libertarians, anarchists and money launderers. The currency of the paranoid and the anonymous, the hypergeeks and digital evangelists. A currency without a clear power base, hosted on a peer-to-peer network which enables holders to make untraceable transactions on the “dark-side” of the internet in order to purchase anything from alpaca socks to marijuana. The coin is not a secret, it has been examined by Reuters, by the BBC, by the US senator Chuck Schumer, university students and stoners worldwide. There are currently 8 million of the total 21 million coins that will be released onto the system, in circulation. Each coin is currently worth about $5.00, meaning that the total value of the currency stands at approximately $40,000,000 as EQUILIBRIUM
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The coin is generated gradually by computers hosting a small piece of software that ‘mines’ the coins, generating money growth at a gradual and predictable rate
of May 2012. The coin is generated gradually by computers hosting a small piece of software that “mines” the coins, generating money growth at a gradual and predictable rate. Of course, having more powerful machines, or multiple machines, allows individuals to mine coins faster. It is clear, however, that the concept of seignorage, where
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BY Dominic Falcao
banks printing money are able to use the new money to buy goods and services: except in this case it is individuals rather than central banks printing the money. An anonymous transaction works as follows: 1. Neil wants to transfer 10 BTC to Andrew. Neil deposits 10 BTC into the system, and gets a 10 BTC balance within the system.
2. Neil gives Andrew his onetime account key. 3. Andrew withdraws 10 BTC, but the coins come not from Neil but from some other people who had deposited 10 BTC earlier. Thus, there is no chain from Neil to Andrew in the public transaction log.
15 Minor transactions are easy to hide, and the anonymity of each transaction can be increased using a “bitcoin mixer”; a service which mixes funds with those obfuscate the source of the coins. However, larger transactions are less easy to hide due to “statistical techniques” (but, of course, this does not stop users making multiple transactions from multiple One famous site which accepts the currency is “Silk Road”; a site accessible only via the anonymous “Tor” browser network. Silk Road sells drugs. It is easy to understand why governments are hostile to the idea. Silk Road really is a digital black market. Its users include proponents of the philosophical view “agorism”, of anacho-libertarians, of the many who resent the control of money by central coercive institutions. It is a currency for those who object to the illegalisation of non-violent activities, and by those who simply want to get high. Agorism is interesting because it very clearly embodies many of the features that seem characteristic of black market activity in general. Alternative methods; alternative networks. Agorists seek a system of voluntary exchange, a full-bodied manifestation of free-market economics, by simply not using existing systems politics and now, bypassing orthodox currencies. Instead of the term “Black economy”, Agorists sometimes use the term “Countereconomy”.
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excludes all State-approved action (the “White Market”) and the Red Market (violence and theft not approved by the State).
Ok. So why can’t we all just start virtual currencies out of our garages with a server and a bunch of algorithms? What stops people buying and selling weapons’ grade plutonium, sex slaves and AK47s? How do you regulate something that is so very clearly put to illicit use? What happens whe n the currency reaches its pre-ordained 21 million BTC limit and there is no bank to prevent Perhaps governments will have to co-operate to regulate
According to Samuel Edward Konkin III, one
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about Agorism:
...the Counter-Economy is the sum of all non-aggressive Human Action forbidden by the State. Counter-economics is the study of the Counter-Economy and its practices. The Counter-Economy includes the free market, the Black Market, the “underground economy,” all acts of civil and social disobedience, all acts of forbidden association (sexual, racial, crossreligious), and anything else the State, at any place or time, chooses to prohibit, control, regulate, tax,
intermediaries that allow initial purchase of coins (as is currently Agorism, as a non-violent philosophy will prevent the proliferation of harmful substances and products. Maybe, when it reaches its limit, arbitrage relations will tuating madly, with those losing faith leaving, and those remaining seeing the value of their currency rise, the faithless returning and so on. It is certainly a curious phenomena, and one that many governments will be watching closely. EQ
Founder: Satoshi Nakamoto
SATOSHI NAKAMOTO is the founder of Bitcoin and initial creator of the Original Bitcoin client. He has that he is from Japan. Beyond that, not much else is known about him and his identity. His involvement in the Bitcoin project had tapered and by late 2010 it had ended. The most recent messages reportedly indicate that Satoshi is “gone for good”. He has, though, left some clues about why he is doing this project: to political problems in cryptography,] but we can win a major battle in the arms race and gain a new territory of freedom for several years. It’s very attractive to the libertarian viewpoint if we can explain it properly. I’m better with code than with words though.” EQ
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16 Source: Z construction & Paving
Undeclared business activity to the tax authorities accounts for £197 billion in the UK. James Paton argues the case for...
Colouring in the Grey Economy L
egitimate business activities that go undeclared to the tax authorities are part of the ‘grey’ economy. There are 4.7 million Small and Medium Size Enterprises (SMEs) within the UK, and 4.1 million workers classiSMEs and self-employed workers engage in some sort of transaction that is hidden from their books. This is tax evasion, where legal income, so they pay less tax. Industries that deal with large volumes of cash transactions are infamous for dodging tax, but the most notorious sector engaged in underground activity is the build-
‘cash in hand’ (by avoid paying take their payment in the form of cash, as they do not need to declare it to HMRC . Both parties taxman loses out in revenue. This happens on a daily occurrence and a question to ask is what is the size of the grey economy? of Tax Research LLP, the grey economy accounts for a minimum of 13.5% of GDP, or £197 billion. The economy is taxed around 37% of GDP, so the government is missing at least £70 billion in tax revenues. If the government collected this undeclared revenue, it would plug a large hole in the
are understandably cautious of government tax inspections, undeclared income. Tax investigations normally end up with normally much lower than their true tax bill. More tax inspectors and government departments costs money, time and may be a waste of resources if the cost of investigations exceeds the amount of revenue recovered. There are so many SMEs that it is totally by government inspectors. I believe the government should drop their pledge to increase the size of
approach the builder and ask for a building work if they pay them EQUILIBRIUM
chase all these tax dodgers? Firms engaged in tax evasion
could improve its record is to combat tax evasion through even
17
from the government. We have considered monitorquestion to ask is why is there so much tax evasion? This I believe is a simple intuitive question. Economic theory, us that there is an optimal tax rate that maximises tax revenues. Beyond the optimal tax rate, businesses go underground and stop declaring some of their incomes. Economies that have higher tax rates have larger grey economies. In Sweden, where the economy is taxed around 50% of national income, it is estimated that selfemployed entrepreneurs under declare their incomes by 35%. Higher taxes increase incentives for SMEs and the self-employed to hide their true earnings. The conclusions so far are cause they know the risk of being caught for all their evaded receipts is low. More government
Government Revenue
Laffer Curve
0
t* Tax Rate (percent)
100
GDP-weighted shadow economy size (as % of GDP) over time 0.55 0.5
Shadow economy (%GDP)
0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.55 19 60 19 63 19 66 19 69 19 72 19 75 19 78 19 81 19 84 19 87 19 90 19 93 19 96 19 99 20 02 20 05 20 08
greater digitalisation of money and limit the amount of cash that is available to the public. Technologies such as Near Field Communication (NFC) – the ability of smart phones to communicate with other electronic devices and so become “mobile wallets” - and the Bitcoin internet currency demonstrate trends in this direction. In this way cash that could be hidden from the authorities becomes digital, which can be tracked. Digital payments have helped to uncover large areas of the grey economy but much remains hidden. Complete digitalisation is however impossible as individuals will always demand cash in the form of coin or paper, as it is convenient to have. As long as there is demand for paper money, individuals can withdraw cash
Latin
0ECD-EU
Sub-Saharan
Asia
MENA
World
THE FIGURE shows the GDPweighted shadow economy on an annual basis. There is a declining trend for almost all country groups, except for the post-Socialist one. But there is also spike starting in 2007, coinciding with the global economic crisis. This could support the hypothesis that the size of the shadow economy is countercyclical - as suggested by Roca et al (2001) and Elgin (2012). [via www.taxresearch.org.uk]
bureaucrats trying to catch up
create. Furthermore, it will have
time, and complete digitalisation of money is impracticable. Higher taxes drive considerable proportions of the economy underground as individuals have less incentive to declare all their
ing motivation of the workforce and increasing foreign investment due to a more competitive tax regime that I believe will lead to higher growth rates and so, overall, higher tax revenues. A system characterised by tax
is the cause of the problem and through tax reforms will create a more transparent economy and innovative society. The government should engage in tax reform and introduce large tax cuts. The tax system is a complicated labyrinth of bureaucracy that can be largely eliminated by simplifying the tax system. tax and National Insurance will make the system more transpartax cuts that would ideally lead to taxation to GDP of around 20%, more of their income, as they would pay lower tax rates. This is an incentive to pay more tax and will uncover large amounts of the grey economy. A counterargument might be to assert that tax rates would not be optimal at this point as even if large amounts of the grey economy were uncovered, the amount of taxation collected by ly smaller than now (a decrease in revenue going some way to indiagree with this line of reasoning. Whilst in the short run tax cuts will lead to a fall in government revenues, lower taxes provide greater incentives for individuals to be entrepreneurial as they have the opportunity to keep and invest most of the wealth that they
with greater digitalisation of money, will also be more transparent. The government must work with the market through taxation, not against it, to colour in the grey economy. EQ “If tax evasion had been taken seriously and been tackled in [Greece and Spain] we would not have a crisis in the eurozone today. Something similar could be said for the UK. The US has an evasion rate about two thirds that of the UK. If we had reduced our tax evasion rate to US levels in the last decade we might owe £200bn less in debt now” - Writing in The Guardian
Richard Murphy Tax Research LLP
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health
n. the state of being free from illness or injury. > a person’s mental or physical condition ORIGIN OE haelth, of Gmc origin; rel. to WHOLE
BY Andrew M Jones Head of Department of Economics and Related Studies
T
he label health econometrics has been adopted as a convenient short-hand to describe the development and application of econometric methods within health economics. The challenges posed by health data have stimulated important methodological innovations. There has been a dramatic growth in econometric studies that use health data. This has stimulated developments in econometric methodology that have spread beyond health economics. The label health econometrics was adopted for a chapter in the Elsevier Handbook of Health Economics (Jones, 2000) although earlier authors had reviewed the use of econometrics
data on British hospital costs, and the RAND Health Insurance lyst for much of the methodoEQUILIBRIUM
econometrics /I,kene’metriks/ pl. n. [treated as sing.] the branch of economics concerned with the use of mathematical methods (especially statistics) in describing economic systems.
‘health econometrics’ for the online edition of the New Palgrave Dictionary of economics. The following article is an edited extract. logical innovation that took place in the 1970s and 1980s (Manning, Newhouse et al., 1987). The scale of activity has grown substantially over subsequent decades. The European Workshops on Econometrics and Health Eco-
established in 1992, have provided a focus for developments and networking by researchers in the mented by similar meetings in North America (since 2009) and Australasia (since 2010). The majority of applications within health econometrics have measures of health care or health as the outcomes of interest. The can include clinical outcomes, anthropometric data and, increasingly, biomarkers. Other studies focus on health-related behaviours such as diet, smoking, drinking and illicit drug use and econometric methods are used to
analyse the results of contingent valuation and discrete choice
micro-data far outweigh those using macro time-series data. Recent years have seen greater emphasis on longitudinal datasets, such as panel and cohort studies, and large scale administrative datasets that are often linked to each other or to social surveys (e.g. Black et al., 2007) The RAND Health Insurance respects, not least as an early
has seen a resurgence of interest in recent years particularly within development economics (e.g. Miguel & Kremer, 2004). In terms of econometric methods the RAND study focused on modelling health care use and associated with the development
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retransformation bias. Cost regressions play a role in health technology assessment
concrete applications in regression based algorithms for risk adjustment (Van de Ven and Ellis, 2000) and in weighted capitation formulas for geographic resource allocation (Smith, Rice and CarrHill, 2001). In both cases regression models are used to predict
Health Care Expenditures form an ever-increasing burden in most developed countries
Health expenditures as a percentage of GDP
of the two-part, or multi-part, model (2PM) and with bring-
IN MANY WAYS, health economics
or groups on the basis of their diagnostic, demographic and socioeconomic characteristics. Much modern applied work in health economics sets out to identify causal mechanisms and
economics in its areas of research specialization – there are theoretical studies, micro and macro studies, industrial organization studies, public economic studies, and labour studies, among others. But health economics has a unique (1963). That is the large role played
est, usually formulated in terms of the potential outcomes frameterfactual outcomes, and for de-
that can be subjected to careful has also focused on the fact that there is likely to be heterogene2006). McClellan, Newhouse and McNeil (1994) and McClellan and Newhouse (1997) were quick to adopt the notion of local captured through the concept has been taken further in applied Heckman and Vytlacil (2005) use a structural model of a system of equations for outcomes and treatment and Basu et al. (2007) use the method of local instru-
discussed in more detail in Jones (2009) and Jones and Rice (2011). EQ The full article can be found at: http://www.dictionaryofeconomics.com/ article?id=pde2012_ H000195.
by market failures, which make it likely that resources will be allocated prevail. Among other topics, the subject deals with Insurance, with managing competition, the availability of information and the impact of uncertainty, the general demand and supply of healthcare and so on. - by Dominic Falcao
Bibliography Aakvik, A., J.J. Heckman and E.J. Vytlacil 2005. Estimating treatment effects for discrete outcomes when responses to treatment vary: an application to Norwegian vocational rehabilitation programs. Journal of Econometrics 125, 15-51. Auld, M.C. 2006. Using observational data to identify the causal effects of health-related behaviour. In Jones, A.M. (ed.) The Elgar Companion to Health Economics. Cheltenham: Edward Elgar. Basu, A., J. Heckman, S. Navarro and S. Urzua 2007. Use of instrumental variables in the presence of heterogeneity and self-selection: an application to treatments of breast cancer patients. Health Economics 16, 1133-1157. Black, S., P. Devereux and K. Salvanes 2007. From the cradle to the labour market? The effect of birth weight on adult outcomes. The Quarterly Journal of Economics 122, 409 - 439. Feldstein, M.S. 1967. Economic analysis studies of the British National Health Service. Amsterdam: North-Holland. Hoch, J.S., A.H. Briggs and A.R. Willan 2002. Something old, something new, something borrowed, something blue: a framework for the marriage of health econometrics and cost-effectiveness analysis. Health Economics 11, 415-430. Jones, A.M. 2000. Health econometrics. In Culyer, A. J. and J.P. Newhouse (eds) Handbook of Health Economics. Amsterdam: Elsevier. Jones, A.M. 2009. Panel data methods and applications to health economics. In T. C. Mills and K. Patterson (eds) Palgrave Handbook of Econometrics. Volume II Applied Econometrics. Basingstoke: Palgrave MacMillan.
Jones, A.M. and N. Rice 2011. Econometric evaluation of health policies, in Oxford Handbook of Health Economics, Glied, S. and P.C. Smith (eds) Oxford: Oxford University Press. Manning, W., J. P. Newhouse, N. Duan, E. Keeler, A. Leibowitz and M. S. Marquis 1987. Health insurance and the demand for medical care: evidence from a randomized experiment. American Economic Review 77, 251-277. McClellan, M. and J.P. Newhouse 1997. The marginal cost-effectiveness of medical technology: a panel instrumental variables approach. Journal of Econometrics 77, 39-64. McClellan, M., J.P. Newhouse and B. McNeil 1994. Does more intensive treatment of acute myocardial infarction in the elderly reduce mortality? Journal of the American Medical Association 272, 859-866. Miguel, E. and M. Kremer 2004. Worms: identifying impacts on education and health in the presence of treatment externalities. Econometrica 72, 159-217. Newhouse, J.P. 1987. Health economics and econometrics. American Economic Review 77, 269-274. Smith, P. C., N. Rice and R. Carr-Hill 2001. Capitation funding in the public sector. Journal of the Royal Statistical Society A, 164, 217-257. Van de Ven, W. and R. P. Ellis 2000. Risk adjustment in competitive health plan markets. In A. J. Culyer and J. P. Newhouse (eds) Handbook of Health Economics. Amsterdam: Elsevier. Wagstaff, A. 1989. Econometric studies in health economics. Journal of Health Economics 8, 1-51.
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Credit: Dirck Halstead—Bettmann/Corbis
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THE CASE FOR
John Kenneth Galbraith By Dan Howdon
T
he general consensus around John Kenneth Galbraith seems to be that he was a talented writer, producing memorable aphorisms (‘Economics is extremely useful as a form of employment for economists’), but one whose economic contributions were ultimately nil. In an interview after his death, Ken Arrow’s pejorative description of him as a ‘big thinker’ was a testament to how far the brave new world of economics with compulsory microfoundations had – happily – passed him by. Dismissed by Paul Krugman, in one of his regular boundary-patrolling barbs, as a ‘celebrity economist’, ‘never… taken seriously by his academic colleagues’ [1], Galbraith EQUILIBRIUM
seems like a man whose time never existed, let alone one whose time has passed. Seemingly universally derided as a relic of an unserious, mathsaverse, quasi-sociological economics, it seems arguable, however, that he is as relevant as ever. His accounts of the precursor to the Great Depression (The Great Crash, 1929) and other panics (A Short History of Financial Euphoria) contains much that rings true about concerns regarding social disharmony in The Culture of Contentment have much to recommend them as prescient commentary on the recent riots. Money: Whence it Came, Where it Went is a mighty tome, discussing the history of money,
monetary policy than any macroeconomics course [2] or textbook I am aware of. His discussion of private wealth and public squalor in still resoGoogle search for ‘“crumbling infrastructure” UK’ returns almost 400,000 hits. The Age of Uncertainty is possibly the best and most readable introduction to broad economic thought. He describes the idea of a balanced budget as being the best ‘design for reducing both the private and public demand increasing unemployment and and derides President Hoover’s description of it as ‘the most essen-
21 tial factor to economic recovery’. You may have heard this sort of thing somewhere since. On possibly the biggest issue of these – social disharmony – as the author of The Culture of Contentment, it is unlikely he would have been impressed by a recent article on these pages (‘Broken Britain?’) regarding the riots. In his account of a potential uprising of a ‘functional underclass’, he substituted insightful commentary for this periodical’s incitement to suicide [3], outright homophobia [4], scarcelyconcealed contempt for the poor, and apocryphal stories of a lack of social discipline [5]. Galbraith remarked that the co-optation of politics by a contented majority, and the alienation from the political process of the poor, means that the chance of ‘an underclass revolt… grows stronger’, and that the belief among the content that such a situation was their deserved fate ‘may be suddenly and surprisingly disproved’. Galbraith described these pages – a strong authoritarexhortation to not throw money at the problem – as ‘the convenient reverse logic of our time’: that the remedy to any social problem should be that which is ‘most in accord with major pecuniary or political interest’ [6], irrespective of at hand. So, assuming I’m right, why
in what proper economists call “applied biostatistics” telling you about him? He does not appear in mainstream economic discussion, and even less in university economics courses. Is his irrelevance warranted? The only honest answer is: I don’t know, I’m not a macroeconomist, go and ask someone else. I, however, think not. Galbraith spoke of the sociology of the economics profeshackishness among economists [7] not at all ‘to conspiracy and not much to design’, pointing rather to the suggestion that ‘the dominant economic interest is the standard and accepted voice in the community’ [8]. What shines through in Galbraith’s writing is, above all, genuine compassion, but, equally, exactly this: frustration with mainstream economics, which he deemed worthy of regular mockery and also, more poignantly, sorrow. He concludes Economics and the Public Purpose with a plea that ‘the future of economics could be rather bright… and be in touch with the gravest problems of our time’, but laments that such a choice can only be made by economists themselves, who must decide between either unimportance, but comfort, and genuine imporhave found more comfort than they knew in the fact that economists teach and discuss the wrong problems or none at all’. In other words: red pill or blue pill? EQ
1952
1954
“
1958
1973
1977
References ers about access to TV sports channels’.
[2] A claim I can make without fear of repercussion, having never studied it here at York.
[6] Galbraith, ‘The Convenient Reverse Logic of Our Time’, in A View from the Stands (1986).
[3] Harriet Harman is invited to ‘jump off a bridge’.
[7] To give one particularly unsavoury
[4] Those concerned about police brutality are dismissed as ‘fairies’. [5] The source for a story about prisoners demanding all four Sky Sports channels rather than just one, genuinely referenced as ‘I even read the other day that…’, turns out to, seemingly, be a Daily Telegraph story (http://tinyurl.com/czewtop) which entertainingly concludes with a statement from the private company running the prison that ‘[w]e are happy been, any formal complaint from prison-
2008 happy to give their name to a letter claiming that Barack Obama’s almostprogressive policies would ‘run a high risk of throwing the US economy into a deep recession’. Readers may be amused to note that another signatory, Ken Rogoff, is a member of the advisory board of accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century’.
His discussion of private wealth and public squalor still resonates – googling ‘“crumbling infrastructure” UK’ returns almost 400,000 hits
1975
in action? Why is a PhD student
[1] Krugman, Peddling Prosperity, (1994).
”
The Great Crash
His accounts of the precursor to the Great Depression and other panics contains much that rings true about the ongoing
The Age Of Possibly the best and most readable introduction to broad economic thought
1994
”
A mighty tome offering a better discussion of monetary policy than any macroeconomics course or textbook I am aware of.
1992
”
His concerns regarding social disharmony have much to recommend them as prescient commentary on the recent riots.
[8] Purpose, (1974)
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/
1 52
years in
BLACKBOARD ECONOMICS ... and Andrew Lansley’s health bill BY James Lomas PHD Student at the Centre for Health Economics, University of York
A
s an economics graduate it’s possible that you start to dread being asked about your degree, in case they ask you questions about the economy. “So how bad do you think the current recession is?”, “What do you think of the 50p tax rate?”, “How long’s the euro going to last?”. What people don’t seem to realise is that all the times I’ve implemented Shephard’s Lemma, stated the assumptions behind Ricardian
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Equivalence and argued that the Agricultural Revolution was in fact an evolution, weren’t going to supply me with the answers to these questions. One thing that blackboard economics did enable me (as an undergraduate [at another University]) to do… was to position myself socially, in its highest echelons, as ‘differentiation boy’. My aptitude for optimisations reliably and without in between tutorials. And it meant I didn’t have to spend too long worrying about any discussion of the theories as I’d always avoid the essay questions. Is this what teaching economics is supposed to be
main political parties. After all it was Labour that introduced quasi-markets into healthcare and enabled GP fundholders. In this sense, the coalition has merely launched an evolution, not a revolution of this policy, increasing the scale on which GPs are in control of allocating healthcare resources. Instead there seems to be a distrust in the government’s underlying motives: what with the Conservatives having privatised much of nationalised industry (not that Labour didn’t) and the industry sponsorship of Rt Hon Andrew hard to trust a policy founded on showing that removing road signs improved road safety. But to conclude on this note would preclude us from looking at the economic arguments surrounding the current reform. encounter is that as an economist I must favour the introduction of any competition into the NHS. I would advise anyone who takes the view that more competition out thinking deeply into the limitations of a free market, to lectures on welfare economics, where he makes a strong case from the blackboard. On a more practical level, I feel it necessary to have a look at how the reform and outcomes in the NHS, without believing the necessarily believing that these reforms would increased choice and competition
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There seems to be a distrust in the government’s underlying motives.
NHS: A History
hard to trust a policy grounds from studies showing that removing road signs improved road safety
“
achieving? Nowadays I am specialising in Health Economics, after completing the far more rewarding and interesting MSc programme at York. And the hot topic of conversation is Andrew Lansley’s reform of health and social care. In particular the reform looks to controversially place the NHS budget under the control of GPs. It’s a topic that genuinely interests me, and not least because my mother, brother and father are all currently employees of the NHS. Politically speaking, as I see
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Fortunately enough, Labour (who apparently hate the reforms and everything they stand for) trialled the same idea when they were in power. However, evaluating this policy is fraught with econometric challenges. A lot of the challenges stem from that their system allowed GPs to become fundholders voluntarily without mandating it from Whitehall, and that there is therefore the potential for a selection bias on any econometric estimates. In any case, the evidence from the GP
of good outcomes and some bad. So in conclusion (or inconclusion as I, perhaps more accurately, just mistyped) I view the current reforms as maybe increasing choice and competition, which basically follows on from the current government, which may or may not have been successful. In this sense I am left wondering whether or to more applied (and less abstract applied maths) economics has actually improved my conversational abilirelating to economics. In my optimistic view of the situation, I feel it has taken me from being an economist with no hands, to one with two. The long sought after one-handed economist doesn’t seem a likely career path for me just yet. EQ
SINCE ITS LAUNCH in 1948, the NHS has grown to become the world’s largest publicly funded health service. It is also one of the most efcomprehensive. The NHS was born out of a long-held ideal that good healthcare should be available to all, regardless of wealth. That principle remains at its core. With the exception of charges for some prescriptions and optical and dental services, the NHS remains free at the point of use for anyone who is resident in the UK. That is currently more than 62m people. Around 3 million people are treated in the NHS in England every week. The NHS employs more than 1.7m people. Of those, just under ing, 39,409 general practitioners, 410,615 nurses, 18,450 ambulance staff and 103,912 hospital and community health service medical and dental staff. Only the Chinese People’s Liberation Army, the Wal-Mart supermarket chain and the Indian Railways directly employ more people. When the NHS was launched in 1948 it had a budget of £437 million (roughly £9 billion at today’s value). For 2011/12 it is around £106 The NHS, like other healthcare systems, has never consistently and systematically measured changes in its patients’ health. As a result, it’s impossible to say exactly how much the nation’s health improves for each pound spent by the NHS. In the UK life expectancy has been rising and infant mortality has been falling EQ since the NHS was established. with other nations. Surveys also show that patients are generally from the NHS. Importantly, people who have had recent direct experience of the NHS tend to report who have not. - Dominic Falcao EQUILIBRIUM
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FEEDBACK
Ever wondered what the department does with your feedback? Dr Thijssen explains...
to reduce the number of forms we have found that the way in which tion down is often considered as -
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cation of how to conduct the work -
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BY Dr J. Thijssen Feedback Coordinator, Department of Economics
“
reaction and, to be honest, one I feedback so far (seminars have
buzz words that is rever-
-
used by you to become an inde-
tions, it is student dissatisfaction -
we, as a Department, have to be by the way, but happens across the research-intensive universi-
-
our feedback practices and here’s
most important one, I suspect, is
one is consistency of provision
some of you may have encoun-
-
a new system in some of the core write, say, a report in a few years’ of your own performance if you -
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25 First of all, to most academics (I think) it is almost something instinctive, something we were never told ourselves but learned along the way. Second, formu-
lating criteria risks leading to a “box ticking” exercise: mention these bullet points and you get a II.1. Such an approach would be very bad indeed for learning in
a happy medium. I am sure you will more from me on these issues in the near future. For now, all the best for the exams! EQ
A Student’s Response
Equilibrum editor IT WAS INTERESTING to read a reasoned attempt at a defence of the type of feedback given to students in research-led universities by a member of the department (in this edition). and I hope to be fair in my summary: 1) that we learn to judge the quality
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There may be room to defend the priority of learning the basics before questioning them, of absorbing before evaluating
“
BY Dominic Falcao
ics. It is a young subject and as such is
to becoming an independent learner and 3) that time spent giving feedback must be seen as part of a tradeoff with time spent designing better module content. There is certainly much common-
insecurity of its myriad assumptions. To question things before we are fully convinced of the shape of the resultant theories is no great achievement.
degree of respect must be paid to a system that is the outcome of several hundreds of years of evolution. There are also many other arguments to be adduced in support of any educational system that emphasises independent thought and independent study. tions about the attempts to go about pursuing these worthwhile and valuable goals for non-DERs students at the University of York. Coming to the end of my second year of studying PPE at York I have so far written one Economics essay. This means three sentences of written feedback in 50 weeks of term-time ams were multiple-choice. My results from our end of term quiz were also multiple-choice. Our seminars are predominantly based around tackling mathematical questions. It is certainly true that I have quickly learnt how to teach myself large quantities of infor-
but feel that even in the light of the above considerations my emotions
I have seen absolutely no evidence of encouragement of independent thought: it has been very literally an -
intense frustration with the compul-
even the slightest vestige of inspiration to engage critically with the course material. Of overall time spent studywas rewarded disproportionately for my meagre efforts. It has always hours are almost entirely unattended. I joined the Economics society as a way of constructively channelling my disappointment and found a group of people already scarred by the lack of engagement involved in the rest of their course. As evidence of the lack of enthusiasm that students have for their course consider that this article is included in by a lack of submissions to the only student publication dedicated to topics in Economics. Consider further that this article is a response to another article analysing the lack of feedback that the department has been able to secure. There is something incredibly dis-
There may be room yet to defend the priority of learning the basics beframeworks and typical patterns of thought before being able evaluate them: it is surely true that we must learn out”. This is especially true of Econom-
not even a shared will to alter it among it is that has caused this discontent. grained; the idea that we might enjoy this course seems to have been bludg-
and students seem largely resigned to getting through the degree as best as possible. Meeting a professor from Lehigh university in the States served to catalyse my understanding of the problems and opportunities open to Economics departments. It is a lack of comparable funding that means that the tradeoff between course content and feedback is so tight and unsatisfying. It is the huge strain on departmental coaches that means that we do not have space to create the kind of academic-family culture and relationship between students and staff that seems so appealing in the States. It is bureaucracy imposed from every direction. I am sure some of the phrases I and unmerited by a department that my own case I had a very idealistic image of how studying Economics would be prior to arriving and have a tendency to be over-critical on this bamy optimism towards the changes to to many of the aspects of the course that had previously unsettled me. Furthe department happily accepted a student-lead proposal for a Teaching type of feedback that will certainly serve to tie the department closer to the student body if students can be inspired to show their approbation for their courses and teachers. The prizes will be awarded at the Christmas Ball event as a highlight of the Economics Department calendar and as nothing less than symbolic of mutual desire for a closer relationship. EQ EQUILIBRIUM
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Chat-up Lines for Economists We were recently made aware that some people didn’t consider economics
KINKY
27
SEXY, that
FILTHY
“
I’D LIKE TO SEE MY ENDOWMENT...
“Bottom
YOUR’E AN ECONOMIST. I’M AN ECONOMIST. HOW ABOUT A LITTLE HORIZONTAL INTEGRATION?
down?”
... IN YOUR EDGEWORTH BOX.
“Now those are some tangible assets!”
”
“Sometimes
“I know all about bonds... ...Show me some real interest: I can predict the rate at which you’ll yield”
A compliments”
Price
and exit… entry and exit”
TH
ER
E’S
B
“You’ve been spending too much time with the invisible hand…time for some external intervention”
in my pants”
“Let’s go to bed and try to disprove the law of diminishing marginal utility”
GO T A
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RV
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I’V
AR EA SO DE N MA ND
I LOV EY CETE OU, R PARIB IS US
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0
Let me adjust your exogenous odel variables... you’re a m and I’m the shock
Quantity EQUILIBRIUM