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BUSINESS ECONOMICS SOCIETY ISSUE ONE

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A BRIEF WO RD . . . Welcome to the first issue of Persuasion bringing you fresh perspectives from students to CEOs from Leeds and beyond. This issue presents eight articles based around Economics, Business and Society, along with unique illustrations from up-and-coming artists. We want to create a magazine worth keeping and are conscious of the environmental impact of printing this so, once you are finished, shelve this treasure or pass it on. The fact that this magazine costs nothing and has no distracting adverts is thanks to funding from Leeds University Business School. We are extremely grateful.

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C ONTENT S EDITOR Douglas Rose dougcrose@gmail.com

Squabbling Children Laura Paraskeva America, China and the US debt ceiling >4 Monetary Policy and the Great Moderation Dr Matthew GreenwoodNimmo Where next for interest rates and the central bank? >7 How can the Productivity of Health Care Markets be increased? Prof. Alan Maynard Speculation and insight on the state of healthcare at home and abroad > 11 I.O.U Jenna Fletcher Who owns Britainâ&#x20AC;&#x2122;s debt and is it a problem? > 13

Billion Dollor-o-gram David McCandless, author of Information is Beautiful, puts monetary value in to context with this revealing visual >16 Burgernomics Rory Gibson The Big Mac Index explained > 18 Hypocrisy Ajay Smith The Murdoch phone hacking scandal and deficiencies in society > 23 Is One Free To Wish? David Robinson Thoughts on Happiness and on a world without wanting or want > 25

ART DIRECTOR Harvey Herman harveyherman@hotmail.co.uk

CONTRIBUTORS Laura Paraskeva Matthew Greenwood Alan Maynard Jenna Fletcher Rory Gibson Ajay Smith David Robinson ILLUSTRATORS Samantha Lippett Amy Godliman David McCandless Chris Harnan Edward Cheverton Harvey Herman PROOF READER Ian Bretherton

Conversations An interview with Alan Aubrey CEO of IP Group, looking at commercialising the newest inventions coming out of Leeds. > 29

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Squabbling Children America, China and the US debt ceiling

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ut simply, America, like the United Kingdom, has spent beyond its means over the last decade. In 2000 the US economy was in surplus, but instead of using this money to pay off their growing national debt it was spent on new tax-cuts, two wars and an expensive prescription drug programme. By the time Obama took office, US national debt had reached $1 trillion. The debt was further exacerbated by the recession. Earlier this year we saw political squabbling in Washington, over raising the debt ceiling - something which was ultimately inevitable and, in previous terms of office, a routine move. The US government needed to borrow more money and the US debt ceiling had been reached. Raising the debt ceiling would not have allowed Congress to spend more money, but simply given the US government the ability to pay bills which Congress already owed. If the debt ceiling had not been raised by 2nd August, the world would have seen the USA default on its debts for the first time and risk losing its triple-A rating. This was described by President Obama as a ‘deep economic crisis, caused almost entirely by Washington’. When one considers that debt defaults by smaller countries such as Portugal and Greece had shaken the world economy, it is clear that a debt default by the USA would indeed have been an ‘economic crisis’ and have had a huge knock-on effect upon the world economy. The US had two very simple solutions to reduce its national debt. The first suggested that the US should stop living beyond its means through the implementation of cuts in spending, for example on defence or Medicare. At the same time, the wealthiest 2% of Americans (earning over $250,000 pa) and large corporations should receive tax increases and be required to give up a greater percentage of their earnings through special deductions. The second solution involved even deeper cuts, but without >>

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www.smlpptt.tumblr.com Images: Samantha Lippett

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<< imposing higher taxes upon the wealthiest members of society. When this second solution was proposed, the Republicans made it a condition of their agreement to the raising of the debt ceiling. As America’s largest creditor, China was very concerned about the possibility of the USA defaulting on its debts. In June this year, China’s surplus with the USA hit a 4-month high. Exports to the US surged by 9.76 % from a year earlier, to $28 billion last month. However, US-China relations took a knock as Beijing lost patience over Washington’s inability to agree a debt-ceiling plan. Hilary Clinton, the US Secretary of State, reassured the Chinese that no default would take place. The Chinese have since described the situation as the ‘world’s greatest economy being kidnapped by dangerously irresponsible US politics’. The USA is not only reliant upon the Chinese because of their cheap imports but also because the Chinese use the US dollar as the main reserve currency. If they were to transfer reserves from US dollars into a different currency this would have huge repercussions on the exchange rate of the dollar. The eyes of the world were upon the USA while the Republicans and Democrats attempted to reach a compromise over their rival solutions, or risk a default on their $14.3 tn (£8.7tn) of debt as well as a credit rating downgrade. No country was more nervous than China, with so much invested economically in the United States. Top leaders and academics have described the Sino-American relationship as the world’s most important bilateral relationship of the 21st century. They were surely questioning the US as an economic partner and reconsidering whether or not they should hold so many dollar assets. Following protracted talks between Republicans, Democrats and the White House, and just 10 hours before the expiry of a deadline for Washington to raise its borrowing limit, Barack Obama signed

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legislation to increase the US debt ceiling and avert a financial default, after Congress voted in favour of a bipartisan compromise deal. It raises the debt limit by up to $2.4tn (£1.5tn) from $14.3tn, and will make savings of at least $2.1tn in 10 years. This move has been routine in the past: the debt ceiling was raised eighteen times by President Regan and seven times by George W. Bush. In the short term, the USA will be able to pay its bills. However, Washington has embarrassed itself over the crisis by appearing to be a dysfunctional government, which may have detrimental long-term implications. Barack Obama described the situation as an event that could have been ‘avoided entirely’. Perhaps this behaviour will, in the minds of the Chinese and other nations, raise the question of whether the US should be reassessed as an economic partner. Perhaps the two powers of the US and China will rule over the world in parallel, but is there enough room at the top? When one considers the idea of China becoming economically superior, is it simply a question of when, rather than if? Is the USA really still the ‘greatest nation on earth’ or is the American eagle going to lose its perch? .

Laura Paraskeva is currently in her second yerar at the University of Leeds, studying Economics and Management. Contact: Laura.Paraskeva@virgin.net

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Monetary Policy and the Great Moderation Where next for interest rates and the central bank?

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he period starting in the mid-1980s and ending with the current global financial crisis has been widely referred to as the Great Moderation, a name which reflects the profound reductions in various measures of economic volatility that have been observed during this time. However, this period has also seen widespread financial liberalisation, the globalisation of financial and product markets and unprecedented financial innovation. In this article, I will argue that these developments have undermined the degree to which the central bank can influence the interest rates set by banks and the yields on financial assets. This, in turn, has reduced the extent to which the central bank can affect conditions in the wider economy via monetary policy.

The link between the interest rate set by the central bank and the interest rates that you or I or various businesses may pay on loans, or receive on deposits, is of fundamental importance to modern macroeconomics. It is common in macroeconomics to see models where “the” interest rate determines investment, saving etc. and where “the” interest rate is set by the central bank in response to economic conditions. However, as we all know, there is no single interest rate that serves all these functions. Rather, the central bank sets a very short-term interest rate and then longer-term interest rates and yields are set in relation to this short-term rate by banks and financial market participants. The reason that this is typically not discussed in economic models is that we make an implicit assumption that these longer-term interest rates track the short-term >>

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<< rate set by the central bank perfectly (perhaps with an approximately constant mark-up). But what if this assumption is incorrect? A stylised view of the way that monetary policy operates can be summarised in the form of the diagram below (note that ‘central bank’ is abbreviated to ‘CB’). It is clear from this diagram that the standard assumption of a one-to-one link between the central bank’s short-term interest rate and the longer-term interest rates set by banks and financial markets ensures a direct link between monetary policy, aggregate demand and inflation. This is convenient given that most central banks strive to maintain an inflation target through aggregate demand management policies involving small changes in their short-term interest rate! If, however, banks and financial markets do not respond at all to the shortterm interest rate set by the central bank

then this link is broken and the form of monetary policy outlined above is ineffective. These are two extreme cases - the reality is likely to sit somewhere in the middle, where banks and financial markets do respond to monetary policy but not perfectly. This raises some important questions about how effective monetary policy may be in steering the wider economy in the desired direction. Recent research that I have conducted with Yongcheol Shin and Till Van Treeck (the original research paper can be downloaded free of charge at http://ssrn.com/ abstract=1894621) has revealed that the linkage between monetary policy and longerterm interest rates was very tight before the Great Moderation (this is called complete pass-through). However, during the Great Moderation, the way that banks and financial markets have responded to monetary policy has changed dramatically. In particular, we found that changes in the central bank’s

• CB sets its interest rate in response to macroeconomic conditions CB sets interest rate

• Most CBs set a short-term interest rate that strongly influences the rate pain on inter-bank loans made at the close of business each day

• Banks change their portfolio of lending and deposit interest rates in response to their cost-of-funds (including these inter-bank loans) Banks & markets react

• Financial market yields adjust as traders respond to the CB policy

• Investment, consumption and savings decisions change according to the new interest rates and yields Households & firms react

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• This will affect aggregate demand and, thereby, inflation

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During the Great Moderation

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Time horizon

-1

Response of longer-term rates (%)

Response of longer-term rates (%)

Before the Great Moderation 1

1

0

Time horizon

-1

1% Hike in Base Rate

1% Hike in Base Rate

1% in Base Rate

1% in Base Rate

short-term interest rate have only been partially reflected in longer-term interest rates during this time (this is incomplete pass-through). We also found that while hikes (increases) and cuts in the central bankâ&#x20AC;&#x2122;s short-term interest rate were equally passed-through to longer-term interest rates before the Great Moderation, striking

The way that banks and financial markets have responded to monetary policy has changed dramatically patterns of asymmetry developed during the Great Moderation. In particular, rate hikes have been passed-through more powerfully in the short-term, while rate cuts have been passed-through more fully in the long-

term. These patterns are summarised in the diagrams below which show the response of longer-term interest rates (set by banks and in financial markets) to a 1% rate hike/cut administered by the central bank. Notice that before the Great Moderation there is fairly smooth adjustment in which longer-term interest rates increase/decrease by 1% in response to the central bankâ&#x20AC;&#x2122;s 1% hike/cut in its short-term interest rate. However, during the Great Moderation, longer-term interest rates adjust by less than the full 1% and there is clear asymmetry. Simply put, the effect of a rate hike is no longer simply the opposite of the effect of a rate cut. So why has this change happened and what does it all mean? It seems very likely that the main factors driving these phenomena relate to the changes in the global financial landscape that happened during the Great Moderation. In particular, banking became a more global industry â&#x20AC;&#x201C; for example, you or I could have a current account with a Spanish bank, a savings account with an Indian bank and a mortgage with an Irish bank if we wanted to. This has created a lot more competition, >>

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<< so banks have become very reluctant to change their interest rates (especially to raise lending rates) in case they drive their customers to the competition by doing so. Alongside this, borrowers themselves have changed during the Great Moderation – as a group, borrowers are now better informed than they have ever been. It is easy to compare interest rates from a huge variety of banks in minutes on the internet. Borrowers are now more ‘footloose’ than they have been in the past and are able to switch banks quickly, easily and cheaply if they no longer offer competitive interest rates. Lastly, the

As a group, borrowers are now better informed than they have ever been widespread innovation that has occurred in the banking and financial services industry has reduced the degree to which banks need to rely on inter-bank loans to balance the books – remember that it is these interbank loans that are most directly affected by monetary policy. This means that the interest rate set by the central bank has become a less significant determinant of banks’ cost-of-funds. The combination of these factors has resulted in a general weakening of the linkage between the longer-term interest rates set by banks and the short-term interest rate set by the central bank. A similar explanation can be constructed for financial markets where corporate debt is traded. The upshot of these changes is that the central bank’s influence on the wider economy has been weakened. In particular, if the central bank cuts its short-term interest

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rate, then there is likely to be a significant lag before banks and financial markets follow suit. Given that households and firms borrow from, and invest with, banks and financial markets rather than the central bank itself, this means that the central bank may be largely unable to stimulate the economy in the short-run in the event of recessionary pressures – this was certainly the case at the outset of the financial crisis. Equally important however, is our finding that the central bank’s ability to raise longerterm interest rates over a prolonged period of time has been severely reduced during the Great Moderation. Our research indicates that if the central bank raises its short-term interest rate today by 1% then, in two or three years’ time, longer-term interest rates will be as little as 0.2% higher than they are today. This suggests that the central bank may struggle to raise interest rates on the scale required to combat emerging bubbles in asset markets. This is very important remember that the financial crisis has its roots in the US housing bubble. So what is to be done? What seems clear is that a central bank that operates solely by manipulating the short-term interest rate may find itself poorly equipped to deal with recessions in the short-run and bubbles in the long-run. Therefore, the development of supplementary tools of monetary policy is of paramount importance. One such tool which has been used as an emergency measure is quantitative easing. Another possibility is the use of counter-cyclical reserve requirements. To conclude, therefore, I will simply say that monetary economics will certainly be an area to watch closely over the next few years .

Dr Matthew Greenwood-Nimmo is a lecturer in Applied Econometrics at the University of Leeds Contact: mjgn@lubs.leeds.ac.uk

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How can the productivity of healthcare markets be increased? Speculation and insight on the state of healthcare at home and abroad

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he markets for health care are large and complex. The UK spends nine per cent of GDP, over £100 billion, on the National Health Service. The USA spends over 16 per cent of a larger GDP on health care and over twice as much per capita as the UK. Despite spending twice as much, Americans don’t live twice as long as Brits! So what is the relationship between inputs and outputs? Over the last century one of the triumphs of civilisation has been improved longevity with increasing numbers living into healthy old age. But is this the product of health care or is it caused by increased income and behavioural change? What

does investment in health care produce? The achievements of medicine are remarkable. We can replace hips and knees, transplant hearts, kidneys, livers and other “spare parts” and control to varying degrees such chronic conditions as cancer, heart failure, diabetes and other formerly fatal conditions. However, most investments in health care continue to have poor evidence bases, i.e. they are used but their effectiveness, let alone their cost effectiveness, is unknown. Doctors do science but also practise“magic”, using interventions taught in medical school but lacking an evidence base! Ideally, spending on health care should increase the length and quality of citizens’ lives. Measuring productivity thus >>

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<< requires data about mortality rates and the quality of patients’ survival. The former can be acquired from NHS and census data. The latter is a matter of debate about how medical care improves individual psychological and physical well- being. UK legislators passed the Lunacy Act in 1845 and required hospitals to measure and chronicle whether care led to “death, recovery, relief or no relief”. A hundred and fifty years later no health care system, public or private, has a systematic, validated system of productivity measurement sought by Victorian legislators. Managers in health care collect and use data on activity, e.g. how many operations are carried out by surgeons. They collect data complications and errors, e.g. in 2009 an Irish surgeon removed a healthy kidney from a nine-year-old boy and left him on dialysis as his other kidney, which he should have removed, was diseased. They have professional guidelines of “best practice” from evidence- based organisations such as the Cochrane Collaboration (www.cochrane. org.uk) and the National Institute for Health Clinical Effectiveness (www.nice.org.uk). These activity and process data are incomplete. But more worrying, if you are a consumer, is that they are not followed rigorously by doctors. All health care systems are characterised by large variations in clinical practice, i.e. doctors do very different things to patients with similar needs and similar characteristics. Some variations are inevitable and defensible given the characteristics of patients. Some variations reflect waste and inefficiency. One US researcher has “guestimated” that if all US doctors adopted conservative, evidence- based practices they would save 30 per cent of the health care budget! A useful amount given the USA’s fiscal problems! The UK government plans to increase NHS expenditure in line with inflation over the next 4 years. However, demographic trends (the ageing of the population) and

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technological advances will require increased funding. The current “solution” to this problem is that the NHS is required to save £20 billion over the next 4 years, one fifth of its annual spend, by increasing productivity and re-cycling these savings to meet increased demand. The Obama care reforms in the USA are extending insurance coverage to over 30 million citizens. This is fiscally explosive for a country running a massive debt. Like their UK counterparts, the belief of American policy makers is that productivity can be increased. The evidence base indicates this is highly optimistic. Over recent decades the rate of growth of health spending internationally, in public and private systems, has increased faster than GDP. If GDP is static (e.g. we emulate the stagnation over two decades of Japan), how can health care be afforded? Will rationing become more explicit? Rationing involves depriving patients of care from which they could benefit and which they want to have. Should rationing be on the basis of ability to pay, i.e. deprive the poor even more? Or should it be on the basis of need, where need is defined as the individual’s capacity to benefit from health care costeffectively, i.e. let the sick die sooner? Health economics offers a nice mix of positive issues (e.g. what works in medicine at least cost?) and normative challenges (e.g. who shall live in what degree of pain and discomfort, when all will die?). Resource allocation in a market where market signals are very poor and professions (“conspiracies against the laity” as George Bernard Shaw called them!) are very powerful provides some wonderful intellectual and moral challenges for economists and managers! . Professor Alan Maynard is a Senior Lecturer in Health Economics at Hull-York Medical School, University of York Contact: alan.maynard@york.ac.uk

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Images: Amy Godliman www.procrastinationathon.blogspot.co.uk

I Owe You

Who owns Britain’s debt and is it a problem?

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he debt in the UK is inescapable, with every newspaper and news programme reporting on the £944.3 billion net public sector debt. Putting this figure into context, the education budget for 2011 stands at £89 billion, therefore one can clearly see how intense the debt situation has become. This colossal figure of £944.3 billion also equates to approximately 65% of British GDP and, with this >>

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<< debt affecting the vast majority of British citizens through looming public sector cuts, is it not right that everyone should understand to whom Britain actually owes this debt? The government continues to issue more gilts as a way of supporting its increasing budget deficit, with a specific interest rate and selected date by which the debt will be repaid. However, because the gilts are bought at auctions run by the Debt Management Office, the government has very little control over how much they will receive for each gilt and who will buy them. This auctioning process leaves the situation rather open to chance, since any investor, from a number of establishments or countries, has the potential to own Britain’s debt. A further pitfall, following the issuing of gilts, is that once they are bought they can then be traded by their purchaser on the bond market, where they change hands fairly frequently. Therefore, it is difficult to track and identify who actually owns the British debt. Data released by the DMO shows that the principal holders of UK debt are insurance companies and pension funds, with a large amount of debt also owned by the overseas and banking sectors. However, due to the overcomplicated workings of the financial sector, it seems to be almost impossible to track the dispersal of all of the gilts. The statistics confirmed by the DMO are relatively vague and do not specify which countries essentially hold these gilts. There has been substantial speculation in the media about which investors in the overseas sector actually own the majority of the UK debt as this could have consequences for future international relations if the debt cannot be repaid. Unfortunately for people wanting to know exactly who in the overseas sector owns this debt, very little information is available. Although the Governor of the Bank of England has repeatedly asserted that it is encouraging to see the continuing high

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demand for gilts, even with a low economic growth forecast, the fact that the overseas sector owns a third of the British debt will inevitably have negative consequences for the British economy. This is because, when the debt is to be repaid, the interest rate added to the initial investment will constitute

The cause for concern is not primarily who holds the British debt now, but who in the coming years will lend to Britain? a leakage from the British economy to investors overseas. Therefore, in the long run, Britain will not benefit from bail-outs given by the overseas sector. However, the more significant question to ask here is whether it is wise to allow one third of British debt to belong wto foreign investors with very little stake in the British economy, other than to make money. The formal connection which Britain has with many overseas investors could lead to the needs of those investors being prioritised over the greater good of the country. It is vital that the British economy is put at the forefront of all decisions made. Nevertheless, at this particular time it could be perceived that Britain’s first allegiance is to its foreign debt holders rather than to its citizens’ well-being. This can clearly be seen, with every public sector cut in response to the omnipotent presence of debt which must be repaid. Nonetheless, it is safe to presume that Britain’s debt is, for the main part, in secure hands. As part of the quantitative easing program in 2009, the Bank of England secured gilts equalling just under £200

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billion. Fundamentally, this puts very little pressure on the long-term British economy as any interest payments that are made are essentially recycled back into the UK government. In addition, the £500 billion that British pension funds and insurance companies hold puts the majority of UK debt held by the UK at around 70%. However, from 2011 the Bank of England has withdrawn from buying more British debt, fuelling growing concern as to who will buy the £18.75bn per month of gilts to meet the DMO funding requirements. This opening in the market will put more emphasis upon the overseas and banking sectors filling the gap and becoming key components in Britain maintaining its public spending. Therefore, it seems Britain has no other option but to create more debt obligations with foreign investors and the banking sector, neither of whom have had the cleanest of records in terms of integrity and money management in the past. With this heavy reliance upon the private sector, there is increasing strain upon the government to control inflation and enforce economic growth. Confidence is the key element in the development of investment and, with economic growth currently sluggish, it seems fairly unlikely that investors will see the buying of British debt as an important venture. However, due to the current economic environment and to cut-backs in services, private sector firms seem an even more unlikely investment. Furthermore, placing the British economy in the hands of foreign investors serves to create a direct link between the amount of future borrowing that the government can access and the exchange rate. With the value of Stirling gradually decreasing, reducing the value of gilts for overseas investors, the prospect of British debt being undesirable needs to be taken into consideration. Britain’s resources for the procurement of further borrowing seem to be depleting, with the Bank of England having withdrawn

from buying gilts and the UK’s economic growth figures revealing a less than convincing economic recovery. This shows that the cause for concern is not primarily who holds the British debt now ( 70% has been seized securely by industries in the UK), but who in the coming years will lend to Britain? In the future, whether or not the ratio of debt holdings between the foreign sector and the UK will be in Britain’s favour is uncertain. However, what is indisputable is that Britain cannot continue to borrow money from any investor attempting to ride on the back of the British debt crisis. Unless Britain can learn to balance its books without resorting to irresponsible borrowing, the consequences for the next generation attempting to restore Britain’s economy to its once thriving state will make that goal almost unachievable .

Jenna Fletcher is currently in her second year of studying Business Economics at The University of Leeds Contact: blue_lagoon_15@hotmail.com

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$60 UK

$41 Beijing Games 2008

$19 NASA

$64 Eradicate AIDS worldwide

$114 Bonuses

$120 Foreign aid payments

$31 Profits

$3

$50 Madoff pyramid scheme

$371 Wall St Revenue 2009

$60 Ebay goods

$199 Interest per year on US Gov deficit

OPEC climate change fund

$780 OPEC revenue

$300 To lift 1 billion people out of extreme poverty (estimated)

$11,900 Worldwide cost of financial crisis

$9 LHC

$30 UN

$308 Donated to charity by Americans 2008

$13

$25 India

$36 Saudi

Walmart profits

$405 Walmart revenue

$61 China

$726 bn US defence budget

$21 Save Amazon

$13 profit

$352 Illegal drugs profits

$31 Oil spill fine

$31 Oil spill cleanup

$239 BP revenue

$206 Big tobacco settlement

$147 To help developing nations combat climate change

$40 Bill Gates net worth

$227 African debt

$69 War On Drugs

$468 US fund for drug abuse (alcohol, narcotics & smoking) 2005

$196 Google Market Value

$227 Apple Market Value

$34 Alt medicine $40 World-wide porn industry

$36 Video games

$148 Cost of obesity related diseases

$226 Microsoft market value

$3000 Iraq & Afghanistan Wars total eventual cost (estimated)

The Dollar-o-Gram The Billion Billion Dollor-o-Gram

Anti-depressants

$19

$825 Global pharmaceutical market

$742 Medicare & Medicaid per year

Gifts to doctors

$21

Erectile dysfunction

$6

$60 Iraq War predicted cost 2003


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Games 2008

$19 NASA

Giving

Spending

$11,900 Worldwide cost of financial crisis

$9 LHC

Fighting

Accumulating

Owing

Losing

Earning

Anti-depressants

Gifts to doctors

Design: David McCandless www.informationisbeautiful.net All the data and more billion dollar amounts: http://bit.ly/bndollar

$40 World-wide porn industry


Burgernomics

The Big Mac Index Explained

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aving read the title of this article, you may have mistaken this for an extremely longwinded advert for McDonalds; burgernomics does indeed sound like something that a cartoon Ronald McDonald would be depicted saying on the side of a Happy Meal. However, the Big Mac Index is in fact a modern economic tool, invented by The Economist magazine to help economists measure purchasing power parity across different countries. Purchasing power parity is one of the most controversial theories in the field of exchange rate economics, and is based upon the idea that a basket of homogenous goods should sell for the same relative price anywhere in the world, regardless of location. The theory assumes that there is no arbitrage between different economies and that the world is experiencing perfect competition. Hence, in theory at least, it is a good indicator of whether or not exchange rates are correct, as a basket of goods should be the same relative price in all countries; this is known as the ‘law of one price’. There are obvious flaws with this theory; firstly, in the short term there are obvious changes in nominal exchange rates from country to country, brought about by the fact that the world is not experiencing perfect competition. This imperfect competition is caused by a number of variables including differing transportation costs, labour costs

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and taxes. In the long run, the law of one price could potentially fail due to differing rates of economic development, the changing tastes and preferences of citizens and differing factor endowments. However, despite its many flaws, the theory of purchasing power parity is still extremely useful in the study of exchange rate economics. It is especially useful to economists when studying countries which use the adjustable peg exchange rate system, where a small economy fixes its currency against that of a much larger currency, most often the dollar, in order to determine the value of their currency. In the light of this, exchange rate economists have invented a number of different indexes to measure the differing levels of purchasing power parity across economies, such as the IMF’s International Comparison Program which is a comprehensive study of price levels across all large economies, and is conducted every five years. However, as with most measures of purchasing power parity, the Program suffers from the ‘index number problem.’ This is where an index struggles to come up with an appropriate basket of goods to be surveyed across all economies. In an attempt to solve the index number problem, The Economist invented the Big Mac Index. The Big Mac Index makes the McDonalds Big Mac its ‘basket of goods’ and compares the relative prices of Big >>

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Images: Chris Harnan www.chrisharnan.tumblr.com

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<< It is fair to point out at this stage that the Big Mac might not be a very good ‘basket of goods.’ Indeed there is only one item in the basket. However, the Big Mac is a surprisingly good basket as it is one of the most wellrecognised global brands in production; it is produced and assembled locally, using largely local ingredients and the recipe does not change worldwide (except in India, where the cow is sacred and therefore the Big Mac does not contain beef; instead it is called a ‘Maharaja Mac’ and is not included in the Big Mac Index). This means that the Big Mac

Purchasing power parity is one of the most controversial theories in the field of exchange rate economics Index does not suffer from some of the major problems faced by other indexes, such as costs incurred by shipping tariffs and differing international production costs. Hence, in theory at least, the Law of one price should hold reasonably true when the Big Mac Index is used. Another reasonable point to make here is that whilst the Big Mac may be a good

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commodity by which to measure purchasing power parity, it cannot hope to be as thorough a test as some of the much larger surveys which use many more goods in their basket and hence have a wider data set. However, whilst this lack of depth may be perceived as a weakness, it can also be viewed as a great strength of the Big Mac Index. By being so simple and accessible it is very easy to make a judgement on the level of purchasing power parity in a country using the Big Mac Index, without spending large amounts of time interpreting data (see The Economist Online to view tables). This simplicity is the main reason why the Big Mac Index is used every year by The Economist and why it has survived without change for nearly 30 years. In her book, ‘The Big Mac Index’, Li LianOng not only provides an in-depth analysis of the various merits and problems associated with the Big Mac Index, but also carries out a study of the accuracy of the Big Mac Index in predicting exchange rates in the long term. She uses such statistical tests as the T-test and regression analysis to examine the Big Mac Index’s effectiveness and concludes that, despite its simplicity, it is actually a very good indicator of long term exchange rates. This all sounds very good but the Big Mac Index is not infallible. Whilst its simplicity is a major strength, the Big Mac Index fails to take

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into account the fact that certain countries may have a comparative advantage in the production of Big Macs. For example, Brazil will have a comparative advantage over Hong Kong in the production of beef simply because it has far more cows than Hong Kong which, in theory, will mean Big Macs are cheaper in Brazil. Furthermore, the Big Mac Index fails to account for differing local consumption patterns. For example, people in England are likely to have more money to spend on Big Macs than people in Nigeria since England is more economically developed. In the same way, because many people in Nigeria canâ&#x20AC;&#x2122;t afford Big Macs, only the rich and powerful can buy them. This means that the Big Mac is a symbol of status so the price of a Big Mac may be kept artificially high. However, despite these problems, the Big Mac Index is a very good measure of Purchasing Power Parity. So, when trading currency in the financial markets or simply trying to work out how much spending money to take on holiday, the Big Mac Index is definitely worth consulting. But if youâ&#x20AC;&#x2122;re looking for a highly accurate and in-depth study of international price levels, I would suggest you have a look elsewhere; whilst providing an incredibly useful overview, the Big Mac Index is too simple to be perfectly accurate every time . Rory Gibson is an Economics student, currently in his second year at the University of Leeds Contact: rory_gibson91@hotmail.co.uk

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Images: Edward Cheverton www.edwardcheverton.blogspot.co.uk

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Hypocrisy The Murdoch phone - hacking scandal and deficiencies in society

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n Tuesday 19th July Rupert Murdoch and his son James came before a Parliamentary inquiry, following discoveries that journalists at the News Of The World, a newspaper forming part of Murdoch’s News Corporation, were hacking the phones of unsuspecting individuals within the public domain. In many cases the victims of these crimes were completely innocent and undeserving. The realisation that murdered schoolgirl Milly Dowler’s phone was among those hacked into proved to be the tipping point for the masses, creating a national scandal and resulting in the eventual closure of Britain’s best-selling Sunday paper. Without question, the hacking of Milly Dowler’s phone was an appalling and unnecessary crime and, rightly, the public rushed to display not only their disapproval, but their outright disgust. But were the journalists at the heart of the scandal solely to blame, or were such heinous expedient acts mandated by deficiencies deep-rooted in our society? After all, as the masses clamoured to condemn the actions of one of News Corporation’s newly estranged children, anyone who had ever funded the redtops because of a desire to read about Cheryl Cole’s failing marriage, or Ryan Giggs’ latest sex scandal, were embracing their own hypocrisy in the process. Sadly, we are part of a society fascinated by celebrity, desperately clawing for their fix, for their source of knowledge, not regarding meaningful goings on in the world around them but, instead, the most private and intimate secrets of people they don’t even know. Subsequently, such an eagerness to illustrate and exploit the shortcomings of those in the public eye made papers like the News Of The World successful for so long, as readers actively endorsed a culture of ‘getting the story at all costs’ >>

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<< within the news rooms. In validating such a culture by happily offering forth their money and, more importantly, their sense of objectivity, people declared that the behaviour engaged in when obtaining such stories was acceptable. To cast moral judgement, when the exact details of those proceedings were brought to light, was simply to throw stones from their glass houses. Admittedly, this is just one case in a society where such acts of hypocrisy are rife. The on-going battle between excessive consumerism and a quest to make our manufacturing and service industries more sustainable is another prevalent example; Apple reports show there have been over 300million iPods sold worldwide, but how many of these are currently collecting dust, fully functional yet completely unused, simply because they are not the new, streamlined model? The resources and energy used in making not-so-disposable electronic goods like these are hardly negligible. Yet we sit smugly on public transport, listening to our third mp3 player, texting on one of our five mobile phones, knowing we’re helping to save the world, because driving is bad for the environment. Lobbying to fight oil companies and airport expansions is all well and good, but actually to make a difference by addressing our own actions as consumers might impinge on our lifestyles and how much do we really care when the responsibility is ours? Unfortunately, the easiest way to excuse such hypocrisies is to blame ignorance. Returning to the case of the ‘Hackgate’ scandal, tabloid readers who wished to remain outraged, whilst reserving their right not to be branded as hypocrites, simply claimed to be blissfully unaware regarding the source of their ‘news’. Truthfully, I don’t believe the majority of readers are actually mentally impoverished peons, but by choosing to remain oblivious and to overlook the means by which the

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stories they read were obtained, for the purpose of remaining morally innocent or superior, they certainly appear so. After all, who ever thought that _____ phoned the tabloids to tell them _____, and that no invasion of privacy took place whatsoever? The most tragic mentality embraced when excusing our hypocrisies, however, is that which the tabloid industry itself is built upon - a prevailing culture whereby it is commonplace to seek absolution through identifying and acknowledging one’s superiority, both over one’s peers and the rest of society as a whole. After all, it is much easier to ignore your own deficiencies if you can recognise worse ones elsewhere. I myself am not above this; tabloid readers may judge celebrities for their choice of lifestyle, but I am judging them for their choice of reading. It may be idealistic to say so but, as the cliché goes, it is time for change. Whilst it is all too easy to blame the media for offering us a ready supply of slags, scapegoats and social deviants, it is important to remember that they do so to pander to our demands; the money and influence they crave are obtained only through our approval or, as the case may be, our silence and cooperation. The same can be said about multinational corporations whose formidable marketing campaigns and constantly updated product lines we so readily lap up. The first step towards achieving change is simply to think twice before gifting them compliance. Beyond that, we need to stop condemning others for failing to meet the standards we ourselves cannot, either through reigning in our own pejorative instincts, or actually pursuing self-improvement .

Ajay Smith is a second year Economics and Economic History student at The University of Manchester Contact: ajaysmith91@hotmail.co.uk

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Images: Har vey Herman www.har veyherman.tumblr.com

Is One Free To Wish? Thoughts on happiness and of a world without wanting or want

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Wishing for happiness When I was little, happiness was the unison of wish and reality. It seemed to me that one could become happier by wanting less. But wishing for less was not so much fun. Aims are worthwhile because of the productive activity they occasion and in this case, as in others, the journey is more important than the destination. Erich Fromm, the social psychologist, who wrote a shelffull of books enquiring into the human condition, concluded “there is no meaning to life except the meaning man gives his life by the unfolding of his powers, by living productively” Such activity is to a large extent driven by expectation, by wish and by hope. Hope, a bundle of unfulfilled wishes, seems an essential factor in promoting happiness. Years ago in China, I was much struck by the apparent happiness of its citizens, though they had few material goods by Western standards. They knew they were on the cusp of a material revolution and their faith in a better tomorrow drove them to work harder to hasten that dawn. Since then, someone has made the observation that poor Indian villagers were far happier than some unemployed communities in British inner cities. The Indian villagers shared a common poverty but worked hard to get food and water and kept alive a hope that the future would be better. The innercity unemployed passed the time somehow, anyhow, lamenting their lowly position; they had lost hope and many used drugs. Despite having more than the Indians, they were truly the unfortunate ones. In passing, it may be that much of the attraction of the Lottery in post-Christian society is that it provides hope for those who cannot hope for Heaven. Yet the word ‘happiness’, like ‘happening’, has ‘hap’, or chance, at its root and a lottery win is no guarantee of good fortune.

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Is One Free To Wish? To what extent is one free to choose what one wishes for? The question of free-will has difficulties (angst seems to go hand in glove with existentialism), but is of considerable ethical importance. Homeostasis - the capacity of the body to maintain temperature and concentrations of ions, etc., within very close limits - gives the brain remarkable detachment from its surroundings. Claude Bernard, the French physiologist, famously championed it as the basis for our freedom: “La fixité du milieu intérieur est la condition d’une vie libre et indépendante”. Experientially, the mind can respond with the greatest skill and independence when there is detachment, calm and concentration. Facts may be reviewed, arguments invented, scenarios rehearsed and actions performed with finesse. The converse, when waves of raw emotion sweep the brain, is also true: rage and panic are proverbially blind and action, if not violent and destructive, often lacks judgment. Insofar as consciousness is allied to electro-chemical processes, it depends upon physical events that follow physical laws and these laws classically leave no scope for mind to affect matter. Nevertheless, the intrinsic uncertainty in quantum theory might offer a possible loophole for will to affect the physical world – but only if the physical correlates of thought are minute. The calmest mind might be able to amplify the effect of a single quantum. Perhaps those who meditate and manage to cease thinking achieve this in their bliss. But what do the rest of us mean by ‘will’? For psychologist William James, will was the act of holding to a thought despite a habitual propensity to act otherwise. For him, the will wrests conscious freedom from blind instinct and emotion. Note that the ‘wilful’

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child often lacks self-control and betrays an absence of real will. Our wishes and actions are dictated by our view of the world and the ideal must be to see things as they truly are, not skewed by misconceptions, partial vision, or prejudice, although that is our general lot. Socrates recognised that no man willingly does wrong, and Iris Murdoch, writing as a philosopher rather than novelist in “The Sovereignty of Good”, went further when she posited that “True vision occasions right conduct”. Whose Will Is Done? Often my ‘will’ is not the conscious exercise of will outlined above, but the daily assuaging of thirst and hunger, the routine of ‘to-do’ lists (written and unwritten), a certain conformity to others’ expectation and the like. of thirst and hunger, the routine of ‘to-do’ lists (written and unwritten), a certain conformity to others’ expectation and the like. Complete free-will may be an illusion, and the pertinent question may not be ‘does free-will exist?’ but rather ‘whose will do we follow?’ It seems that, after millennia of living in groups, a capacity to unconsciously imitate parents and leaders and to learn from mentors has been hard-wired into our brains. We instinctively make friends, form groups and fight enemies, gauge our worth relative to our neighbours and seek power and its tokens to gain status in the community. Vital to our ancestors, some of these traits may be less relevant today in our increasingly open society. Yet they remain powerful forces. It is striking that the European Union commended itself to some politicians not because it would foster cooperation as such, but primarily because it made war between member countries virtually impossible. Despite much talk of being free, we remain essentially obedient to our emotions and to our >>

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<< leaders - humans like us, who often seem particularly driven by instinctive and atavistic forces. Media moguls amplify and shape public opinion in their leading articles and are courted and feared by politicians. Advertisers pay dearly to win footholds for their fiats in our minds. Electronic networking can foster virtual crowds, creating identity and reflecting wishes like a cocoon of mirrors. We remain tribal at heart. Are The Poor Always With Us? When Seebohm Rowntree drew attention to poverty in York in 1901, he found 10% of households did not earn enough to obtain the minimum necessities of life. He wrote that a family at this level could never pay a train or bus fare; never buy a newspaper or go to a concert; never buy a postage stamp to send a letter; never give money to a good cause; never save; never buy dolls, marbles or sweets for their children and never drink or smoke. There is plenty of this ‘primary’ poverty abroad in the world now. Yet such is our propensity to see ourselves simply in relation to our neighbours, that in Europe those households with an income of less than 60% of the median income can now be defined as being in poverty. In nineteenth century Ireland the poor found that potatoes and milk provided a complete diet and the population grew to the maximum the land could support. Typically, a whole family lived in a single room and shared it with their pig. When in 1846 and 1847 the potato was struck by blight and rotted, many starved to death. Is human life in itself so precious that we now look forward to maximising the World’s population and, therefore, look to a time when many have just enough food to live on? Conflict and war will continue to blight our superficially civilised societies as long as groups - whether companies, sovereign states, races or religions - seek to grow and gain advantage in a world of limited resources.

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That greed which is condemned as selfish in an individual is applauded when exercised for the benefit of the group. Yet, to reduce strife, we may need to slow down in our race to consume finite resources. People may need to be content with their relative status, to be content with a standard of living which is constant and without the prospect or hope of improvement. Can We Be Happy Without Desire? What can people wish for in a static society? What activity will conduce to happiness when no more material progress is possible? Mystics would point to their joy in simply being, the abandonment of desire, the annihilation of self. Lest the reader who remembers the start of this essay objects that this sounds like the facile wish-reduction described there, it must be said that it is not. This is not a curtailment of wishes in order to be happier in their easier realisation. Rather it is a lack of attachment to personal wishes and desires and an acceptance of the activity which a wider vision occasions. Yet it is natural that people will pursue growth atavistically, will continue to seek power because it is natural to do so and will exclude or kill those in other groups when resources are limited. Maybe the greatest challenge facing politicians and economists in the future will be to arrange for a steadystate where all can enjoy an absolutely good standard of living without either (a) seeking to grow their share at the expense of others’, or (b) expanding the population until everyone is reduced to the penury of nineteenth century Ireland. The mystical element is another matter! .

David Robinson is a teacher and thinker Contact: davidrobinson61@btinternet.com

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Conversations An interview with Alan Aubrey, CEO of IP Group, looking at commercialising the newest inventions coming out of Leeds

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n this unstable and unpredictable environment, Alan Aubrey sees it as important to increase UK investment in its own innovation, something Leeds has been doing for some time. “The financial meltdown, the civil unrest, the cuts to public services, all show we need to create new forms of economic wealth, new jobs, whole new industries in fact. We can’t just rely on financial services and retail any more to keep the economy afloat,” he says. The new industries he’s referring to, the so-called ‘knowledge-based economy’, are industries where knowledge, research, ideas and innovation can be monetised for the benefit of UK plc as a whole. Mr Aubrey is particularly well placed to know. An Economics graduate of the University of Leeds, he now runs IP Group plc, a company set up to do just that – help universities commercialise their research. Of the ten exclusive partnerships with universities that IP Group has signed to

date, its deal with Leeds has been one of the most productive. He feels that, as a mature Western economy, we need to move up the value chain to a knowledge-based economy. Scientific innovation can be a major engine for growth. Over the next five or ten to twenty years he feels we’ll be going through this transformation. Mr Aubrey adds that most people agree with this and lots of people talk about it, but IP Group are actually doing something about it. He singles out Leeds as one university at the forefront of this movement. In the eight years that IP Group has been working with Leeds it has helped six of the companies it has created with the university to float on the stock market, with a combined value on admission of over £70 million. One of these companies, Tissue Regenixplc, founded by Professor Eileen Ingham and Professor John Fisher, has recently been billed by investment bank Peel Hunt as “one of the most exciting medical >>

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<< device opportunities in the UK” and a company that could eventually be worth hundreds of millions. The patented Tissue Regenix process treats donor animal and human tissue with chemicals and enzymes so that they can be transplanted without the need for anti-rejection drugs, thus enabling patients simply to “re-grow” their worn-out or diseased body parts. Mr Aubrey believes that this is about a lot of people having a much better quality of life - something which wouldn’t have been possible before. Then there is Green Chemicals plc, a developer of “cleaner, greener, safer” solutions for a range of applications in the textile, health and beauty and personal care markets. It has recently announced that its ‘green’ hair dyes will be going on sale in a spa at Harrods, having signed a licence agreement with Urban Retreats Ltd – an operator of high-end hair treatment centres and beauty spas. Xeros Ltd, meanwhile, is creating a name for itself in laundry. That company is developing a new ultralow water clothes cleaning process. Using polymer beads, Xeros can clean clothes using up to 90% less water, at lower temperatures and using less detergent. It has been awarded ‘Best Technological Breakthrough’ at the first Climate Week Awards in March, was named in the WWF’s 2010 survey of top 20 global ‘green game-changers’ and was in the 50 best inventions of 2010 by TIME magazine. The Leeds/IP Group partnership was originally borne out of a conversation between Mr Aubrey and Professor Kevin Keasey of the Leeds University Business School. The concept of IP Group (or Techtran as it then was) becoming the university’s ‘preferred commercialisation partner’ was then championed by four “pioneers” at the university; Alan Wilson, then Vice-Chancellor of the University, Berenice Smith, then Finance Director, Professor David Hogg and Professor John Fisher.

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“They [Leeds] had something in place that wasn’t working for them so they were open to something radically different,” said Mr Aubrey. “The Vice-Chancellor himself had been involved in a successful spin-out (GMAP Ltd) and so he understood commercialisation and entrepreneurship.” IP Group signed its deal with the University in Leeds at the end of 2002 and started work on its first opportunities the following year. Mr Aubrey believes the secret to the partnership’s success to date has been down to both the quality of innovation at Leeds and the IP Group model, crafted by Techtran’s co-founder, Dr Alison Fielding, IP Group’s Chief Operating Officer. “The quality of the research [from Leeds], combined with our model, gave us both a vested interest in making it happen,” he says, adding, “I personally believe that this model, which is very hands-on, will prove to be one of the best models for commercialisation.” That said, he concedes there is still a long way to go yet for the UK in general. He feels that this is a long-term game and that it will take another five to ten years for it to fully play out and for IP commercialisation to be recognised. Furthermore, he accepts that the government has a key role to play in the success of this nascent industry which, in his view, needs a mix of both fiscal and direct policy initiatives. He believes we need a favourable tax framework in which to invest because this is fundamentally a risky area – some investments fail - but also that we need the government to continue to support the UK science base. Having just raised £55 million for IP Group, however, Mr Aubrey has ensured that, irrespective of the current climate, his company has the funding to see out this long-term game and come out as one of the winners. For now, that means continuing to increase the company’s investment in the UK’s talented scientific innovators .

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On c e rea d , p l ea s e p l a c e t h is m a g a z in e :

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