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Keynes Economics  Newsletter

Edition 3

Contents 03 The Fake Business – Aryan Oberoi 06 Put need before greed - Sanjeev Gupta 09 Book review - Mr. Christopher 11 Tutor2u in Dubai - Mitali Doshi 15 Can money buy happiness? - Yash Bhansali


Yash, Rihana, Aryan

It’s been a busy year for the Dubai Keynes Society and the leadership team is extremely disappointed to have to let go of such a dynamic club, but we are confident that the quality and prestige of the club will not be lost. We would also like to thank Mr. Christopher who has been a great support for all of us, without whom the club couldn’t have taken place. This year we’ve had a range of talks from students as well as external speakers from all over Dubai, all of who have enriched our economic knowledge and inspired many of us. We even witnessed our youngest member ever, from Year 7, lead a session on the dollar as a reserve currency – blowing away the sixth formers and teachers. In the last few weeks alone we have had Mr. Bhargava addressing global inequality, learnt about the operations of Mckinsey from the head of recruiting, Pranav, a sixth former, look at the ins and outs of Pharma and the NHS and Jaimini Patel stressing the importance of economic history. We would like to take this opporutnity to thank everyone that has presented this year - we are extremely grateful! Have a lovely summer, we hope to see you all at DKS next year.

The Fake Business – Redefining Capitalism through Social Businesses

Aryan Oberoi

“Once poverty is gone, we’ll need to build museums to display its horrors to future generations. They’ll wonder why poverty continued so long in human society – how a few people could live in luxury while billions dwelt in misery, deprivation and despair.” – Muhammad Yunus.

“Capitalism is broken”

A line most frequently heard by Marxists and crazed communists. One person you would not expect to definitively state these words would be Muhammad Yunus, founding father of Microfinance, Nobel Peace Prize winner and foremost authority on social entrepreneurship. In his latest book, “A World of Three Zeros”, Yunus highlighted his strong beliefs that the capitalist system was “broken”. Focusing on wealth concentration primarily, the evidence does not dispute his statements. In 2010, a study by Oxfam showed that the richest 388 people held the same wealth as the bottom 3.3 billion. What is perhaps more shocking is that by 2016 the top group shrunk to just 8 people whereas the bottom grew by 300 million. If thats not wealth concentration, I don’t know what is. With high unemployment in most countries, peoples skills, knowledge and creativity are being wasted. Yunus argues that

capitalism at its core, breeds wealth concentration. It is built into the system as we have seen the disproportionate effects recessions and booms have on the wealthy and poor time and time again. To prevent this mushroom effect from occurring society has tried multiple methods, loans, tied aid, and by far the most common, charity. Mr. Yunus makes a clear distinction however, he does not want to destroy capitalism, rather redefine the assumptions and relationships to create a more equal world. According to him, humanity has been digging itself into a hole for that last 100 years and a change now is necessary to begin to reverse the negative effects. Enter the social business. A Social Business – A non-dividend company that is created to address and solve a social problem. Here lies the solution. Whilst many would say charity and donations should fix those problems, Mr. Yunus disagrees; if charity was as effective as we assume it to be,

Why do the richest 8 people own more wealth than the bottom 50% of the world’s population? Why are polar ice caps shrinking not growing? Why are people stuck in poverty? He explained that by donating to charity, we are acknowledging the problem and treating its effects but not the root cause. Charity is an aid not a solution. Instead, Mr. Yunus explained how social businesses are the way forward – businesses that break the classical economic definition of a firm by focusing instead on the welfare of society and solving problems rather than profits – hence a “fake business”.

His pioneering Grameen Bank started the idea of microfinance – lending small denominations of money to the villagers. The villagers lives had been essentially owned by loan sharks who charged extremely high interest rates for the money and abused the villagers with an almost mafia like presence. With no credit history and no collateral, no state or commercial bank would ever lend to them causing a sharp reduction in social mobility and consolidating the wealth concentration. The nonprofit Grameen bank issued loans based purely on trust resulting in what many would assume: a high default rate, however the Grameen Bank only has a 0.8% default rate in all its years active. By providing the villagers with small loans they are able to set up their own businesses and payback the loans quickly whilst creating a stable future from themselves and escaping the clutches of the loan sharks. Just like that, there is a constant flow of money, money is loaned out, poverty is abolished, and the money comes back to be loaned out somewhere else. Social businesses need not just be banks: they could be a solar power company, a water company, anything that solves a social problem. Reading further into the professor’s life work, you can see he has created a social business to solve any problem he finds.

Capitalism can be fixed. At the same time, he explained that a complete redefinition of the economic system is a necessity to pull society and the global economy away from wealth concentration and inequality. Like myself, he vehemently disagrees with the neoclassical economic model of the man – homo economics: the idea that humans simply maximize utility and are completely rational and emotionless. This is an oversimplification of humanity. Humans are complex beings with strong relationships, thoughts, creativity and conflicts, all of which will affect their decisions. Modern economics, simplifies this all into consumer confidence or as more recently seen, consumer happiness. The professor states that we must stop trying to simplify the economic man and accept humans for what they are. Only then will be able to start to solve the chronic inequality and poverty faced by humanity. “Humans are job creators not job seekers”. Currently, the education system prepares children find jobs rather than create them, yet politicians are still astounded when unemployment remained unusually high for past decade. Mr. Yunus envisions reforms to the educations systems to encourage students to create jobs rather than search for them. Yet here comes the paradox – if everyone is an entrepreneur and creates jobs, who will work for them? Mr. Yunus’ answer: “that’s the change we will make, redefine the relationship so people are not employees and employers but partners instead”.

Put need before greed; flamboyance can wait Sanjeev Gupta (Parent Contributor - article from Forbes India) American columnist Bill Vaughan once quipped: “It would be nice if the poor were to get even half the money that is spent in studying them.� I was doing what I like doing the most today-taking my evening walk, not often enough though, with my 14-year-old chirpy daughter. She usually talks incessantly during these walks and I find it incisive and entertaining. Her talks range from her school escapades to what her friend said to her to the music she loves to the books she is reading. Sometimes she dwells on matters of extreme sensitivity, like asking me why I had a fight with my wife and telling me why I was wrong and how I should handle such things in future.


One evening recently, she asked me a strange question. Why do firemen not earn as much as movie stars? I waited, as I invariably do, when questions like these come, as they are usually followed by a Smart Alec answer to embarrass her not-so-clever dad. But there was no answer this time and I realised that she was asking a genuine question. My economics trained mind went into overdrive (mode) as I started explaining concepts like utility value, perceived value, scarcity value and entertainment value. She heard me. But she was not convinced. Her argument was that one role was clearly necessary, dangerous and above self while the other was optional, frivolous and temporal. Her insights put my mind in a spin. Could it be that she had a point? Had the human race got it wrong, after all? That we are sponsoring, spending and supporting laughter, mirth, enjoyment and ignoring issues like

safety, security, sacrifice, service above self and sincerity?

Should our streets have more policemen with better weapons and smart technology deployed to look after the common man? Should our hospitals have more nurses per patient than highly paid, hard-to-see surgeons? Should our workplaces have much better paid janitors and secretaries and less of the ridiculously paid dealmakers? What is the point if more than half the world's population lives in gross neglect and worse still, a third lives with no hope at all? Should distribution of wealth among nations and then communities and then people be made compulsory? Then lo and behold, I read on Facebook that one of Bollywood's most respected voices says that it's embarrassing that they pay more to a helper on a movie set than their Chartered Accountant. Should entertainment and luxury command such premiums?

At what cost?

At a more mundane level, my mind went back to the issue of the recent emergence of the African middle class. Much is being said about the consumer power of the African buyer and his/her manifold needs. In the potholed streets of Lagos to the rain-swept avenues in Nairobi, from the bustling African townships in Johannesburg to the agitated milieu in Cairo, all I see these days is the consumer. Department stores, upmarket coffee shops, fashionable boutiques, snazzy night clubs filled with people buying, collecting and regaling. But just outside those shops I see impoverished faces, streets with no lights and homes beyond them in total darkness. I go to hospitals and see corridors lined with patients and nobody to serve them. At homes of my friends I see opulence but the driver waits outside in torn clothes and very often in the hot summer sun. Reminds me of what Bernard Malamud said: “We were not poor and we only ate chicken when we were sick or the chicken was." Much has been said about capitalism and socialism. I do not wish to venture into that ideological debate. I am only asking one question: How do we direct our scarce resources first for our everyday needs and then allow for what could be optional?� How do we get the firemen, the janitors, the drivers, the postmen and the security guards to have a decent human life first? Because if we don't, and instead we ape the West in terms of pursuing wealth and decadence for a chosen few with millions left behind, we will destroy the foundation. Or never have one.

Reminds me of what Bernard Malamud said: “We were not poor and we only ate chicken when we were sick or the chicken was." Much has been said about capitalism and socialism. I do not wish to venture into that ideological debate. I am only asking one question: How do we direct our scarce resources first for our everyday needs and then allow for what could be optional?� How do we get the firemen, the janitors, the drivers, the postmen and the security guards to have a decent human life first? Because if we don't, and instead we ape the West in terms of pursuing wealth and decadence for a chosen few with millions left behind, we will destroy the foundation. Or never have one.

Mr.Cs Book Review Tropical Gangsters: One Man’s Experience with Development and Decadence in Deepest Africa by Robert Klitgaard which makes it the only Spanish speaking nation in all of Africa. Development economics is an important part of the new A Level syllabus and EG often crops in in my class discussions as it is such a country of extremes. For example, it’s GDP per capita is roughly similar to that of Portugal (back in 2008 it was higher than the UKs!) thanks to its oil fields but more than a third of its people live in absolute poverty (less than $1.90 a day); the president’s playboy son has been in the news for all the wrong reasons and the stories involved mansions in Paris, Bugatis in Malibu etcetera so this is a fascinating case study for the classroom. ‘Roberto’ arrived in Malabo in the mid 80s as a specialist economic consultant to various Equatoguinean ministries attempting to kick start economic structural reforms on behalf Having spent some time in West of a World Bank funded project. He met a Africa and witnessed first-hand some country still reeling from the Macias decade of the many development constraints when income per capita had shrank more such parts of the world face, I was than any other place on earth over a 20 year attracted to the blurb of Klitgaard’s period having been the wealthiest country in story particularly as I have a deep the area just after independence. Macias interest in Equatorial Guinea, a tiny was the dictator who took over after the country bordering Cameroon that was Spanish and managed to destroy any until 40 years ago a Spanish colony industries that had any comparative

advantage to speak of, namely cocoa farming (this was pre-oil). The economy in 1985 was in a pitiful state: average annual income was $100; four fifths relied on subsistence agriculture; life expectancy was 45 years old and 90% of population contract malaria every year. A sorry state of affairs.

The story charts the trials and tribulations Klitgaard encountered in his 2 year stint; his dealings with some inspirational government officials desperate to improve the lot of their countrymen as well as the corrupt, inept and dangerously incompetent. The World Bank and the IMF have a perhaps justified reputation for forcing developing countries to undertake ‘shock therapy’ aka traumatic economic structural adjustment (meaning less government, freer trade, more private enterprise and devaluation of a country’s currency) in a short space of time to restore rapid economic growth. They are expected to do this if they want the cash and since so many countries are bankrupt and up to their eyes in debt, they must do what the IMF/WB say. Trying to create an economy that works in such a way after having only been freed from its colonial shackles 20 years previous is a vast challenge; as the minister of finance put it “you have had centuries to get to where you are, we have only just begun.” This is a fascinating piece of non-fiction especially for anyone interested in the real day to day challenges faced by Africans, their leaders, aid donors and other expatriate officials all trying to help. We can learn from text books and some of us have been lucky enough to go to such places and experience these challenges in the flesh, but as always the next best thing is immersing yourself in a great book, expand your understanding and powers of empathy and maybe just maybe it may help you write a decent economics essay ;)

Tutor2u in Dubai 2018 Mitali Doshi On 24th March 2018, Dubai College was very fortunate to host Geoff Riley and Ruth Tarrant for a two-day workshop consisting of 8 sessions on the AS and Alevel Economics Course. Students from Dubai British School, English College, Sunmarke School, DESC and Dubai College filled the Auditorium on Saturday morning ready for two days’ worth of economics, quizzes and Geoff’s “gold-dust evaluation points”.

We were given two booklets (or as Geoff liked to call them “booooklet”) each which held a break-down of the course, revision guidance and study activities. Session 1 started with a back to basics of the more mathematical aspect of the course. Covering the numerical analysis of supply-demand diagrams, elasticities, inflation and index numbers, Geoff and Ruth highlighted the importance of these seemingly simple calculations. They helped us to review the vital formulas needed to help us achieve the top grades possible. A quick switch over into session two delved into the dynamics of market failure and subsequent government intervention. In this session I learnt the importance of being specific and succinct. Ruth understood that the education sector was a particular favourite among students, but she reflected how being precise would allow us to cross the standard par of marks, such as the emphasis on early years education and its long-term implications.

After a small break Ruth helped us revisit supply side policies and policy conflicts. What was most beneficial in this session was the case studies she introduced us to, so as to think outside the box, stand out from other candidates and gain a better chance for top marks. Instead of the standard education & training or improvements in healthcare, Ruth illustrated how social security benefits and the development of the gig economy could help us write a much more interesting answer with regards to supply side policies that could stimulate economic growth. I found our discussions on the UK youth unemployment particularly interesting, as whilst it was easier to condemn it for being at 12.5%, it was Geoff’s ‘fun fact of the day’ that put this number into a much more global outlook. He revealed that Spain faced youth unemployment between 30-40% whilst Tunisia suffered from 86% which made it easier to compare UK’s situation with other nations. This was an extremely pertinent lesson in that values and how they can be inferred can vary differently when seen through different lenses. I learned how it is important to bring a greater degree of global awareness to our answers in order to make them more refined. Taking a quick lunch, we came back, keen to learn more and perhaps more importantly gain the highest marks in the mini quizzes in order to win the prestigious prize of the exemplar essay “booooklet”. The last session of the day saw the UK performance and demand side policies. Ruth and Geoff did an extremely interesting exercise in where we had to evaluate snippets of news and real-life scenarios. This was an introduction into honing our skills for the DRQ (and not the “data ignore questions”). We discussed the relations between agriculture, production, services and construction on economic growth with a reflection on the significance of the statistics provided.

Both Geoff and Ruth outlined to us that whilst there was great emphasis on knowledge and economic theory, this would not be enough to obtain the highest marks. We must be able to mould that knowledge and apply to the real world. Thus, I was introduced to the PECAN PIE (sadly this was not the edible kind). I found this way of structuring invaluable as it would give me a clear indication of the direction I could take my essay in and the ‘Contextualized Analysis’ would give the essays strong foundations based in the real world. We were told that to have knowledge is one thing but to portray it in a correct manner is another skill entirely, one which Geoff and Ruth did not leave without embedding within the students. After a brilliant day one, I was unsurprised at the level of engagement on day 2 as students asked and answered questions with confidence and assurity. Mainly for the year 13 course, the content was slightly more advanced, but Geoff therefore made it all the more engaging. With session 1 we dove straight into economic policy and I learnt that monetary policy was not limited to just the altering of interest rates and quantitative easing but also consisted of inflation targeting (first done by New Zealand as per Geoff’s seemingly limitless bank of facts) and forward guidance. The concept of forward guidance was intriguing as it tied in with the theory of animal spirits and behavioural economics. Ruth illustrated how we can take our AS level knowledge and upgrade it in order to provide more sophisticated and worldly embedded answers. Evaluation was a key focus throughout the day as we learnt to always consider multiple perspectives of the other stakeholders providing a more holistic view of our arguments. Thus, we were introduced to APE. We were told to question the assumptions of the theory, consider alternative perspectives of different economies and stakeholders and ultimately to always try and provide evidence through case studies and statistics. This would help constructs the “in theory … but in practice …” paragraphs which were personal favourite of Ruth.

Session two extended on this line with a focus of the global economy. After a quick battle of #fakenews between Geoff and a student, I was provided with a plethora of headlines and context that would be highly beneficial to thread throughout my answers. We analysed an article concerning America’s protectionist policies under Trump which alluded to his recent steel restrictions and the drastic implication on other economies such as Mexico and China. We used our newly learned APE method to write an evaluation of this article and then discussed the methods of structuring our answers as well as the actual content of it. Taking a short break, we rushed back into some microeconomics with theory of the firm. Geoff and Ruth did a crash course on the 5 market structures and did a mini competition quiz on the associated cost and revenue diagrams of each. I found the case studies to be refreshing in their uniqueness as we explored the global denim industry, the UK gin market and the US cinema market which could be used to gain the elusive application marks. In groups we also read some evaluation paragraphs of varying marks and dissected their strengths and weakness so that we could later use this to create one of our own. Geoff and Ruth then provided a tentative template of a good evaluation paragraph and how it is of utmost importance to focus on key stem words in order to truly answer the question and remain concise and succinct.

CAN MONEY BUY HAPPINESS ? Yash Bhansali For many years, the economic growth (measured in one way through GDP) has been considered the parameter of social development and welfare. The notion goes that as countries and therefore their people experience economic growth, the rise in incomes and improvement in developmental infrastructure, should increase their happiness. However, in the 1970’s the economist Richard Easterlin formulated the ‘Easterlin Paradox’. The Easterlin Paradox argues against this notion of augmented happiness in relation to rise in income or wealth. The paradox is based on information from the US economy in the 1960’s and 70’s where Easterlin observed that despite a rise in National Output and therefore living standards, successive generations of US citizens were not proportionately happier than their parents.

One potential reason for this is the law of diminishing marginal utility. To better understand this, let us take two individuals, Person A who has an income of $1000 and person B who has an income of $100,000. Now let’s assume that due to a rise in National output, both A and B each see a $100 rise in income. This $100 income acts as a 10% pay raise for person A; this is a substantial rise and thus A may see a rise in their happiness levels, whereas for person B the same $100 is only a 0.001% rise in income. This seems rather insignificant and so the same amount of money may not contribute to an improvement in happiness.

This example clearly demonstrates a key principle in Economics, that as we have more, the marginal happiness we get by adding just one more increment (in this case the $100) is lessened. This is probably why a rise in incomes in the USA did not lead to a proportionately high rise in happiness within the nation. However, other economists have argued, that the Easterlin paradox may not always be true because it does not consider societal competition. It is incontrovertible, that as humans, we get pleasure not only out of personal growth, but also out of being better than someone else. What I mean by this is, for example, knowing you make more money than your neighbour will stimulate an ego boost which will lead to a feeling of accomplishment and therefore happiness. This is just a recognition of humanity’s innate competitive nature, where more value is placed on surpassing those around us than is placed on our own development. We crave the recognition that comes with outdoing someone else. It is for this reason, that I have reached the conclusion, that whether increase in incomes and living standards results in a proportionate rise in a person’s happiness, is a function of how many people are receiving the rise. If only a small section of society is seeing their living standards improve, then this may increase the happiness of this societal section (just because they know that they are now ‘richer’ than most others in their community) than if everyone received the rise in income. (Of course, I do acknowledge that the role of government and the economy is not to improve the lives of a select few, but to create long-lasting and far reaching social and economic benefit!)

In my personal view of whether money leads to happiness… All I shall say is that money is an excellent by-product of a very poor point of focus, and whilst it may result in short term exuberance, as Easterlin rightly professes, the more you will have, the less you will need!


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