The New Albanian 2016

The New Albanian

THE BRICS: WHERE ARE THEY NOW?

CONTENTS Issue No. 1 | The New Albanian | Economics magazine

Introduction to the BRICs What does it mean? Where did the term come from? What should we expect?

Brazil: The Economic Impact of the World Cup and the Olympics Has it benefitted or will the pressure be too much to bear?

Russia: Where Is The Economy Going?

How are Russia attempting to resolve their current situation with communication?

India: A Bright Future Ahead What progress have we seen so far and is all the optimism justified?

China: Where will it take the global economy How China has challenged the western growth model

Behavioural Economics Individual prosperity vs public prosperity and how game theory can be used to explain our decisions Does the Modern Patent System achieve what it set out to do?

How a system designed to encourage innovation is hampering development, reducing competition and being exploited for individual gain John Nash and Game theory Nash’s contribution to game theory and the Prisoner’s Dilemma explained Fracking What is it? What long term impact will it have on the environment The Conspicuous Consumption Effect Challenging a basic economic principle linking demand and price

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INTRODUCTION TO THE BRICS

BRIC is the acronym associated with the four major emerging national economies - Brazil, Russia, India and China. They are all developing or newly industrialised countries with large, fast growing economies who have significant influence on regional and global affairs. The term was coined in 2001 by chairman of Goldman Sachs Asset Management, Jim O’Neil in a report on growth prospects. From 2000 to 2008 the BRIC countries’ combined share of total world economic output rose from 16 to 22% and together the BRIC countries accounted for 30% of the increase in global output during the period.

China’s economy and pace of its development has out-stripped those of its BRIC peers and alone it has been able to contribute more than half of the BRIC countries’ share and greater than 25% growth in world economic output from 2000 to 2008.

Rapid economic growth and demographics of China and India are expected to give rise to a large middle class whose consumption would help drive the BRIC’s economic development and expansion of the global economy.

BRIC countries have accounted for much of the dramatic increase in science research investments and scientific publications, raising their collective share of global R&D spending from 17 to 24 percent.

Brazil is abundant in natural resources, is one of the fastest growing countries in the world and attracts millions of immigrants. Its richness in commodity wealth and high interest rates fuel upward pressure on its currency. In the 2000s Brazil benefited from the commodity boom but was forced to prove its mettle in the 2008 financial crisis - in the past they would have been in the heart of the storm but instead they cut rates and recovered quickly and easily.

However, it has been debated whether Brazil was simply included to make the acronym sound good and such skepticism was affirmed with a mere 1% growth in the economy in 2012 and only 2.7% in 2011.

Currently investment spending is in steep decline and has decreased by more than 10% last year. Unemployment has reached 16.5% and the Brazilian Real has lost a quarter of its value against the dollar in the last 12 months.

International debt is mounting and in the last nine years debt has tripled not only for the government but for consumers and private companies too.

However, with the country on the edge of a massive political cleansing, anything that can be done to reduce regulation and taxes will begin to reduce unemployment and restart the Brazilian economic engine.

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Russia’s demographics seemed to be one of its biggest obstacles to development and Putin’s incentives to increase the birth rate included longer maternity leave, investment in prenatal care and even a promise of $10,000 to parents who have a second child.

Russia has one of the best national technology policies in the world along with the human capital and entrepreneurial talent to create some of the most highly valued technology companies in the world. Russia’s history of strong centrally guided education, with very high standards in both maths and science, enable it to easily increase its use of modern technology and its innovative application.

Income from vast natural resources, chiefly oil and gas, helped Russia to overcome the economic collapse of 1998 and the state run gas monopoly Gazprom is the world’s largest producer and exporter that supplies a large share of Europe’s needs. Russia has also fallen into recession and has taken a severe hit from the plummeting oil prices as one of the world’s major exporters, and likewise its currency, the Rouble, has slumped too indicating an unhealthy dependency on the commodity. Oil revenues are rumoured to be down about $30bn in five years. State condoned corruption is rife and is a major problem for Moscow and the economy is still suffering as a result of western sanctions imposed following Putin’s annexation of Crimea in 2014. Economic forecasts for the economy are pessimistic to say the least with the IMF predicting a 1% contraction in growth this year and economists and business leaders are warning that Russia faces long term stagnation and declining competitiveness.

Recently, India has been described as one of the world’s biggest economic bright spots.

Favourable demographics makes India’s labour force almost as large as the combined labour forced of China and the US. It has the advantages of a credible legal system, many English-language speakers and home grown technology companies which are expanding globally. The real success behind confidence in India’s future growth is due to the focus on the growth in the services sector with 52.1%

of value added to Indian GDP coming from the services sector while industry (including manufacturing, mining etc) makes up only 30.1% and the country has benefitted greatly from the fall in oil prices as an importer.

China’s socialist market economy is the world’s second largest economy by nominal GDP. Until 2015, China was the world’s fastest-growing major economy with growth rates averaging 10% over 30 years. China is a global hub for manufacturing and is the largest manufacturing economy in the world as well as the largest exporter of goods in the world.

China’s economic growth slowed in the first quarter of 2016 to its slowest pace since the global recession but signs are emerging that the economy is stabilising. The Chinese economy is undergoing a prolonged slowdown as the country’s communist leaders steer it away from a growth model based on export manufacturing and investment toward one focused on more sustainable services and private consumption and the economy is on track to meet the growth target of 6.5% to 7%.

The following articles will explore the individual economies in more depth with focus on the economic impact of Brazil hosting the World Cup and the upcoming Olympic Games, where the Russian economy is going and how they will resolve their communication problems, progress in India and an exploration of how China has challenged the western growth model.

- Georgia Kelsey

Interested? Read more about Jim O’Neil and the BRIC economies

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BRAZIL: The Economic Impact of World Cup and the Olympics In 2014 Brazil hosted the FIFA World Cup and will also host the Olympics in 2016, being the first South-American country to do so. It is financially demanding to host one mega sporting event, but to host two of them, back-to-back, is extreme. I will be looking at what Brazil is required to build to host the World Cup and the Olympics and the impact of hosting both of these events has had and could have on Brazil’s economy.

Brazil is a Newly Industrialised Country (NIC) and is the eighth largest and one of the fastest growing economies in the world. With an average GDP growth rate of over 5% between 2000 and 2012, Brazil has a very large GDP of around $1.903 trillion (nominal value). Despite significant growth, poverty is still rife, with 15.4% of the population below the poverty line. The high level of income inequality in Brazil can be seen through the gini coefficient of 0.493. So, the hope of hosting these two events is to decrease the income inequality throughout the country, contribute to Brazil’s growth as an emerging economy and raise financial aid for the country post-Olympics.

For Brazil to host the World Cup they were required to build six new stadiums and refurbish another six. Not only were stadiums needed, but also Brazil needed to invest heavily in infrastructure in order to accommodate the large number of visitors who will be attending the events. They also needed to build: new roads, tube lines, ship

ports, expand its airport, build more power plants and the list continues… Another significant cost would be security measures.

Investment and efforts would need to be channelled into reducing Rio’s high crime rates. Overall, the cost to host the world cup totalled $14 billion. On top of that, it is estimated to cost Brazil $18 billion for the Olympics as well. But will it be able generate sufficient revenue to fund all the necessary investment?

So, what does all this mean for Brazil’s economy? Well, first consider what this high investment will do to the economy: the answer is, not much. According to economic theory, high levels of investment are a powerful stimulus for growth when the price elasticity of aggregate supply (AS) is elastic.

However, this may not be the case for Brazil; as of 2010 economic growth was extremely high at 7.5% and the country had record low unemployment, about 6%, meaning without much spare capacity, the increase in AD will just cause more inflation, which is not conducive to growth and it is indicative of an overheating economy. It is therefore no surprise that inflation rose to over 6% and is continuing to soar. Brazil is struggling with high inflation rates due a multitude of other factors too, such as the rising cost of electricity and increasing concern over excessive investment. A surge in demand this summer may serve only to compound this issue further.

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Roughly 600,000 people flocked to Brazil for the World Cup and even more for the Olympics. All of these fans will pump millions if not billions into the economy by spending on meals, entertainment, accommodation and more. This will aid in the process of Brazil trying to break even on their investment.

Moreover, due to the worldwide media attention on Brazil, it will be able to brand itself on the global stage as a vibrant, diverse and cultured country, with gorgeous landscape and somewhere that one has to visit, therefore increasing tourism in the future and so this may also provide long term implications for sustained inflows into the economy.

However, whether or not tourism actually does increase after the games is also questionable and increased tourism may not boost AD as much if some people who live in Rio go on holiday at this time to escape the crowding and commotion. Also, sources suggest that increased tourism is not guaranteed, by looking at other examples in other countries, such as the 2004 Athens Olympics, where they experienced a drop of 10% to tourism and in Utah in 2002, where 50% of nonresidents planned to stay away during the event. After the games in Beijing did potential tourists become more or less interested in visiting the city?

You would think it would make them more interested, but following negative publicity about the high levels of pollution, some sources suggested that people were actually less interested.

With the spotlight on Rio, the pressure is on for them to promote it as a tourist destination, even without any sporting events.

The last thing that we should consider is what happens to the stadiums and the land required for the event after the Olympics. The facilities are very large and often take up key urban real estate meaning thousands have been displaced in order to make room for construction. Moreover, after the Olympics, the demand for such large stadiums falls and

it is unlikely they will be used to their full capacity again. For example, think back to Beijing’s Bird’s Nest. This was the Beijing’s Olympic’s main arena and it is hardly used anymore. Not only is this an inefficient allocation of resources but the maintenance fee also represents a large opportunity cost for the government. For example, the stadiums cost Australia roughly $30 million a year in maintenance, so keeping these stadiums is costing the government a hefty sum.

However, so far, the British stadiums have not succumbed to the same fate as the other countries’ stadiums post games. For example, the sand at the Volleyball stadium was redistributed to other sports facilities and is still used. In fact some of the sand was even brought to Verulamium Park to make a volleyball court. The government has also implemented a successful scheme to ensure that sports teams, kids who are trying to start or keep up their sports and the general public use the stadiums so they are not abandoned.

This has ensured that the stadiums are not a waste of space and that the cost of maintaining them for the government is not too significant. Only time will tell if Brazil is able to ensure their investment has long term positive impacts or whether it will go to waste and be a burden on the economy.

Taking all this into account, hosting these events may have its costs and benefits, but overall the main benefit, that beats all costs for a country hosting these events, is they get to show off their country and the local population have had and will continue to have an opportunity to spectate at these historic events, an opportunity many have never had before, except when they lost 7-1 to Germany… However bad that was for Brazil, I think we can safely say though that they did host a very entertaining World Cup, and I am excited to see what the 2016 Olympics will show as well.

- Tom Savage

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RUSSIA: Where is the economy going?

This summer has been an economic disaster for Russia; they have been sanctioned by the US and EU, and falling oil prices have caused the rouble to tumble into dangerous regions.

Russia’s economy is contracting for the first time since 2009 and running their widest budget deficit since 2010. The situation is becoming so drastic that a report from Bloomberg news reported Russia’s intention to raise the retirement age to 65 after the 2018 election and sell state assets in a massive wave of privatisation to reduce the deficit.

However this summer Russia has been engaging in numerous conferences in an attempt to strengthen the Eurasian economic system, a move that has massive socioeconomic implications that extend even beyond Russia. Whilst the present economic situation is rather bleak for Russia, the future appears brighter.

Russia’s annual SPIEF conference was highly promising for the economically developing nation, with $5.4 billion worth of deals signed, and a host of discussions about its energy sector. The key implications behind Russia’s agreed construction of the Nord Stream II and Greek stream gas pipelines are both political than economic. Whilst it generates a large income for Russia, this also demonstrates

that Russia has not been isolated by Europe, and that the “politically charged sanctions cannot eliminate the natural economic basis on which bilateral relations have historically been established.” (SPIEF 2015) There is also a more intriguing nuclear agreement that arose between Russia and Saudi Arabia; a rather left of field agreement that raises stark questions about the intentions of Russia, and begs the question of whether Russia intends to open up a deeper set of negotiations with the oil rich nation. Whether or not this relationship intensifies, it holds enormous potential economic rewards for Russia to reap in the future.

Following this conference was the BRIC (Brazil, Russia, India, China) summit, hosted in Russia, who took a leading role. The outcome of this conference holds deep future political and economic consequences. The two main decisions at the summit were the creation of the BRICS New Development Bank and the Contingent Reserve Arrangement. These two institutions are the bedrock upon which the BRICS are a t t e m p t i n g t o c re a t e a n o n - w e s t e r n alternative economic group. If the BRICS are able to liberate the ‘bronze billions’ this will offer Russia huge economic markets to tap into and trade with, offering diverse and

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prosperous economic options and alternatives to western markets.

The economic implications behind this mean that Russia will not be at the mercy of European sanctions, as it is developing strong trade links with other nations, enabling it to move away from its dependence upon Euro-centric trade.

Russia furthered their non-European economic negotiations over the summer during the first ever EEF (Eastern Economic Forum). The far eastern corner of Russia was discussed heavily. Rich in unused resources, which could catalyse growth their economy again. The use of this far-eastern region of Russia can act as the “evolution from a European-centric economy to a more diverse one that embraces economic multipolarity” (EEF 2015), partially due to the large amount of resources available, and the geographical proximity with the Arctic ocean, China, Japan, the Korean province and an obvious route to the EU. If Russia invests in infrastructure in Vladivostok, and its arcticocean ports, there are multiple economic ventures to explore. The obvious rise in trade would boost Russia’s economy, and would likely incur trade relationships outside of Europe again, whilst generating a host of jobs in that area. The artic-ocean port expansion would create a north-south trade axis, rather than the traditional east-west, evolving Vladivostok into a pacific transit point for all pacific trade routes. Russia’s sheer size leaves it in a unique position to exploit the potential benefits of a globalised economy, and it appears they are planning exactly that.

The summer of conventions and meetings involving Russia, and at times in Russia, offer a bright future for Russia’s economy, if managed carefully. The developments made to branch out of the Washington Consensus offer an expansion in the breadth of Russian global economic involvement, encapsulating a successful summer with lucrative agreements.

- Kavit Borkhataria

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INDIA: A Bright Future Ahead The Indian economy is the seventh largest in the world and is regarded as one of the rare bright spots in the otherwise gloomy global economy. This is reflected in the sky-high optimism of the Indian population regarding their economic prospects, both individually and as a nation, which is much higher than their counterparts elsewhere. Up 16 places in the global competitiveness index, the future does indeed appear brighter than the other emerging economies who have either stagnated or declined. Credit is partly due to Prime Minister Narendra Modi whose initiatives to stimulate investment and growth are beginning to pay off.

Inflation has been a significant problem for India as an emerging economy but it is being brought under control according to Arun Jaitley, the minister of finance, thanks to inflation targeting in the monetary policy and the government investment in infrastructure which should help to stabilise the supply of food and other goods. In general, inflation is becoming increasingly stable, for example the Minister of state for finance, Jayant Sinha, has also said that he expected a good monsoon to reduce some of the concerns around food inflation. Retail inflation cooled

to a record low of 3.78% in July which has contributed to the recent interest rate cuts.

India presents an exciting opportunity for investment; with a bustling and vibrant private sector of business it continues to pique the interest of foreign investors. Prime Minister Modi has also been waging war against India’s notorious red tape in order to achieve his target of making India one of the world’s top 50 business-friendly economies.

India did, in fact, experience one of 2014’s best FDI growth rates and mid year investments are double those of last year.

Investment in India’s banking sector has also gained momentum in the past 3 years due to the commercialisation of banks.

Previous operational constraints in India meant businesses were forced to wade through lengthy series of permissions and protocol to receive project approvals and even then they were liable to arbitrary and outdated tax bills which obviously reduced and discouraged investment. Although results on Modi’s efforts would never have come about quickly, it is worth the wait. Changes that have now been implement to increase the ease of doing business include the fact that you do not need a minimum capital 8

deposits nor a certificate to start operations, it is easier to get electricity and companies in Mumbai are able to connect to the power grid 2 weeks earlier than before.

India needs investment for continued growth and the scope for it is huge; for example t h e re a re o p p o r t u n i t i e s t o i n v e s t i n infrastructure and in the banking sector.

Moving forward, effort and focus must be sustained for several years in order to reap the benefits of job creation.

The manufacturing sector is competitive and is not subsidy-dependent like in China.

Modi set up an initiative called “Make In India” to encourage multinational and domestic companies to manufacture their products in India with the goal of turning India into a global manufacturing hub. The major objectives were job creation and skill enhancement across 25 sectors of the economy including automobiles, IT and textiles to name a few. It has also helped to increase sustainable GDP growth and tax revenue.

Income inequality has always been a problem in India and in attempt to tackle this, the government led an initiative, “smart villages”, which helps to connect rural areas to the internet, and to provide clean water, sanitation and low carbon energy and it intends to

reach at least 2,500 villages by 2019. Efforts around financial inclusion in the banking sector and skilling people to make them more able to generate livelihoods are targeted to reduce inequality. 180 million bank accounts have been set up in the last 12 months for people who previously didn’t have one.

In terms of the external global effects on the Indian economy, the slump in oil prices has helped to move the current account closer to balance as it imports 80% of the oil it consumes and this has also helped to keep inflation down. The Finance Minister has also said that the oil prices have helped the government to rationalise subsidies too and claims that it has also helped to transfer wealth from the producing nations to the consuming nations. India has been less affected by China’s slowdown than other Asian countries and actually provides an opportunity to steal investors’ attention from China to the Indian economy.

The economy is gathering momentum and is on a strong footing, far from mid-2013 when it was dubbed one of the “fragile five”. Macroeconomic indicators show a positive environment for increased economic growth and the IMF has predicted that the Indian economy will grow by 7.3% in 2016 which will make it the world’s fastest-growing big economy.

-Georgia Kelsey

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CHINA: Where will it take the global economy?

The rise of China as an economic superpower has been as fast as it has been unpredictable.

China has changed out of all recognition in just thirty years. Since the economic reforms of the late 1970s, 52% of the population have been lifted out of poverty (above $1.25 per day – World Bank), 2.8m have become millionaires (The Economist) and Chinese consumers now spend more on luxury goods than consumers in any other country on the planet.

If you think that means China is getting a lot more like a western country though, think again. All this growth has happened in a country where Facebook and Twitter are banned, Playstation is illegal, four times more people are executed every year than in the whole of the rest of the world combined and 700 million people don’t even have access to clean drinking water.

From a western perspective this is all very perplexing. The conventional wisdom, the mantra of the IMF, the World Bank and other bastions of the old world order (chiefly presided over by the US), is that growth cannot be accomplished without democracy.

The story goes that a country cannot be properly described as developed if its citizens don’t have political power, that’s to say at least the ability to vote for the party they like and the ability to vote them out again after a few years if it hasn’t gone well.

Yet here is China, growing at 7% a year (and that’s in a bad year) despite a firmly

Communist government and very little freedom of political expression. A walk down any city street in Guangzhou or Shanghai, Shenzhen or Beijing would take you past office workers shopping for Burberry raincoats while BMWs and Jaguars race past you on the road. It would be hard to convince yourself that this is an under developed country.

It’s not just the political system that’s defied the conventional western view of how countries should develop. The frenetic pace of growth has led to a country which has taken on the trappings of the consumer society while retaining some of the values and customs of the past which might seem at odds with the western world view. For example, in the West, we have a word for the by-passing of laws and the speeding up of bureaucracy by giving money or gifts to officials – we call it corruption. Yet in China, gaining favour by giving lavish gifts has been a way of life for centuries. The speed of the county’s development has exacerbated the inequalities that corruption creates as well as hampered some of the inward investment that the government has been keen to promote (western firms can be put off by the need to bribe their way into a country). For these reasons the Chinese government has been trying to clamp down on corruption and one of the effects of this has been a downturn in demand for the European luxury goods which were often purchased as such “gifts”.

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As corruption tends to be much lower in rich countries and at its worst in poor ones, it’s difficult to think of any other country where luxury goods are so widely consumed yet corruption so widely practised that a fall in the latter has a measurable effect on sales of the former.

China refuses to conform to the West’s idea of what a rich country is and how it should behave. This is a problem because China is now so economically important that what happens in China affects us all. If we can’t understand how things work, we cannot predict their effect and protect our economies from negative consequences.

Understanding the slowdown that China has experienced over the last couple of years is essential for the African countries whose recent development has depended almost completely on Chinese investment. It is also essential for the US, European and particularly Australian firms whose export strategies have been based on expectations of an ever-growing Chinese middle class willing and able to buy more and more western goods. It’s also essential for consumers around the globe who have grown used to China providing cheap clothing, toys, electricals and the rest, and keeping our inflation rates down in the process. We need to understand whether this slowdown is simply a short term blip, a long term

adjustment or the beginning of the end, or none of these.

Because China doesn’t conform to the western model, we have even fewer tools to help us understand what’s happening or predict the future than we do for western economies. The recent turmoil on Chinese stock markets is a perfect example. Unlike western stock markets where most investors are large professional institutions, in China much of the money in the markets belongs to private individuals – shopkeepers, teachers and office workers many of whom have borrowed money to buy shares and now find themselves owing back money they no longer have.

We lack models for this kind of economy, and it’s evident from looking at all that’s been written about it that no one can really explain the sudden fall or, importantly, what will happen next.

So China presents a model never seen before and without doubt a future likely to be like nothing we’ve ever seen before either. The risk for the rest of us is that the sheer size of the Chinese economy, (the second largest if not the largest in the world, depending on how you measure it), means that every other economy on the planet must come along for the ride.

- Linda Bonner

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INDIVIDUAL vs COLLECTIVE WELFARE Whether or not you are consciously aware of it, your behaviour when making economic decisions has helped shape the economy as it exists today. Whilst not one of the most prevalent aspects of economics, at least not in public thought, it is one of the most pertinent.

The most famous aspect of human psychology that is used in economics is game theory, majorly influenced by John Forbes Nash Jr. Game theory manifests as a problem of individual prosperity vs the public prosperity. When Adam Smith pioneered capitalism and free markets, the driving force behind this was the pursuit of maximising one’s self-interest. It was his belief that when everyone fulfilled his or her own interests that this tended to help the public as well. John Nash however discovered a loophole in this.

The most effective way of explaining game theory is to use an example, and the most common example is that of the prisoner’s dilemma. The example asks people to imagine that there are two prisoners who have committed a crime and are caught. They are being investigated individually, and are unaware of what is occurring in the other’s interview. There are four different scenarios that can take place: the first is that they both confess and both receive a 5 year sentence, another is that neither confesses and they both receive a 1 year sentence and the final scenario is that one prisoner confesses and

the other does not, leading to the former receiving no prison sentence and the latter a 10 year sentence (obviously the judicial system is not as simplistic as this, but for the purposes of this example we shall imagine that it is). If their decisions were driven by self-interest alone (we'll assume that this is to confess and hope that the other does not) then the outcome is not desirable for either, incurring a 5 year prison sentence for both.

Whilst at the individual level the best choice was to confess, as this entails the possibility of no prison sentence, we can see that at the collective level this actually reaped damaging consequences. The reverse is true of the next option. Whilst at an individual level it is far riskier to not confess, and risk a 10 year sentence, if this action is pursued by both prisoners, than at a collective level it is far better as they only receive a 1 year prison sentence either. If we took their scenario under Smith’s traditional doctrine, and asked them to think in a competitive mindset, then again we would arrive at the scenario where both confess and the resulting total welfare at the collective level is reduced as they both receive 5-year prison sentences.

The issue here is that traditional capitalist doctrine acts upon a maximisation of expectations model; this essence is looking for choices that average out the best possible outcome. We can see that by confessing you will receive either 5 or 0 years of jail time, an 12

average of 2.5, whereas confessing leaves you will 1 or 10 years, an average of 5.5. Thus traditional economic theory suggested the former. However as I have already discussed the mutually beneficial option is to confess.

This seems so odd, given the higher risk it entails, and is one of the reasons why it is s u c h a p o p u l a r a re a o f b e h a v i o ur a l economics.

The economic issue of our psychological disposition in the process of choice making often leads to the issue of the sum total of individual welfare against that of the collective. In the example of game theory, the two behaviours were that of competitive and cooperative, the latter clearly rendering a greater total welfare for the prisoners.

Another area where this issue can occur is the distinction between pure and reciprocal altruism. Pure altruism, with reference to behavioural economics, represents the behaviour that people display when their actions are served towards the benefit of others, even when this comes at the expense of their own economic utility and/or well being. Reciprocal altruism however is rather different. What occurs here is that people will adopt actions that benefit the collective society as a whole, even if at their own cost, but only if others do so, hence the reciprocity clause that it entails.

An example that can be used, particularly in Britain after recent summers, is that of switching off outdoor hoses. The pure altruist would turn of their hose irrespective of what others are doing, as their thinking is in line with what benefits the collective whole, and they are willing to receive the loss of utility that this occurs. The reciprocal altruist however will only switch off their hose if they believe that others will as well. As such reciprocal altruists’ behaviour can be far more erratic than that of their purer counterparts, and will not always serve the benefit of the collective whole. Again we have a situation where cooperation, and the new behavioural element of altruism, is far more beneficial for the economy as a whole than self-interest and competition. If we followed what served

our own self-interest first then we would all use our hoses; clearly this would lead to the nation at a collective level running out of water, and then there would be dire consequences for all.

What all this purports to is that, in an ideal world, our behaviour when making economic choices (i.e. behavioural economics) would help to raise the collective level of economic welfare and utility. However a purely neoclassical capitalist take on situations is not enough to render this. Often one has to look beyond their own circumstances and imagine how their actions affect a collective level in order to choose to the 'right' decision. The main obstacle in this is ourselves; we have a tendency to act irrationally. Take a gambling addict for example; they know that the chances are stacked against them winning money, and yet they continue to gamble even when they know that this will not bring them any further economic utility or help the economy or society at a collective level. The main reason for this, as David Hume put it, is that reason is "the slave of our passions".

This makes the topic of behavioural economics rather tricky to examine in practice, given our tendency to fall prey to whimsy and counter-intuitive action. However in theory we can examine certain ways in which think our behaviour can be defined, and this article sought to highlight just a glimpse of the expanse that is this new area of economic research.

- Kavit Borkhataria

Read more about behavioural economics - Tim Harford

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Does the Modern Patent System achieve what it set out to do?

For tens of years the government has protected patents, saying that they aid and even promote innovation. However, I’m looking into whether this really is the case, and to what extent patents actually benefit our economy.

equates to surprisingly large revenue for the UK government (approximately £69 to £138 million).

Believe it or not, the patent system allows for DNA sequences to be owned by specific people or companies for a period of time, typically lasting twenty years. This means that a company has a sole right to exclude others from making, using or selling this particular DNA sequence. During this article I will refer back to the patenting of DNA sequences, for evidence towards some of my arguments against the modern day patenting system.

Although it isn’t just the government who benefits from the modern day patent system, individuals and organisations can use it to their advantage as well. The public good position on patents is simple enough; in filing for registering a new and useful idea; you receive a temporary monopoly, typically lasting for twenty years. This provides the innovator with reassurance of material gain should the innovation become successful, which in theory should largely incentivise innovation. This valuable monopoly permits the innovator necessary time to perfect their innovation and launch it into a premature market, in which they are the lone market force, allowing them the potential to maximise their revenue and develop a recognised and individual brand.

Furthermore, these initial innovations should theoretically encourage additional innovations, increasing the speed of technological advances as a knock on effect forms, one innovation building upon another.

However, we have to give it a chance. Let’s first consider what patents do well for different aspects of the economy, beginning with the government. The first thing I came to notice when researching for this article was the surprisingly high prices of patents, ranging from £3,000 to £6,000 in the UK. In fact the Government’s own website states that patents are ‘expensive and difficult to get’. When considering that in 2014 the UK government received 16,000 patent renewals, along with 7,000 newly granted patents, this

Not only this, patents act as a form of protection for smaller, start up companies. If it weren’t for the modern patent system, larger companies would exploit start up firms in their industry by simply recreating their innovative ideas. This would be devastating for start-ups as the financial backing and exceptional brand recognition of larger firms would allow them to easily exceed small firms, appropriating their ideas. In a sense, this demonstrates a patents ability to encourage people to pursue the

In 2015, a new global cancer report estimates that the deadly disease will kill 7.6 million people, which amounts to over 20,000 deaths a day, a truly terrifying statistic. Now you may be wondering what this has to do with the modern day patenting system and whether it achieves it target of increasing innovation; unfortunately it has a lot more to do with it than you would have thought.

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entrepreneurial task of starting an innovative firm with low funding, due to the necessary protection offered.

Unfortunately when considering the modern patent system, it isn’t all good news. All economists will know that free trade and competition especially are good for an economy, driving prices down and quality up.

Patents are a restriction on both, in allowing monopolistic situations, which represent uncompetitive markets. This provides a hostile environment in which lone companies are able to exploit consumers, to a certain extent. In fact, The Economist stated that rather than encouraging economic growth and innovation, patents ‘excite fraud, provoke endless lawsuits [and] bestow rewards on the wrong persons.’

So we know now that patents can be damaging for the e c o n o m y, b u t how well do they work in terms of encouraging innovation?

Initially they appear to provide a number of incentives to innovate, but we have to consider a broader take to understand the ways in which the moder n patent system depresses innovation.

If we come back to the DNA sequencing example, we can consider a medical research organisation that has patented a specific DNA sequence on the belief that they may be able to use this to cure cancer. Rather than encourage medical breakthroughs, this actually decreases the chances, or the time taken, to develop the potentially billion-dollar cure for cancer. This is due to a lack of research into specific DNA sequences, since the modern patent system effectively only allows one organisation to work on any sequence at a given time. Dr. Gold, director of the Centre for Intellectual Property Policy at McGill University has been quoted stating, ‘Not only will we not develop those drugs for cancer and heart . . . but we won't get the

innovative breakthrough drugs unless we change [the modern day patent system].’

This concept can, however, be applied to any sector of the economy, not just medical research, especially when considered from a different mindset. The Economist stated, ‘Comprehensive patents are taken out by some parties, for the purpose of stopping inventions, or appropriating the fruits of the inventions of others.’ Take for example the everlasting light bulb conspiracy. This suggested that the everlasting light bulb has indeed been invented, although a leading light bulb supplier has purchased the patent in order to maintain their otherwise obsolete business. Regardless of whether it is true or not, this is an ideal representation of how the modern patent system could be used for individual gain, while diminishing innovation and technological advances.

In fact, if you take the number of inventions present at international fairs as a measure of innovation, there is evidence to suggest that countries with no patent systems were not less innovative than countries such as ours, as discovered by Mr. M Boldrin and Mr. D. Levine in ‘The case against patents’, 2012. When considering whether patents encourage innovation, there appears to be an illusion that the amount of patents filed equates to the amount of innovation, but this is not the case. You are certainly not guaranteed success with a granted patent, thus leading to my conclusion that, rather than being a cause of innovation, patents are a result of successful innovation, which was the cause of competition.

- Ben Harvey

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John Nash and Game Theory In comparison to most of the subjects you will be learning at the moment, Economics (as a separate discipline) is a fairly new field of study. The birth of what is now modern economics is often attributed to the magnum opus of Adam Smith, The Wealth of Nations, which was published in 1776. To put this into perspective, complex mathematics (that is arithmetic, algebra and geometry and so on, rather than simply the use of numbers) dates back to 3000BC. So for Economics to be so widespread and broad it has had to grow vastly and rapidly. One area I will be looking at in this article is Game Theory, the Nash Equilibrium and the economist John Nash.

Firstly a few definitions: Game Theory is a method of studying strategic situations, which are settings where the outcomes that affect you depend on actions, not just your own but others’ actions also. This basically means any situation with imperfect competition, i.e. not applicable in the case of monopolists where there is no competition, or where no firms have superior or inferior market power - they are all price takers and there is perfect competition. It has applications in many fields, including: economics, politics, law, psychology, computer science and biology.

Many people are familiar with a little bit of Game Theory, in that you may have seen a game called the ‘Prisoner’s Dilemma’. I am going to use an example that’s very similar. It

is called the Grade Game. It is a noncooperative game, so each player makes their decision independently. The game is shown below:

As part of a school course, you are asked to fill a form and fill it in with a letter. You will be randomly paired with someone. If you put p and your pair puts q, then you will get grade A, and your pair grade C. If both you and your pair put p, then you both will get grade B-. If you put q and your pair puts p, then you will get grade C, and your pair grade A. If both you and your pair put q, then you will both get grade B+. It may sound confusing but will be shown more clearly later.

For these games we can assign payoffs to the outcomes and form a payoff matrix. Let’s say that getting a B- is neutral so equal to 0.

Attaining a C is equal to -1, a B+ to 1, and an A to 3. Using this we form the matrix below.

OUTCOME MATRIX

PAIR:

p

q

ME:

0, 0 (B-,B-)

3, -1 (A, C)

q

-1, 3 (C,A)

1, 1 (B+, B+)

p

Here if the pair plays q, the best strategy is p.

If the pair plays p, the best strategy is p. P strictly dominates. For this reason you may be wish to choose p. However, there are 16

various problems with playing a strictly dominating strategy. Firstly, rational play by rational players can lead to bad outcomes.

Here, p dominates regardless of the pair’s choice, so both players will likely opt for it.

This gives a lower payoff than if both chose q. This means it is Pareto inefficient. Pareto efficiency occurs with the allocation of resources in which it is impossible to make things better for certain individuals without making the situation worse for others. Here it is Pareto inefficient as the allocation can be improved for both individuals without a cost to either.

types of game no player can benefit if they change only their strategy. The importance of this in Economics, Maths, Social Sciences, and biology (to explain certain organisms’ behaviour in evolution) earned him the Nobel Prize. He also had other notable works in maths, including in algebraic geometry.

Unfortunately he struggled during his life, from the end of his time at Princeton University, with paranoid schizophrenia and mild depression. This manifested in paranoia and hallucination, and eventually led to his divorce (despite him staying with his ex-wife for care and remaining friends). Eventually he managed to take himself off antipsychotic medication, living in a ‘quiet life of enforced rationality’.

He improved significantly, remarried his first wife, and returned to his studies and teaching. Unfortunately after receiving the prestigious Abel Prize (2015), his taxi from Newark Airport, New Jersey, crashed and resulted in the death of both him and his wife.

- Toby Barnes

Book and film, A Beautiful Mind, is based on the life of John Nash Secondly the assigned payoffs may not be true to both players. Here they assume that the player only cares about their own result.

This may not be true; in a classroom you may be surrounded by friends and not wish them to get a bad grade, so the payoffs should be altered to suit not just the grade you attain but also the grade the pair attains.

Although John Nash didn’t father Game Theory, he did propose a set of strategies and mathematical equilibria in which for certain 17

FRACKING: OPPORTUNITY OR DANGER? What is fracking? Why now? What long term impact will it have upon the environment? These are just a few of the questions that surround this controversial extraction method. In this article, Gareth Nichols; Head of Economics, will try to address these questions and help you to decide whether this is a policy the Government should be pursuing in the short, medium and long term.

What is fracking?

Fracking is an extraction method whose history can be traced back to the 1940s, but was not widely implemented until 2003 when deposits, such as the Barnett Shale deposit i n Te x a s , w e re e x p l o re d b y e n e rg y companies. The process involves drilling down hundreds, if not thousands of metres into a suitable rock deposit that has natural gas trapped in its pores. From there, a horizontal shaft is drilled into the gas bearing rock, which itself can be hundreds of metres long. When the bore hole has been completed, the fracking fluid is pumped into the bore hole under high pressure causing tiny cracks to be created throughout the rock deposit. In the US, the average amount of fluid consists of 8 million litres of water, 200,000 litres of chemicals and several

thousand tonnes of sand. Next, the fluid is pumped out, with the sand being left behind to keep the newly formed cracks open. The natural gas can now be recovered. Once the source has been exhausted, the shaft is sealed after the fracking fluid has first been pumped back into the bore hole.

Why now?

The average fuel bill in England and Wales, for those paying by standard payment, increased to £1375 in 2015. Coupled with the fact that 57% of the 70 billion cubic metres consumed each year is imported, it would seem only sensible that the Government implements a policy that reduces the cost for the consumer and secures the UK’s energy needs for the future. The British Geological Survey estimates that there may be as much 18

as 40 trillion cubic metres of shale gas in Northern England alone, more than enough to power us for the next 50 years.

In the United States, where more than 1 million bore holes have been drilled using hydraulic fracturing, the yields have been astronomical. The US has become the largest natural gas producer in the world, with the price falling by as much as 47%. Not only has this benefited the end consumer (US households now pay less than a third for their gas compared to their British counterparts) but the boom in the extraction industry has also resulted in an increase in employment and real incomes. In North Dakota, incomes in 2013 grew by 7.3% on average, whilst in Texas, not only has employment returned to pre-recession levels, but an additional 597,000 jobs have been created beyond the August 2008 peak. The sector in total employs 2.1 million people, and is projected to reach 3.5 million by 2025. Finally, the US Government at both state and federal levels has also benefitted; they have collected in excess of $75 billion in additional tax revenue as a result of the growth in this industry.

There is nothing to suggest that the UK would not also experience these same economic benefits if it were to pursue fracking as the next major source of energy.

What long term impact will fracking have upon the environment?

In short, no one is really quite sure what the long term risks are. Given that fracking has only been widely implemented since 2003, no long term studies have yet been conducted.

However, several potential risks have been identified.

Firstly, due the large volume of fresh water being consumed in the process, there is a question over the morality of the process during a time in which the availability of fresh water is diminishing. Not only is this consumption of fresh water questionable, but

it also becomes toxic to the point that it cannot be eectively processed at treatment plants. This contaminated water is then sealed deep underground where there is the possibility that it could leach into drinking water sources. This has already happened in the US due to industrial negligence.

Secondly, there is significant impact upon the global climate. Although natural gas releases less CO2 into the atmosphere than coal when burnt to produce electricity, approximately 3% of the gas extracted from shale deposits escapes. Natural gas is 25 times more potent as a greenhouse gas than CO2, trapping up to 100 times as much heat over a five-year period. Also, the process itself is more energy intensive than traditional extraction methods and with bore holes being exhausted quickly, they need to be replaced more frequently.

This means that, despite its greener credentials when burnt, shale gas has a bigger impact on climate change than coal.

Should fracking be given the green light in the UK? In December 2015, the Conservative Government awarded 159 licences for onshore oil and gas exploration, so it would appear that the Government has made its decision. In the short to medium term, we can expect that fracking will lead to lower gas prices, increased employment and greater economic growth. However, the long term impacts will be dependent upon the ability of the Government to eectively regulate to mitigate the risks associated with fracking. If they can learn from the best and the worst practices in the United States and design rules that reduce the risks, then shale gas could prove to be a vital and clean energy source for the UK for the next 50 years or more. If, however, fracking licenses are granted without eective supporting regulation, then it will be future generations that pay the price for myopic policy making.

- Gareth Nichols

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The Conspicuous Consumption Effect In economics, you will probably know that the quantity of goods and services people are willing and able to consume (buy) at a given price level, is called the Effective Demand. It seems fairly obvious then, that as the price rises, people can only afford less, and so demand decreases. This is the Law of Demand, and it is shown on the graph below.

Demand for a Normal Good Demand

and certain cars (e.g. Rolls Royce). It would seem that demand would rise proportionally to price for Veblen Goods; but this isn’t always the case.

Some Veblen goods may be influenced by the ‘Snob effect’. This is when there is a preference for a certain good because they are different from what are most commonly demanded. So they are desired for their exclusivity, and therefore price determines their quality. For these that above a certain price level, the ‘Snob effect’ may come into

Price

Demand for a Veblen Good influenced by the Snob Effect

Quantity

However there is a group of goods for which demand increases with price. Rationally this can’t make sense. Why would a consumer be more willing to buy something, the more expensive it got? This effect may happen for more than one reason. However I am going to focus on the conspicuous consumption effect.

The conspicuous consumption effect was introduced by the nineteenth century American economist and sociologist Thorstein Veblen through his works of “The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions”. It is described as the purchasing of a good or service in order to display publicly the practitioner’s economic power, whether that be their accumulated wealth or their income.

This display is used in order to attain or hold on to a higher social status. Goods which apply to conspicuous consumption are Veblen goods. These are luxury items that include rare vintage wines, designer clothing,

play and so demand starts to increase with price. However below this price level, the good doesn't hold any ‘Snob value’ and so it follows the normal Law of Demand.

Conspicuous consumption was described to occur in any society in which people are paced in distinct strata and classes.

Therefore people wish to buy more luxurious goods to rise up in class. This was particularly obvious in the mid and latter nineteenth century; accumulation of wealth had emerged the nouveaux riche class. It has since evolved to fit the consumption dynamics of the middle class and is still observable today.

- Toby Barnes

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