Transferable ideas within economics

The Cambridge Economics Tripos is deemed to be rigorous because of the depth of material covered in each paper, but the course as a whole also offers breadth in the subject of study. While I am taking a diverse range of papers in the Economics Tripos this year, I’m strangely seeing more connections and relationships across the papers. Of these, I’ll just touch on three (1) how important math and micro foundations are (2) the similarity of mathematical and philosophical reasoning (3) how academic papers overlap across papers.

It’s the first day of week 3, and I’ve done at least one supervision piece for each of the papers I’ve taken this year, and I think it’s an appropriate time to talk about the papers I’m taking. In Year 2, we have three compulsory papers in microeconomics, macroeconomics, and econometrics. We are also required to choose one optional paper from the following: trade and development, labour, math and statistics, and history and philosophy of economics. To understand the subject better, I opted to take two optional papers instead, and these lie on the two ends of the math-essay spectrum: mathematics and statistics for economists (MSE), and history and philosophy of economics (HPE).

The first thing that struck me this year was how foundational mathematics and microeconomics are. The first topic that we are doing this year in macroeconomics is intertemporal macroeconomics, and we built the entire model from micro-foundations, starting with the Robinson Crusoe model and the consumer choice for intertemporal substitution in consumption and labour. The way that macroeconomics is now rooted in the microeconomics we learned last year made me appreciate last year’s material a lot more, and appreciate macroeconomics a lot more. Our first topic in microeconomics this year is game theory, and when we looked at Cournot games and optimisation again, we had to invoke the Lagrangian constraint optimisation technique, which was drilled as an algorithm last year. This year, when we looked at optimisation under constraint again in MSE, I finally appreciated how the Lagrangian actually worked based on the constraint qualification and the Weierstrass theorem, which I had taken for granted last year. With the extension into the Kuhn-Tucker theorem for inequalities rather than pure equalities, the multiplier interpretations and complementary slackness conditions that our microeconomics lecturer briefly talked about suddenly made a lot more sense. As such, I am also very excited to learn how the foundations in statistics that we learn in MSE might be applied to the econometrics that we are currently doing. The foundations in mathematics are in its axioms and definitions. After the painful process of contemplating on the nature of epsilon balls in n-dimensional space in order to prove some results, I’m gradually appreciating how these axioms and definitions in mathematics feed into our economic results and algorithms. Thus, I’d say that mathematics is probably the most foundational and transferable. It is with proper understanding of mathematics that microeconomics is grounded, and it is with grounding of microeconomics that models in macroeconomics makes sense.

After working on the first supervision sets, I found the similarity between mathematical and philosophical reasoning very interesting. While mathematics proceeds in a long line of hieroglyphs (for those who don’t understand them), and philosophy proceeds in a long line of English words (that might still be vaguely understandable), the way reasoning and deduction works are very similar. That’s what I have learnt when I worked out mathematical proofs (assuming they are correct) and when I wrote my first philosophy essay on the assumptions on rational choice theory. Deduction proceeded from definitions and assumptions, and in order to get to the conclusion that we want, more assumptions have to be built in. It is from this air-tight reasoning process that we can examine the argument to see how it might crumble if some assumptions are proven false (or non-falsifiable, which results in another philosophical complication for sciences). This latter part is what people generally associate with critical thinking. I also found that many argument forms are similar, but are just known by different names: modus tollens in philosophy is similar to proof by contradiction in mathematics for instance. Beyond the material, I find that engaging with these two disciplines fundamentally changes and hones the way we think about issues and logic. To this end, I’m quite glad to observe this relationship and that I have the opportunity to take both papers rather than just either of these.

When I think of academic publishing, I usually associate them with having a very narrow focus. There is some area of specialisation that this economist is good at, and he fills a rather obscure part of our knowledge gap. As such, since undergraduate papers are cursory and broad in the fields that they explore, we should expect academic papers to fall neatly into any one of these papers that I’m taking. But the papers clearly overlap, and the way each paper grants a different perspective to that academic paper is really interesting. There was this seminal work by Friedman in our macroeconomics reading list for the Permanent Income Hypothesis (PIH). In setting up the PIH, Friedman had to appeal to microeconomic foundations before setting up the macroeconomic theory. The empirical US data cited and conclusions drawn can be understood and evaluated from the “econometrics” lens. The way his propositions follow from the definitions and intuition can be understood and evaluated from the lens of mathematics and philosophy. The history part of HPE also situates the paper in its historical context – monetarist view, post-war period in US, where scientific and socio-cultural circumstances could have influenced this theory. While each paper grants a particular perspective, the material of the paper was still clearly macroeconomic, and perhaps that is all that most students see. It really excites me to see how these ideas converge, and I hope that when I write (now and in the future) I will be able to use these transferable skills learnt in each paper to produce original work of the highest quality.

It’s definitely difficult trying to cope with five papers, apart from the many other things I’m doing, from starting a society, to doing research and consultancy during term through the social innovation programme, to the commitments as a prayer secretary in CF, to simply caring for and being available for people in general. But it’s always great to work while the sun in still up, and the blessing and learning is definitely worth it!

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Dreams we all have dreams

“Dreams, we all have dreams. What can we be? What can we do? Lord, with all we are, we pray that our dreams will lead us, will lead us to you.” These were the lyrics of the first song in a musical that the children in my church in Singapore put up.

It was a familiar story about the three trees. Once upon a time, there were three trees sitting on top of a hill, and they discussed what they wanted to do in the future. Tree 1 said that it wanted to be a treasure chest holding gold and silver; tree 2 said that it wanted to be a mighty war ship; tree 3 said that it wanted to remain on top of the hill to point everyone to God. One day, some woodcutters came to the top of the hill and decided to cut all the trees down. Tree 1 got thrown into a stable and was made into a feeding trough, holding animal feed instead of treasures; tree 2 was made into a bench rather than a boat; tree 3 was thrown into the lumber yard for the wood was flawed (and it had no ability to grow and point to God anyway). But some time in the future, there was one silent night where Mary and Joseph were in Bethlehem and was unable to find a place to sleep in the inn. They then went into the stable and Mary gave birth to Jesus there, and placed him in the manger. Tree 1 then realised that, as he was the manger holding baby Jesus, he was holding on to the greatest treasure the world has ever seen. Tree 2 was placed on a fishing boat one day, and Jesus was sitting on it. As there were strong winds and waves and the fishermen were scared of drowning, Jesus stood up and rebuked the storm – it then became calm. That was when Tree 2 knew it was carrying someone who could even control nature! Finally, tree 3, then existing as two planks of wood, was finally picked up, and nailed together to form the shape of a cross. It was then dragged to the top of a hill so that criminals nailed on it would be publically disgraced. But tree 3 held not just any criminal, but Jesus himself, on that fateful Friday. When people remember Jesus, the cross on which He was crucified was one of the symbols – tree 3 was pointing people to God.

What’s the moral of the story? When we pray that our dreams will lead us to God, we realise that we don’t get to where we dream we would be, not because our dreams were too big, but because they were too small.

As I’m thinking about the process of chasing dreams, I’m considering the extent to which the answers to “what will we be? what will we do?” are dependent on exogenous factors (factors beyond our control), and on endogenous factors (factors within our control). And both are immensely related and conditional on each other: we might need exogenous factors to prompt us to act in a certain way or allow us to make certain decisions, and we might need to force a door open ourselves so that exogenous opportunities may come more easily. In my case of research and education, getting bonded is not a favourable exogenous circumstance, but I’d still endogenously find ways to get to where I want to be – through starting a society, through self-publishing, through learning and studying beyond the tripos, through asking questions daily, etc.

But regardless of the exogenous and endogenous causes, God can so easily overwrite anything. Or, more likely, God works behind these exogenous and endogenous causes. I guess as I am chasing my dreams, I should count all work, all busy-ness (writing this post and rushing supervision work, for instance) as a privilege – a blessing from God, as He is giving me opportunities to chase these dreams. Even though the intermediate points that I’m at don’t seem to be where I’ve envisioned, I’ll hold on to His promise that He will make it all work out for the good of those who love him (just like the trees). Thus, I put my heart and mind into everything I do, because I know that I am chasing these dreams and God is faithful. And I consistently pray that my dreams will lead me to Him.

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Why Open Classroom?

I recently did a quick google search on “open classroom”, and found that it was a US concept of putting children in a large hall and having several teaching groups simultaneously, catered to individual learning ability. The idea was that teachers had to learn to teach “without walls”. I suppose this is what I want to learn to do as well – to teach without walls.

That’s precisely what I aim to do with Open Classroom as I’m running the first session today. I want to experiment with and experience interesting pedagogical strategies (communication); I also want to think about how to my make subject accessible, and to learn more about the subjects that other people study (content).

How can this be done? I imagine a typical session to be an hour long, where we have 30-45 min of lesson demonstration, using a particular strategy to communicate a certain idea. Then, we have 15 min of discussion concerning the effectiveness of the strategy.

This would tackle two main issues associated with teaching: communication (pedagogy) and content. The person teaching at that time would have the opportunity to experiment with a pedagogical tool (from the internet, or self developed), and the rest of the class would have the privilege of experiencing it first-hand. Content-wise, the person teaching would have to think much more deeply about her subject, and think about which aspect of it is important to present to non-specialists; the audience also has the opportunity to learn about their non-specialist area in an engaging (though experimental) way. As such, regardless of one’s position in the society (might it be teacher or learning), he has something to gain and something to contribute – the teacher gains feedback for communication and content; students gain knowledge and experience of pedagogical strategy; the teacher contributes the lesson and the students contribute feedback.

By putting different people in various roles together, I hope to create a conducive environment for generating ideas in pedagogy and various subjects. There will be a mutual gain for everyone who is involved, so I really hope that this will be a great learning opportunity for all who are interested! May we learn to teach without and beyond walls.

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Philosophical backing in Christianity

The summer holidays have just past and term has just started, so I’m at the point of considering how I can best spend my time this term, and one important thing that came to mind was to be reflective, rather than just to execute every task for the sake of it. I’m quite glad that I have a blog to facilitate this process, so for people who follow me, please don’t be surprised that I write two posts a week that seem tangentially related to my life. Furthermore, I’m beginning to appreciate how much I enjoy writing and researching, so this blog is probably just an outcome of this interest, and self-publishing could be the start of something better?

If I could only mention one thing that I’ve learned over summer, that would be that I’ve come to appreciate the strong philosophical backing behind Christianity. This was the outcome of sharing my faith with many people, and people with different backgrounds and experiences challenging what I believe in (which is great, because this means they are interested in broader issues). Through the process of sharing, I also had to think more about issues that I’ve neglected in the Christian faith, so this was great for personal learning and growth too.

Perhaps, i should first talk about what “philosophical backing” implies. Quite interestingly, the first lecture I had this term was a philosophy lecture (because I’m taking the history and philosophy of economics paper this year). As Anna Alexandrova went over the overview of what we would cover in the philosophy part of the course, she reminded me of what a philosophy teacher taught me in sec 3 about three parts that constitutes a philosophy: ontology, epistemology, and ethics. This was precisely how the HPE course would be structured – we would look at epistemology and ethics with Alexandrova and social ontology with Tony Lawson. Ontology is a study of what things really are; epistemology is the study of knowledge and how we obtain what we call knowledge; ethics is what we do with things. In most philosophies, ethics would follow logically from how the ontology and epistemology have been set out (if we were to look at Mill and Kant more holistically). As such, what I mean by a philosophical backing behind a faith is that what the religion espouses as ethics is grounded in its ontology and epistemology.

I really appreciated the ethical backing behind Christianity when I was in school. I did my school attachment over summer (as a teaching scholar) in a Presbyterian school, so the students had morning devotions. Parents of non-Christian students send their children to Christian schools because of the values that they espouse. There was one week where the school was talking about resilience. Almost all schools will tell there students to be resilient in some form, but this school took it from an interesting angle. The vice-principal shared that we should be resilient because God is faithful. I found this a far more convincing argument for resilience: if we take it from a secular perspective, we often tell children to try until they succeed – possibly trying would increase the probability of success (perhaps infinitely trying will reach P=1 at the limit so you have certainty of success when you have infinite trials to exhaust all possibilities). But surely, we don’t want children to spend their youth on what is unfruitful. Now, if we tell children that they should be resilient because God is faithful, there is certainty of success in the first trial already, because God never fails. The success may not be what we think it is, but God works for the good for those who love him. That’s why we choose to be resilient – because of His promise. As such, it is evident that it is with the ontological backing of who God is that the ethics we espouse becomes far more meaningful.

As I was helping out with the orientation camp, I had a couple of interesting conversations with freshers who are non-Christians (and readily claim to be so). Since my group were mostly scientists, there was a general naturalistic perspective held about religion. Religion is constructed by human beings to account for things they see in nature; nature evolved organically, and came from a single dot followed by a big bang. That seems like a perfectly logical account of how the physical world works, but how do we account for human action? That’s where economists and psychologists come in – we do something so that we can optimise our utility, or feel good about ourselves. Much of our social norms are then built on the Hobbesian view of the world – we have a social contract of ethics so that we would not kill each other. Are people really that selfish and using each other just to get ahead without genuine care for each other? We need someone with a very cold heart in order to say that. there is love, and naturalism can’t account for that easily. Perhaps, we might advocate that murder and theft are wrong based on social contract, but we have a much stronger moral impetus when God says that these things are wrong (and our consciences, as created by God, support it). As such, with the ontological and epistemic backing of God’s revelation of the law, we do have a grounded ethical imperative in what is right and wrong.

Finally, I’ve learned what identity really means. Since university students are in a season of their lives when they ask “who am i?”, it seems appropriate to understand what identity is. After talking to so many people over summer, I’ve had several responses. Some people say that it is a social construct of similarities and differences – when you hold an identity, you associate yourself with a group of people who bears this similar trait and distance yourself from people that do not hold this trait (e.g. race). Some people say that identity is a collection of actions – one acts in particular ways to build up his portfolio, and this is what defines his identity. This account cannot explain what led to these actions initially though. Some people say that identity is how people see us, so we have absolutely no control over who we are. This also implies that we don’t have any one identity, since different people see us differently. But this is what I believe: identity is how God sees us. And God made all of us in His image, and He loves us, and He wants us to be His children. This completely changes how we view people. Rather than looking at people on the street as the output of certain inputs and functions, I see them as people made in the image of God and each one of them is precious in God’s eyes. That was also why I cared so much for each of the freshers I met and why I wanted to bring out the best in them. Similarly, in light of all our failures, when we look at who we fundamentally are, if we know Christ, that brings so much comfort.

I am quite looking forward to term, and I am really thankful for what I had learnt over the holidays about the philosophical backing behind Christianity. Hopefully the courses this year would teach me to be more critical and grow in my appreciation of who God is.

Posted in Theology | Leave a comment

General Tariff influencing economic recovery during the 1930s

Evaluate the historical evidence on two mechanisms through which the General Tariff may have influenced the economic recovery during the 1930s.

The General Tariff of 1932 implemented in interwar Britain might be argued to be a significant policy that allowed Britain to recovery strongly after the 1930 recession. Evidence shows that Britain’s recovery was milder and recovery stronger than USA and Germany. There are several mechanisms that the General Tariff could work through to influence the economic recovery including import substitution, effective protection rates (Capie), macroeconomic effects, and the trade blocs. This essay will focus on import substitution and macroeconomic effects, and evidence seems to suggest that tariffs do indeed aid economic recovery in the 1930s.

The import substitution argument suggests that when the general tariff was implemented, imports become more expensive, so people would switch from consuming imports to consuming domestic goods. This results in an increase in net exports (NX) and an increase in domestic consumption (C) that would together lead to an increase in GDP that characterises any economic recovery. A useful framework for evaluating this is the import replacement rate (IRR), where IRR = [del Y – del X]/ del M, so that would be the difference between the change in production and exports divided by the change in imports. If import substitution were effective, then IRR would be close to one, as every unit of production that is not exported offsets a fall in imports directly.

Richardson (1967) used the IRR framework to calculate the effect of tariffs in various industries. He divided them into two groups – the newly protected industries, and the non-newly protected industries. Interestingly, Richardson found that IRR was about 3 for the newly protected industries and IRR = 2 for the non-newly protected industries. This implies that the effect of the tariff was rather weak in import substitution. He uses this premise to later argue that it was the housing boom that led to the recovery.

Vartis and Solomou (1990) criticised Richardson’s methodology. Firstly, even with Richardson’s figures on British trade, exports of newly protected industries increased more and imports fell more than the non-newly protected group. Thus, they argue that Richardson’s measure effectively measures the life cycle of the industry, rather than import substitution. As such, they compared two periods – one before 1930 and another after to observe the effects of the tariff. Then, they found that higher tariffs did lead to higher production, suggesting some grounds for the import substitution argument.

Broadberry and Crafts (2011) conducted a more detailed analysis of the import substitution argument. Instead of the two-way classification that Vartis and Solomou used, Broadberry and Crafts used a three-way classification – they kept the non-newly protected group, and divided the newly protected group into two – those below 10% tariffs and those above. Using a difference in difference methodology, they found that only the newly protected group with tariffs above 10% experienced significant growth, so it was not tariffs itself that mattered, but relative tariffs. Lloyd and Solomou reviewed this article and noted two issues in Broadberry and Crafts’ thesis: (1) there was a methodology issue when we lump the entire 0-10% tariff group together as having no tariffs and 9% tariffs clearly gives different effects (2) there was a classification issue: in particular, rope, twine and bacon clearly had more than 10% tariffs, but Broadberry and Crafts put them in the 0-10% group. With this in mind, Lloyd and Solomou conducted a similar study, and concluded that growth was still positive for the >10% group. Unlikely Broadberry and Crafts who argued that there was no long run productivity differences with additional protection, Solomou and Lloyd suggested that there could be some productivity effects.

Evaluating the import substitution mechanism, evidence seems to suggest that there was positive growth effects on particular industries that had additional protection, though the growth for the economy as a whole through the tariffs might be rather dubious. Hence, we turn to macroeconomic effects next.

Before looking at macroeconomic evidence, it would be useful to understand the theory behind how tariffs can lead to macroeconomic growth. Y = C + I + G + NX, and tariffs have a role in increasing NX and increasing C, due to expenditure switching from exports to imports. For this argument to work, we need evidence for the following: (1) there was an increase in NX and C (2) multiplier effect was positive.

Evidence shows that NX was not a primary cause for Britain’s recovery in the 1930s, because there was effectively a collapse in world trade in the 1930s when almost all countries were protecting. Eichengreen and Irwin (1992), however, qualify that Britain’s trade agreements still put it in a position such that it created trade without diverting trade by having a trade bloc with its empire. Theoretically, if we look at the policy trilemma, we do have good reasons to believe that NX could not increase. The policy trilemma suggests that countries can only have two out of the three objectives: (1) fixed exchange rate (2) independent monetary policy (3) free capital flows. Britain, as the world’s banker, would not restrict capital flows, so it had a choice between (1) and (2). After the devaluation (exit from gold) in 1931, it changed its trilemma position to have an independent monetary policy and forgoing fixed exchange rate. In this position, output Y is determined in the money market, and by comparative statics we know that NX cannot change. If imports were to fall with tariffs, exports have to fall to balance the trade, so exchange rate has to appreciate. The appreciation of exchange rate will work right against the devaluation in 1931. However, we should qualify that Britain was in a managed float system in the 1930s, so it was unlikely to have an uncontrollable downward or upward spiral of exchange rate. This should also be placed in the context of collapsing world trade, so the increase in NX is not a good account.

Consumption increasing is consistent with evidence. In light of low incomes in primary producing countries and in US, much of UK’s recovery in the 1930s was domestically driven, and this would be attributed to the increase in consumption. This is especially true in the housing market: while the housing market took up about 3% of the GDP, it accounted for 17% of the change in GDP between 1932 and 1934, suggesting that consumption here was significant. Richardson noted that a new development block developed here due to the demand created by housing, so this was a strong impetus for recovery. In contrast, Eichengreen notes that less than 10% of the new jobs created during recovery were attributed to any export-linked sector. It should be qualified that while consumption increased, its link to tariffs is rather weak, since most scholars attributed it more to the cheap money policy in 1932.

Keynesians would argue that the multiplier effect during the interwar period was strong. Kahn estimated it to be 1.87 and Keynes between 2 and 3.55. This meant that an exogenous increase in aggregate demand through tariffs can lead to a more than proportionate increase in GDP, and tariffs would then be an effective channel to help with the 1930s recovery.

However, newer evidence suggests otherwise. Crafts and Mills (2012) re-estimated the multiplier during the interwar period and suggested that the multiplier would only be 0.5 to 0.8, due to “psychological crowding out”. Ricardian equivalence occurs when an increase in G results in people expecting taxes to increase in the future, so they would save instead of consume. Since the multiplier effect was contingent on rounds of consumption and high marginal propensity to consume, they would greatly weaken the multiplier. In the context of the interwar period, the government had already incurred large debts from WWI, so any public expenditure would lead to pessimism and more savings rather than spending. As such, it is possible that there is a positive but small multiplier effect, which clearly challenges the role of tariffs.

It is difficult to evaluate the role that tariffs played in Britain’s 1930 recovery as a whole, because the 1932 tariff occurred together with several other policies, and it is difficult to delineate their effects. On the field of import substitution, the effects are clearer because comparative statics can be done across industries as the scholars have done. On the macro-economy, the effects are less clear. Evidence suggests that NX growth was limited, and the recovery was stimulated largely internally, premised on a large housing boom, which can be attributed more to interest rates than tariffs. Estimates on the multiplier are also rather debatable due to the differences in methodologies used. If we look beyond these two mechanisms and into Capie’s study of effective protection rates, and subsequent works by Kitson, Solomou and Weale, we will find that even the effects on individual industries are less clear, and zero correlation was also found by the latter group. As such, historical evidence is not particularly clear on the tariff mechanisms, but it still remains as a useful explanation to understand the 1930s recovery.

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Did the Industrial Revolution generate a rapid increase in standards of living for the working class?

The British Industrial Revolution is characterized by the utility of steam, newer technologies, cotton factories etc. Debates on the standard of living (SOL) has been rather polarising, ranging from the optimists who look at the new products and technologies, to the pessimists who look at the unsanitary conditions of urban living that lowered life expectancy. There have been many proxies for the SOL for the working class, including real wages, heights, working hours, life expectancy, and diets. We will look specifically at real wages, heights, and diets in this essay, and it appears that while SOL increased over the industrial revolution, we cannot say that it was indeed “rapid”, so a weak pessimist view should be adopted in light of evidence.

Real wages (W/P) is a very convenient measure of SOL as it gives us a quantitative measure of the people’s purchasing power. An early estimate of this was done by Lindert and Williamson (1987) who looked at workers in different sectors (including agricultural workers, blue collars, and remaining workers) and estimated the real wages of the male workers. They found that W/P was variable for most of the Industrial Revolution (IR) and had a significant increase after 1820. This stagnation in W/P prior to 1820 has been theorised as the Engels Pause. This study then strongly supports the view that there was a “rapid increase” in SOL, if we can take W/P as a good proxy for SOL.

The criticisms immediately following Lindert and Williamson concern the scope of their study. Horrell and Humprhies (1992) argue that they only looked at male wages, which would overstate wages, since males tended to earn more during the IR. Thus, they estimated family incomes instead, and considered people from more sectors, including household weaving. Consequently, they found the trend to be similar to Lindert and Williamson’s, although the extent of W/P increase was less than their estimates. This, however, was highly dependent on Lindert and Williamson’s Cost of living index.

Feinstein (1998) then did the most extensive study to date by considering workers from all sectors, and attempted to revise the cost of living index to gain a better picture of the W/P trend. By looking at the aggregate consumption basket, Feinstein found that real wages were variable up to 1815 and had a slow increase thereafter, so this supports a weak pessimist view.

There were subsequent developments to the real wage data. Clark (2001) argued that Feinstein was too pessimistic, so he re-estimated the consumption basket and the cost of living index, suggesting that the consumption basket for agricultural workers was slightly different. Clark then found that price levels were lower than what Feinstein estimated. Allen (2007) revisited the problem to reconcile the difference between Clark and Feinstein by taking the best measures of each approach, and had estimates that were closer to Feinstein. If we use the progressive credo, evidence seems to suggest a weakly pessimistic view towards W/P. Among the sources, there is agreement that there was some form of Engels pause before 1820, and an increase in W/P thereafter, and the extent of the latter increase is disputed.

Heights appears to be a promising measure of SOL, as it is a composite measure. Food gives people energy, which can be used in the following ways (1) basal metabolism (2) work (3) disease fighting (4) growth. Thus, higher people (as a result of more growth) correlate with less work, less diseases, and more food, which are reasonable proxies for a higher SOL.

Floud et al attempted to measure height trends in IR by looking at heights of military recruits, since such heights data are readily available in their records at enlistment. Looking at the heights of recruits in the Royal Navy and the Marines, Floud et al found that the heights of people born up to 1770 were increasing, and started falling thereafter.

In light of the truncated sample, Nicholas and Oxley did a separate study and found a different result. They looked at the heights of female convicts transported to Australia and observed several trends. Firstly, the heights of people from urban areas were lower than those from rural areas. Secondly, the heights of both groups fell over time, with the rural heights falling more (which is consistent with enclosures that led to the decreasing use of commons and food available to the people without land). Lower heights of people from urban areas is consistent with Szreter and Mooney’s study that life expectancy was lower in urban areas and Huck (1995)’s study that infant mortality was higher, as they all point to the idea that there were more diseases in urban areas.

The use of heights is not without criticism. Correlation with other measures is one major problem. The real wage measures tell us that SOL seemed to be stagnant until 1820 and started increasing thereafter. However, Floud et al’s heights data tell us that SOL increased up to 1820 and fell thereafter. Nicholas and Oxley’s heights data tell us that heights were falling throughout the IR period. Thus, there is a lack of consistency between different methods of measuring heights and with other SOL measures.

Another problem in measuring heights is the time as a proxy for SOL – do people’s current heights tell us about their current SOL, or the SOL at the time of birth? The Barker hypothesis suggests that people’s life expectancy at 50 depends on their month of birth: life expectancy is lower for those whose mothers were pregnant over winter and there was less food available. Cinnirella (2008) looked at this aspect in IR, and compared the heights of people born in rural areas who migrated to cities against those who stayed in rural areas. It was found that the urban migrants were shorter on average – this suggests that heights not only proxy for SOL at the time of birth, but also one’s current living conditions. Cinnirella’s study also shows a steady decrease in heights over time.

The heights data complicate our inferences on SOL from real wage data due to its inconsistency. Nonetheless, it seems that heights were decreasing in the latter half of IR, and a weakly pessimist position is implied.

Another consideration for SOL would be diets and consumption. Muldrew (2011) looked at agricultural produce to estimate the amount of calories available. He found that there was 4000-7500 kcal available per person (and we only need 2500 for our sedentary lifestyle) during the period, which suggests that SOL was indeed high. His trend estimates that calories available increased until 1770 and started falling thereafter.

Floud et al (2011) did a slightly different estimate by looking at consumption rather than production. They found the calories available to be much lower, and found a steady increase in kcal consumed over time. In order to reconcile these differences, Meredith and Oxley (2013) looked at the methodologies, and reestimated the diets. They suggested that a large part of the agricultural produce could have been used as animal fodder and for seed retention, so Muldrew’s estimates were implausibly high. Nonetheless, their trend path was still closer to Muldrew’s.

With the reconciled diets data, we can reasonably conclude that diets increased up to 1770 and fell thereafter. This is actually consistent with Floud et al’s heights data which suggests that heights started falling in the late industrial revolution, where less food was available. However, the other data where diet consumption increased over time clearly contradicts Cinnirella’s estimates that heights decreased over time. The more difficult task now is to square the decrease in heights and diets in the latter IR with the increase in real wages. It might be easily dismissed that real wages were not spent entirely on food, but the heights and diets data seem to support Feinstein’s pessimistic view through a slow increase of real wages more closely.

With these proxies for SOL taken in conjunction, a weakly pessimistic view can reasonably be adopted. Economic historians tend to focus on these quantitative measures, but they should be seen together with more qualitative works. Griffin (2013) collected autobiographies and memoirs of people living during the IR and found that there was greater hope and freedom, and that some people actually enjoyed these longer working hours and apprenticeships. As such, it is helpful to go beyond the quantitative measures, and to consider how people might think that IR might have increased the SOL at that time after all. Overall, the view that there was a “rapid increase” can clearly be rejected, but a slow increase might still be reasonable.

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Is less state intervention better for the economy?

State intervention in the context of the economy refers to the activity of a political institution that influences the free market. The state is distinct from the government – Belgium, for instance, functioned without an elected government for some time, but the political institutions that relate to the state still functioned. Stiglitz (1987) suggested that the state is distinct from the market in that it has two features: (1) universal membership and (2) powers of compulsion that allow it to provide goods and services more efficiently than the free market, especially in the case of public goods – in other words, the state is a Coasian bargain (Demsetz), and this becomes highly evident when we look at the evolution of political institutions (North, 1991). Saying that less state intervention is better for the economy involves some extent of normative judgment, or idea of what “better” entails. Here, we will look at the main arguments for more state intervention first – the existence of market failure and the ability of the state to alleviate it, then we we will look at the main arguments for less state intervention – the possibility of government failure through imperfect information and public choice. Finally, some discussion on the type of state intervention rather than a question of “more” or “less” is also warranted. Overall, whether less state intervention is desirable largely depends on a country’s context and institutions.

Before looking at whether there should be less state intervention, it makes sense to consider why people deem state intervention as necessary in the first place, and the most common argument is market failure – the failure of the free market to be efficient. This can happen through externalities, where there are external costs and benefits accrued to third parties such that the good is either over or under consumed. One example would be positive externalities in schooling, as a more literate population correlates with higher growth and less crimes. Since the poorer people are less able to afford education, the state’s subsidy and provision of education can help to alleviate this source of market failure. Public goods will be another example – van Zandt studied the history of lighthouses and found that there was some form of state intervention in all provision of lighthouses, beyond giving property rights. Due to the nonrival and nonexcludable nature of public goods, they would either be undersupplied or not supplied by the free market, and the state can help to provide these goods. Clearly, in some contexts, state intervention is deemed necessary.

It should be noted that, for the heterodox economists, the idea of “market failure” is not very clear either, so the role of the state can be questioned. In the neoclassical school, one source of market failure is the market imperfections that arise from monopolies, where these firms produce at an output where MC=MR and charges above the socially optimum at P=MC. This results in supernormal profits for the monopolist, but a deadweight loss accrued to the rest of society. While the neoclassical school views this as a market failure, the Schumpeterian school views this as a market success! For Schumpeter, what matters is creative destruction and continuous innovation. The existence of supernormal profits for monopolists is precisely what incentivises people to innovate in order to gain market power. Thus, across different schools of thought, there is less agreement on what constitutes a market failure, and in these cases, we cannot conclusively argue that more state intervention is warranted.

Thus, the question of whether state intervention is warranted will be answered differently across different contexts and different schools of thought. Market failure through monopoly profits are less clear. Even in the context of externalities, Coase theorem suggests that when the government does not intervene, or merely assigns property rights, the free market still has the ability to correct its inefficiencies – there is some support here when Ostrom looked at the commons. In particular, for Britain in the 1700s, where commons were managed by parishes, it was rather unlikely that people could exploit the commons without the rest of the parish knowing about. Suffice to say, most people would agree that public goods are undersupplied by the free market, so state intervention is clearly warranted here. In particular, Zaire under Mobutu would have performed better with more state intervention that built public infrastructure that prevented the wearing down of public roads by 95% by the end of the military regime. As such, there are some clear cases of market failure that certainly warrant more rather than less state intervention.

There are standard arguments for less state intervention from public choice theory. Public Choice Theory suggests that we should not look at the state as an all-good and all-knowing Platonic philosopher king (Butler). Instead, we should compare a realistic market with a realistic state. (Posner) People running the government and state are themselves economic agents who want to maximise their own utility, which can come from higher budgets, or electoral outcomes. This implies that the state might not act in the interest of social efficiency (if such a term can even be defined after we have considered the market failure arguments), but act in its self-interest. This would be in the form of pork-barrel spending where politicians spend inefficiently on public goods or help concentrated interests in order to gain popularity with the swing voters. A recent example would be how Trump opted out of the Paris accord in order to protect the concentrated interests of the American workers who work in coal and steel and have practices that are not environmentally friendly, even though it takes up a very small proportion of the economy. In light of such failure, we might argue that less state intervention is desirable, so that the market can weed out its own inefficiency – as can be seen when Thatcher cut down subsidies to inefficient industries in the 1980s that eventually aided structural change and growth.

The second argument for less state intervention would be that there is imperfect information in the state. The state’s ability to provide the right subsidies and optimum amount of public goods is premised on the all-knowing nature of the state, when this is far from true. The government does not know the optimum amount of carbon emissions to cut down on – which empirically led to the price of carbon credits in Europe falling close to zero at some point. How much public goods to provide is also another political question, as Alesina noted that in US, differentials in public goods are correlated with the extent of ethnolinguistic fragmentation, suggesting that the provision of public goods came more from political decisions rather than purely economic considerations of costs and benefits to the society. In light of information gaps, mechanism design appears to be a promising way of giving the government sufficient information where each person has every incentive to reveal his true preferences such that optimal amount of provision can be achieved. One success story would be Singapore’s Certificate of Entitlement system that uses the Vickery second price auction such that people would only pay the lowest bid that made the cut for the COE. However, in most situations, such mechanisms are rather complex and difficult to implement across the state, so it appears that Hayek might be right after all – that the market knows best. Without sufficient information, less state intervention can be desirable.

It is very difficult to make any blanket judgment on whether more or less state intervention is better for the economy. The points for and against intervention mentioned above are non-exhaustive, and for each point there are many more qualifications and critiques. Perhaps, the bigger problem is that economics cannot even give a good answer for what “better for the economy” entails, for this is a normative judgment that differs across different schools of thought. Nonetheless, there can be some agreement across countries and contexts. North Korea would likely do better with less state intervention, as we have seen how the black market in Russia alleviated the inefficiency in central planning. In Africa, state intervention in the form of providing education would probably be desirable in the long run, as Glaeser (2004) notes that such development of human capital correlates most closely with growth and development. Across history, we have seen both success and failures of a strong autocratic state – successes include the East Asian countries that relied on the state for corporatism, devaluation and protectionism; failures include the communist countries that eventually collapsed. Thus, empirical evidence and theory cannot give us any conclusive answer to this question, and it is more important to consider these ideas in its context and institutions.

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