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October 15, 2011 / Lukasz Cerazy

What Do You Aspire To?

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Good moral values have reached a low after being attacked by a general adoration of ignorance. I feel it is worrying that the number of leaders that are evidently irresponsible or unintelligent keeps getting larger. The individuals on whom these leaders rely on apparently let them get away with their incompetence or are otherwise not bothered with who they are. Our social fabric is controlled by both formal and informal rules that form customs, norms and mores. They are exercised by praising certain behaviours and ridiculing others, ultimately leading to conformity and common social patterns. These human interactions have created the new black, which appears to be futility.

What is worrying about our current situation is the general degradation of ambition and moral!

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Evolution has taught us that through development and a constant strive towards becoming better equipped to suit our surroundings, we as people can survive and evolve. That can best be achieved by improving our understanding of how the world works and come up with improved solutions to our problems. Not only is our world changing ever faster due to globalisation, but so is our climate and environment. Being able to better adapt to these changes requires more complicated solutions that derive from wealthier knowledge. Social and economic prosperity has developed very rapidly over the last 200 years, mainly due to technological and scientific advances. These have occasionally come in bursts, like the industrial- or Internet revolutions, and are a result of our intellectual heritage. Never have so many people had such good living standards – but there is still room for significant improvement. Pursuing ambitious aims and widening our understanding of the world is not only a noble onus, but an essential one. This view has increasingly been challenged by individuals in society that pay no attention to aesthetics or moral values and are perversely driven by primitive incentives. Their behaviours have unfortunately gained acceptance from large parts of society and created new conformities. These include shame, ridicule, sarcasm, criticism and disapproval when it comes to championing knowledge, righteousness or honesty and have increasingly been replaced by ignorance, corruption and dishonesty.

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I want my leaders to be visionary, intelligent and honest – features that are largely based on merit and achievement. A leader like that is better placed and also more likely to make decisions that create social benefits and guide a nation towards a bright future. Personal drive to achieve a better life has always existed; however, what we now see is a much wider acceptance of short termed incentives with a high focus on money and promotion. This drive takes focus away from what a position within the state entitles and has created a perverse favor-based system, where leaders are chosen for posts they clearly do qualify for, mainly because they have earned enough favors. In most cases these leaders do not fulfill their formal or informal obligations and set a very poor example for society. This is a significant reason why the state has a big responsibility when it comes to social conformities. People look up to and follow their leaders and in many cases emulate their behaviors. A statesman should have strong moral values and be highly qualified to lead society along the right track. Unfortunately, it is not difficult to list political leaders that should not hold their positions. Villy Søvndal, Sarah Palin and Silvio Berlusconi quickly string to mind, not to mention all the self-elected despots.

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The trend is also evident across most media where there is a wealth of channels and shows that feature people with a lacking capability of abstract thought. These somehow become great hits! What is the attraction of watching reality-shows with individuals that have non-existing ambitions or, to put it bluntly, who are stupid? Is it to make us feel less miserable with our own lives? It has the unfortunate side effect of sending out the unambiguous message that it is acceptable to be ignorant and is that really what we want to aspire to? One of the reasons behind why it might be so wide spread is due to the changes in which we filter news and events. In our modern thrill-seeking, one-stop society, we increasingly distance ourselves from the severity of events as the amount of continuous information is hugely overwhelming. Significant news events get toned down because they appear to happen with a high frequency and do not concern us. It has unfortunately become everyday life to hear about a corporate or political scandal without really thinking about how it affects our lives or how to deal with it.

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The symptoms mentioned above are a result of a more profound unrest in societies across developed as well as developing countries. The Credit Crunch and following debt crisis has made the world a more volatile and uncertain place to live in. Governments have reacted by contracting fiscal budgets or introducing outright austerity measures. These tend to have a significantly negative impact on society. The measures are unfortunately necessary because of accumulated debt created by unsustainable spending, corruption and waste in the public sector. This means that very hard times lay ahead. When the economies were growing and interest rates were kept low, few paid attention to the rising public debts and unsustainable spending levels. However, when the markets crashed and governments tightened their belts, it hit the average worker very hard leaving them with a feeling of injustice. And rightly so! Heads of governments, national banks and international agencies were too optimistic about the growth prospects and too lax about regulating the financial system. Now, when prospects look gloomy and many cannot see the light at the end of the tunnel, uncertainty rises. When uncertainty rises, social unrest rises and manifests itself across society. It has most prominently manifested itself in the revolutions, civil wars and riots that have been raging across the globe recently. The BBC wrote an interesting article about the riots in England that shocked many across the globe. The article illustrates very clearly that it is not just one factor that plays a part in this social meltdown and testifies to the fact that society still faces serious challenges in the future.

Governments in heavily indebted countries are currently in a very difficult position, not only because of the mounting fiscal pressure, but because of the effects their measures will have on society. Young people may very well be worse off than their parents in certain parts of the world. Youth unemployment is at a very high level and is unlikely to improve with tightening fiscal policies. The opposite is actually more likely and this creates a very serious structural problem for most developed nations. In these countries the baby-boomers are about to retire, with fewer young people to pay for their earned retirements. This will inevitably create an even bigger strain on the public budget. In times of fiscal tightening the young are the most likely to suffer and with education costs rising this might very well create a divide in society that will lead to even more unrest. There is even the risk of losing a generation of young people to high unemployment and slow growth. The fiscal regulation is therefore likely to make the situation even worse. It is painful to think that parts of this economic and social crisis could have been avoided if our leaders had more fiscal discipline and bigger determination to perform reforms, which could have flattened the severity of the crisis. In many of the most indebted countries structural reforms were long overdue; especially labour market and taxation reforms that now appear very painful.

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There is a bigger need now than ever for visionary, capable and inspirational people to lead us in a common direction that is both sustainable and beneficial. Irresponsible spending and lending will inevitably leave our children with fewer opportunities, which is both immoral and unsustainable. Creating a coherent society must therefore also be a target for our leaders so that history does not repeat itself.

I believe that it is easy to argue for having ambitious aspirations. I also think that individuals who think otherwise are free to have that opinion, but I cannot see how they should be praised for it.



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May 24, 2011 / Lukasz Cerazy

Choosing to Become an Addict

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The inspiration for writing this article comes from a very interesting and heated debate I had with a medical doctor and a close relative of an addict. We were talking about mechanisms that determine outcomes for people that end up in addictions of harmful substances and had quite different views on the matter. We all agreed that being an addict of any kind of substance is harmful to ones health and environment in the medium to long run. Firstly, it degenerates vital organs and affects the mind. Secondly, there are social costs, or negative externalities, associated with an addiction, which society has to bear. These come in the form of higher costs for national health, increased crime, broken families and funding of various help-organisations to give a few examples. The point where we seemed to disagree the most was surrounding the scenario of choosing between ones family vs. alcohol or drugs. Why take drugs or drink alcohol at all, if it is common knowledge that these substances are harmful? In the debate I was met with the argument that the addicted person should have enough power or self-control to know that he or she was doing something wrong and be capable of giving up their bad habits. I disagree with this view and think that it is a simplification, because I believe that individuals can reach such a point where they react to their addiction and therefore do not actively choose to abandon their families. That point is when the best option the addict sees is to pursue their abuse, which I also think is what best describes an addict. This might seem counterintuitive so let me elaborate on why I believe so.

Economics can offer very valuable explanations as to how individuals make decisions in various situations. One of the key concepts that can be applied is known as discounting. This concept is easy to understand when applied to an economic example: Discounting is a function of bringing future transactions to a net present value. This can also be expressed as the difference between present transactions compared to future ones. Most people prefer current consumption to future consumption because they want to achieve the benefits now rather than at a later point in time. The discount rate expresses what it would take to compensate an individual for putting their consumption forward in time. With a discount rate of 10% per annum, one would have to pay 10£ of every 100£ to compensate an individual for waiting one year to spend their income. The public sector uses a 3,5% rate on projects running up to 30 years, so 10% might seem high. However, many factors determine how heavily individuals discount the future. Your sex and culture will have a significant influence on how much focus you put on the present compared with the future. For individuals who are prone to addictions the time-line is skewed very heavily towards the present, requiring huge compensations for them not to engage in taking drugs or drinking alcohol. This means that despite the well-known fact that drinking, smoking and having unprotected sex is potentially lethal, individuals will still engage in these activities as long as they see a greater benefit from doing so now compared to any risks associated with their health in the future. Furthermore, the fact that the disadvantages are expressed or appear later in time, individuals will often place too much emphasis on the short run.

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The second very useful concept is what economists call Rational Choice Theory. The framework assumes that individuals are acting in their own best self-interest and describes how they engage in a cost-benefit analysis whenever they are presented with a choice. This is a simple framework where all the benefits are pooled on one side and held up against all the disadvantages on the other side. A situation when someone uses addictive substances is therefore expressed as follows: advantages > disadvantages. An important distinction is that the theory is not concerned with any of the motives behind the decision but rather with the balancing of costs versus benefits. The word rational in this case relates to the optimisation of personal utility and does not relate to making choices with a clear conscience or sane state of mind. The theory therefore fails to address issues like ethicality, moral or empathy; however, it gives us a good understanding as to why the addict simply does not stop their abuse.

In the initial stages of taking drugs or drinking alcohol the costs are not large and do not outweigh the benefits one might get from engaging in these activities. The benefits could be expressed as the utility an individual receives from being in a social context or from seeking an escape from ones everyday life. However with time, as the appetite of the body for the addictive substance grows, the costs rise dramatically. This means that the choice no long is associated with getting a short-term benefit, but rather avoiding the very large costs of not letting into the desire. This leads me to conclude that even though an addict knows that he or she might be doing something that is harmful to themselves they will continue doing so until the costs outweigh the benefits, which can be very difficult, especially if their abuse is associated with a depression, psychosis or other types of difficult circumstances. This means that despite the actions of the addict pursuing their abuse, which may lead to other areas of their lives being seriously neglected because of the ever growing costs, they will continue to do so as long as there is a net benefit. This is a very important distinction, because their choice is not concerned with prioritising between two different options, but rather between carrying out the intake or not.

This theory is of course not perfect and has its weaknesses because it does make assumptions about the amount of information available. The addict is limited by what he or she views as a benefit and perhaps lacks a better understanding of the consequences of going down a road of heavy drinking or drug use. However, I am still not lead to believe that the choice is as simple as being a good parent versus giving into an addiction.

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January 21, 2011 / Lukasz Cerazy

A Transparent Liberal Democracy

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The birth of the social network has not only been significant in terms of greater communication and connectivity, but it has also become a powerful voice. A vocalisation of public opinions on all sorts of issues and its power has grown to such an extent that it now has the potential to change the social contract between the state and the public and to revise business practices. Lately a new phenomenon has risen to public prominence, which is a type of organisation, like WikiLeaks, that blows the whistle on sensitive issues. Their effectiveness is still complicated to determine, but the organisations certainly have the power to embarrass businesses and political leaders. There are two significant reasons why these organisations have more potent ammunition to fire with and better capabilities to change popular public opinion than ever before. First, the news or information can be distributed fast and very effectively within huge social networks. Furthermore, once it has spread it is nearly impossible to delete that information because the number of copies is simply immense and no authority has the capability to account for its distribution. Second, and perhaps most importantly, the individuals who seek to blow the whistle come from within the system itself, like national security offices or offshore banks.

Public Opinion

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The whistle blowers might have a variety of reasons why they come forward with sensitive material, but it seems to have a more profound motivation than just 5 minutes in the spotlight. Their motives might be self-interest or potential gains in the future; however, they might also be driven by the desire to correct social unjust relations or practices. Without having a clear-cut answer to their motive, because there are always exceptions and cases vary, it is, however, possible to interpret how the public judge their actions. Supporters of individuals that do come forward and pass on sensitive information to organisations that publish these, give them a sort of hero-status because they are seen to want to unveil “the truth” about a controversial issue. A correction of this kind of affair can potentially lead to greater equality or other social externalities, which benefit society. On the other hand, the sceptics are entrenched in their view of data protection and want to reserve the rights for firms and state to protect their trading secrets or policies and put up barriers to their distribution of information. This division resembles the intellectual property rights debate on patents, copyrights and the like. In general this can be seen as a division between the left and right on the political spectrum, despite this being a quite vague classification that is not universally true.

Political Spectrum

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In spite of the obvious risk of prosecution, if one is found to be in breach of a confidentially contract, the whistle blowing community is gathering momentum and individuals from more sectors of the economy express their desire to make the public aware of an unfair relation. Government and business can no longer be certain to get away with corrupt or unjust dealings because it may become the next day’s big scandal. In this context the timing of this wave of discontent for the “system” is no coincidence. It follows a big global recession where it is harder to justify inequality or corruption given times of austerity compared to times of prosperous growth and increasing social unrest has been a reality across the globe. It also follows a period where governments have appeared to have sleep during a prolonger period of economic boom and failed to regulate the financial sector appropriately to avoid the credit crunch and following recession. Confidence is therefore low in politics and furthermore, big corporations that pay out huge bonuses to executives or transfer their wealth to tax havens have come under scrutiny and public outrage.

This outcome is hardly surprising given the development of two main factors: globalisation and governance. First, the process of globalisation has been underway since the industrial revolution and resulted in a much greater degree of economic, political and social world integration. Throughout history firms have always wanted to protect themselves from competition and sometime fought very hard not to loose their trade secrets or asked for political immunity. Not many decades ago it would have been possible for firms to go abroad and make a deal in almost complete secrecy and make huge profits from it because of the lack of information available to their customers or competitors. That scenario seems unlikely in today’s inter-connected world with prices shifting almost instantaneously on a computer screen in London when a deal has been struck on aluminium in India for example. Markets have become significantly more transparent and more difficult to manipulate, despite the obvious need for anti-trust laws. This has resulted in a more efficient distribution of resources and therefore a higher degree of equality. Markets have in essence become more efficient and reflect better what buyers and sellers are willing to accept. One of the main factors that contribute to the creation of an efficient market place is the distribution of information and the access to it. The amount of information that is available to us now is staggering and we have to filter and sort it to make sense of it. Globalisation has, therefore, helped the flow of information to create better marketplaces. However, many barriers still exist as firms or politicians still vigorously resist transparency, which is what the whistle blowers are aware of and is at the heart of their actions. In essence we should promote transparency because it is associated with greater equality, positive externalities and social benefits. However, incentives should also exist for firms to engage in for instance research and development by having intellectual property rights. A balance is therefore crucial and it appears to be swinging in the favour of advocates of openness and transparency yet again, because not many can justify that these gigantic multinational corporations should avoid paying taxes or otherwise hold governments at ransom if they threaten legal actions.

Secondly, governance has played a significant dual role in this development. Formally governments around the world have been promoting neo-liberalism and freedom of the individual from both sides of the political spectre. Liberalism and individual freedom were concepts that both George Bush and Tony Blair used extensively during their tenure. The elections in the UK and USA in the late 1970s and early 1980s together with the transformation of China and the fall of communism in Central and Eastern Europe paved the way for liberalism as a mainstream ideology. Margaret Thatcher’s election in 1979 and Ronald Reagan’s election in 1981 signalled the beginning of a wave of liberal rhetoric as they came to power with a mandate to end a period of stagnant economic growth coupled with high inflation. The role of the free market was given particular importance; governments transferred many of its functions to the private sector and argued that individuals, not any institution, would collectively have the most information and therefore make the best decisions. The result was a marketisation of the public sector and the breakdown of many market barriers in order to free the individual. The end of the Cold War, the fall of the Berlin Wall and later the Soviet Union meant that neo-liberalism had no obvious rival and was allowed to engulf much of the Western World more or less unchecked. Emphasis was put on equal opportunities and the pursuit of individual happiness and has evolved into the kind of liberal democracy that describes most of the free and economically advanced nations today. This ideology has been a significant factor in promoting equal rights, choice of religion, sexual orientation and freedom of speech and has in this way helped to develop an open and dynamic economy, where information is available to the greater public.

Neo-liberalism has proven to be a good catalyst for both economic growth and freer consumer choice, however, it has come at the expense of increasing inequality and more wealth has been transferred to the richest than before. The result is a peculiar kind of freedom that has reinstated privilege and class-division and reduced labour mobility thanks to neo-conservative tendencies amongst the individuals that had the most to gain from open markets. It has become very clear, especially during the latest crisis, that markets do not always produce the best outcome and state intervention is necessary in cases where market failures arises. Despite all the rhetoric about freedom, we have not created a very transparent liberal democracy, but that might be about to change with organisations like Wikileaks that see it as their primary concern to expose dodgy dealings by businesses and political misconduct.

Liberalism and equality are words that have been used in many political manifestos across the political spectre but a true utopia of setting everyone free has never been reached. To reach this kind of freedom would involve overthrowing the current social structure, with force if necessary, and letting individuals act without hindrance, but such an arrangement would need corrections as individuals require paternalistic supervision if their behaviour is questionable and that would result in intervention, which goes against the whole idea of this kind or liberty. On the other hand, a liberal system that engages in some kind of governmental control or self-regulation suffers from the disparity between what is best for the greater public and what is best for a self-interested politician.

Blow the Whistle

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In my view the state should be actively involved in correcting market failures to benefit society and create positive externalities, but otherwise not engage in planning the economy in any way. That kind of system has not been sufficiently geared to prevent businesses or politicians from engaging in actions that create private gains to them at the expense of social cost. However, the whistle blowers may be the actors in society that put in these controls by monitoring the activity of other. It is a kind of social self-regulation by the non-governing part of society itself. The problem in the past was that these individuals did not have enough weight behind them to make any serious corrections to improper actions, but the social network does and can make a difference. In this relation it is not important that all previously unjust or corrupt deals be mapped out, but it is sufficient to know that their mere presence gives individuals the incentives to check their own behaviour.



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December 20, 2010 / Lukasz Cerazy

Heavy Debt Burden of the Euro-Area

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Germany reiterated their stand on the Euro at the latest ministerial meeting in Brussels by saying that the Euro will not be allowed to fail and that no country will be deserted. This is a strong claim of intent and is exactly what is needed – a firm stand on the Euro by all countries that they will weather the storm together. Any other indication would mean that the already sceptical capital markets would make lending much more difficult for the most troubled countries, which then quite possibly would face default and worsen the situation for the whole of the EU. Making emergency funds available now is a relatively low price to pay compared to the dissolution of the Euro, weakening currencies in many parts of the continent and casting doubt about the entire European project. Much has already been achieved in Europe with the single currency its most obvious manifestation. The Euro is still a young currency, which has had relative success up until the crisis but the lack of mainly fiscal harmonisation has meant that the euro zone was hit asymmetrically by the latest recession. The crisis is going to be a turning point for the EU and the Euro, a point from where we can expect more and better integration and harmonisation to make sure that Europe is better equipped to deal with any future crisis.

The crisis has its roots in the roles of monetary and fiscal policies in the Euro zone. Countries belonging to the Euro have given up their monetary sovereignty to the European Central Bank (ECB), which controls money supply and the interest rate for the whole area. This means that individual countries are unable to make monetary interventions and control their exchange rate and balance of payments. The role of the ECB is to ensure price stability in the region by having a target of 2% inflation. In normal conditions this ensures solidity for the European economy and provides a healthy environment for growth. However, this also means that monetary policy cannot be used as a tool for managing or controlling an economy, especially one that will respond asymmetrically. The other tool to govern an economy is fiscal policy, which individual countries still have control over and is a main cause of the sovereign debt crisis. Expanding fiscal spending has the aim of boosting demand and economic growth, however, it comes at the cost of running a public deficit and increasing national debt. Some of the economies in the Euro zone systematically and prolongedly ran this type of policy without being able to perform structural reforms, increase taxation or reduce public spending in times of healthier economic growth.

The diagram below shows the level of public debt in chosen European countries and for the Euro area as a whole. (Values for years 2011 and 2012 are forecasts – Economic Outlook by OECD (2010)).

Public Debt as Pct. of GDP

There is a common trend for most of the members represented in the chart, which shows a slight debt level reduction up to 2007, followed by a period of huge debt accumulation showing the effects of the credit crunch and following recession. The chart clearly shows why there is cause for concern and why certain countries have needed assistance and other are in danger of going down the same route. Ireland has, most remarkably, gone from quite low levels of debt followed by a huge increase. The sudden accumulation of debt was primarily created because of a large deleveraging movement both in the public sector but most prominently in the private sector. Ireland was full of toxic debt and had significantly overheated the economy with the financial sector at the heart of it. Huge capital flows swept Ireland when it entered the Euro and created a bubble that burst in 2007 leaving the economy unable to service its debt and in need of international assistance. Both Greece and Italy are running at very high levels of public debt and Greece had to be bailed out in May 2010 after failing to service its debt. The condition for the bailout was implementation of austerity measures, which will seriously affect the countries economy in years to come. Italy’s situation has not become better after the internal political stalemate; however, the country is perceived not to be in any immediate danger because of its high levels of reserves, but that sentiment may quickly change and put even more pressure on the Euro if Italy fails to meet any of its obligations.

The level of public debt in the Euro area as a whole is too large because it is consistently above 60%, which is the maximum allowed by the stability and growth pact signed by all 16 Euro members. The problem got really serious for countries like Greece and Ireland when their credit rating was downgraded by rating agencies and still poses a real threat for countries like Portugal and Spain; however, some of the panic might have been averted by the statements made at the last ministerial meeting. It is clear that the levels are contrasting and reflects a lack of fiscal harmonisation and direction. However, investors quite happily looked at the Euro countries as one, ignoring the fundamental fiscal, financial and institutional differences between the individual members. Leading up to the crisis the true risk was not reflected by credit yield spreads, which meant that Greek, Irish or Spanish bonds where viewed to be much safer than they actually were. During the earlier part of the crisis yields eventually began to diverge and investors became very much aware that these bonds were not as safe as for instance German bonds. The difference in cost of burrowing for member states is a significant issue for the Euro area, which it must seek to address. These are all symptoms of an unsustainable arrangement in Europe that will need to change.

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The problems date back to before the creation of the Euro and the Maastricht Treaty agreement, which sets the rules for entering monetary and economic union. From the outset individual countries were tied by their path dependence and had contrasting domestic institutions and economic compositions. Countries like Italy did not actually fulfil the fixed conditions, but were still allowed to become a full member of the union and others have since diverged from the treaty systematically. Germany, one of the loudest voices when it came to instilling discipline among the members, broke itself the agreements but did not suffer any of the consequences. There are, never the less, clear rules or penalties for countries that do not adhere to the agreement but there is no efficient enforcement in place leading to haphazard governance. This is a clear area that needs improvement and better policing, but is still not the key to the solution.

The real issue that needs to be addressed is better fiscal integration, which eventually leads to member states giving up some or all of their sovereignty. The possible solutions that are on the table are federalisation of the Euro zone or a complete fiscal union. The latter is less realistic to pull through now and is already receiving huge opposition because individual nations will loose their ability to intervene. The second one is more likely to be successful, however, it will not be an easy task of creating agreement. Historically, this has been the case throughout economic development where towns did not want to give up their powers to a regional rule and later regions resisted a national chain of policy-making. In either case members must realise that this is a necessity in order to make the whole project work. It is an ambitious project that is aiming at centralising more decisions, which means giving it up locally. That is never going to be populistic and individuals in power will resist throughout that process but the vision of creating a better European economy must overbalance the individual or national sentiment.



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December 13, 2010 / Lukasz Cerazy

Why Nothing Is Really Free

Do you like getting things for free? Most people do, but did you know that there is a hidden cost associated with all goods or services? For instance, there is no such thing as a free cinema ticket – even if you did not pay any monetary value for it. That may seem strange at first; however, you paid for it in time. Even if your friend offered you a spare ticket to go with him or her to see the new Harry Potter movie, you would have to give up your time to get to and from the cinema and watch the film, so in fact you are forgoing the chance of doing anything else with your time. You could potentially spend that time doing something else, like working or performing any other activity.

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If I had to choose the most important economic concept I would have to pause, not for long, but I would still have to consider if anything could challenge the idea of opportunity cost. I believe that opportunity cost is such a powerful and universally applicable concept that it would be my number one. The theory goes back to the foundations of economics and was developed by John Stuart Mill in the classical period. The theory is embedded into much of the thinking at the time and was actually informally understood before Mill’s conceptualisation. David Ricardo understood opportunity cost because it was intrinsic to his comparative advantage theory.

Opportunity cost describes the relationship between scarcity and choice. Formally it is defined as the opportunity foregone of the alternative option. The resources used to acquire a certain good or service could have been put to an alternative use, which cannot be enjoyed because they have already been utilised. The alternatives are therefore mutually exclusive and play an important role in deciding what to do with the limited resources that are available to us. The real cost a good or services takes does therefore not only depend on how big its monetary value is. Its real value also takes time, utility and foregone opportunity into account and is therefore a much better estimate than an accounting value.



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December 8, 2010 / Lukasz Cerazy

Have We Become Stupid?

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The richer the economy the more we spend on things that are less important to our survival. In the most advanced economies around the world the average household spends more money on its leisure budget than on food. Apparently the question: “do I really need this?” is not a good enough barrier in our quests to satisfy an ever-growing consumer need. In pre industrial times all that was earned went to feed the family and have a place to live. In those times life was much harder than it is today and families often had to work from morning until evening in the fields just to make a living. On the other side of the industrial revolution economic activity has accelerated at a breathtaking pace and the average purchasing power of an individual has risen dramatically. This has been associated with the development of more specialised functions in society that benefit overall production and increase efficiency. However, some of the jobs that have been created in this economy I seriously do not understand! Why is there such a thing as a dog-stylist or a celebrity on a reality show about Botox parties? These things are totally irrelevant and a complete misallocation of resources!

 

It can sometimes make me so frustrated that I consider running for government with the mission to tax these markets starting with gossip magazines! Why are we not spending all that money on fighting hunger, AIDS, malaria or something else useful? That is because we are irrational human beings – all of us – including this economist. Why does anyone play the lottery when the expected value is so small? Dan Ariely, one of the world’s top behavioral economists, jokingly put it: “playing the lottery is like a tax on stupidity”! Adam Smith touched upon this as early as the 18th century in his work “The Theory of Moral Sentiment” when he described our desire to seek the approval from the impartial spectator. We are all biased towards promoting our own best self-interest be that getting a good job, finding an appropriate spouse or receiving recognition from our peers. This drive has a big influence on how we spend our income. In a perfectly rational world we would consider what is best for us, both individually and collectively, and only spend our money on things that truly benefit society like finding a cure for cancer. However, we are much more selfish than that and living in a perfectly rational world would also be boring.

Maslow's Pyramid

Our consumer choices are dictated by many factors such as: looking good, getting more money, saving time, feeling comfort and many more. In this aspect it can be quite useful to look at Maslow’s pyramid. Abraham Maslow described in this pyramid our hierarchical needs from physiological needs to self-actualisation. This goes some way in explaining the allocation of a household’s demand. Especially how it can vary over time and depends on a given person’s situation. When a lower level is sufficiently saturated we become complacent and crave to satisfy higher desires. However, why do these useless things arise on the supply side in the first place? This is perhaps a harder question to answer but it is probably because marketers understand these needs and lay out very persuasive messages to the public about becoming successful if you watch their show or buy theirs product and nobody want to be left behind. In this perspective supplier powers are much greater than that of the demand side and with a bit of collusion it is not hard to imagine that very few can dictate what the new trend is going to be. Industrial lobbies are, for instance, fully integrated into the political process; however, one does not see many consumer groups putting pressure on producers of dog outfits or dog jewellery.

Photo: DOR MALKA

I do not care about what Katy Parry does or who becomes the next top model, neither am I interested in the Kardashians! But apparently other people are because otherwise they would not have paparazzi chasing them or there would be no such show as Big Brother 12. People that buy gossip magazines and watch these reality shows give incentives to these industries to push on. Should they be banned during times of crisis or scarcity? With the risk of being inconsistent it could be argued that it not a bad idea, however, I believe in free choice and I therefore have to accept others wish to buy useless things. However, I do encourage a more critical approach by consumers towards spurious producers of things we don’t really need. It seems like such a waste, especially in difficult economic times when people are out of work when others take their dogs to get kitted up.



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December 2, 2010 / Lukasz Cerazy

A Crisis of American Capitalism

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The 2008 crisis was first dubbed: “the Credit Crunch” because of its squeeze on lending – initially a housing bubble burst in the USA releasing concerns about the amounts of debt in other markets. The London Interbank Offered Rate (LIBOR), which is the rate set for financial institutions in the interbank market, spiked in October 2008, meaning that lending ceased causing outright panic. After years of leveraging and excessive indebtedness a sharp deleveraging shock incurred that would become more than just a financial bubble. Northern Rock, a UK bank, was the first victim of this crisis and was hit by a bank-run, which forced it to require loan facilities from the Bank of England and later the bank had to be privatised. This was the first warning of things to come. At the peak of the crisis it claimed the heads of several financial institutions that either failed, were acquired or were privatised. By then it became clear that the crisis would not be contained within the financial markets and that it would affect other parts of the economy, as it turned out, it became a global crisis that severely dampened economic activity.

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At that point governments threw in the ‘neo-liberal’ towel and sought Keynesian fiscal stimulus to try and pick up demand. Because it spread to most part of the economy I argue that it is a true crisis of capitalism in a sense that institutions, governance and regulation will irreversibly change. I am confident, however, that economies will eventually emerge from this crisis but I am also confident that a new order will be established. This order will shift economic, political and social perceptions, which will again change the face of capitalism. The reason why capitalism has been the main economic paradigm is that it has previously survived two severe crises and emerged stronger: first the great depression of the 1930s and then the stagflation of the 1970s. The previous crisis, the dot-com bubble, was different in both its scale and scope and it was confined to a narrower part of the economy. It was no more than a ‘bump’ on the road and was not a capitalist crisis. It is, however, important to note that every crisis is unique and arguable more complex over time.

Certain observers, particularly Gordon Brown, proclaimed that the boom and bust cycles were a thing of the past and that the economy was quick enough to adjust itself to any changes in the economy. However, a financial crisis is neither a supply-driven nor a demand-driven crisis. Fundamentally it is a result of too much debt that was encouraged by financial institutions, which by securitization were able to spread the risk to others but it simply resulted in severe systemic risk. The accumulation of debt was made possible by huge deregulations in the financial sector in the late 1970s, mainly in the USA and UK under Ronald Reagan and Margret Thatcher respectively. The other powers at the time, Germany and Japan, did not seem to have the answers – experiencing economic difficulties they were left behind a powerful American economy. However, it appears now that these other countries could be in for a revival and become a counterweight to total American dominance along with China, Brazil and possibly Russia and India. In the long run it would appear that the booms and busts of the countries that did not go down the route of comprehensive financial deregulation experience a smoother cycle, which is more stable for long run growth.

In many ways the economy has become more efficient and transparent, which means that it is quicker to react to changes, however, as we have all seen, effective financial regulation is necessary and cannot be left to its own device. These events have therefore brought new thinking into practice and prompted the introduction of Basel III in the near future, which is a set of international regulations for the financial sector.

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What is different about the 2008 crisis is that it is a first real global recession, which was made possible by certain international imbalances. Alan Greenspan, chairman of the Federal Reserve, was able to pursue expansive policies that were targeted at stimulating the economy because of cheap imports mainly from China, which kept American inflation low. Following the dot-com crisis American interest rates were kept very low and the George Bush administration moved the federal budget from surplus into deficit letting the economy race on. The loose money conditions in turn fuelled the housing bubble and raised demand for construction and equity. It seems that the policies adopted by America over more than a decade made the economy come crashing down even harder. As other international imbalances persist, like the huge American debt, sovereign debt of Euro countries and global current account balance of payments imbalances, it is not unrealistic to think that these disparities will have to be smoothened out and indeed this is already happening as part of automated mechanisms, however, international cooperation is necessary to synchronise a joint recovery. The dominant position of America has already taken a serious hit and there appears to be other political, social and economic ideas that can challenge the State for the first time since the end of the Cold War. Undoubtedly the USA will still be a leader on many areas, however, the gap has been significantly narrowed and it will no longer dominate single-handedly.



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November 26, 2010 / Lukasz Cerazy

Does the Euro Have a Future?

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The peripheral countries in the Euro have been subject to speculative attacks by investors and capital markets, which is putting pressure on the monetary and economic union in Europe. This tension has put the future of the Euro in question and certain observers suggest that the existence of the Euro is in danger of collapsing. Greece felt pray to rising costs of lending 6 months ago, which resulted in the government not being able to service its rather large debt. To avoid a default like the one that hit Argentina approximately a decade ago the EU and IMF put together a bail-out in the form of a steady supply of very favourable lending conditions. Now Ireland has found itself in a similar position and received supports form the EU but capital markets have not responded well and remain sceptical. This has put the heat on countries in a similar fiscal position and resulted in medium term bond yields to rise on the Iberian Peninsula and in Greece. The EU has reacted by trying to cure the symptoms but is not seriously addressing the problem at the core of issue, which is institutional reforms and fiscal integration. This proposed reform did not receive much attention as long as things were going well, however, now that the members of the EU have reacted asymmetrically to the shock of the recent recession its initiation seem more pressing. The Euro has got a future but will depend of the willingness of its members to undertake reforms, otherwise, the Euro could fall apart and much of the integration could be reversed. Opinions on what the right thing to do are abundant and have much political sentiment, however, economically it is clear where different routs will lead.

November 24, 2010 / Lukasz Cerazy

How a Government is Undermining Its Own Future Growth

Angry students protesting against big rises to tuition fees have flooded White Hall, the main artery of London. Today’s demonstration is the second large protest following an earlier manifestation of dissent, where the headquarters of the conservative party was under siege and got vandalised. The coalition government have transferred much of the cost of undertaking studies at university level onto students and have set fees at £6,000 with an upper tier of £9,000. This is almost a triple increase, which inevitable will means that fewer individuals will opt for a university degree. In another senseless move, the coalition government has introduced a cap on non-EU immigrants that will mainly hit the trained and highly skilled workers by restricting their entry into the UK. This cap is being introduced because of election pledges and a growing sentiment among politicians, mainly conservative, that something must be done about the unemployment amongst native workers. Politically it may take some courage to say that these policies are not suited to stimulate a fragile recovery, but from an economic perspective they are clearly very ill-advised.

Student Portests

The magnitudes of various factors in economic growth theory are difficult to establish because it is very difficult to construct a counter factual. However, many agree that one of the most important factors for economic growth is education or put in another way: human capital. This factor is proving to play an increasingly important role as the demand for unskilled workers is dropping fast in the developed economies such as the UK. The production of cheap manufactured goods has been outsourced to transition economies such as China, which has experienced an astonishing export lead growth. The strong forces of globalisation have meant that education and life-long-learning has become more important than ever.

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In this context it seems absurd that the government introduces a strict cap on migrant workers, as the previous Labour government has long overcome the problems of unskilled workers coming in to the UK. This move is being opposed by businesses and Vince Cable, Business secretary, has also lauded his fear of undermining future growth. Likewise, the move towards American conditions in education has damaging effects on future growth too because individuals will struggle to get the qualifications needed in a highly competitive global environment, especially with the rise of many new economies that have huge populations with skilled labour. So the proportion of unskilled native workers is likely to increase with no foreign workers able to step into these roles. There does not seem to be any consistency with the policies at Westminster, which seriously threaten the fragile economic situation and future growth.

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The government should be a provider of education for the reasons above, but also because schooling is the best way to create equal opportunities. This does not only mean providing free universities but also short courses that will give workers better qualifications on all levels. This strategy has successfully been implemented in the Scandinavian countries where the labour participation rate is one of the highest in the world and unemployment is kept down with active labour market policies. The cap on immigration should equally be revised because in its current form it is likely to cut off a supply of skilled labour.

November 14, 2010 / Lukasz Cerazy

The Word We Love to Hate: Capitalism.

Why all the unfortunate associations with the word: Capitalism? In my experience the word is to some extent being misused to account for peoples misfortunes or political deceptions. That is not to say that capitalism, the main economic paradigm of the modern age, is without its faults to which I shall return later. The Oxford Dictionary defines the word capitalism as follows: “The economic system based on private property and private enterprise”. That is to say that the majority of the economy is run by private enterprise that seeks to maximise profits. Despite the perhaps blunt definition, capitalism does not imply a laissez-faire state. In a capitalistic society, private and public sectors coexist and depend on each other.

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The public sector has an important role to play as both employer and supplier of various aspects of modern society such as health, education, competition, safety, rule of law, defence and protection of the environment. However, it also plays an equally important role as regulator because decision-making is decentralised and initiative lies with the entrepreneurs. This is in contrast to socialism where decisions are taken centrally and where there is no private initiative. As such these definitions should not give rise to any hateful view and indeed this unfortunate tag is more recent, perhaps dating back to the birth of neoliberalism in 1979. The first time the word “capital” was recorded was back in the thirteenth century in the city-states of Northern Italy. However, it was not until the eighteenth century that the term “capitalism” was use with any regularity. It has now evolved into an array of meanings that are often personal, however, the original meaning predates these associations.

The more neutral word capital is what economists describe as something that is valued for its future use i.e. an investment. This can take many forms and is closely associated with some kind of stock that has a life span. Its value lies in being able to apply that stock to make future improvement or bring down costs. It can therefore take on the value of land, money, schooling or e.g. a harvest. The more modern meaning of capitalism comes from the large requirements of machinery, land, labour and natural resources, which is characteristic of the post-industrial era. A capitalist is therefore a person that engages in an investment with his current wealth to get some kind of income or rent from it in the future. Owning your own house makes you a capitalist. In the modern economy a capitalist is someone who gets a significant amount of income from his or her salaried employment, which therefore includes most people. So the technical definition is quite harmless.

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Capitalism both applies to very liberal countries such as the USA and to countries that put high value on equality such as the Northern European countries. It is closely associated with both democracy and the free market, where the latter can create environments, mostly in unregulated markets, that are cynically driven by profit maximising, predatory behaviour and unfair treatment. These scenarios are what fuel the arguments of anti-capitalists; however, it is rather a symptom of a particular market failure than of capitalism itself.

Capitalism has proven to be the least bad way of running an economy, however, one of the main problems of capitalism is its proneness to monopolies, which are either granted via patents or result because of a competitive advantage of a player in the market. Oligopolies work in a similar way and the result is very often high prices for consumers. However, in a modern economy government needs to regulate as the latest recession has taught us. Well-developed anti-trust laws therefore have to be in place to secure healthy competition and regulation of monopolies. The government also has the daunting task of regulating other market failures and lessons from the past should be learned so that society can function both effectively and in equality. This should hopefully have provided the reader with a better understanding of capital, capitalism, the role of government and an encouragement to use these phrases more carefully.

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