Skip to content
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.

Image: renjith krishnan / FreeDigitalPhotos.net

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.

Image: Francesco Marino / FreeDigitalPhotos.net

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.

Advertisements
November 12, 2010 / Lukasz Cerazy

The Way We Work Has Changed

Working the same place all you life is a thing of the past. Very few individuals work for the same company until they retire. Neither does a worker progress in a company purely based on the number of years he or she has been with the firm. But what are the trends in the modern labour market of today? Flexibility! The labour force needs to be flexible to meet the dynamic activities that characterise the globalised knowledge economy. This involves working part-time, working from home, working on short-term projects, freelancing or any other kind of work that is not a full time 9:00-17:00 job. Unfortunately, this is something that governments still struggle to fully cope with. Many governments still prefer the normal full-time worker and give them better protection via legislation. However, as the world economy is increasingly a service economy where ideas and intangible factors produce more value, a more flexible approach is both more desirable and produces positive externalities. The social benefits arise because flexible working can attract workers that would otherwise have stayed out of the labour market because they are unable or unwilling to work full time. The world is changing and policies should therefore be scrutinised and adapted to suit the globalised environment better.

Image: renjith krishnan / FreeDigitalPhotos.net

Henry Ford’s vision of a standardised industrial process that takes advantage of economies of scale where focus is on optimising and reducing inefficiencies, does no longer apply to the same extent. Adam Smith, the father of classic economics, also focused on efficiency and the drive of the selfish individual to describe work and later the division of labour. In the modern economy the need to interact and get together with other individuals is much more important. Business is increasingly done as on-off projects where various individuals get together to produce an intangible product, which involves many specialists. In this type of work some players are more peripheral or important than others, however, the network of people is what is essential. The organisation of labour is much more fluid and often confined within a restricted space and time and disappears upon completion.

This trend means that individuals float in and out of employment in the eyes of the regulators, which is often discouraged. However, this type of work can actually lead to higher efficiency, as individuals are only involved in projects as long as their services are needed and can be switched on and off much easier. In many industries this is the norm and is increasingly becoming a competitive advantage. This especially applies to the creative industries such as art, fashion, music, films, advertising, architecture and many more. Governments should therefore not try and discourage this type of work and create equal opportunities and rights for the people in the part-time sectors. This could effectively help bring unemployment down and improve the quality of work. Consequently that could mean that more people will have the incentive to stay in the labour market longer and or work more. It is no secret that we commit ourselves more if we are managers of our own time and work on our own projects.

October 25, 2010 / Lukasz Cerazy

Harmonisation and Common Standards Are Necessary – Especially in the Case of Trade in Services

Services are very often intangible and invisible so when it comes to international trade, regulators apply indirect controls. This unfortunately restricts the free flow of trade in services and as long as the degree of harmonisations is as low as it is at present trade will not pick up. The good thing about trade is that it is beneficiary to all parties involved and it is a plus-sum-game. The trouble with regulating the flow of services between borders is tricky, as border-agents cannot observe any objects actually crossing the border. These transactions are made electronically or delivered in person so the tariff-type-barriers are more rare than what is observed in goods; however, regulators can control their various kinds of delivery. This inevitably amounts to a very large number of barrier categories, as each service has its own unique way of delivery and or association with a manufactured good. However, there are some distinctions that apply to trade in services: Establishment of the firm vs. the firms operations and discriminatory vs. non-discriminatory regulations.

 

Image: jscreationzs / FreeDigitalPhotos.net

In today’s globalised and integrated world it is very rarely the case that a domestic firm is preferred over a foreign one, given that they are both equally competitive. However, all discriminatory barriers present the case where the differences between e.g. health and safe regulations in various countries creates uneven conditions for firms, obviously favouring the domestic ones. Foreign firms have to go through a long process of complying with local regulation, practice and law. This therefore also presents the best appeal for a greater degree of international cooperation and harmonisation. This not only applies to barriers in trade, but also in the case of education, traffic and e.g. the type of plug used in electric appliances. There are of course network externalities to be gained from adopting the same system. The differences are mainly due to path dependence of various cultures and at the time of their application they did not create greater problems because the world was not as well connected as it is today. At present it make more and more sense to adopt common norms, which is also gradually happening, however, governments and international institutions play a crucial role because they can either speed up the process or stop it.

A common standard will only be adopted if the cost of changing two different systems into one harmonised one is less than the utility and social gain that comes from only operating one system. The degree of positive social externality is strongest between countries in close proximity, because they usually are the biggest trading partners. That is also why economic and trade unions like NAFTA, EU, Arab League and ASEAN comprise of neighbouring members and it is also why continental Europe has a different electric plug from the UK and a different one still from America. The establishment of the General agreement on Trade in Services in 1995 was therefore a crucial step in developing common norms, however, a lot more focus needs to be put on the role services can have on global efficiency and growth. The world is a service-economy, with various agglomerated centres of manufacturing, so the scope for harmonisation is substantial and its urgency continuously more pressing. With the important role the World Trade Organisation and GATS can play in bringing together parties and overcoming the unwillingness to change national laws it is crucial that trade negotiations are held and perhaps it is time to create a new agenda for a future round at the WTO.

October 20, 2010 / Lukasz Cerazy

Reform Europe!

A great depression has been avoided because governments injected huge amounts of money into their economies all over the world. Now that money has to be paid back to creditors, which is a process that is going to take many years. Governments are feeling the strain as the pressure on public finances has reached unsustainable levels. Greece’ troublesome and inefficient public sector was the first to crack and needed to be bailed out to the discontent of many European taxpayers. Likewise, many demonstrators went to the streets in Athens to protest against the austerity package the IMF and EU presented them with, however reforms needed to be made. When creditors became more alert and looked around, the rotten state of many country’s financial situations were all to clear. Some of them that came under particular scrutiny were: Spain, Portugal, Iceland and even the UK because of their big deficits and debt burdens. Fortunately speculative attacks were avoided on these country’s currencies and capital markets kept their composure.

Demonstration during the Greek Financial Crisis

Something different is happening in France at the moment, however, its timing has also been accelerated by the global financial crisis. Police and labour unions say France is currently experiencing the biggest strike actions the country has ever seen. Demonstrators are protesting against pension reforms, which are to set the minimum retirement age up from 60 to 62. This is despite the French being recipients of some of the most generous schemes in Europe and having an average labour market exit age more than 2 years prior to the European average. According to Eurostat statistics, France had the earliest exit age of any European country of the sample in 2008. The same sample also shows that individuals over 65 years of age were in the top 3 when it came to retaining their level of incomes. France seems to be reluctant to give up on any of their worker protections, while the police have been given permission to use special interventions against the protesters blocking fuel depots. With scenes resembling civil disorder the problems of a superabundant public system will not go away.

Protest against pension reforms in France 2010

 

All these cases exhibit different symptoms, but are caused by the same disease: unsustainable public finances. Greece was simply not fit to join the EURO and it also failed to reform its huge deficit and public debt. France is far behind in reforming pension schemes to match an European average, all the while the proportion of individuals in the Euro Area over 65 years of age has grown from 10% in 1960 to 18% in 2008. Reforms are not only necessary but also make sense if Europe is interested in retaining its welfare state. The challenge, however, is far from easy and poses serious dangers to compromise the recovery and social equality. The UK government has just presented its spending cuts to reduce its public debt. According to many observers they appear more severe then expected, which shows how serious some governments are with fiscal stability. Protests are already planned in London against what appears to be a 500.000 cut in public jobs over the next 4 years and a reduction of all main departments by a third.

More demonstrations are planned in London

 

Much of Europe shares the same fate of a painful transformation to a modern welfare state. Reforms are necessary across Europe however the complex composition of the European states means that local governments should target different areas; however, in an integrated and globalised economy it should be a collective effort towards a common goal. The urgency of reforms also varies, but one place where the EU and government should hear alarm bells ringing is Italy. This country has an enormous debt, an obsolete labour market policy and seriously violates the growth and stability pact. Italy scores amongst the worst in Europe when it comes to years of schooling or training, labour market participation, exit from the labour market, unemployment benefit rates and other social securities. Italy also has a the highest proportion of individuals aged 65 and above, which is likely to cause the same problems as it is doing right now in France. Whatever governments choose to do, taxpayers should get value for their money. People would be more willing to accept these reforms if they came more gradually and not as a result of sloppy or corrupt governing or passivity. There is still a way forward for Europe, so let us seize the moment and not pass the burden onto the next generations.

Statistics: EuroStat, OECD & World Bank

by Lukasz Cerazy

October 6, 2010 / Lukasz Cerazy

Reaping Network Externalities with Open Source

Firms in the services sector are finding it difficult to uphold their intellectual property rights, especially in industries like entertainment, IT, software and telecommunications. The number of patents and other copyrights issued over the last three decades has risen dramatically. This is mainly due to the increased ability of firms to exploit their ideas and knowledge in the marketplace, but also by the fact that the world is turning into a knowledge-based economy where individuals who hold ideas will prosper more than the ones who hold the means of production. However, a serious problem for these firms exist in that not all users respects their rights and endangers their profitability. Ever since the beginning of the Internet Revolution a race has existed between regulators and users in a kind of shadow economy, which has raised many heated debates. This race has produced many new innovations and possibilities predominantly because of its fast pace and high degree of competition. It has also lead to many spill-overs that have been beneficiary to the industries and created positive externalities, so they are not all bad. However, a degree of protection for firms is necessary because they would otherwise be discouraged from engaging in R&D or invest in projects, if they were unable to be rewarded in some way.

The problem is obvious because it is very difficult to control the flow of these products since they are intangible and sometimes invisible. Firms in the service sector suffer from not having possession over their products – only intellectual property rights. Firms in the manufacturing sectors, on the other hand, most often experience both and can therefore operate in the marketplace with a higher degree of control over their products. Furthermore, the service firm’s cost structure forces them to engage heavily in many sunk costs, which they have to cover later – this only gives them an even larger incentive to seek intellectual property rights, perhaps triggering a counter reaction by their users. Monopolising or restricting the distribution and use of their services has also been the preferred tool by firms in these industries for most of the period. In reality though, creative individuals and advanced users continuously find new ways of circumventing restrictions and are outpacing regulators.

Firms are aware of the economics behind their positioning and many have now adopted an inverse strategy. A “if you can’t beat them – join them!” approach. This means letting parts of their product, which often also are the most difficult to control, be free. This has predominantly been the case for IT, software and telecommunication firms. They then only charge for the hardware or subscription, for instance, and let the intangible part be accessible to users. The reason why they are adopting this approach is due to the phenomenon economists call; network externalities. This is an old and well-understood occurrence where the social gain grows with every additional user of the network. Think of it like this: a telephone is not of much use if you are the only one that has one. By applying this strategy firms are able to encourage more users to join their network, increase the gains for the users and in many cases the firm become more profitable. This is possible because the costs are near zero at the margin, meaning that one extra user can join at almost no cost to the firm. There are of course limits to this strategy as users are only inclined to join networks they see benefit in, which are limited. Firms therefore have to reach a critical mass of users or they will never take off the ground. That is why there are very often no more that a handful of networks, which attract a very large part of a given market, usually relying heavily on brand strength. Think of Google, Facebook, Microsoft and the list goes on. These networks become more useful the more users join or use them and they also create compatibility. This is owing to the fact that the demand-curve, unusually, is parabolic and upwards bending before a certain point. This results in two points of equilibrium where the first one is called the point of critical mass and must be reach if a firm is to succeed and the other is the highly profitable point of a big consumer mass with the same level of supply. However, there is a certain lock-down effect once users gather in a network and the barrier to exit becomes greater.

Are you connected?

There is good reason why firms would apply this strategy to try and reach market domination, however, some may loose out even though they are better just because of user’s brand loyalty with a competing firm. There are, however, other opportunities, which include introducing open source software that not only benefits from network externalities, but also significantly increases the pool of developers for their systems. The operating system Linux and the Google’s Chromium are examples of this. Firms then rely on the combined pool of users and developers to evolve the software to what the users themselves think is most necessary for them and reward the best ones. This is evidence that it pays to be a techie. By applying these and similar strategies firms are able to reach a critical mass of users and can become very profitable. So, if you have a business idea that would operate in a virtual market, you now know the basic economics behind it.

September 14, 2010 / Lukasz Cerazy

Services Can Lift Economic Growth.

Economies can look to trade in services for increasing much needed economic growth and create more jobs. There is much literature on the topic of trade and multinationals, however, the vast majority of it deals with goods and manufacturing-subsidiaries. The General Agreement on Trade in Services was only established in 1995 as a treaty of the World Trade Organisation, whereas the modern liberalisation and standardisation of trade in goods has been underway since the Second World War. This also has to be seen in the light of the service revolution that took place in the 1960s, which resulted in services contributing more to global gross domestic product than goods. It is therefore puzzling that we do not know more on this topic, however, articles are slowly appearing and some of the most recent ones show an unfulfilled potential for trade in services.

This potential has alerted governments to its possibilities of revenue. There is also the benefit of balancing out a negative trade in goods with a positive trade in services. Increasing exports is considered as a way to stimulate regional or national activity leading to more employment and higher output. This would go some way in filling out the employment gap left behind by more mechanised production and the outsourcing of manufacturing. It is also important to note that this development is not solely a phenomenon of the developed world, so its relevance and significance applies globally.

Services are, however, inherently different from manufactured goods, because they exhibit characteristics of intangibility, invisibility and embeddings into goods and often require simultaneous production and consumption. These factors make trade in certain services impossible; however, more are now tradable than ever before including more basic services such as transportation, education and insurance. Evidence on the supply side shows high levels of tradability in certain service sectors nationally, however, internationally these levels are much lower, which means that there must be external barriers to the tradable services when they have to cross borders. Most barriers to trade are associated with their mode of entry – in fact, the majority of barriers to trade are of the non-tariff kind and are often a result of local market regulations that do not target trade, making the issue even more complex to solve.

There is still much work to be done internationally and more attention should be paid to the GATS, before the degree of trade in services can reach higher levels. The focus should lie with bringing down any protectionist barriers to trade in services and bringing about standardisation by developing common norms. The WTO is therefore an ideal forum where this can be achieved. The common misperception is that cultural and language obstacles are the biggest non-tariff barriers to this form of trade, but research has revealed that only about a fifth of businesses in the EU perceive these types of barriers to be the main ones. There is therefore great scope for expanding trade in services and bringing about economic growth and more job opportunities internationally.

July 27, 2010 / Lukasz Cerazy

Advance of the Service sector – Is it the Case of Being More Innovative or Simply Outcompeted in Manufacturing?

In the developed economies around the world, services contribute by far more to GDP than manufacturing does. Likewise, more people are employed in the tertiary sector, in the developed countries than in developing ones. In the EU services contribute by about 65% to GDP and even more so in the USA and Japan. The kind of production that was characteristic of the developed nations following the industrial revolution in the late 18th century has almost entirely been replaced by highly skilled labour and high value adding, capital-intensive production in the 20th century. Technological innovation often occurs in bursts or leaps, permanently transforming the economic landscape. Our path has followed three industrial revolutions: the fist starting in the mid 1700s with the invention of the steam engine and establishment of factories. The second industrial revolution encompassed the evolution of the engine, the art of metallurgy and the exploitation of crude oil and other natural resources. The third industrial revolution saw the birth of the computer and Internet age.

Our economic pathway has been dependant on technological innovations through centuries. It was, for example, through technological revolution in agriculture that mankind could avoid the Malthusian trap and become an advanced civilisation. Developing nations seem to follow a similar path of gradual steps of industrialisation and raising national incomes. This process has the effect of increasing worker’s wages over time and it therefore squeezes the manufacturing industries. There have been two responses to this external force by developed nations:

1) Transformation. The economy evolve into a knowledge-based economy, increasingly relying on services of various kind to employ individuals and either abandon the low-skilled manufacturing industries or protect them via subsidies to avoid job-losses.

2) Outsourcing. Companies have over the past four decades been engaging heavily in foreign direct investment to move their production activities to where labour is cheaper and only kept administrative, R&D and marketing functions in the home country.

This course has lead to the economic rise of countries like Russia, China, India and Brazil, where production is cheaper. There countries, and especially China, have – for that reason – been called the workshops of the world. This has in turn lead to healthy development and improved living standards in those economies. However, it poses challenges for the developed nations, like increasing the pressure on education, creating job opportunities for low skilled workers and future growth.

So to answer the question whether it is a pull or push mechanism that has driven the advance of the service sectors in the developed world, the correct answer lies somewhere in between. It has been pulled by the innovations and efficiency seeking, which has developed sophisticated service industries. On the other hand it has also been pushed by the increasing competitiveness of the less developed countries, which has eroded the old industrialised country’s manufacturing capabilities. This then poses another problem, because oddly enough only 9,2% of exports is commercial services, whereas manufactured good take up the bulk of exports out of the EU. There is therefore a significant risk that growth will not be as fast if trade in services is not expanded to a higher level. It is however not realistic that services will take up more of exports than goods in the near future as many barriers to this type of trade exist. These are: trade substitution via FDI that replaces otherwise servicing a market, differences in laws, language and cultural barriers. However, there is scope for greater harmonisation in synch with the degree of globalisation. Tearing down barriers is not the only way though. Policy-makers should focus on encouraging small and medium sized companies to exports their services by realising their potential. This is because these firms often do not realise their own possibilities and narrow their markets down to the distance a good could travel within a few days of standard delivery. But as these firms produce a service, that can reach the other end of the globe with the push of a button, the marketplace becomes global. So if patents and other intellectual property rights are any measure of the marketplace for ideas it has grown tremendously over the last decade. Those who hold ideas, not those who own machines, will generate greater profits in the economy of tomorrow. Furthermore a strategy that pursues increasing exports in services can realistically lift economic growth.

– By Lukasz Cerazy

July 23, 2010 / Lukasz Cerazy

Is the world economy on rout to reversing the degree of globalisation?

This might seem as an almost impossible scenario to most observers. However, globalisation has been reversed before and in a significant way. Most recently after the Wall Street Crash (1929) following the First World War, which saw protectionism become the preferred policy amongst most of the developed countries. It is not the first time the world has seen great migrations and leaps in commerce and international trade. The term globalisation encapsulates the idea of international influences and operations, which has been well known from very ancient civilisations and their trading routs or migrations. The ultimate degree of globalisation is a complete integrated world economy with identical standards, perfect mobility of goods, services, capital and labour. However there is a long way to fulfil this potential and perhaps it is not a feasible one. It is, however, widely recognised that the level of globalisation is the most advanced it has ever been, despite periods of remarkable de-globalisation. The fear is therefore not unfounded.

Some therefore fear that the current era of globalisation might be heading for the same dismal future. The same critics express their discontent with the word that has increasingly become a term of abuse rather than a term of praise. Much like the term Capitalism it has too often become a popular target for explaining all sorts of misery, which is unfair. This is of course not to say that there are not serious issues associated with globalisation. It is rather the way in which it is being managed that is deeply critical, when it appears to always be in favour of the developed world and their corporations. There is therefore much scope for improving globalisation, which first and foremost must happen through political integration and agreement. The creation of an international body, that has the power to effectively enforce agreements and to make governments adhere to its rules, is of the highest priority. Otherwise, for example, countries like the USA, who can best afford to prevent environmental degradation, will continue not to ratify the Kyoto Protocol and other international obligations.

There are overall five significant factors that make globalisation different today than in the past. These are:

1)   Free Trade. Organisations like the GATT and the WTO have been instrumental in achieving multilateral trade agreements. Most notably China and India have removed barriers to trade in order to drive their economies through exports.

2)   Outsourcing. Corporations have moved much of their operations to areas of lower production costs, where – controversially – regulation is much more lax.

3)   Communication costs. These have been brought down significantly through the standardisation of container shipping and the over investment in broadband communication during the euphoria of the dot-com boom in the 1990s.

4)   Liberalisation. Following doctrines from Thatcher and Reagan many countries have opened up their borders to flows of goods and services, as well as capital. This has – not without controversy – opened up markets for Western nations to enter these markets and as well as letting hot short-term speculative capital investment flow quickly in and out. Labour, however, still remains less immobile.

5)   Legal harmonisation. International standards are becoming more prevalent and property and intellectual property rights more widely respected.

All of the above factors can and should contribute to a beneficiary level of globalisation. So in order to avoid the risk of reversing the process and furthermore contributing to its fairness, the way in which it is being managed should come under scrutiny. Many of the factors, which have led to the current stage of globalisation, are irreversible, so they cannot be undone unless newer technology makes them obsolete or international scepticism deepens. The second point is much more critical at present, which is not surprising when, for example, examining the IMF’s conditions of receiving aid and universally applying the Washington Consensus. The G8 should therefore initiate the creation of an international organisation that could address the issues of globalisation. Let us make people believe in globalisation again and the best way to do that is to let its benefits reach more people. The potential is certainly there. This is possible because globalisation it is not a zero-sum game and it has made millions of people better off already. There has never been a time, where life expectancy and living standards have been higher, to which globalisation has been a the key element. There are therefore good reasons to promote a higher degree of globalisation, if it can be managed fairly.

By Lukasz Cerazy.

December 13, 2009 / Lukasz Cerazy

The Economist

The so called credit crunch of 2008 made it obvious that neither supporters of Keynes, Friedman, nor inflation targeting monetarists could prevent a recession spreading across the globe. As the crisis took front page the public turned to find the ones responsible for it. This would imply partly blaming themselves for taking up unrealistically large loans and overvaluation of assets such as stocks or property value. Nonetheless the system was at fault too: very loose monetary policies, technocracy in the banking sector, lack of comprehensive risk analysis, misguidance by rating agencies and misunderstanding of systemic risk were all significant factors in the USA from where the crisis spread. Criticism turned towards policy-makers, bankers and economists alike. Some of the criticism is justifiable as certain models, ways of governance or practices need to be reviewed or new ones developed.

Economists do make suppositions to build models and theories where these assumptions are not applicable in all cases. However, claiming that they never get it right, crises an inevitability and implying that the science is irrelevant, is not the way forward! Only by a better understanding of economics can society hope to create suitable economies, policies and governance. Economics has been and will always be a social science to the contrary of what modern day Business Schools try to vend it as. It is, however, a discipline that hasn’t been acknowledged on its own for as long as medicine, theology, sciences or any other of the classical teachings. Economics sprang out from Philosophy and Cambridge University was the first institute to establish a course in Economics in 1903 separate from the Moral Sciences. Adam Smith, seen by many as the founder of modern economic thought actually never studied or gave any lectures in economics because it did not exist. Economics describe how social interactions create trade, economic rent, future contracts, inflation and can therefore never be classified as a subcategory of management or business. Economists analyse what the inputs and outcomes from business are, not the other way round. Economics should, nevertheless, not be viewed as a science that does not have implications on business or have great utility in its application in the modern market place. That is exactly where it has been gaining its claim for implementation.

The present environment is, however, quite different from the times when Keynes walked the halls of Cambridge University or Friedman lectured at the University of Chicago. In fact the world economy has become increasingly interconnected, mainly via trade, and international monetary and social integration and therefore changed the science and its implications. It has made further specialisation imperative and many sub-divisions have arisen as a consequence. Behavioural economics is one of those newer branches that is increasingly interesting for it application as it is concerned with the emotional factors the take place in most economic decisions. It analyses human behaviour and as market actors do not always make rational decisions it encompasses market failure. It is a science that is developing swiftly as the understanding and application of economics is increasingly clear. The tedious research, econometric analysis and economic modelling rarely make the front page. On the other hand when unemployment, inflation or a recession hits it is high on the public agenda. Understanding of economics and careful governance has played significant roles in the social development over the past century and has remarkable lifted living standards, improved education and healthcare. The economist should therefore not be underestimated.

November 16, 2009 / Lukasz Cerazy

Celebrating the Fall of Communism

As the world commemorate a very significant historical event that took place 20 years ago, it came rather unexpected at the time. The West German chancellor, Helmut Kohl, was out of the country when the Communist Government announced that they would modify their travel restriction. The fall of the Berlin wall was the symbolic manifest but what had really fallen was in the minds of people – the oppression, tyranny and division in Europe. It signalled an end that had been brewing for a long time, one that was already underway in other Central European countries, and is best remembered for its joyous moments in Berlin. It is the most remarkable political event of my lifetime! It gave millions of people economic and political freedom in the form of democratic governance and more open markets. In the late 80s workers in Central and Eastern European countries united and protested against the communist government. It was not the kind of revolution Marx envisioned when he described class struggle. The insurgence was rather a demonstration of discontent with a totalitarian governance that was completely rotten from within. If it had intended to make everyone equal it succeeded in doing so by significantly reducing people’s living standard compared to similar countries in the West. The best example of that is of course Germany after it was divided, where the gap between East and West increased year after year. The population was equally poor and only dreamt of the the products the west could enjoy. Freedom comes with economical well-being and political freedom. Communism’s central planning failed on the first account with its inability to providing economic growth. On the second account it failed even more severely, as it nurtured a police state that was corrupt and gave power to those on the inside of the system, making some more equal than others. Spying on its own population became the norm and anyone who had any opinion that was critical of the communist party was considered an outlaw for corrupting the nation’s moral. Freedom of Speech is a notion we take for granted in the developed world and it should be valued and admired because individuals should have the right to express their opinion. Censorship and repression can only lead to manipulation and exploitation. The government having property rights, controlling production, press, education, communication and transport find it remarkably easy to exercise power to achieve goals for its own interest groups. How is that struggle different to the one between the land-owning and the working class in Marx’s analysis? The answer is that it is not and the conflict which he was addressing took on another form but was not resolved. That is why individual, not any central form of governance, should have these rights and exercise these functions.

Central and Eastern Europe’s fate was not predetermined in any way. It was rather based on historical events and path-dependence. The division and iron curtain that split East and West came after distinctive developments where both sides went through conflict but one was taken by the mesmerising offensive force of Marxian though. Personified in by and large Joseph Stalin. Marx’s described a class struggle between the capital owning class and the working-class and cried out for his fellow working-class comrades to unify and revolt against the capital-owning class. The analysis was, however, based on assumptions that were flawed, most significantly in the description of the two classes. It assumed that capital and thereby innovation and development comes free without any opportunity cost. This aspect was however already known as David Ricardo before him had described it albeit in the context of trade. Marx presented his ideas but never produced a blueprint to the way in which these goals would be reached. He knew that the socialist state would lead to class struggle and ultimately the removal of the capital-owning class was necessary. A moral dilemma Stalin took into his own analysis with bloody consequences. This single characteristic of the communist agenda is what makes it disgraceful and is the biggest intellectual void in pursuing such an outcome. Stalin’s interpretation resulted in mass murder and the instalment of concentration camp to achieve his regime and to remove anyone who would oppose him. The secret additional protocol of the Molotov-Ribbentrop Pact which was an agreement between Germany and Russia to invade and divide Central and Eastern Europe between them was the onset of the Second World War when it was lunched. Stalin implemented sovietisation in the newly conquered region with Marxian doctrine and rhetoric which resulted in one of the most dire and dark moments in history as the capital-owning class, now extended by Stalin’s analysis to include intellectuals and officers were murdered. One of the most horrific was the Katyn massacre. Stalin did not refrain from executing his fellow countrymen either. He set up many concentration camps across the Soviet in his fight against the top class. This attitude of restraining anyone from acting as entrepreneurs was sustained and rights to land still monopolised all the way up to the blatant fall of communism in the late 1980s. When that wall came down on the 9. of November 1989, it should stand as a firm reminder of the dangers of internalising on government scale and resolving class struggle by Marxian ideals.

Unfortunately individuals who benefited from the communist rule did not want to give it up so easily, so the virus is still circulating in these former communist countries, under the name of socialism, they now adopt policies which are alarmingly close to those formulated under communism, bribery still common and political and industrial bias prevailing. When faced with glorifying pictures and rhetoric of the communist leaders in today’s political debates it is disturbing how these ideas are portrait as morally justifiable. Marx, always being indebted, was not a good economist and his contribution was a costly exercise in demonstrating how planned economy fail. Depicting Stalin and other Marxian political leaders as salvationist of the miseries of the working class is equally incorrect. The goal of greater equality does not excuse execution despite it being a noble one. Let us always be reminded by these events and pursue personal freedom and rights by encouraging decision making to be based on the widest flow of information which can never be comprehensive by total government control.

%d bloggers like this: