Dear Ed

It takes only a whiff of socialism to get Ed Longinotti (U6) into his chain mail and on his horse, lance at the ready.

Imagine his state of readiness reading this piece in The Times.

So here is Ed's letter to the Editor of The Times followed by my challenge (alternatively, you can now read Ed's letter on The Times website by clicking here):

Dear Sir,
Naomi Klein feels vindicated because ‘she did warn us’. Anyone with a basic understanding of free market economics and history could have warned us. A free market economy will always suffer from recession, as Joseph Schumpeter put it ‘they are the winds of creative destructive’ [I think Ed means 'creative destruction'], reallocating resources from inefficient to efficient firms. Such a process has been experienced in every free market economy, for example ‘tulipomania’ in 17th Century Amsterdam. To suggest that the current recession represents the collapse of the free market system is an unjustified leap; it is merely an integral process of the capitalist model. Klein asserts that any gap left by the apparent failure of free market economics must be filled by the left – or else fascism will ensue. However there is no alternative proven system to that of individual liberty and free market economics. The left has never been able to propose a practical alternative, as the experiences of the 20th century and the Soviet Union show. Indeed, socialism and fascism have strong connections, for socialism depends on the sort of collectivisation and centralisation of control that in the words of Adam Smith puts governments in a position where ‘to support themselves they are obliged to be tyrannical’. Socialism is not the path to freedom, for it is inherently authoritarian. Such criticism of this kind is not to be confused with dogmatic support for laissez faire economics, but is based on the concept that where individual competition can be created, it is a better way of guiding the allocation of efforts and resources than any other. It does not deny, but indeed emphasizes that for competition to work beneficially a carefully thought out legal framework is required – perhaps more carefully thought out than the current framework.
Yours faithfully,
E. Longinotti, King’s School Chester, Upper Sixth.

My challenge
Best response to Ed (starting 'Dear Ed') will be published on the blog.

Testing times for the euro

Year 13 economics students have just under a fornight to wait before they get the results of their January synoptic exam. They spent much time getting to grips with whether membership of the euro area was in the long term interests of an economy and the sustainability of the euro. Year 11 students have also explored the pros and cons of the euro in their recent poster work.

The Telegraph has a useful article covering the trials and tribulations of the Irish economy, not long ago hailed as the Celtic Tiger, or the 'miracle' economy of the euro area. According to the article "Ireland's 'miracle' economy has turned terrifyingly sour - and as it strains against the inflexibility of the euro, its next crisis may shake the entire EU. "

Recommended reading for all economics students and for Year 11 GCSE students. Click here to access the article.

Sterling silver lining?

Some of my Year 11 students are fully signed up members of Citreon C4 Picasso admirers club. My own Picasso won't be getting its second outing to its homeland this summer because of the collapse of sterling - the Waltons will be holidaying in the UK.

It seems that holiday companies Pontins and Butlins are banking on more of us doing the same. Pontins are investing £50 million in their UK holiday facilities after a 20% increase in summer bookings. And Butlins is moving up market, opening a 'boutique hotel' in Bognor Regis (boutique in Bognor?). Families planning a trip to Cornwall could be disappointed as many holiday cottages are reportedly fully booked. Good illustrations of the impact on business of changes in the exchange rate.

The collapse of serling (the trade-weighted index is down almost 25% from its peak in 2007) is also worth Year 12 economics students exploring. One of questions posed in recent lessons was the relative importance of each of the components of aggregate demand (AD). Inevitably, most attention focused on the importance of consumer expenditure. Such a dramatic fall in the exchange rate, though, can have a significant expansionary impact on AD. Economists have a rule of thumb that each 1% fall in the exchange rate has the same effect on the economy as 0.25% cut in interest rates. If this is right, the collapse of sterling is equivalent to a whopping 6% cut in interest rates. On top of the interest rate cuts announced by the Bank of England, the expansionary impact is incredible.

As the full effects of both the falls in sterling and the interest rate have yet to fully feed through to output, maybe there is a silver cloud on the horizon?

My challenge
What are the parallels between this story and the UK's exit from the Exchange Rate Mechanism (ERM) in the early 1990s?

No tight collar for TM Lewin

It's refreshing to post some up-beat news for a change. Amidst the gloom of ailing and failing car manufacturers I found this piece in The Times uplifting. Its focus is very much for business students and is perfectly timed for the AS course.

TM Lewin, Jermyn Street shirtmaker, is thought to be due to report sales up around 20% since last February. It opened 11 new stores over the course of the year to boot. Why is it when the City boys are losing their jobs that sales of classic cotton shirts are on the up? The answer it appears is TM Lewin's promotional strategy of almost constant discounts - not what you would expect in a market in which quality is often judged by price. The company's best known discount is its offer of four shirts for £100. The result is that, on price, TM Lewin competes with M&S but still has the advantage of being perceived as being more up-market.

Watch out for my stripey red and blue number tomorrow - so cheered am I that I intend to get out the iron tonight!

Recommended site

I can strongly recommend John Sloman's economics news site to AS and A2 students looking for a way of relating what they study in class to what is going on in the real world.

Yes, it is linked to his book and, yes, it is all part of the online promotion which seems to accompany textbooks these days. But it is well worth a look. It takes the form of a blog with entries that give links to news and articles. Each blog is followed by a series of questions. The search facility is good - I used it to find resources on the problems of interpreting GDP statistics for my Year 11 GCSE students. Unless you have Sloman's book, finding blogs linked to chapters is not likely to be useful.

We are currently reviewing textbook provision for sixth form students and Sloman's book is a contender - it is one we have used in the past with success.

Young Economist of the Year 2009

Those of you putting together your essay for the Royal Economics Society's essay competition might like to read teh winning entry from last year.

It is available on the Tutor2u website or by clicking here.

Slumdog success

Whether or not Slumdog Millionaire wins the Oscar for best picture, the story of the film's making should interest GCSE and AS students studying business. The film industry can generate box offices success, yes (Slumdog has so far netted £21 million) but the risks involved are huge.

The business story behind the glamour of the Oscars makes interesting reading and a good case study in entrepreneurship and raising finance for 'independent' films. Click to read more in today's Sunday Times.

What's it all costing?

Today a group of influential Labour MPs call for another £20 billion of government injections into the economy to reduce the impact of the recession. They claim that, if implemented, their package of measures would ensure that 2009 became known as the year the recession bottomed out. The measures include a freeze on stamp duty on house purchases, a tax credit for those buying houses, an increase in the Job Seeker's Allowance and a reduction in capital gains tax on new investments.

But what is all this really costing? There are several ways of answering this question. According to the Office for National Satistics ONS), the effect of the bank bailouts has been to add between 70 and 100% of the nation's GDP to national debt. The recession itself has reduced the amount of tax collected from individuals and businesses by around £7 billion. Then there is the cost to the economy of the lost output due to falling demand.

Economists have a simple but useful concept to measure 'cost'. This concept measures not the financial costs but the cost of what is foregone - the opportunity cost. The graphic at the top of this blog shows what the money so far spent on bank bailouts could have bought had it been spent on alternatives. This helps us to make sense of the very big numbers which have appeared of late.

My Year 10 economics and business students will be looking at opportunity cost after they return from half term.

Useful weblinks

ONS announcement on the national debt

January's public finances release from the ONS

Stephanie Flanders on the cost of the bank bailouts

BBC video on the reduction in tax revenue

BBC article on the reduction in tax revenue

Tutor2u presentation of the impact of the recession on tax revenues

BBC graphics: the global downturn

Chance to be Chancellor

Fancy a go at being Chancellor? Well now you can thanks to a competition being run by the Citizenship Foundation and The Times.

Here is what you have to do:

Students are provided with a list of ways (policies) in which public money can be spent on areas such as Environment, Health and Education. However, just like in the ‘real world’, they can’t pick them all. Students will need to prioritise the policies that they think are most important, making compromises where necessary, and then justify their choices by writing the Chancellor’s speech. Once they’ve made their choices, students will need to write a speech of between 500-1000 words to explain to the country what they will be spending their money on, and why. Students will need to express their opinions clearly in writing and be persuasive in their arguments. They’ve got a whole country to convince!

Contact SDW if you are interested in taking part - the competition is open to all students aged 14 - 19. Closing date for entries is 31 March 2009.

Further information

Chance to be Chancellor website

Competition pack

Briefing information on the Budget and the economy

What IS happening to prices?

During the Great Depression prices in the US fell by 10% a year from 1930 - 33. Fears of deflation are obviously weighing heavily in the minds of the Bank of England's MPC (see 'Turn on the printing press' below) But what exactly IS happening to prices in the UK.

On the government's preferred measure of prices (the Consumer Price Index - CPI), prices were UP 3.0% last month compared to January 2007. So what is all the fuss about deflation? Part of the problem is that whilst the CPI shows prices rising the comparisonn is with the same period last year. So prices may be falling but they may still be higher than last January. The expectation is that by the middle of the year CPI will be showing more of the trend that worries the Bank of England.

An alternative measure of prices, the RPI (Retail Price Index), shows prices last month only 0.1% higher than last January. But the RPI includes a measure of mortage interest payments which are falling due to lower interest rates and falling house prices. The correction in house prices is probably in itself desirable. Asset price bubbles as they are known (over-inflated house prices for eaxmple) tend to devote scarce resources away from their most productive uses - a little less obsession with property prices would not be a bad thing. The house price bubble of the last decade is, after all, why we are where we are today and what led to 'creative' banking practices at the root of the credit crunch.

Prices, then, may not be falling and inflation may still be above the Bank of England's target rate of 2%. But, as we have seen, economic indicators can turn on the head of a pin.

Watch this space ...

Useful weblinks

Spectre of deflation haunts Britain (Independent)

Turn on the printing press

The latest minutes of the Bank of England's Monetary Policy Committee (MPC) recorded a unanimous vote in favour of the Bank requesting premission from the Chancellor of the Exchequer to turn on the priniting presses and print more money. In an unprecented move the Governor of the Bank of England is expected to write to Alistair Darling within the next few days.

There has been much about 'quantitative easing' on this blog and in lessons (thanks to Rex Harrison). Here are just t a couple of links which economics students may find useful.

At the end of 2007 while writing a chapter on macroeconomic performance for the new OCR A2 economics textbook, I remember opening to a Study Tip with the words "you live in interesting times" - little did I know HOW interesting times would become!

Useful weblinks

Bank to request permission to print (Independent)

Stephanie Flanders on quantitative easing

Times graphic explaining quantatative easing

Guardian Q&A on quantative easing

Too high, too low - but not 'just right'

The rate of inflation in the UK is falling, whichever measure you look at. According to the latest CPI (Consumer Price Index) inflation was down to 3% last month. On the RPI (Retail Price Index) measure it was close to zero.

In the current climate monetary policy is being driven by a fear of deflation - falling prices. Listen to Stephanie Flanders report on the Bank of England's fears here.

Yet some believe that the slashing of interest rates is stoking up an inflationary problem for 2011. All of this uncertainty means that the period of price stability ushered in by the granting of operational independence to the Bank of England is over. It is anyone's guess whether prices will actually fall (deflation) or whether prices will rise (inflation) dramatically in 18 - 24 months time. According to Stephanie Flanders, the Goldilocks economy (where prices are 'just right') is a thing of the past. This makes things very tricky for the Bank of England ...

My challenge to Yr 12 economics students

Why are there different measures of inflation and does it matter?

Old or new romantic?

Economic's claim to be a science is rooted in the 'marginal revolution' of the 19th century. Economic agents were thought to act rationally, seeking to maximise their gain from consumption and production and acting independently of each other. The neatness of such rationality was that economic theories could be developed with the tools of mathematics. As time passed, economic theories became more mathematically elegant and testable by their predictions.

This was all very different to the era of the Romantics in the 18th century which inspired music, literature and the arts. Yet a new book, The Romantic Economist, argues that we have much to learn from the likes of Byron and Wordsworth. Economics is as much an art as a science, if not more so.

The Romantic Economist is reviewed by Larry Elliot in Monday's Guardian here. I will make sure that there are copies available in the library after half term.

My challenge

For those thinking of applications to Oxbridge for PPE / economics consider whether economics is an art or a science. We will meet up during the second half of term to discuss. Prepare by reading The Romantic Economist and books / articles in the library on the methodology of economics.

Growth and development

It hardly seems like the time to be critical of economic growth! Most commentary on the global economy takes for granted that it would be quite nice to have a little growth at the moment. For with growth comes jobs, with jobs comes income and with income comes a higher standard of living.

But is economic growth the be all and end all of economic policy? My Year 13 economists are beginning to question whether economic growth necessarily implies development in the early stages of their final A2 module on development economics. I'll get around to looking at their first thoughts when I mark their blog task challenge based on the recent news about tyhe activities of a UK multinational mining company in India. Not long either before the same sorts of questions are posed to Year 11 economics and business students.

Both year groups will find the following link to a great resource on the BBC website useful. It provides a walk through of the United Nation's Millenium Development Goals (MDGs) and is accessible to all students.

My challenge to Year 11 students

To what extent has China's recent impressive economic growth been desirable?

Latte lessons

My Year 12 economics classes are now well into their weekly 'latte lesson'. The concept is simple - each Friday morning is a break from the monotony of the specification and a chance to explore something economic that takes the students' fancy. Oh, and the drinks, biscuits, homemade brownies and chocolate tea cakes the presenter must supply!

The result? Some fantastic research, presentations and discussions so far on the Japanese economy and Zimbabwe. And a couple of inches on my waist line too!

Rex Harrison was spurred on to research Japanese economic performance in the 1990s in order to draw lessons about the current economic downturn and the appropriate policy responses. Rex's explanation of quantitative easing was masterly - who will forget his matchstick bankers? I will make his presentation available on the VLE for everyone to download.

In the meantime, as interest rates in the UK fall to 1%, the likelihood of 'quantitative easing' grows stronger. Year 12 students might be interested in this interactive guide to quantitative easing from the FT as a follow up to Rex's presentation. I think the FT may have borrowed the idea from Rex!