Finance: Past, Present and Future

In the Dáil yesterday, Taoiseach Enda Kenny stated that a referendum would be held regarding Ireland's  participation  in the European Stability Treaty ( click here for Irish Times coverage).  This referendum adds to the uncertainty surrounding the euro, and a 'no' vote in the referendum would raise series doubts about Ireland's  participation  in the euro.  The EU may now be tempted to buy off Irish voters to ensure a 'yes' vote in the referendum. Raymond Crotty, an Irish economic historian, instigated a High Court action against the Irish  government in 1987, which resulted in the ruling that all significant changes to EU treaties required an amendment to the Irish constitution.  Amendments to the Irish constitution can only be made by holding a referendum.  At least the Irish electorate, unlike most of their EU contemporaries, are getting a say on the European Stability Treaty!

Robert Shiller has an interesting piece in the NY Times on whether high-IQ investors build better portfolios than their low-IQ peers.  Click here for the article.

This is a fascinating 15-minute video, where George Selgin criticises the operation of U.S. monetary policy.   In particular, he criticises the Fed for only engaging in open market operations with primary dealers (i.e., large stable (?) financial institutions) and only buying and selling government securities.   He recommends that both these policies be ended and that the Fed stops lending directly to individual institutions i.e., that it closes its discount window.

Should central banks intervene to burst asset price bubbles?   In this nine-minute video, Adam Posen of the MPC argues that central banks should not intervene to prick booms as not all booms are followed by a bust.   In other words, central banks cannot identify ex ante if a boom is an asset price bubble.

There is an interesting piece over at VOX (hat tip - Graham Brownlow) asking whether economics undergraduates are being well trained - click here .  There are at least six things which stand out for me in this piece. 1. Economics degrees need some economic history - economic history asks the big questions that need to asked. 2. There is too much of a focus on mathematics rather than economic intuition. 3. There is an overemphasis on econometric theory at the expense of analysing real data. 4. Econ graduates know very little about institutions and workings of the actual economy.  For example, they know very little about finance, banking, and the monetary system. 5. There needs to be more heterodoxy e.g., networks 6. Graduates have little in the way of well-developed communication and presentation skills. I totally agree with these critiques, and I am proud to say that these criticisms cannot be levelled against the graduates that Quee...

Owen Sims, a grad student at Queen’s, recently pointed me in the direction of David Graeber’s Debt: The First 5,000 Years (an interview with Graeber about his recent book is available below).  Graeber is an anthropologist and anarchist.  My interest in Graeber was piqued by the fact that he has a go at Austrian economists in general and Menger’s theory of the origin of money in particular. I have yet to finish reading his book, but I agree with Graeber’s critique of Menger that barter is a myth.  The historical and anthropological evidence on this is compelling.  I also agree with his critique of Austrian economics – he sees it more as a religion or ideology.  There is much to be learned from Austrian economics, but we must be careful that our analysis of economic phenomena does not descend into mere ideology. Click here for an extensive post by Graeber on money, Menger, and Austrian economics.

Why do Americans refer to their money as bucks?   The European colonial settlers ran into problems whenever they attempted to trade with the Native Americans as the latter were unwilling to accept bank notes and coins.   Tobacco or wampum was sometimes used as a medium of exchange, but gradually deerskins or buck skins became the common medium of exchange (or money).   Hence, to this day, Americans refer to their money as ‘bucks’!  

Click here for an illuminating infographic (hat tip – Ronan Gallagher), which helps us understand the scale of the European debt crisis. They also have an infographic on the scale of the US national debt – click here . National debt clocks are available here .

MI5 files which have been released by the National Archives reveal that the Nazis attempted to undermine the British currency by forging large quantities of Bank of England notes - click here for story.  The plan had been to drop them from the air on England - sounds a bit like Helicopter Ben's plans to fight deflation! One wonders what the impact of this monetary stimulus on the wartime economy might have been had it succeeded? 

After reading Chavs , I reread the work of Charles Murray on the underclass.   As an undergraduate, I was fascinated by the work of Charles Murray, the controversial American political scientist and libertarian, who documented the rise of the underclass in the United States.   In the early 1990s, he was invited by the Institute of Economic Affairs to study Britain’s underclass.   Murray, who perceived himself as standing in a long line of classical liberals, was very definite about the causes of the rise of Britain’s underclass – the undermining of the family structure as well as social welfare programmes.   You can read his study, as well as several critiques of it, by clicking here .   Please be aware that some of Murray’s work (particularly The Bell Curve ) needs to be read with discernment. 

According to Daniel Hamermesh, beauty pays - attractive people are more successful and there is a beauty premium.  You can see his book on this subject here .  The Beautiful People  dating website has recently revealed that Northern Irish men are ugliest in the world ( click here for the story).  Does the beauty premium apply to economies?  If so, the Northern Irish economy is doomed!  Can government intervention do something about this?  Taxes on kebabs or subsidies for male hair products?

Following on from yesterday’s post, I have another criticism of Jones basic thesis that the demonization of the working class is due to deindustrialisation and Margaret Thatcher.   In my opinion, Jones ignores the long-term evolution of the working class.   Why were the working class enfranchised in the first place?   Why did democratic governments redistribute wealth from the rich to the poor?   Why have the working class been under attack?   Why have the working class been effectively disenfranchised? One possible explanation provided by Hickson and Thompson  goes as follows: the working classes were enfranchised as they were required to defend the country in the era of mass warfare and large citizen armies.   The enfranchisement of the working classes in Britain begins in the late nineteenth century, and coincides with the rise of Imperial Germany.   It is completed in the aftermath of World War I, and between 1918 and 1946 large-scale re...

I have just finished reading Chavs: The Demonization of the Working Class by Owen Jones .   Jones does a good job of demonstrating how the white working class has become demonised, vilified, and satirised in British society – think Shameless, Vicky Pollard etc..   A joke at a dinner party of educated professionals was the spark which resulted in Jones writing this book.   The joke went as follows: “It’s sad that Woolworth’s is closing.   Where will all the chavs buy their Christmas presents?”   I too have heard people use this derogatory word, and like Jones, I too have cringed. What is a chav?   For some it is a feral underclass, a rump of the old working class who are largely supported by welfare.   For some a chav is a young working-class person who wears tracksuits and fake designer clothes (e.g., Burberry baseball caps).   For others a chav encompasses all the negative traits associated with the working class – violence, drunkenness, i...

Given that I have come to the end of my free banking posts, I thought that I would plug Larry White's new book, which is published at the end of March - click here .  You can find working paper versions of some chapters here .  This book looks at the great economic policy debates and experiments of the last century from Lary's unique perspective.  Larry talks about his book in the interview below.

Here is a great one-hour lecture by Larry White on the theory of free banking.  Enjoy!

In my work on the evolution of corporate capitalism, I have highlighted the rise of women shareholders in the nineteenth century.  However, it is only in recent decades that we see the rise of women directors.  Norway, for example, has a law which requires firms to have a certain proportion of women on their boards.  The UK government is presently considering a quota system for British firms - click here for more on this story. Does the presence of women directors have an effect on firm performance?  There is some research on this question which would suggest that women directors have a positive effect - click here and here .  A more fundamental question, however, is whether the presence of women on boards will lower the extremely high remuneration of corporate executives?  There is a broadcast on Radio 4 this evening, which discusses the growth in executive pay over the past three decades - click here for summary....

Click here to read about the creation of a new currency in Bristol - the Bristol Pound   (hat tip to Chris Colvin, an old Bristolian)  Unlike past attempts to create a local currency, the creators of the Bristol currency have taken care of the last period problem associated with fiat money.  How have they done this?  Well, in true Thompsonian fashion , the local government accepts the new currency as payment for local taxes (rates)!  This ensures that it has value in the last period, and therefore encourages traders and shoppers in Bristol to use it.

Facebook announced last week that it was going to have an initial public offering of its stock.   Will Facebook stock be a good investment?   Some investors may be put off by the governance arrangements, whereby Mark Zuckerberg maintains a controlling interest of the corporation.   Zuckerberg will effectively have 56.9% of Facebook’s voting rights!   However, some studies have shown that public corporations which are managed by their founders perform much better than diffusely-owned corporations ( click here for further details).   It is only when those founders hand over to their offspring that one needs to worry.   Given that Zuckerberg is only 27, it could be some time before his daughter / son takes over! I have a more fundamental problem with Facebook as an investment.   Although one in seven minutes on the Internet is spent on Facebook, I fail to see how it can earn enough profits to justify its rumoured high flotation price.   Faceboo...

You can read here seven things that Prof. Andrei Shleifer, one of the world's leading economists, has learned about the transition from communism.  Shleifer and a team of Harvard economists were instrumental in providing policy advice to the Russian authorities in the 1990s.  It is surprising that despite the failure of the 'big bang' approach to the privatisation of state-owned enterprises in Russia that Shleifer still advocates that privatisation in transition economies should not be over-planned or delayed.  However, Shleifer's credibility on this issue has been affected by some conflicts of interest which arose for him whilst advising the Russian authorities.  These conflicts of interest ending up costing Harvard University millions of dollars in order to settle a lawsuit against it.  You can read more about this here  and here .  It has only been 20 years since the beginning of the transition process in former commun...

I have just read this NBER paper by Thomas Philippon and Ariell Reshef , which looks at wages and human capital in the US financial industry from 1909 to 2006.  A more recent edition of the paper can be found on Reshef's webpage . Their work identifies the following stylised facts: First, the relative skill intensity and relative wages of the financial sector exhibit a U-shaped pattern from 1909 to 2006. From 1909 to 1933 the financial sector was a high skill, high wage industry. A dramatic shift occurred during the 1930s: the financial sector rapidly lost its high human capital and its wage premium relative to the rest of the private sector. The decline continued at a more moderate pace from 1950 to 1980. By that time, wages in the financial sector were similar, on average, to wages in the rest of the economy. From 1980 onward, another dramatic shift occurred. The financial sector became once again a high skill, high wage industry. Strikingly, by the end of the sa...

Here are several short video clips, where Larry White gives his perspective on the 2008 crisis etc..  Enjoy!

Fred Goodwin, former CEO of RBS, has had his knighthood rescinded.  Sir Fred's aggressive risk taking and mismanagement of one of the oldest banks in the world (RBS was founded in 1727) brought him plaudits in the good years as the bank returned high dividends to its shareholders.  However, since the bank's collapse in 2008, he has been a made a scapegoat and pilloried in the UK's gutter press.  Goodwin did nothing illegal (as far as we know) - he simply made some terrible strategic decisions and mismanaged one of the world's largest banks.  What about those politicians who have permitted corporations to pay exorbitant salaries to executives?  What about our political elite who oversaw the deregulation of the financial system?  Will they have their peerages etc removed?  Will they have their pensions reduced just like Fred Goodwin?  I think that targeting Fred Goodwin is a populist measure which distracts the populace from thinking about the...