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Within months of being introduced in 2009, enthusiasts were hailing bitcoin, the digital currency and peer-to-peer payment system, as the successor to the dollar, euro, and yen as the world’s most important currency.
The collapse of the Mt. Gox bitcoin exchange last month has dulled some of the enthusiasm for the online currency. According to bitcoincharts.com, the price of bitcoin, which had peaked at over $1100 in December, tumbled to about half of that in the wake of the Mt. Gox failure, leading a number of commentators to suggest that bitcoin is finished.
Others remain bullish on the currency, arguing that the collapse will lead to greater scrutiny of the system and the reemergence of a stronger, more secure bitcoin. Although the price of bitcoin has declined since the Mt. Gox collapse and volatility remains high, rallies are not unheard of. On 3 March 2014, for example, bitcoin began the day trading around $580 and peaked at over $700 before falling back into the upper $600s (data from bitcoincharts.com).
I have argued elsewhere that if bitcoin were to replace the leading world currencies, the results would be catastrophic. The most important objection is that—when it works according to plan—bitcoin mimics the gold standard. The total number of bitcoins that can be created (“mined” in bitcoin terminology, just to maintain the image of gold) is fixed and cannot be altered. Adopting a bitcoin standard would make it virtually impossible for central bankers to undertake aggressive monetary measures—as the Fed and European Central Bank have done—to bolster a flagging economy and a financial system on the point of collapse.
Another public policy downside of bitcoin is that because it is peer-to-peer, without a centralized monitoring authority, it allows funds to be transferred away from the prying eyes of government. This famously came to light last fall when the on-line drug bazaar Silk Road—which conducted much of its business in bitcoin–was shut down by the FBI and its proprietor arrested on drug and computer charges. Needless to say, the attractiveness of a payments system like bitcoin to criminals and terrorists should dampen the fervor of even the most enthusiastic bitcoin devotee.
Is there anything to like about bitcoin?
Yes. Bitcoin—or, more precisely, a system with some of bitcoin’s attributes—would give a boost to commerce.
Moving money with bitcoin is cheaper than using PayPal, credit cards, or bank transfers, all of which charge one or both parties fees. The savings on international transactions are even greater, since these transactions, when carried out with traditional currencies, typically involve both higher fees for moving the money as well as additional charges for converting form one currency to another. Denominating the transaction in bitcoin eliminates the currency conversion fee altogether.
Eliminating fees associated with commercial transactions is the most compelling argument in favor of bitcoin, as anyone who has ever used a credit card overseas, tried to transfer money, or used an out-of-network ATM will attest. The disadvantages of bitcoin far outweigh its benefits. Still, its ability to facilitate cheaper trade is appealing. The sooner someone figures out how to adopt that aspect of bitcoin for safer, more adaptable traditional currencies, the better for all of us.
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Image credit: Bitcoin banknote by CASASCIUS. Creative Commons License via Wikimedia Commons.
The public has been so fatigued by the flood of appalling economic news during the past five years that it can be excused for ignoring a scandal involving an interest rate that most people have never heard of. In fact, the Libor scandal is potentially a bigger threat to capitalism than the stories that have dominated the financial headlines, such as the subprime meltdown, the euro-zone crisis, the Madoff scandal, and the MF Global bankruptcy.
It’s not surprising that Libor has generated less interest than these other stories. It has left neither widespread financial turmoil nor bankrupt celebrities in its wake. It took place largely outside of the United States, further rendering the American media and public more disinterested. It involves technical issues that induce sleep in even the most hard-bitten financial correspondents.
Yet, despite its lower profile, the Libor scandal is potentially more serious than any other financial catastrophe in recent memory.
The subprime crisis can be blamed on poor government management: irresponsible fiscal policy combined with loose monetary policy and poor regulatory enforcement. The euro crisis resulted from one poorly conceived idea: creating one currency when retaining 17 distinct currencies would have been better. The Madoff and MF Global debacles can be chalked up to a few isolated unscrupulous and reckless individuals.
By contrast, the Libor scandal was nothing less than a conspiracy in which a group of shadowy bankers conspired against the majority of participants in the financial system—that is, you and me. And therein lies the danger.
Libor is the acronym for the London InterBank Offered Rate. Previously produced for the British Bankers’ Association, it was calculated by polling between six and 18 large banks daily on how much it cost them to borrow money. The highest and lowest estimates were thrown out and the remainder—about half–were averaged to yield Libor.
Libor plays a vital role in the world financial system because it serves as a benchmark for some $800 trillion in financial contracts–everything ranging from complex derivative securities to more mundane transactions like credit card interest rates and adjustable rate home mortgages.
Since so much money rides on Libor, banks have an incentive to alter submissions to improve their profitability: raising submissions when they are net lenders; lowering them when they are net borrowers. Even small movements in Libor can lead to millions in extra profits–or losses.
Financial conspiracy theories are about as commonplace–and believable–as those on the Kennedy assassination and the Lindbergh kidnapping. This time, however, emails have surfaced proving that banks colluded on their Libor submissions. In one email, a grateful trader at Barclays bank thanked a colleague who altered his Libor submission at the trader’s behest: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
Unfortunately, efforts to reform Libor have been insufficient.
In July British authorities granted a contract to produce the Libor index to NYSE Euronext, the company that owns the New York Stock Exchange, the London International Financial Futures and Options Exchange, and a number of other stock, bond, and derivatives exchanges. In other words, the company that will be responsible for making sure that Libor is set responsibly and fairly will be in a position to reap substantial profits from even the slightest movements in Libor. Like putting foxes in charge of the chicken coop, this is a recipe for disaster.
The financial system’s role is to channel the accumulated savings of society to projects where they can do the most economic good—a process known as intermediation. My retirement savings may help finance the construction of a new factory; yours might help someone pay for a new house. Although Goldman Sachs CEO Lloyd Blankfein exaggerated when he called this function “Doing God’s work,” intermediation is nonetheless a vital function.
Intermediation will come screeching to a halt if individuals, corporations, and governments no longer trust the financial system with their savings. Those who believe that the interest rates they pay and receive are the result of a game that is rigged will just opt out. They may not go so far as to stash their savings under their mattresses, but they will certainly keep it away from the likes of bankers they believe have been cheating them. Instead they will hold it in cash or in government bonds which will reduce the amount of money available for productive purposes. The consequences for the economy will be severe.
Rather than handing Libor over to a firm with a conflict of interest, the British government should announce that a year from now, Libor will cease to exist. How would markets react to the disappearance of Libor? The way markets always do. They would adapt.
Financial firms will have a year to devise alternative benchmarks for their floating rate products. Given the low repute in which Libor—and the people responsible for it—are held, it would be logical for one or more publicly observable, market-determined (and hence, not subject to manipulation) interest rates to take the place of Libor as currently constructed.
Only by making this important benchmark rate determined in a transparent manner can faith be restored in it.
There are many policies around the world designed to encourage ethnic desegregation in housing markets. In Chicago, the Gautreaux Project (the predecessor of the Moving To Opportunity program) offered rent subsidies to African American residents of public housing who wanted to move to desegregated areas. Germany, the United Kingdom, and Netherlands, impose strict restrictions on where refugee immigrants can settle. Many countries also have “integration maintenance programs” or “neighborhood stabilization programs” to encourage desegregation. These policies are often controversial as they are alleged to favor some ethnic groups at the expense of others. Regardless of the motivation behind these policies, knowing the welfare effects is important because these desegregation policies affect the location choices of many individuals.
I am interested in one such desegregation policy in Singapore: the ethnic housing quotas. Using location choices, I analyzed how heterogeneous households sort into neighborhoods as the ethnic proportions in the neighborhood change. To do this at such a local level I had to assemble a dataset of ethnic proportions by hand-matching more than 500,000 names to ethnicities using the Singapore residential phonebook.
The ethnic housing quotas policy in Singapore is a fascinating natural experiment. It was implemented in public housing estates in 1989 to encourage residential desegregation amongst the three major ethnic groups in Singapore: Chinese (77%), Malays (14%), and Indians (8%). The quotas are upper limits on the proportions of Chinese, Malays, and Indians at a location. Locations with ethnic proportions that are at or above the quota limits are subjected to restrictions designed to prevent these locations from becoming more segregated. For example, non-Chinese sellers living in Chinese-constrained locations are not allowed to sell to Chinese buyers because this transaction increases the Chinese proportion and makes the location more segregated.
Using transactions data close to the quota limits and controlling for polynomials of ethnic proportions calculated using the phonebook, I documented price dispersion across ethnic groups that is consistent with theoretical predictions of the policy’s impact. The findings suggest a model where Chinese and non-Chinese buyers have different preferences for Chinese neighborhoods.
Indeed, my estimates show that all groups have strong preferences for living with members of their own ethnic group but the shapes of the preferences are very different across the three ethnic groups. All groups have ethnic preferences that are inverted U-shaped but with different turning points. This means that once a neighborhood has enough members of their own ethnic group, households want new neighbors from other ethnic groups. Finding tastes for diversity and differences in the shapes of ethnic preferences is consistent with previous research using data on racial attitudes from the General Social Survey in the United States and also surveys of ethnic relations in Singapore.
I used these estimates of ethnic preferences to perform welfare simulations. The seminal work by Thomas Schelling on tipping showed that externalities exist in a model with ethnic preferences because a mover affects the utility of his current and future neighbors by changing the ethnic composition of the neighborhood. Due to these externalities, Schelling showed that policies such as the ethnic quotas could potentially be used as a coordination mechanism to achieve equilibrium with integrated neighborhoods. My welfare estimates show that under the quota policy, about one-third of neighborhoods are close to the optimal allocation of Chinese, Malays, and Indians respectively.
The Review of Economic Studies aims to encourage research in theoretical and applied economics, especially by young economists. It is widely recognised as one of the core top-five economics journal, with a reputation for publishing path-breaking papers, and is essential reading for economists.
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Subscribe to only business and economics articles on the OUPblog via email or RSS. Image credit: HDB flats at Tampines New Town. By Terence Ong. [Creative Commons], via Wikimedia Commons.
The corporation is the most important institution in the world – an institution that clothes, feeds and houses us; employs us and invests our savings; and is the source of economic prosperity and the growth of nations around the world. At the same time, it has been the cause of terrible poverty, deprivation and environmental degradation, and these problems are set to increase in the future.
Over the last few years alone we have endured:
The accounting scandals in Enron and WorldCom
The Libor scandals
The underpayments of corporation tax
The misselling of mortgages, payment protection insurance, and derivatives
The financial crisis
The environmental disasters in the Gulf of Mexico and Fukushima
Each of these is thought to have their own cause and to require their particular solution. This is fundamentally wrong: the problems are not specific and the solutions are not individual. There is a generic problem that requires a common solution. The problem is the corporation and the solution is to fix it and not everything around it.
Fixing the corporation involves addressing its failures of ownership, values, governance, regulation and taxation. This requires:
Corporations taking responsibility for their actions and consequences, and having long-term committed shareholders;
Corporations having clearly defined values and principles, and truly independent boards of directors responsible for their implementation;
Tougher enforcement of public laws regarding bribery, corruption, environmental damage, fraud, insider dealing and market abuse;
More stringent protection of our financial systems and ecosystems;
Less intrusive regulation elsewhere and greater use of the corporate tax system to align interests of corporations with society at large.
Implementing these changes involves a reform of business education and a redefinition of the roles and responsibilities as well as rights and rewards of executives and investors.
This is not so much a reinvention as a rebirth of the corporation. Historically it was established by royal charter with a defined public purpose to undertake voyages of discovery and promote trade. The family firms that succeeded it were frequently established by founders with strong ethical principles and visions. Two corporations that illustrate that are Lehman Brothers and Barclays Bank, not today’s versions but those of the 19th and 17th centuries respectively. Mayer Lehman, the founder of Lehman Brothers, took his children every Sunday to the Mount Sinai hospital to see the plight of the less fortunate members of New York society. John Freame, the founder of Barclays Bank, wrote Scripture Instruction, a principle text used by the Quakers for more than a century. Over time those strong values have contracted into a single one of maximizing the short term earnings of shareholders.
That is not universally the case – some of the world’s most successful corporations and best performing economies have very different purposes and values. Bertlesmann one of the world’s largest media companies, Robert Bosch the automotive company, Carlsberg the brewing company, and Tata the conglomerate owner of Jaguar Land Rover are all structured as industrial foundations with boards that are responsible for the values and principles of their organizations. The Nordic and Scandinavian countries, which are currently being upheld as models for the rest of the world, emphasize a broader set of corporate principles encompassing a wider set of stakeholders than their shareholders.
This bears not only on the positive aspects of what corporations could do but also on the normative ones of what they should do. While notions of morality are well developed in relation to individuals, they are not in respect of corporations. Indeed, the idea of a moral corporation would generally be regarded as an oxymoron. It is not. What gives it substance is the ability of the corporation to establish levels of commitment to which we as individuals can only aspire. What makes it credible is the coincidence between the normative goals of doing good and the positive ones of making goods because ultimately the moral corporation is a commercially successful one and the competitiveness of nations depends on the moral fibre of its corporations.
Restoring trust in corporations is one of the most important policy issues of the 21st century. Without it economic policies will fail, environmental degradation will intensify and financial systems will collapse. With it, we can achieve levels of economic prosperity and well-being that far exceed what we have experienced to date.
Video: Colin Mayer on fixing the broken trust in corporations
Colin Mayer is the author of Firm Commitment: Why the corporation is failing us and how to restore trust in it (OUP, 2013). He is the Peter Moores Professor of Management Studies at Oxford University’s Saïd Business School, an Honorary Fellow of Oriel and St Anne’s Colleges, Oxford, and a Professorial Fellow of Wadham College, Oxford. He is a member of the UK Competition Appeal Tribunal and the UK Government Natural Capital Committee, and a Fellow of the European Corporate Governance Institute.
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In the United States, around 25% of households tend have a substantial amount of expensive credit card debt that they carry over multiple months or even years, while also holding significant liquid assets, i.e. balances in checking and savings accounts.
For example, in 2001 data, such households paid an average 14% interest rate on the credit card, while earning nearly no return on the bank accounts. A median such household had $3800 in credit card debt, and $3000 in the bank. The average amounts were about $5800 and $7200, respectively. This behavior is quite persistent with age, as the picture below shows. It is also persistent over time, at least over the last two decades. The statistics for 2010 are very close to those for 2001.
It may seem that given the cost of revolving credit card debt, people should pay it off if they have any money in the bank. Hence, the phenomenon has been termed the “credit card debt puzzle”. Much of the discussion of it in the literature interpreted it as evidence that people lack self-control, or that they lack the financial sophistication to plan properly. In my study, I instead focused on a more familiar idea: that people hold on to money in the bank because they may need it for expenses for which credit cannot be used, and such expenses could be large and unexpected. Not only do we pay our rents and mortgages still largely by check or electronic payment from the bank, but if we have a large car or home repair to take care of, the contractor might give preferential pricing to a cash payment or simply not accept credit cards. Indeed I find that homeowners are more likely to simultaneously have debt and money in the bank, and that home repairs are an important source of large and unpredictable expenses for most households. Then, even if a household has credit card debt, it may not be optimal to draw down the bank account to zero to repay the debt. Incidentally, this idea has been advanced in the past by those who have studied the same behavior on the side of firms.
The story is intuitive; the difficult part is measuring how well this explanation can account for the puzzle, because we do not have good data on how people pay for things during a typical month, and because it is difficult to disentangle which expenses are unpredictable. Nevertheless, using several household surveys and a model of household portfolio choice, I measured both typical monthly liquid expenses (i.e. those done by cash, check, debit and other ways that require the bank account to have a positive balance), and the extent of uncertainty in them. I find that for the median person, there appears to be enough uncertainty to warrant holding on the order of $3,000 of liquid assets, even if she has credit card debt as well. In other words, many people who simultaneously have credit card debt and money in the bank are behaving without violation of self-control or rationality, under the constraint that they do not have enough money both to pay off their debt and attend to their expected monthly expense needs.
While the story accounts for the median amount of money held in the bank by those who also have credit card debt, the average household has a lot more money in the bank, and more money than credit card debt. This means that there are people who have very large amounts of liquid assets while still revolving credit card debt. While such households may face more severe risks than the average case that I measured, and while some may hold money in the bank because they foresee a possibility of a job loss and want to be able to pay at least their average expenses, it does suggest that some people may be able to improve their financial positions by examining their bank and credit card balances, and the interest costs that they pay on the credit card debt, to see if they can pay off some of their debt using their money in the bank.
Irina A. Telyukova is an assistant professor of economics at the University of California, San Diego. Her research focuses on different aspects of household saving. She has several publications on credit card debt and money demand. Her current research is about the use of home equity in retirement, in the United States and across countries, including a study about reverse mortgages. She is the author of the paper ‘Household Need for Liquidity and the Credit Card Debt Puzzle’, which appears in The Review of Economic Studies.
The Review of Economic Studies aims to encourage research in theoretical and applied economics, especially by young economists. It is widely recognised as one of the core top-five economics journal, with a reputation for publishing path-breaking papers, and is essential reading for economists.
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Subscribe to only business and economics articles on the OUPblog via email or RSS. Image Credits: (1) Graph produced by the author. Do not reproduce without permission. (2) Credit Card. By Gökhan ARICI, iStockphoto
If you become wealthier tomorrow, say through winning the lottery, would you spend more or less working than you do now? Standard economic models predict you would work less. In fact a substantial segment of American society has indeed become wealthier over the last 40 years — married men. The reason is that wives’ earnings now make a much larger contribution to household income than in the past. However married men do not work less now on average than they did in the 1970s. This is intriguing because it suggests there is something important missing in economic explanations of the rise in labor supply of married women over the same period.
One possibility is that what we are seeing here are the aggregate effects of bargaining between spouses. This is plausible because there was a substantial narrowing of the male-female wage gap over the period. The ratio of women’s to men’s average wages; starting from about 0.57 in the 1964-1974 period, rose rapidly to 0.78 in the early 1990s. Even if we smooth out the fluctuations, the graph shows an average ratio of 0.75 in the 1990s, compared to 0.57 in the early 1970s.
The closing of the male-female wage gap suggests a relative improvement in the economic status of non-married women compared to non-married men. According to bargaining models of the household, we should expect to see a better deal for wives—control over a larger share of household resources – because they don’t need marriage as much as they used to. We should see that the share of household wealth spent on the wife increases relative to that spent on the husband.
Bargaining models of household behavior are rare in macroeconomics. Instead, the standard assumption is that households behave as if they were maximizing a fixed utility function. Known as the “unitary” model of the household, a basic implication is that when a good A becomes more expensive relative to another good B, the ratio of A to B that the household consumes should decline. When women’s wages rose relative to men’s, that increased the cost of wives’ leisure relative to that of husbands. The ratio of husbands’ leisure time to that of wives should therefore have increased.
In the bargaining model there is an additional potential effect on leisure: as the share of wealth the household spends on the wife increases, it should spend more on the wife’s leisure. Therefore the ratio of husband’s to wife’s leisure could increase or decrease, depending on the responsiveness of the bargaining solution to changes in the relative status of the spouses as singles.
To measure the change in relative leisure requires data on unpaid work, such as time spent on grocery shopping and chores around the house. The American Time-Use Survey is an important source for 2003 and later, and there also exist precursor surveys that can be used for some earlier years. The main limitation of these surveys is that they sample individuals, not couples, so one cannot measure the leisure ratio of individual households. Instead measurement consists of the average leisure of wives compared to that of husbands. The paper also shows the results of controlling for age and education. Overall, the message is clear; the relative leisure of married couples was essentially the same in 2003 as in 1975, about 1.05.
One can explain the stability of the leisure ratio through bargaining; the wife gets a higher share of the marriage’s resources when her wage increases, and this offsets the rise in the price of her leisure. This raises a set of essentially quantitative questions: Suppose that marital bargaining really did determine labor supply how big are the mistakes one would make in predicting labor supply by using a model without bargaining? To provide answers, I design a mathematical model of marriage and bargaining to resemble as closely as possible the ‘representative agent’ of canonical macro models. I use the model to measure the impact on labor supply of the closing of the gender wage gap, as well as other shocks, such as improvements to home -production technology.
People in the model use their share of household’s resources to buy themselves leisure and private consumption. They also allocate time to unpaid labor at home to produce a public consumption good that both spouses can enjoy together. We can therefore calibrate the model to exactly match the average time-allocation patterns observed in American time-use data. The calibrated model can then be used to compare the effects of the economic shocks in the bargaining and unitary models.
The results show that the rising of women’s wages can generate simultaneously the observed increase in married women’s paid work and the relative stability of that of the husbands. Bargaining is critical however; the unitary model, if calibrated to match the 1970s generates far too much of an increase in the wife’s paid labor, and far too large a decline in that of the men; in both cases, the prediction error is on the order of 2-3 weekly hours, about 10% of per-capita labor supply. In terms of aggregate labor, the error is much smaller because these sex-specific errors largely offset each other.
The bottom line therefore is that if, as is often the case, the research question does not require us to distinguish between the labor of different household or spouse types, then it may be reasonable to ignore bargaining between spouses. However if we need to understand the allocation of time across men and women, then models with bargaining have a lot to contribute.
The Review of Economic Studies aims to encourage research in theoretical and applied economics, especially by young economists. It is widely recognised as one of the core top-five economics journals, with a reputation for publishing path-breaking papers, and is essential reading for economists.
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Have we seen a potentially new form of global governance quietly emerging over the last decade or so, one that is establishing a surrogate and informal process of the constitutionalization of global economic and political relationships, something that is creeping up on us almost unnoticed? This issue of ‘global constitutionalization’ has become an important topic of analysis over recent years. Its development is most obvious in the case of business and corporate activity but I suggest it has a much wider provenance and is threatening to encompass many other aspects of global governance like human rights, security and warfare, environmental regulation, and more besides. One difficulty in analyzing this trend is to define its characteristics and parameters since it represents a rather loose configuration, one that is not easy to pin down.
Quasi-constitutionalization is a surrogate process of constitutionalization, not a coherent program with a rounded set of outcomes but full of contradictory half-finished currents and projects: an ‘assemblage’ of many disparate advances and often directionless moves – almost an accidental coming together of elements. So it does not amount to a ‘system’ in any conventional sense. This means it marshals together a complex bricolage of resources: material techniques and devices like models, documents, court decisions, legal statutes and treaties; institutional orders like legal apparatuses, bodies and governance organizations; and discursive expertise, theoretical knowledges and instruments. But it is a process nonetheless: it is building norms of conduct, rule-making, and a distribution of powers in a ‘global polity’.
I call this a quasi-constitutional process because while it resembles a constitution in many respects it is difficult to transpose constitutionality directly into an international environment where there is no single competent authority that might foster or enforce such a constitution.
In turn, this connects to various senses of the juridicalization of international corporate and other affairs, where new or revitalized types of law are increasingly being brought into play as the mechanisms for resolving disputes or organizing governance. This involves new forms of public law, private law, customary law, regulatory and administrative law, all of which are rapidly evolving in the international arena alongside traditional international law. Institutions that embody such a process are the WTO, various agencies of the UN, the OECD, Bilateral Trade and Investment treaties, and a huge number of standard setting and benchmarking organization many of which are private in character but which both claim and exercise a public power at the global level. This is the site of a reinvigorated private law and private authority operating in the international domain. In the case of companies, they are increasingly adopting the language of global corporate citizenship to characterize their activity as civic actors in this evolving quasi-constitutional environment, and they are being addressed as such by bodies like the World Economic Forum and the UN’s Global Compact. Bilateral trade and investment treaties have mushroomed over recent years. Investment treaties are an example of global private administrative law in action.
On the other hand we have the OECD in its capacity as sponsor of socially responsible conduct by multinational companies (Guidelines for Multinational Enterprises) which has become an instrument of global public administrative law. John Ruggie’s recent attempt to introduce a comprehensive regime of human rights into the business world (the UNs Protect, Respect and Remedy Framework) is another case in point of the creeping quasi-constitutionalizing process.
But a major issue of concern is whether quasi-constitutionalization leads to the Rule by Laws (RbLs) rather than the Rule of Law (RoL) in the international system? The RoL may be being given away as RbLs replace a comprehensive system of democratically constituted judicial review, which cannot happen in the case of global quasi-constitutionality.
Thus in this evolving environment, instead of the rule by elected and accountable political officials we are seeing the emergence of rule by lawyers and by aged judges and law professors in international commercial and other matters. These are the actors that are leading the process of institutional rule-making. Public and particularly private elites are making-up the rules as they go along, arbitrarily and on an ad hoc basis. I call this a rule by a new self-appointed Guild of Lawyers on the one hand and a new Clerisy of the Law on the other. In effect, we are giving up any form of democratic legitimacy and accountability with this introduction of global quasi-constitutionalization.
Grahame F. Thompson is Professor of Political Economy at the Copenhagen Business School (Denmark), and Emeritus Professor at the Open University (England). His research and teaching interests have been in international political economy matters, and globalization; with a recent focus on the role of business organization in the context of international economic matters. He is the author of The Constitutionalization of the Global Corporate Sphere? (OUP, 2012).
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Subscribe to only business and economics articles on the OUPblog via email or RSS. Image credit: Cover of U.S. Constitution by giftlegacy via iStockphoto.
On the 100th anniversary of his birth Tuesday, one may wonder what the Nobel laureate would say about the more controversial policies now unfolding across America. What would Friedman have thought about the recent advances in school choice, an idea he developed in 1955? How would he react to the government’s decision to tax Americans who do not purchase health insurance? Would Friedman take a position regarding the financial impact of soaring public union pensions on state economies? As an expert on monetary policy, certainly Friedman would have an opinion regarding the federal government’s bailout of the financial industry and its impact on our personal freedom.
I think the most important measure of a thinker’s influence are his once-controversial ideas that are now considered so obvious that no one seriously disputes them. I’ve recently been reading a collection of Friedman’s Newsweek columns from the late 1960s and early 1970s, a time when he was at the peak of his fame and influence. Among the proposals he wrote about most frequently were: severing the link to gold and letting the dollar float, fighting inflation by reducing the growth of the money supply, ending the draft, abolishing wage and price controls, and cutting taxes.
Friedman had a two-part counterattack. Part one was to argue—fairly persuasively—that monetary policy rather than fiscal policy was the key to recovery from the Great Depression.
Part two has a more complicated legacy. The straightforward reading of Friedman’s point about monetary policy and the Depression is that, yes, a propserous market economy does require active public sector management of the demand side of the economy. But Friedman wanted it to be read a different way, as an example of the damage done by the government doing bad things. These characterizations are basically equivalent, but Friedman’s way better suited his ideological proclivities regarding income redistribution. But faced with a new depression, Friedman’s way of putting this has created two problems. One is that on the right a lot of folks view calls for central banks to adopt appropriate monetary policy as just another form of government activism. Meanwhile on the left thanks to co-branding between a monetary focused view of macroeconomic policy and Friedman’s views on other matters, many view it as a kind of sellout to argue that business cycle problems can be cured with monetary policy.
After sitting on the President's Council of Economic Advisors from 1995 to 1997, acting as Chief Economist and Senior Vice-President of the World Bank from 1997 to 2000, and winning the Nobel Prize for economics in 2001, Joseph E. Stiglitz has clearly established his bona fides. As one of the leading economists in the world, [...]
Looking at some of the best pictorial evidence of the McDuck vault, it is evident that this large pile of gold on the left appears to be five feet tall. This is deduced under the assumption that the average duck 14 inches tall, which is then used comparatively to quantify the pile (5 ft = 4.3 duck heights). With a little calculus and graph-work, the rough integral can pinpointed to y=-x2-1x+5. This equation puts every “x” and every “y” value at exactly one inch, as seen below.
There have been previous attempts at these sorts of calculations; the present world economy of 1%ers makes figuring out this kind of thing much more practical.
This is a fine place to point out that the second effort in Fantagraphics’ Carl Barks Library will soon be out and it contains the seminal “Only a Poor Old Man” story in which the money-bin diving is introduced.
The 2012 class of Guggenheim Fellows was announced this week by the John Simon Guggenheim Memorial Foundation, inciting some exuberant responses on the part of several winners (check out Terry Teachout’s Twitter feed). The Guggenheim has long been hailed as the “mid-career award,” honoring scholars, scientists, poets, artists, and writers, who have likely published a book or three, professed a fair amount of research, and are actively engaged in projects of significant scope. The fellowship possesses some tortured origins—(John) Simon Guggenheim, who served as president of the American Smelting and Refining Company and Republican senator from Colorado, seeded the award (1925) following the death of this son John (1922) from mastoiditis (Guggenheim’s second son George later committed suicide, and more infamously his older brother Benjamin went down with the Titanic). Among this year’s crop (we dare say more forward-leaning than previous years?) is a roster of standout “professionals who have demonstrated exceptional ability by publishing a significant body of work in the fields of natural sciences, social sciences, humanities, and the creative arts,” affiliated with the University of Chicago Press: Creative Arts Christian Wiman, editor of Poetry magazine and author of three poetry collections, coeditor of The Open Door: [...]
We are united in our hatred of war and our abhorrence of violence. But a hatred of war is not enough, and when employed to conjure away history, it is a cynical vanity which posits that one is, somehow, in possession of a prophetic insight and supernatural morality which evaded our forefathers. It is all fine to speak of how history "should have been." It takes something more to ask why it wasn't, and then to confront what it actually was.
Pilgrimages, saints, shrines, indulgences and miracles were central to western medieval culture and religious experience. Yet, although much has been written, what has often been overlooked by historians is the economic underpinning of medieval religious beliefs and practices.
Pilgrimage itself was founded on an implicit contract between the pilgrim and the church. Those who embarked on a lengthy pilgrimage to one of the three great pilgrimage centres (Jerusalem, Rome and Santiago de Compostella) were making a costly commitment. Firstly, there was the devotional journey, which might involve an absence of a year or more, and the associated expenditure on transport, food, and lodging etcetera. Secondly, there were major risks in the form of shipwreck, disease, exhaustion and robbery. And, finally, there were the offerings to be made to the shrine of destination as well as the other shrines en route.
In return for their commitment, pilgrims were offered two primary benefits: the possibility of miraculous intervention by the saints whose shrines were venerated, and the prospect of indulgences (remission from purgatory) according to a fixed scale sanctioned by the Pope.
Saints worked their miracles through their bodily remains. Since the miraculous power of a saint’s relics was as much in the parts of a body as the whole, it became common to dismember the remains and distribute separate limbs. Similarly, the custodians of Beckett’s shrine at Canterbury were able to offer limitless ampoules of the martyr’s blood mixed with water – the efficacy of the holy solution being unaffected by dilution. This practice allowed the (theoretically limited) supply of saintly remains to meet the growing demand for relics throughout Christendom.
While miracles catered for pilgrims’ needs on earth, indulgences offered relief in the afterlife. According to early Christian doctrine the super-abundant merits of Christ and the saints created a “treasure” of superfluous merit, which, through the intermediation of the church, could be drawn upon to expiate the sins of the faithful. The church distributed this treasure to willing purchasers who had received absolution. Testators would often leave bequests for surrogate pilgrims to travel and make offerings on their behalf in the hope that indulgences would be granted to relieve their suffering in the next world. It appears that there was a pool of “stipendiary” pilgrims available for hire to meet the demand for surrogate pilgrimage from testators and those too ill to travel.
In addition, it seems that our medieval forebears were very much aware of what we describe today as “brand management”. Shrine managers targeted their clientele, promoted their advantages over competitors, and provided supporting evidence for miraculous claims with story collections.
Medieval pilgrimage shrines can also be viewed as a form of franchise business operating under the umbrella brand of the universal church: the local shrine managers marketed their patron saint and took in large-scale offerings that were recycled, in varying proportions, to the clergy, church building programmes and the poor. As franchiser, the Papacy exercised an important degree of control over the operation of franchisees and the use of its umbrella brand, while preventing competition from unauthorised sources. This was achieved through the papal monopoly on the creation of saints, the Pope’s discretionary powers relating to indulgences and, less successfully, through the validation of miracles and relics.
In this business model, the shrine was a profit centre and the shrine custodians (local ch
When tax incentives draw single women into the labour force, what activities do they sacrifice? Do they spend less time enjoying leisure? Do they cut back on household chores? Do they give up time with their children?
Over the past thirty years, US policymakers tried to increase participation of single mothers in the labour force by expanding the Earned Income Tax Credit and reforming the welfare system. One key motivation for reform was the perception that some single mothers were choosing to be idle and instead ought to contribute more productively to society by working. But did the policy reforms induce single mothers to shift from one productive activity – work at home – to another – work in the market? In a new paper published in the Review of Economic Studies, we find that the answer is “yes”: tax policy largely shifts single women between work at home and work in the market. Interestingly, however, when tax incentives draw them into the labour force, they may not cut much from their “quality time” with their children.
Remarkable patterns in the data suggest that tax policy had a very important effect on the labour supply and housework decisions of single women over this period. From the mid-1980s to the mid-to-late-1990s, the incentive to participate in the labour force greatly increased for single women with children relative to those without children. This was largely due to major expansions of the Earned Income Tax Credit—which transfers money to low-income single households only if they participate in the labor force—and cutbacks in welfare, both of which impacted low-income single women.
The figure below shows that over the same period of years, hours of market work for single women with children increased substantially relative to those without children, as previous literature has documented. This suggests that the changes in policy may have been responsible for the large changes in market work over the same period.
Strikingly, the pattern for housework looks like a mirror image of the pattern for market work. Hours of housework fell substantially for women with children relative to those without children over the period of the primary policy changes, with little relative change outside of this period. The relative fall in housework accounts for over half of the relative increase in market work, suggesting that most of the change in market work came out of housework. We find that for every additional hour that a single woman spends working in the market in response to a change in tax policy, she spends about 40 minutes less time working at home.
Mean usual hours of market work and housework of single women with and without children, 1975-2004
Importantly, we find no evidence that single women’s amount of time spent with children (as the primary activity, i.e. “quality time”) decreases significantly. We also find that single women’s time spent eating and preparing food decreases and that time spent sleeping changes insignificantly.
We find evidence that single women’s purchases of food away from home, such as takeout and restaurant meals, increase in response to an increase in the incentive to participate in the labour force. This makes sense: Women are busier when they enter the labour force and make up some of the time by purchasing food prepared by others instead of themselves. We also find some evidence that overall food purchases rise. Single women thus appear to use market goods to substitute for time: they become busier when they enter the labor force and save time by buying food in the market instead of themselves spending time on food.
International responsiveness to the food crisis in the Horn of Africa has relied again on the art of managing the headlines. Sophisticated early warning systems that foresee the onset of famine have been in place for years, but still the world waits until it is very nearly too late before taking real action – and then paying for it.
The big aid organisations, official and non-government, are right to say they have been underlining the gravity of the present emergency for months, at least from the beginning of the year. On June 7 FEWS NET (the Famine Early Warning Systems Network funded by USAID) declared that more than seven million in the Horn needed help and the ‘current humanitarian response is inadequate to prevent further deterioration.’ Two seasons of very poor rainfall had resulted ‘in one of the driest years since 1995.’ Still the world did not judge this to be the clarion call for decisive intervention.
Three weeks later, on June 28, OCHA (the UN’s Office for the Coordination of Humanitarian Affairs) said that more than nine million needed help and that the pastoral border zones of Somalia, Ethiopia and Kenya were facing ‘one of the driest years since 1950/51.’ Six decades! Two generations! A story at last! The media mountain moved, and the NGO fund-raisers marched on behind.
I have The Times of July 5 in front of me. ‘Spectre of famine returns to Africa after the worst drought for decades,’ says the main headline in World news. On page 11 there is a half-page appeal from Save the Children illustrated with a picture of a six-week old Kenyan called Ibrahim ‘facing starvation.’ On page 17 Oxfam has its own half page saying that ‘more than 12 million people have been hit by the worst drought in 60 years.’ The Times that day also carried a Peter Brookes cartoon of a hollow-faced African framed in the map of Africa, with his mouth opened wide for food.
So, for 2011, an image of Africa has again been fixed in the western consciousness. It is an image of suffering – worse, of an impotent dependence on outsiders – that most certainly exists, but is only part of the story, even in the Horn.
The western world may understand something of the four-way colonial carve-up and the post-colonial disaster that overtook the Somali homeland, but it certainly has no proper answers to the conflicts and dislocation that lead to starvation and death. In northern Kenya, to which so many thousands of Somali pastoralists have fled in recent months, the West does have an answer of sorts – it can feed people in the world’s largest refugee camp, in the thin expectation of better times back across the border. Then there is Ethiopia, with several million of its own people needing help, its own Somali population swollen by refugees, and the country for ever associated with the terrible famine of 25 years ago which launched the modern era of aid.
Here it is possible to make some predictions. There will be no widespread death from starvation in Ethiopia, not even in its own drought-affected Somali region where an insurgency promotes insecurity and displacement. New arrangements between the Ethiopian government and the UN’s World Food Programme have insured more reliable and equitable food distribution, and the Government presses on with schemes to settle pastoralists driven by persistently poor rains from their semi-nomadic lifestyles.
The government of Meles Zenawi, which has just marked 20 years in power, has on the whole a creditable record in response to the prospect of famine.In 2003/4 the country faced a far larger food crisis than it did it in 1984, but emerged from it with very few extra deaths. In the former famine lands of the North where there is an impressive commitment to grass-roots development there is almost no chance of a retu
, in which she explores the wealth gap that's helped spur our worst economic crisis since the Great Depression in light of research on human nature and the evolution of human social organization. Interesting to point out that another NYT study bills the average top executive's salary at ten million dollars and rising twelve percent per year.
And just who's fair?
Angier spells it out for us:
Darwinian-minded analysts argue that Homo sapiens have an innate distaste for hierarchical extremes, the legacy of our long nomadic prehistory as tightly knit bands living by veldt-ready team-building rules: the belief in fairness and reciprocity, a capacity for empathy and impulse control, and a willingness to work cooperatively in ways that even our smartest primate kin cannot match.
In The Fair Society: The Science of Human Nature and the Pursuit of Social Justice, Peter Corning draws on evidence similar to what Angier cites in her article: the evolutionary record, along with the latest findings from the behavioral and biological sciences. The result? A provocative argument for the innate fairness of human beings, and the advancement of a new Biosocial Contract that takes lessons akin to those gleaned from the Kung bushmen of the Kalahari and the Ache hunter-gatherers in eastern Paraguay and applies them to the Madoffs and Enrons in our midst.
Is capitalism at a crisis point? Angier uncovers a study "in which Americans were given the chance to construct their version of the optimal wealth gradient for America." Both Republicans and Democrats ended up with a chart with a degree of income inequality that looked much more like Sweden's than that of the United States.
Chimpanzees might not carry a log together, but I've seen a conspicuous consumer or two lend a hand in understanding Ikea's cart-schlepping escalator. Corning reminds us there are real reasons why we might band together and build that Expedit shelving system arm-in-arm:
This week, the foreign ministers of Japan and China shook hands in public in Beijing, pledging better relations in the years to come. It was a reminder to westerners that we still don’t know nearly enough about the relationship between the world’s second and third biggest economies (Japan and China having recently switched places, so that Beijing now holds the no. 2 spot, riding hard on the heels of the US). Relations between China and Japan have been rocky over the past few decades, with an incident over the arrest of the captain of a Chinese fishing vessel by the Japanese authorities causing ructions just last autumn. And of course for many Chinese, the relationship is shaped by memories of the horrific war with Japan between 1937 and 1945 in which some 15 million Chinese died. But China and Japan are also profoundly linked economically and culturally. Japanese companies invest in China; Chinese goods flow into Japan. And the two countries share aspects of culture, particularly writing systems and religious practice, that come from centuries of shared interaction. In the twentieth century, Japan was the dominant member of the duo. But as the century to come seems to be China’s , what does that mean for its closest neighbour, sometime enemy, and now wary partner?
The key player in this diplomatic minuet is the US, still, of course, the world’s biggest economy and a cultural powerhouse. It may be in relative decline, but it looms large in every region of the world, including the Pacific. And of course, the continuing security arrangements between the US and Japan are one of the factors that exercise minds in Beijing. The Chinese see the Pacific as the site of a new regional hegemony: not territorial, but in terms of influence, both military and economic. Having the United States, with its powerful naval presence, in the Pacific, is a constant reminder that there is a check on their ambitions in the region and that not everyone in that region welcomes every aspect of China’s “peaceful rise.” And Japan is still a key US ally. After World War II, Japan was disarmed precisely so that it could never again invade and occupy Asia. But as a result, Japan’s defence was taken care of by the United States, leaving Japan free to grow its economy (remember, until the 1990s, “Asian economic miracle” meant Japan, not China). Ironically, the China of today might have preferred it if China had been left to develop its own forces without US assistance in the postwar era, since it would be easier for Beijing to face down an independent military in Tokyo than to do so a force backed by Washington. The rivalry is not just about arms: both China and Japan compete for influence in the region and beyond with foreign aid and investment. So the mistrust remains – but also the realization that the relationship will inevitably change as China becomes richer and Japan becomes older (Japan is one of the faster-ageing societies in the world – although so will China be from the 2020s on, because the children of the one-child policy are getting older).
When I was in school, I always had trouble understanding the time line of history. It wasn’t until college that I could piece together time lines between nations and continents. You know how I did it? I looked at economies, how industries developed, what a nation traded, and with whom it was trading. A developing time line, say from farm to industry, helps me understand not only the evolution of a nation’s history, but also its situation today.
Often, in secondary education, economics and economic systems are taught separately from history, civics, and current affairs. Yet, concepts in economics can sometimes best explain a nation’s moment in history, the reason the nation has the alliances it does, and the type of government structure that exists in it. Economic systems can be a good way to introduce history, politics, dissect current affairs, and even play around with predicting future outcomes in a fun, discussion-oriented class setting.
Tsunami damage in Japan
This week, consider Japan. Given the natural disasters that are in the news, maybe a glimpse into Japan’s economic history can help students connect the current events of today with the country and people involved. This might be a good way to bring some background to the news article you read for class, or just as added interest-inspiring material. Since 1990, Japan’s economy has been rather stagnant. Slow growth, coupled with a low birth rate meant the recession of 2008 was a double blow to the just-recovering economy. The Japanese were probably pretty fed up. Which could be a reason why since 2000, Japan has had seven prime ministers, some staying in power for mere months before being ousted and replaced by someone else. Someone who, people
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As most of you probably know by now, there’s a new stage in life – emerging adulthood, or for the purposes of this post, the unmarried young adult. Marriage is getting pushed off (26 is now the average age for women, 28 for men) which means…more premarital sex than ever!
According to sociologists, emerging adults are all part of a sexual market in which the “cost” of sex for men and women in heterosexual relationships is pretty different. Out of this disparity has risen the theory of “sexual economics,” which I recently read up on in Premarital Sex in America: How Young Americans Meet, Mate, and Think about Marrying. At first glance women appeared to be the clear losers in this market. See this passage:
Sexual economics theory would argue that sex is about acquiring valued “resources” at least as much as it is about seeking pleasure. When most people think of women trading sex for resources, they think of prostitution and money as the terms of exchange. But this theory encourages us to think far more broadly about the resources that the average woman values and attempts to acquire in return for sex – things like love, attention, status, self-esteem, affection, commitment, and feelings of emotional union. Within many emerging adults’ relationships, orgasms are not often traded equally.
Basically, the sexual economics theory says that while women and men are doing the same thing during sex, socially they are doing two different things. Women can and do enjoy sex, but they also have an agenda, while men…just want to have sex. Which to me just seemed, well, sad. Hadn’t women all finally agreed that a man can’t ever make you happy, only you can? But the more I read up on the theory of sexual economics, the less cut-and-dry it became. Women might use sex to get commitment, but they’re also getting things like advanced degrees and independent financial stability - which also play a role in this new sexual economy. This led me to ask: are men really the clear winners in this game? I scoured the countless studies and interviews in Premartial Sex in America and came up with the following chart to sort all the data out.
Wins in the Emerging Adult Sexual Market by Gender
Today's "Why Marx Was Right" blog discussion features an essay by Jake Meador on Chapter 5 of Terry Eagleton's Why Marx Was Right, addressing the claim: "Marxism reduces everything to economics."
One of the most common dismissals of Marx accuses him of historical reductionism. “Marx creates a caricature of history in which every event is determined purely by class struggle or economic factors,” goes the critique. Eagleton addresses the refutation by clarifying what Marx actually said about historical causality and then explaining how his claims are not as simplistic or materialistic as some critics have suggested. Going beyond mere refutation, Eagleton then develops a Marxist theory of work that is far more holistic in nature than many of Marx’s critics might expect. In his response, Meador compares Marx’s theory of work and history to two other less conventional economic thinkers, British dramatist Dorothy Sayers and Kentucky farmer Wendell Berry. Through comparing these three authors we can avoid the more typical Marxist vs. Capitalist debate while also seeing both the overlap and the conflict between Marxist thought and the small-scale localism of Berry and Sayers. Read and discuss more on Bensonian...
In the wake of the latest financial crisis of 2008 that brought the largest economies on earth to the brink of disaster and destroyed trillions of dollars in wealth worldwide, the public has been searching for answers in an environment of openness unprecedented in generations. Numerous public intellectuals have been re-thinking the dominance of the economic ideology and system of global capitalism. Literary critic Terry Eagleton has sought to revive the thought of Karl Marx as a counterweight to the prevailing economic order. What should we make of this man’s ideas, which have alternatively been lionized and demonized in myriad cultures for the past century? What are the consequences of bringing Marx’s work to bear on our current situation? This essay examines the popularly misunderstood materialism of Marx. Lee engages this specific idea of Marx and its implications through an examination of the relationship between ideology and practice, noting the ways in which his materialism — properly understood — is a brilliant and essential corrective to prevailing rationalist views of the human person, and yet expressing reservations about the violent assumptions underlying his views and consequences thereof. Finally, Lee suggests a fundamentally more materialist alternative to Marx’s violent ontology.
Breznitz and Murphree find that in our new world of globally fragmented production China does not need to master breakthrough innovations to achieve success, as popular opinion would have it. Instead, China's development is based on keeping pace with the technological advances of other nations, and mastering subsequent stages of innovation. Significantly, this development path has been drastically different from the plans and ambitions of the Chinese central government, and hence, this growth trajectory was not at all centrally planned. The book systematically tracks and explains this development path and in doing so offers a unique understanding of the Chinese political economy and its structured uncertainty.
This morning I turned in the last piece of homework I will ever have. I submitted my final research project: my master’s thesis.There was no parade, no trumpets or cymbals to herald my victory. No “three cheers!” to mark the completion of my efforts. Just the simple knowledge that I have finally finished.
They won't hand me my diploma until later this month, but the reality is that today marks the end of my years of formal education. Added up, 18 years of teachers, classrooms, professors, projects, presentations, and dreaded papers. Over.
When I think back on the memories of school, what stick out most are not the facts I learned or the books I read, but what I recall are all the relationships I made and the fun I had when I wasn’t studying in the library alone.
School offers us just that, the opportunity to find new experiences that we wouldn’t have otherwise discovered.
Because of a middle-school French-class trip to nearby Québec, I learned that my friend Emma would always find ways to get us into the most fun kind of trouble, and that I love all things maple-syrup related. Because of reading I Will Try during library hour in elementary school, I have made it my mission to travel across Africa (although not exactly the way the author did, when he decided to walk from Malawi towards America for his education). And because of spending countless hours at the local pub after economics class, I have learned that while philosophical entanglements often leave one feeling unfulfilled, beer and good company always leave one in better spirits. We would spend hours there, after Economics Development class, after History of Economic Philosophy class, after Statistics class: my peers and I, in time spent not studying, but taking what we learned in lecture and talking about it, openly, with opinions, with our own theories and smart colleagues to bounce ideas off of.
These are the friends, memories, and happy learning experiences I will grow from for the rest of my life. Even if, heaven forbid, I forget how to use the econometrics regression equation to find the unknown parameters to formulate the average expected outcome of an observed condition. (Not that I hope to ever forget my mathematical training!) My experiences remind me, looking back, that learning happens throughout life. One has only to put oneself in situations that allow for unexpected, exciting opportunities to arise.
Though my years of formal education might be complete, they leave me with the knowledge that power lies in asking questions, and life is a learning curve that I will always be trying to bend. I may be out of the classroom, but I will forever be a student.
Do you have favorite memories, or wisdom to share about your education experience? Leave a comment below!
In Economics of Good and Evil, Tomas Sedlacek asks: does it pay to be good? In order to answer this question, he looks at the way societies have reconciled their moral values with economic forces. He explores economic ideas in world literature, from concepts of productivity and employment in Gilgamesh to consumerism in Fight Club. In the videos below Sedlacek talks about why he wrote the book, before going on to explain ‘the story of Joseph and bastard-Keynesianism’.
Tomas Sedlacek works for the National Economic Council in the Czech Republic and is a former economic advisor to President Václav Havel. The Yale Economic Review called him one of the ‘5 Hot Minds in Economics’. He will be talking about his book at the RSA in London on Thursday 16 June.