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John Maynard Keynes in Modern Macroeconomics Education

January 14th, 2011 Comments off

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It is of interesting note that Paul Krugman and Paul Samuelson, in their dismissal of John Kenneth Galbraith’s The New Industrial State, mentioned that Galbraith was a talented writer (Duhs, 2009, p123). Perhaps it would not be too far-fetched to suggest that such a comment was motivated by the fact that both Krugman and Samuelson were Keynesians. John Maynard Keynes was not known for being an easy read, with scholars and economists alike criticizing The General Theory of Employment, Interest and Money for its complex writing despite its largely practical nature. Keynes, whose fame peaked with the publication of The General Theory heralded some sort of revolution in the economics of the late 1930s. The General Theory created a change in the way governments handled the recessions of a post-Depression era. Once economies were lifted out of depressions, Keynesian policies gradually disappeared and in the 1970s were mostly displaced by Milton Friedman’s monetarism (Stewart, 1993). Keynes may have lost his popularity towards the end of the 20th century, but he returned to attention recently in light of the global financial crisis. Seeing as long after his death Keynes remains a big name in economics, it is only natural then to expect his teachings introduced in a standard macroeconomic course. Hence this essay will examine the content of textbook macroeconomics and how much of it agrees with the economics of Keynes, primarily through the analysis of introductory macroeconomics textbooks.

Looking at the history of Macroeconomics textbooks, we can see that Keynesian economics began to saturate economics textbooks since as early as the 1940s. A study of Paul Samuelson’s Economics shows that Keynesian economics was gradually assimilated into mainstream economics syllabus, starting with its first edition which was loosely structured around Keynes’s concepts. Samuelson’s text was the principle introductory economics textbook of the USA and today it is built around ideas from The General Theory alongside other relatively recent economic concepts such as the Phillip’s Curve. Pearce and Hoover (2005, p186) additionally notes that today’s macroeconomics textbooks are mostly Keynesian. However, it is worth mentioning that most textbook Keynesian economics are not necessarily teachings of Keynes but rather other economist’s interpretations or understanding of Keynes. There exists a difference between (as Alex Leojohnhufvud famously put it) “Keynesian Economics and the Economics of Keynes” (Garrison, 1994). Colander observes that textbook Keynesian policies were not exactly Keynes but rather Abba Lerner’s interpretation of Keynes while Caporaso and Levine (1992, p101) notes that economists such as textbook writer Samuelson placed Keynesian ideas into a neoclassically inspired framework. The latter supports the notion put forward by Littleboy that textbook writers merely picked up bits of Keynes that fit into its neoclassical vision.

Things take a fascinating turn when the discord between Keynes’s own teachings and textbook macroeconomics are made visible. A quick review of standard macroeconomics textbooks is sufficient to show that Keynes was not purely “watered down” or “bastardized” as claimed by some economists, but rather eliminated completely in certain crucial parts. The most obvious would be the lack of the political side of Keynes due to the textbook writer’s pursuit of the measurable and results-oriented components of Keynesian economics. Keynes did not trust the market system to perform satisfactorily on its own, and this forms a core section of Keynesian economics. Sharing a similar opinion with Karl Marx (who is completely absent from most modern macroeconomics textbooks), Keynes denied the ability of the market to keep a steady rate of employment and production. However, Marx went on to claim that the free market system is “violently unstable”, a thought that Keynes disagreed upon (Caporaso Levine, 1992, p101-2).

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John Maynard Keynes in Modern Macroeconomics Education (Part 2)

January 14th, 2011 Comments off

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According to Keynes, too often has Adam Smith’s “invisible hand” been let off with a slap on the wrist despite its ineffectiveness in keeping economies above water and this forms the basis as to why Keynes sees the need for some form of government intervention. Keynes’s pessimism regarding markets was never taken seriously by textbooks, with most writers attributing it to the turbulent period he lived in.

One particularly big predicament for Keynes was the development of the private corporation. A part which the standard macroeconomics textbook fails to give coverage on, the private corporation is to Keynes the cause of faults in the financial market. The distribution of shares as a method enabling individuals to hold wealth in a liquid form generated instability in the accumulation of wealth. Caporaso and Levine (1992, p110) observe that this makes long run commitment to a particular productive enterprise no longer compulsory and places a premium on short term capital gains. As Keynes (1936, p156) put it, those who profit from this are those who best forecast “what the average opinion expects the average opinion to be” a short time ahead of the general public. This in turn encourages speculative activities and in the end results in price instability. Keynes (1936, p159) likens these investors to gamblers, stating that “when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”. Keynes advocates share market transaction taxes in order to solve this problem. Simply put, the ultra-short term nature of financial market exchanges would be heavily dampened by a tax that is capable of raising transaction costs. This shifts investor perspectives away from the short run side of the spectrum and reigns in the pace of transactions. This reform along with Keynes’s proposal for an International Clearing Union was never mentioned in textbooks, possibly for their radical nature.

Taking things a little further, it is perhaps fair to say that Keynes would not agree to the content of today’s macroeconomics textbook even if they are based on derivations of his concept. Firstly, the way in which textbooks today present content can best be portrayed as being of mainly mathematical and diagrammatical manner. Today’s textbooks are neoclassical, combining Keynesian theory and classical theory. Macroeconomics textbooks take an engineering approach at seeing the world, resulting in society being projected as a highly mechanized structure to ruling technocrats. This is much in line with the Benthamite movement where society’s utility is given a value and governmental decisions are made to maximize collective utility. On the other hand, we have Keynes who was not just an economist, but was additionally a social reformer and a philosopher. He had a more earthly view of the world and concedes that uncertainty remains an integral part in everyday life. He took note of the way people discount what they don’t know from making future decisions, and how this posed a flaw in the decision-making process. Then there is also the concept of “animal spirits” where Keynes believed people are often governed by their whims and fancies rather than cost-benefit calculation. This is perhaps consistent with his personal life in which he was known to enjoy artwork, have affairs with men, and finally marry a famous ballerina. This quirky side of Keynes contrasts sharply from the rigid economics of textbooks.

In the end, Keynes’s writings and beliefs were to guide people towards what he thought would be an ideal state of society. Before The General Theory, he wrote Economic Possibilities for our Grandchildren in 1930 which dealt with the potential of future living conditions and society.

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John Maynard Keynes in Modern Macroeconomics Education (Part 3)

January 14th, 2011 Comments off

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Ohanian (2008, p10-11) notes that Keynes’s 100 year prediction was highly accurate despite the lack of empirical record and insufficient theory at the time he wrote the essay. Keynes wanted a society where production was no longer a problem and there was equal choice for everyone. To put it simply, all wants can be satisfied due to increasing productivity from constant technological progress. Keynes even forecasted that eventually society will reach a point where too much leisure becomes a problem. Ohanian states that Keynes’s forecast of dramatically decreasing work hours in the future was near to that predicted by a modern growth model, and this was a stunning achievement for his time period. However, his prediction of the future state of leisure is still very far off the mark and for the time being does not seem very likely.

Keynes was no doubt a brilliant contributor to economics, and one that was far ahead of his time. The oversimplification and exclusion of much of his work in textbooks could be seen as insulting by some scholars, but perhaps it is of necessity to the technocratic age that we live in. In an era where the focus on results and technology dominate the analytical process, it is most probably best if the neoclassical vision of textbooks remained for the time being. In conclusion, it can be said that the content of macroeconomics textbooks does leave a lot to be desired particularly when it comes to Keynes and in general, the political economy. By reducing macroeconomics to mainly calculations and forecasts to maximize wellbeing, the more thoughtful and challenging side of economics has been left out. If prior to Keynes textbooks were planned around Adam Smith’s teachings, it would be very interesting to know which economist would be the next to mark a revolution in macroeconomics education.

(approximately 1480 words)

References

Duhs, A. 2009. “Course Notes”, Political Economy and Comparative Systems, The University of Queensland, Queensland, Australia.

Garrison, R. W. 1994. “Keynes was a Keynesian”, The Review of Austrian Economics, Vol. 9 No.1, pp. 165-171.

Littleboy, B, Taylor, J. 2006. “Macroeconomics 3rd Edition”, John Wiley Sons Australia, Queensland.

Littleboy, B. 2009. “Commentary on Keynes”, The University of Queensland.

Ohanian, L. E. 2008. “Back to the Future with Keynes”, Federal Reserve Bank of

Minneapolis Quarterly Review, Vol. 32, No. 1, pp. 10–16.

Pearce, K. A, Hoover, K. D. 2005. “After The Revolution: Paul Samuelson and the Textbook

Keynesian Model”, History of Political Economy, Vol. 27, pp. 183-216.

Stewart, M. 1993. “Keynes in the 1990s”. Penguin Books, Middlesex, England.

Taylor, H. 1936. “Mr. Keynes’s General Theory”, New Republic 86 (April 29): 349

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Risks of Outsourcing Computer Software and Hardware support

January 13th, 2011 No comments

Outsourcing is when a company turns to external resources at other companies to do tasks they once did internally. Outsourcing may be done to draw on external expertise, such as hiring legal specialists or certified auditors. However, outsourcing is frequently done to save money by shifting work to companies that gain efficiencies from large scale by being specialized. This outsourcing creates risks for firms that outsource software and hardware support.

1. Loss of control

Server support is now determined by both the policies of the outsourced firm and by corporate policy. Employees of the outsourcing firm may follow their own policies first and your policies second. Outsourcing firms can dictate service level agreements and penalties if standards are not met, but they cannot control how work is performed. Companies that outsource work must also cede control of contractors to the managers who direct their activities.

2. Added feedback delays

Instead of calling an internal support staffer to resolve a problem, customers must call an outsourcing firm for help. This frequently results in calls being received by a first level technician following a script. If the problem requires advanced skill sets, there is additional delay in transferring the call to a subject matter expert or putting in a ticket for them to call a user back. The need to pass through an intermediary adds delays to customer support. If problem does require the subject matter expert, they may need to travel to the site to resolve the problem. This delay may not occur when in house staff can walk down the hall and solve the problem.

3. Loss of expertise

Employees of an outsourced firm are rarely as knowledgeable as internal staff who have worked with specific hardware or software applications. Even if the internal staff are available, they may be reassigned to other areas or may not be available when outsourcers come to answer calls. If the internal experts are transferred to the outsourcing firm, ether as part of a realignment or a reorganization, the risk that they will seek yet another employment opportunity arises. There is also the risk that experts who are sent to the outsourcing firm may be terminated by the new company once they have trained lower paid technicians to do the most common tasks they performed.

4. Loss of accountability

When an internal employee performs poorly, that individual can face internal corporate consequences. This can include reassignment or firing. When an outsourced technician performs poorly, the outsourcing firm can solve the problem by assigning a different technician as the first solution. Changing account managers may also be offered as a solution. The worst case scenario for the outsourcer is that you take back the IT functions that you outsourced, but for which you may have lost your key personnel or licenses. This causes a loss of accountability when outsourcers do not perform to prior service levels.

5. Loss of intellectual property

When data is processed by an outsourcer, there is an additional risk of data loss due to the extra processing steps or outside hands and eyes that perform the work. Another risk is that outsourcers may take processes learned from interacting with staff and transferring those lessons learned to their other customers or using those best practices themselves; this may not be a direct effort to steal intellectual property but the spread of best practices to the competition does not help the outsourcer. While outsourcing may save money, the cost can be higher than it seems.

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A Comparison of Socioeconomic and Institutional Methods of Explaining the Rise of Capitalist Democracy in England (Moore vs. North & Weingast)

July 18th, 2010 Comments off

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The arguments of Barrington Moore’s Social Origins of Dictatorship and Democracy and of North and Weingast’s Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England on the genesis of capitalist democracy in England mostly supplement each other by examining different variables and processes that relate to England’s evolution. Both works stipulate that England’s capitalist democracy entailed social elements that sought a free economy and did so by political means. Calling said elements the “commercial class,” Moore explains how this class emerged, came to power, and saw its policies implemented. North and Weingast, however, explain how political institutions evolved to allow a free market economy and how the commercial class’ interests translated into a fair, balanced, and checked English government. In a sense, Moore explains how initial conditions established the commercial impulse that would eventually drive free market democracy and how the impulse came to manifest itself politically and legally. North and Weingast, arguing on the precondition of the existence of the commercial class, explain how the evolution of political institutions, driven by economic motives, created a balanced, accountable government that led to a politically and economically free society. Thus the two arguments overlap in how the commercial impulse arrived at the doors of government, but supplement each other as one explains the cause chiefly using socioeconomic variables as the other explains the effects chiefly using institutional variables.

In attempts to explain the rise of capitalism in England, Moore uses socioeconomic conditions, the rise of the commercial impulse and availability of resources, whereas North and Weingast use institutional changes in government, the regularization of public finance. Thus the two arguments don’t necessarily contradict each other; rather, they examine different possible causes of the same phenomenon. Moore argues that market influences, the possibility of enclosing land, difficulty in finding cheap commodities, and the devolution of the connection between landownership and legal power all led to the emergence of the commercial impulse. The booming land, wool, and grain markets along with high food prices and a labor shortage, Moore argues, developed a need to make profit in English agrarian society. Moreover, the high price of resources and widespread availability markets inspired a once agrarian class of people to produce for economic gains rather than for sustenance. In addition, because “the land and tenurial relations based on it had largely ceased to be the cement binding together lord and man,” (Moore, 5) land thereafter came to be viewed as a source of revenue rather than one of political or legal power. Moore points to the burgeoning land market and rise of enclosures as evidence reaffirming his claim that public perception concerning land ownership shifted to one of capitalism. Furthermore, he asserts that the commercial impulse along with the aforementioned variables of resources were the chief causes behind the growth of a capitalist economy. Thus, Moore examines resource endowments and evolution of agricultural profitability to explain the growth and success of capitalist commercialism. On this point he and North and Weingast disagree.

To North and Weingast, the success of commercial capitalism was a result of government’s establishment of a “relevant set of rights…[and] a credible commitment to them,”(North and Weingast, 803) derived from their assertion that “the development of free markets must be accompanied by some credible restrictions on the state’s ability to manipulate economic rules to the advantage of itself and its constituents”(North and Weingast, 808). They argue that with restrictions on the Crown’s ability to practice arbitrary power in the pursuit of public finance and renege on loans, English government earned financial credibility and was therefore able to finance expenditures. This shift to free flowing credit to government trickled down to the public economy beginning when “the Bank of England began private operations…[along with] numerous other banks”(North and Weingast, 825). Thus North and Weingast argue that government credibility led to free flowing credit in the public economy. As a result of this influx of available credit, they argue, private enterprises were able to create new and grow existing businesses. Although the two arguments diverge when explaining the general reasons for capitalism’s success, Moore’s argument is mainly aimed at explaining why capitalism emerged in the first place whereas that of North and Weingast explains why capitalism boomed once it became embedded in the water supply. The two arguments have a more supplementary and overlapping relation when explaining why capitalist interests percolated government and succeeding in translating their philosophy into law.

While explaining how capitalist democracy came about in England, Moore examines how social changes affected policy and the composition of Parliament while North and Weingast examine how changes in financial policy and the new composition of Parliament affected English government. Thus, North and Weingast begin where Moore ends: at changes in financial and monetary policy and a new composition of Parliament. In Moore and North and Weingast’s arguments, these changes in government are viewed as an effect and cause, respectively. Moore argues that the disenfranchisement and resulting dissolution of the peasantry, royal infringement upon free market, and the transformation of Parliament from an exclusive body of hereditary nobles to a “committee of landlords” (Moore, 21) led to a Parliamentary opposition to the Crown that resulted in a government that promoted capitalist democracy. As land became increasingly necessary for successful agrarian capitalism, the practice of enclosing peasant-owned or common land became regular. This practice not only allowed resourceful peasants, or yeomen, to participate in commercial capitalism, but also led to rapidly decreasing peasant population that would have opposed modernization. Moore argues that the Crown strove to protect the peasantry from enclosures to ameliorate public discord by using prerogative mandates to reallocate the jurisdiction of property rights disputes from common law courts to the Star Chamber.

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A Comparison of Socioeconomic and Institutional Methods of Explaining the Rise of Capitalist Democracy in England (Moore vs. North & Weingast) (Part 2)

July 18th, 2010 Comments off

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However, Moore argues, because of the economic implications of enclosures and apparently self-serving practices of the Crown, commercial interests developed in opposition to the Crown. Moore further argues that “the wealthier townsmen turned against royal monopolies…as barriers to their own interests”(Moore, 13). As such, Moore asserts that the unilateral and regulatory nature of the Crown came to represent the final frontier before free market capitalism to an increasingly cohesive commercial class. This opposition came to the forefront of politics as Parliament came to represent the interests of the commercial class. In sum, Moore argues that economic motives drove Parliament to go against the Crown and was able to see its interests come to fruition due to the gradual disappearance of the peasantry and a lack of effective military, bureaucratic, and administrative bodies. Moreover, as Parliament began passing its reforms measures to ensure a free market, the Crown was now subject to a primitive form of impeachment, namely, beheading. On this point the two arguments agree completely. Moore argues that “the Star Chamber…[was] the general symbol of arbitrary royal power”(Moore, 17). Moreover, Moore argues that beside the Star Chamber, there was no major institutional reform because “a flexible institution which constituted both an arena into which new social elements could be drawn as their demands arose and an institutional mechanism for settling peacefully conflicts of interest among these groups”(Moore, 21) already existed. North and Weingast, however, assert that the evolution of English Parliament, monarchy, and court system comprised a near revolution.

The same changes in political institutions are described in both arguments, but North and Weingast treat these changes as much more significant to the development of free market democracy. Identifying that the “execution of public laws and expenditures was not subject to a public budgetary process,” (North and Weingast, 809) North and Weingast why they believe institutional change was sought after. Moreover, the fiscal irresponsibility of the Crown led to a coalition of the commercial class “seeking to preserve personal liberties, rights, and wealth”(North and Weingast). Thus the major impetus to reform was a budgetary one, but the nature of the reforms led to a system of government based upon checks and balances. North and Weingast identify several parliamentary measures taken to reform the budgetary process but in turn created a stable balance between Parliament and the Crown: the passage of the Statute of Monopolies and Triennial Acts, the abolishment of the Star Chamber, the reduction of legal legitimacy of royal prerogatives, and the modifications to land tenure laws. As a result of these changes in infrastructure, North and Weingast argue, the Crown’s ability to practice arbitrary was stripped. An important form of royal arbitrary power, they argue, was the disenfranchisement of political opposition in the form of gerrymandering, calling for detainment of political opponents and excessive bail thereof, and suspension of the writ of habeas corpus. Without such practices, one would face little to no threat of disenfranchisement and thus would be able to exercise political freedom. Thus North and Weingast argue that economically driven reforms to the budgetary process allowed for a balance of government and legitimacy of exercising political freedom. The two arguments overlap in explaining how parliament came to represent commercial interests. Moore, however, explains how the dissolution of the peasant class and rise of the commercial class established a strong, cohesive coalition that politically opposed the monarchy without going into detail as to how the commercial class went about accomplishing its goals. North and Weingast, on the other hand, focus on how the commercial class reformed English political institutions to establish separation of powers, a system of checks and balances, and a relatively laissez-faire government. In sum, Moore explains how socioeconomic trends translated into political trends as North and Weingast explain how political trends translated into legal and institutional trends.

Both arguments attempt to explain how capitalism and democracy emerged in England, and why they arose simultaneously. They both explain why the commercial class succeeded in bringing about a burgeoning capitalist economy, though they do so using distinct variables: Moore looks at socioeconomic trends, specifically the fall of the peasantry and the profitability of agriculture in England to explain the economic victory of capitalist forces, while only briefly examining institutional variables, the changing composition of Parliament, and the abolition of the Star Chamber to supplement his argument.

North and Weingast almost strictly use institutional variables in their assertion, namely the reform of the budgetary process to ensure the regularization of public finance which eventually trickled down into the public economy. Further, both arguments set out to explain how the commercial class arrived at the door of government and allowed for a democracy. Both make points backing up the assertion that commercial interests came to oppose the monarchy, though for different reasons. Moore depicts the opposition to an antidemocratic more as an apolitical opposition that gradually percolated Parliament and thus became political. North and Weingast lack any significant social commentary on this matter, instead relying on how Parliament’s desire to reform the budgetary process developed a balanced and democratic government to prove their point. In explaining both the rise of capitalism and that of democracy, Moore focuses on the cause and the phenomenon using socioeconomic variables whereas North and Weingast focus on the phenomenon and its effects by examining the evolution of English political institutions.

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Summary of Milward’s “The Economic Effects of the Two World Wars on Great Britain” and Cooley & Ohanian’s “Postwar British Economic Growth and the Legacy of Keynes”

June 7th, 2010 Comments off

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As early as the mid 1700’s, the British led the world in economic mass production. Britain had truly been the “workshop of the world,” and was the dominant economic figure of its time. However, starting with the First World War, many changes occurred in the British economy. The wars required the full effort of the production of the nation, and mobilized its manufacturing resources to provide for the war effort. This situation provides an interesting case of the dramatic effects of a nation’s economy becoming engulfed in war. Studying this case can lend insight into the effects of war on the international balance of trade, and also on a localized level.

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Economic change began with the First World War, continued through the second, and had lasting effects in the post-war era. Alan S. Milward details the changes during WWI and WWII in The Economic Effects of the Two World Wars on Britain. His book describes in detail the particular domestic and international impacts relating to the economic status of the UK. Thomas F. Cooley and Lee E. Ohanian investigate these impacts during the years after WWII in Postwar British Economic Growth and the Legacy of Keynes. They pay particular attention to the way the British government handled finance during and following the Second World War, and discover the lasting effects of its efforts. The two works complement each other, with Milward’s book and Cooley’s article providing an encompassing view of the large changes from these wars that affected Britain for a large portion of a century. They show that the wars caused Britain’s decline from international trade, while simultaneously economic status of the lower and working classes.

Milward argues that the two world wars caused numerous economic and social changes in Britain, most importantly Britain’s decline from status as the primary manufacturing exporter of the world, reform in social health services, and changes in income distribution. He formats his work in an extended essay structure, first addressing the importance of the changing interpretation of the history of the topic, and then discussing the separate domestic and international economic impacts of the war. His methodology is sound, calling on primary research by numerous individuals, and citing hard numerical data to support his claims.

Milward shows in the work that income distribution was changed in two distinct ways. First was the dramatic increase in income for agricultural workers in Britain. Efforts by German blockades in WWI forced the British government to incentivize increased crop production, causing 3 million additional acres of arable farmland at a time when the crops produced there were in high demand. This in turn caused a greater volume of domestic foods to be sold at higher prices, putting more money in the pockets of farmers. World War Two also saw an increase in their earnings. By the time of WWII, a law passed guaranteeing a minimum wage for agricultural workers, allowing their income to increase seven and a half times between 1938 and 1949.

The second change in income distribution was a result of rapid factory mechanization. Starting in WWI, unskilled laborers saw a constant improvement in their earning power. They saw higher employment levels and greater regularity and formality of employment. Additionally, the unskilled replaced the former jobs of many semi-skilled workers. These factors contributed to a reduction the income gap between working class individuals and the middle classes.

Milward points out the lasting effects of social health service reforms. Most interestingly was the WWI’s impact on the formation of Britain’s National Health Service. The increased levels of organization in the country due to the war prompted inquiry into the “ill-organized public effort” of medicine. He makes an interesting point that this lasting change allowed by a brief shift in political power brought about by the changing economic conditions of the war. In this way, a tremendous social impact was created due to the unique conditions of the war.

Perhaps the most important economic impact of the wars was Britain’s decline from the role of the world’s chief manufacturing center. WWII in particular caused a great change in the pattern of trade worldwide. Britain’s earlier economic powerhouse had relied on its ability to “continue to earn even in wartime conditions the wherewithal to pay for the imports which sustained its economy,” requiring the island to continue to export goods as well. The great draw on manpower for the wars meant that production effort shifted away from exports and trade in order to provide supplies. Decreases in foreign investment and pressure from German submarine attacks compounded the change. This manufacturing gap was filled by the United States, which provided manufactured war goods to Britain during both wars, and continued to provide commercial goods after the wars were over. In this way, Britain lost its foothold as the primary “workshop of the world.

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Summary of Milward’s “The Economic Effects of the Two World Wars on Great Britain” and Cooley & Ohanian’s “Postwar British Economic Growth and the Legacy of Keynes” (Part 2)

June 7th, 2010 Comments off

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Milward argues his points well, based on numerical data and the statistical research of many individuals. His sound arguments allow him to give accurate information with a clear level of detail on Britain’s economy during the two wars. Cooley, on the other hand, focuses on the time period following WWII. This war imposed a tremendous financial burden on Britain’ economy; Cooley investigated different possible methods to pay for it compared to the actual payment scheme used by the British government. He argues that the high tax rate Britain utilized after the war was very costly, and impeded economic performance after the war.

Cooley’s method differed greatly from that of Milward, in that it was primary research based on a mathematical model. Cooley’s method compares Britain’s economic data from the time after the war to predicted data if Britain had instituted other financial policies. He wished to investigate the potential of the tax system that had been suggested by John Maynard Keynes, which called for high tax rates immediately following the war, versus a “tax smoothing” policy that defers the costs by means of government borrowing. These are both compared against the actual policy employed, that utilized aspects of both theoretical policies.

The format of the work begins with an overview of the government’s financial situation at the time. During the 200 years preceding WWII, the British government had traditionally used the tax smoothing policy relying on heavy borrowing to pay for the wars. However, at the time, Keynes, a prominent economist, criticized government economic policy and suggested a system relying on sharp increases on taxes of capital income. This would immediately cover the cost of the war, instead of postponing it for later decades. The government ended up following much of Keynes’s advice, but not all. Nonetheless, the financing of WWII represented a striking change in public finance for Britain.

The paper then divulges the details of the mathematical model used to predict economic performance for both Keynesian and traditional financial schemes. The model is used to predict capital stocks, government spending and output, economic investment and consumption, among other factors. After giving thorough and detailed descriptions of the mathematical methods used for the research, the paper states the conclusions made by it. Cooley successfully proves his points, basing his argument off of real world data and mathematical models. He is able to objectively prove his argument based on these facts.

Cooley finds that the policy suggested by Keynes would have been dramatically more costly than the one followed by the government. Furthermore, tax-smoothing policy would have been much less costly to the British economy than the actual policy employed. However, the welfare implications of the policy followed were just as good as those for the tax-smoothing policy. The lower and working classes were not hurt by the economic policy followed. This finding agrees with Milward’s work, demonstrating that the lower classes ultimately benefitted from the wars. Despite the overall damage to the economy, the income gap was reduced, the lower and working classes ended up with a higher standard of living.

The two works provide an encompassing viewpoint on the effects the wars had on Britain’s economy. They provide a prime example of how total war can disrupt a nation’s foothold in foreign trade. Furthermore, they describe the local impact, describing the manner in which the lower classes were able to benefit from changes during these wars even while the overall economy suffers. These changes are indeed thought provoking. One is lead to question whether the United States would have gained its manufacturing economy without the gap left by Britain because of the wars. The latter half of the twentieth century may have played out very differently, had the wars not occurred. Britain may still have been a world economic leader. Additionally, one is led to wonder if similar domestic effects resulting from other wars. Even if a country is not ravaged or defeated in a war, will there be lasting social effects? Do special conditions during a war allow political changes that would otherwise not occur, such as the National Health Service? If one is to generalize the conclusions coming from Britain’s example, it seems that wars can have a far reaching impact long after they have concluded. The First and Second World Wars disrupted Britain’s economic structure, and produced lasting forces of change.

Sources:

1. Milward, A. The Economic Effects of the Two World Wars on Britain. 2nd ed. Hong Kong: Macmillan, 1984.

2. Cooley, Thomas. "Postwar British Economic Growth and the Legacy of Keynes. " The Journal of Political Economy 105 no. 3 (1997): 439-472.

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The Music Industry as Counter-Example to the Technological Explanation for Shakeouts

May 21st, 2010 Comments off

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While papers such as Klepper (2002) and many others argue that technological innovations lead to shakeouts, Scherer (1965), Mansfield (1968, 1983), and Mueller (1967) suggest that market concentration and large firm size are only weakly associated with innovation. Alexander (1994) shows one case, the music industry, in which technological changes actually resulted in a de-concentration of firms (by spurring new entry).

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Evidence

The history of music industry concentration and the chronology of events provide general evidence against technology always being the direct cause of shakeouts. At the beginning of the industry’s life (1890-1900), there were three major firms producing the vast majority of audio products: Victor, Columbia, and Edison. This included both the machines—cylinder and record players—and the actual cylinders and records. Patents on these machines were a major barrier to entry, but major innovations from 1900-1910 and the expiration of important patents in 1914 resulted in industry deconcentration. Early record production required live-action recording to produce each record, requiring either multiple record writers present during a performance or multiple performances. From 1914 to 1919, the number of firms manufacturing records and record players grew on average by 44 percent annually. Demand was stimulated as a result of a new variety and quantity of available products on the market, and the period was characterized by heavy innovation in the music, particularly by small producers. However, from 1919 to 1925, the number of producers declined at an average annual rate of 14. 4 percent. Larger firms were able to capitalize on the small producers’ innovations, resulting in imitation as well as several horizontal mergers. The onset of the Great Depression and World War II finalized the reconcentration of the music industry. Prior to 1948, Columbia, Decca, RCA Victor, and Capitol were responsible for three-fourths of record sales in America.

Following the war, a new innovation reshaped the industry: magnetic tape recordings. Previously, records were produced in a very tedious and unforgiving fashion. Errors in the performance for a recording would require the artists to execute the piece perfectly—start to finish—in order for the recording to be successful, but magnetic tape

allowed a particular section with an error to be spliced out and replaced by a re-recorded part. Magnetic tape machines were also much cheaper. By reducing the amount of studio time required and also lowering the costs of starting up a recording business, magnetic tape technology was followed by an increase in the number of companies producing LP (long-play) records from eleven to two thousand between 1949 and 1954 (Gelatt 1954).

By 1956 independent firms held around 52 percent of the music recording industry’s total market share, increasing to the industry’s peak in 1962, at which time independent firms accounted for 75 percent. Afterward, major firms began to reacquire market share, primarily through horizontal mergers, and the number of firms in the industry began to shrink.

Analysis

This prompts us to seek an alternative explanation to technological changes for the causes of the most recent extended music industry shakeout (1962-). Several technological improvements turned out to be exogenous (allowing universal adaptation) rather than endogenous (proprietary and thus concentration-inducing). The nature of the technologies Alexander cites tended to be scale-reducing, thus reducing barriers to entry. Developments in musical technology over the past 50 years have been consistently scale-reducing, though the trend for a large portion of that period has been toward consolidation. Magnetic tape and compact disc players became commercial and low-cost home appliances, and their respective means of creation grew as common (tape recorders, CD-burners, etc. Computer-based music recording and playback has become more widespread. Still, the number of firms has been decreasing.

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The Music Industry as Counter-Example to the Technological Explanation for Shakeouts (Part 2)

May 21st, 2010 Comments off

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Currently, the music market is dominated by six major firms: Time/Warner, Sony/CBS, Thorn/EMI, Philips-Polygram/PMG, Bertelsmann Music Group/BMG, and Matsushita/MCA.

One important factor stands above all other explanations for this consolidation: distribution. While prior to 1962 there were several strong and independent music distributors who provided an alternative to the major firms’ distribution networks, major firms began making significant buyouts in the 60s onward, creating a dominant market tendency toward the horizontal integration of distribution. Many independent distributors went bankrupt, and this tendency grew even more exaggerated in the 1980s. The six major firms mentioned above presently constitute almost the entirety of the industry’s market share at the distributor level.

In light of this evidence, one revised hypothesis is that technology can play a role in market concentration in as much as it augments scale economies. Technological innovations such as widespread personal computers with sound processing and recording capabilities, as well as advanced software for manipulating recordings, have reduced the necessary scale to begin producing consumable music recordings to anyone with or without talent, with just a $300 personal computer, a $30 microphone, and some small degree of sound engineering skills. The internet has also drastically reduced the scale required for significant levels of distribution, with peer-to-peer sharing networks, internet-based record stores, and social networking pages like MySpace. com.

On the other side of the story, some non-technological things may account for firm “lock-in” or other phenomena that lead to high industry concentration. Distribution strategy is one possible example of this, but it is likely that the dominance of particular firms that allowed them to construct their distribution networks shares a cause with their distribution strategies. Music is a very unique kind of product. Each new “product” (a song or album) also happens to be distinctly associated with a set of individuals. The quality of the music itself is controlled from a non-technological (in the physical sense) set of innovations relating to meter, pitch, tone, content, or overall theme. Some major firms may have the musical brainpower to “get it”- a group of experts, who manage bands and affect the musical product, that ultimately represents a stock of knowledge the firm has about stimulating and satisfying demand for music. Furthermore, labels fortunate enough to enlist legendary bands, perhaps by only good fortune, gain a long-lasting advantage, both from their experiences with a popular band (more concerts, albums, events, merchandising, etc. as well as from the profits, which attract more expertise, which attracts and creates better bands, etc. There appear to be many opportunities for self-reinforcement in the industry. Whatever is the case, the technology-based shakeout story lacks explanatory power in music.

Source:

Alexander, Peter. New Technology and Market Structure:

Evidence from the Music Recording Industry. Journal of Cultural Economics, Volume 18, 113-123, 1994.

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