Economic Thoughts and Essays

By Rhys Williams

Technological Revolution

Posted on by Rhys Williams

Explain the debate between Allen and Mokyr on the role of institutions and resources in explaining the Industrial Revolution in Britain

Mokyr believed that the Industrial Revolution was greatly aided by the technological changes which came about through an increase in scientific knowledge from what he termed the Industrial Enlightenment. This enlightenment came about through increased scientific knowledge, skilled craftsmen and experimentation. Scientific knowledge improved through a number of factors; firstly overall education improved as higher real wages meant that it made more sense for couples to have fewer children but to invest more in their education. This was further enhanced by increased urbanisation which increased the incentive to learn as urban citizens would need to read, write and count to conduct business and trade. [...]

The Lewis Model

Posted on by Rhys Williams

Describe carefully the Lewis dualistic labour surplus model. Does the Lewis model describe accurately the process of economic development in poor countries?

The Model

The Lewis model proposes a dualistic economy consisting of a formal, industrial and urban sector, and an informal, agricultural and rural sector. The formal sector is characterised as capital intensive and being run by profit-maximising capitalists who hire labour until the wage rate equals the marginal product of labour. This is because it makes economic sense for a firm to continue to hire labour until the costs (wage) equal the benefits (the marginal product of the additional unit of labour). [...]

Expansionary Fiscal Contraction Hypothesis

Posted on by Rhys Williams

Expansionary fiscal contraction can occur under certain assumptions whereby a major reduction in G changes future expectations about taxes and G which leads to an increase in C causing higher GDP if the rise in consumption exceeds the fall in G. This can only happen if government expenditure as a percentage of GDP is reduced significantly to lessen crowding out and allow the private sector to expand. We need to assume that the economy is at full employment for fiscal contraction to be expansionary.

There are three mechanisms for why this may occur: the belief of Ricardian Equivalence, crowding out theory or market sentiments. [...]

Why have unions declined over the last 30 years?

Posted on by Rhys Williams

Account for the collapse of private sector trade unions in industrialised economies since the 1980s. Why has the experience of public sectors been different?

In the 1980s 54.5% of employees were trade union members but by 2000 this number was below 30%. This decline in unions can be seen through a variety of measures; in 1980 64% of all workplaces recognised at least one union, this dropped to 42% by 1998; in 1984 some 70% of employees were with a workplace which conducted some form of collective bargaining, by 2004 this figure was at 39%. Many factors have been proposed for this decline of trade unions in the private sector and to a limited extent in the public sector. [...]

The Mundell-Tobin Effect

Posted on by Rhys Williams

This article explains the Mundell-Tobin effect by showing the relationship between the ISLM and ADAS models. The Mundell-Tobin effect states that nominal interest rates may not rise 1:1 with price levels, as the Fisher effect states.

The Fisher effect derives from Fisher’s identity of i = r + π where i=nominal interest rates, r = real interest rates and π=inflation rate (i.e. rate of change in price levels). Fisher believed that if π rose by 1 then i must also rise by one.

Mundell-Tobin came along and said that this wasn’t the case, because they believed that r, the real interest rate, would fall if inflation rose, meaning the overall effect would be that i didn’t rise on a 1:1 basis with inflation. [...]

Quantitative Easing

Posted on by Rhys Williams

What is Quantitative Easing and Why has it been used?

Quantitative easing is a policy introduced by the Bank of England to pump [to date] £375 billion into the economy. It works by the BofE purchasing government bonds (known as Gilts) off private and institutional investors which increases the price of government bonds, thus lowering the yield* and making it cheaper for the government to borrow. When first used it was seen as a form of unconventional monetary policy and was used because the central tool in a monetarists pocket – the use of interest rates to stimulate demand – was ineffective. [...]

Bourgeoisie Capitalism

Posted on by Rhys Williams

Deidre McCloskey, the eminent economic historian whom some of you may know as Donald, before her illustrious transition in the 1990s, recently gave a talk to the Legatum Institute on her ideas of Bourgeoisie Capitalism.

When asked to summarise her thesis into a few words, she said “let people have a go”. She believes that economic growth doesn’t stem from institutions or capital accumulation – although these may be necessary – but the real reason arises from market power embetterment: if people believe that hard work can improve their situation then they will do so. This counters the Weber theory: that protestant virtue of savings and hard work allowed for a pool of investable money to expand the capital stock, along with a pool of hard workers and entrepreneurs which created unparalleled economic growth. [...]

Minimum Wages

Posted on by Rhys Williams

Why have statutory minimum wages become more prominent in recent decades? Why have they generally had little adverse effect on employment?

Prior to the introduction of the national minimum wage (NMW) in 1999 there had been no statutory wage floors since the abolishment of the Wages Councils in 1993 by the Conservative government. Growing wage inequality in both the D50:D10 and D90:D50 measure (which looks at the differing wage rates in the respective percentiles) was one of the leading reasons in the demand for some form of minimum wage to counter this growing inequality. Metcalf finds that the NMW reduced the D50:D10 ratio by 9 points if we include the effects of immigration. [...]

Life at Cambridge Part II

Posted on by Rhys Williams

This is a long overdue follow on from my previous post Life at Cambridge, and details my experience of the Cambridge Economics Tripos for 1st year Lent and Easter terms.
The Course

Lent

Microeconomics

This term we began by looking at Game Theory, where we cover the basics such as Nash Equilibrium, before moving on to more sophisticated games, looking at 3×3 matrices as well as 2×2. Simultaneous games are considered, along with Cournot and Bertrand games and models of business strategy and the notion of game theory is applied to matters such as externalities and public goods. There are also references to evaluation, such as how game theory isn’t the best model of real-life situations; for example in a finite game, theory tells us that if it pays to cheat in the last round (i.e. [...]