Recommended reading for Economics students


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Economics AS students have now finished their exams and the pro-active among them will be starting to look ahead to next year and their applications to university.  At this time of the year I am often asked for recommendations for wider reading.

Whenever I am asked this I think there are two main aspects of Economics that make it a fascinating subject to teach but also which students should be aware of when considering it as a choice of degree subject.  The first is that  it is a varied and controversial subject with a number of continuing disagreements (for instance over the nature of capitalism).   The second is that the subject overlaps with a number of other subjects including Politics, Philosophy, History, Psychology, Finance, Mathematics, and Statistics, to name just a few.

So here are 5 choices for the ambitious student which attempt to reflect these ideas.

The Communist Manifesto, Karl Marx.  Seemingly obscure, or out-of-date this is still one of the best and most insightful critiques of capitalism ever written.  The language is occasionally off-putting to students but written with a rare combination of passion and clarity.

The Affluent Society, JK Galbraith.  For most of human history the problem confronting human beings has been one of scarcity.  But for some countries, the new challenges are the problems associated with affluence and abundance.  Galbraith – always one of the best economic writers – highlights the problems of waste and misallocation of resources present in our own societies.

Capitalism and Freedom, Milton Friedman.  The Anti-Marx!  Friedman defends capitalism against its attackers and argues that it’s the basis for all important freedoms.  Not only that but it should be extended while government involvement should be reduced.

The Wealth and Poverty of Nations, David Landes.  A historical overview of the success of capitalism in generating wealth and development.  Fascinating historical insights informing a pro-market outlook.

Mathematics for Economics and Finance, M. Anthony and N. Biggs.  The use of mathematics in economics is frequently unnecessary and off-putting but it’s an unavoidable part of the subject.  Anthony and Biggs make it very accessible, while always explaining the purpose of the models used (as well as their limitations).

4 ways to do well at A Level Economics

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Economics is a very popular subject at A Level but being good at it involves much more than just knowing the syllabus.  Here are my top tips for students wanting to excel at A level.  Overall the key is to challenge and explore the subject yourself.  This will make it come alive and give you confidence to tackle even the most unfamiliar of topics.

Apply the theories to things happening around you

Economics is a body of theory about  the forces governing production and consumption.  But it is not something that can be understood or appreciated merely by being read about it in a textbook.  The purpose of it is to help us understand and predict how the real world actually behaves.  So give it a go!  Look at what’s happening in the world around you and see if you can use economics to make sense of it.  This could be at a  very local level e.g.  Why are so many pubs in my area closing?  Is that due to changes in demand or supply?  Or why are private school fees increasing so much?!  Or it could be at a more ‘macro’ level e.g. Why is inflation still above target in the UK?  Which theory of inflation can best explain that?  If they can’t explain it well what might explain it better?  This is how you start to think like an economist.  It also makes the subject come alive – you start to gain confidence in using economics, not just in knowing about it.  Once you can use economics then you will lose your fear of the questions that examiners can throw at you at A2 level.

Challenge the theories and consider the assumptions 

When you are first being taught economics, there is so much new to learn that teachers have to simplify the theories a great deal.  For instance you may have been taught at AS level that inflation could be caused by an increase in firm’s costs.  But asking yourself the question:  “would any increase in costs always lead to an increase in inflation?” might prompt you to think that it wouldn’t if firms were facing very strong competition.  And that might then lead you to realise that it depends on an assumption about the market power of firms.  This opens up a much richer and more subtle understanding of the assumptions behind economic theories which also makes it much easier for you to ‘evaluate’ arguments and ideas.  So challenge the theories you are taught, test what assumptions they are based on and ask whether you think those assumptions are likely to be true.  By doing so you will develop a critical approach to economics that will stand you in good stead in the exams.

Start to make connections between the separate modules

In order to make the teaching of economics easier and more systematic, the topic has been separated into different units (typically micro and macro) which are then taught separately.  At AS level you are unlikely to see much link between say, elasticity and aggregate supply.   But as you progress into A2 increasingly you should find yourself making links between the different modules.  For instance you might notice that AS curve has a different slope / elasticity at different points.  You might ask why this is and what that means for the impact of different policies.  Or you might be learning about how firms decide how much to produce and wonder how that relates to interest rates.  Economics should work as an integrated subject so pursue these thoughts and try and make those connections.  Once you see how it connects you will build confidence in tackling unusual and synoptic questions.

Fill in the gaps yourself

As your knowledge of economics increases you may start to see some gaps in the syllabus – topics you feel you should know about but which haven’t yet been taught.  An obvious one to me is that you are unlikely to learn much about financial markets at A level (stock markets, bonds, speculation and so on).  Well once you spot a gap you should take the initiative to find out about it yourself.  Why not research it on the internet?  Or ask your teacher or tutor about it?   Another gap might be how government works:  how are government policies actually determined?  What is the role of political parties?  This might prompt you to find out more about politics.

When you see a gap, don’t ignore it, explore it!

Overall making a success of A Level economics involves making the subject your own – what you learn in school is the starting point for your own personal investigation of the issues that fascinate you.

 

Merkozy plan is completely wrong-headed


All eyes are on the eurozone summit this week and the proposals by France and Germany to create a new ‘fiscal union’ to stabilise the euro and prevent a future crisis. The details of this plan are still sketchy but the key elements seem to be: the enforcement of new rules intended to prevent countries from running excessive budget deficits (more than 3% of GDP) which will be backed up automatic sanctions, together with a guarantee that private investors will not be asked to take losses on their loans in the future. Importantly it does not include the creation of eurobonds or a commitment that the ECB will buy up the bonds of troubled nations such as Italy and Spain. So far the financial markets seem to have been impressed, with Italian bond yields falling sharply yesterday. Setting aside the very real doubts about whether the scheme will get the agreement of the 17 euro states (or 27 EU ones), let us imagine that it does come into effect. What would this mean? And would it prevent a recurrence of the current problems? The answer has to be that it would probably be a disaster.

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Globalisation without global governance is a disaster


The global economy is in big trouble again. Unemployment remains too high and growth too low across the Western world while emerging economies such as China and Brazil show signs of over-heating. Meanwhile the Eurozone stumbles from one market crisis to another due to its inability to deal with the insolvency of Greece. A common thread through all these problems is that they require a global or regional response from governments and monetary authorities – but that such a response is currently impossible to coordinate. This in turn is due to the weakness of the existing institutions of global governance such as the IMF, United Nations, and G20. If globalisation is not to be reversed or end in disaster it is vital that these institutions be strengthened so that they can manage economic policy on a regional or global basis.

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Letter from Spain


I just got back from a holiday on the lovely island of Menorca, one of Spain’s Balearic Islands. While I was there I couldn’t help noticing a few things which showed up some of the main problems facing that country. With the eurozone crisis rapidly spreading from Greece to Italy and Spain, these issues could come to a head sooner than I thought.

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Why is inflation so high?

When the credit crunch and economic recession hit the UK, like many people, I expected inflation to fall sharply and possibly go negative. Although it did fall somewhat it has now been high and rising for some time. It is currently 4.4% and has been above the official target of 2% for about 2 years. It is continuing to rise and remains much higher than in both the US and EU. Why is this? And what does it mean for the economic outlook?

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What a sustainable recovery would look like

The world economy is once again looking fragile. The UK economy contracted at the end of last year and unemployment remains stubbornly high across most of the West. Meanwhile there are signs that Asia is over-heating. While it’s easy to focus on the short-term outlook in many ways it is not the most important issue. More important are the questions: what happened to bring us to this point? and what does this mean a sustainable recovery will look like? To get a handle on these questions we have to go back a bit in time.

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Quantitative easing is now pointless

A couple of years ago an ugly term, hitherto condemned to abstruse economics textbooks, was suddenly all over the media – quantitative easing. This term describes the creation by Central Banks of new money which is then pumped into the economy. The idea is that the Bank uses this money to buy assets such as government bonds, thereby driving down their yield (the effective cost of government borrowing). If the cost of government borrowing falls, then so too should the cost of loans for consumers and businesses. This then should encourage consumption and investment, helping the economy to recover. Or at least that is the theory.

Quantitative Easing – or QE – was first tried in Japan during their decade long slump with apparently few positive effects. But when the West was hit by the mammoth credit crunch in 2007/8 it became extremely difficult for people to borrow money despite low base rates. So Central Banks turned to QE as a potential solution. It may well be that, along with the massive bailouts of banks, it did help to alleviate the credit crunch and thereby help prevent worldwide economic catastrophe (although it is still too early to tell for sure).

Now the US has just restarted QE and Central Banks stand ready to restart it in the UK and Europe should the recovery falter. But its highly likely that a further bout of QE now would be at best pointless, and at worst, actually harmful.

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Austerity is a massive gamble


Today George Osborne will announce the first major cuts in government spending for at least 20 years, and perhaps the biggest cuts for a generation. The details are not yet clear but it seems likely that some budgets will be cut by at least 25%, with social security, defence, social housing and the justice system likely to see major reductions. There are also likely to be some tax increases. Regardless of the precise details, the aim is to reduce the budget deficit and put the public finances on a more sustainable footing. The hope is that this will also help to spur a ‘rebalancing’ of the economy away from public spending and financial services and towards manufacturing and industry. The aim seems admirable. But what are the chances that it will actually work?

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Debt aversion is the new black

Imagine that one day you go down for breakfast, turn the tap on to fill the kettle up, and nothing comes out. After some investigation you discover that the water company has simply decided not to supply you with water and you have no idea of when this will end. Of course it would be terribly inconvenient. You’d have to buy bottled water at great expense, stop having baths and showers, and start catching rainfall in makeshift water butts. Now suppose one day the water gets turned on again. It would be a great relief, of course, but you wouldn’t just go back to your old ways. I feel sure that you would perhaps keep some emergency water supplies and carry on limiting your consumption of water in case it got switched off again. You most certainly wouldn’t go out and buy a hot tub to celebrate. A lurking fear that it could happen again would make you cautious for a long time. If you replace people with businesses and water with debt in the above thought experiment then you will come pretty close to understanding what has happened in most Western economies since the financial crisis began in 2007.

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