Bellerbys Economics - Mr Stephenson

Monday, March 31, 2008


There has long been a school of economists who describe themselves as Physical Economists and who seek to relate the principles of Physics to Economics. A simple example of this is their concept of kinetic money (money that is in circulation) and potential money (money stored in a bank).

But now, we seem to be developing a new branch of economists who might describe themselves as Bio-Economists. A research team from Imperial College interested in population control recently proposed that in competitive environments, evolution slowed down. They looked at rates of evolution amongst populations of birds to support this hypothesis. Sure enough, in environments where many different species of birds existed, each species found its own niche and was very reluctant to then evolve beyond that.

How similar this is to the concept of perfect competition in Economics. In theory, businesses are so busy competing, that they don't have time to innovate. A quick survey of any high street will demonstrate that once businesses have found their niche (kebab shops, estate agents, clothes shops, bookshops, coffee bars), virtually every high street begins to look the same and businesses do not innovate away from that. Is it the case then that we could expect more innovation from oligopolistic structures where there is non-price competition? A situation where businesses are able to bear risk as an economy of scale and seek to develop new product markets? It's an interesting thought.

I look forward to exploring more Bio-Economics with you in the future - is the Market a living organism? Discuss.

Monday, March 17, 2008

China's New Economic Head

China's new economic head is Wang Qishan. Zhou Xiaochuan will be keeping his job as Head of the Bank of China but will now presumably report to Mr Wang as China's central bank does not have independence from the Government.

Wang Qishan's key task will be the fight against inflation (now 8.3%) which he hopes to achieve without reducing economic growth by smoothing out 'bumps' in the supply-side of the economy.

Wang's reputation is impressive. He was number 2 to Zhu Rongji in the 1990s. Mr Zhu is still revered as the mastermind of China's economic miracle, rescuing an economy that was collapsing in 1994 with inflation at 27% following a period of rapid demand-side growth in the wake of the Tiananmen incident. Wang Qishan is also a popular former mayor of Beijing and a former governor of the Chinese Construction Bank, one of China's big four banks that specialises in large infrastructure projects. He also happens to be chairman of the organising committee for the Beijing Olympics - a very busy man!

Wednesday, March 12, 2008

Impotent Central Banks

The Central Banks of the OECD countries have clubbed together to inject trillions of dollars into the banking system once again because they are worried about the crisis of confidence the banks are showing in lending money to each other - an essential part of the 'liquidity' of the system - getting money to where it's needed most quickly - a form of allocative efficiency.

However, with so many banks and financial institutions carrying high-risk debt in a way that can hardly be described as transparent, everyone is being ultra-cautious.

But the central banks' action is very limited. They can't print new money (risk of inflation already too high), they can't buy back treasury bills or government stock in bulk (they'd have to pay way over the market value) so loans to banks are their only option.

It's unlikely the banks will jump with glee at taking on more debt.

The only real solution will be if the rich Arab nations or the sovereign wealth funds of China and Russia start investing in the west - which brings us back to yesterdays' posting!!

Tuesday, March 11, 2008

Islamic Finance May Save the World

All economics students will know by now that the credit crunch in the US last summer has created a great meltdown in the world's financial markets - a meltdown caused by too much easy credit being issued at high interest rates and then that debt being packaged and repackaged by various financial instruments and sold from bank-to-bank at increasing profit margins around the western world - a house of international finance built on spreading quicksand.

It's the USA that has suffered the most, although other countries have also suffered such as the UK with the Northern Rock disaster. Observing the economic wreckage of the US, many countries have taken steps to protect themselves from a crashing dollar - not the least of which are the Arabic oil nations who met in Bahrain in February, reaching the decision to sell more of their oil for more stable Euros.

The Arab oil nations have come out of the situation in the best possible light. Firstly, oil prices continue to rise as demand increases and supply remains fixed (now $107 a barrel) so their coffers are full. In fact, they have about one trillion dollars to play with (that's twelve zeros). Also, Islamic law has prevented the sovereign wealth funds of the Arabian peninsula from investing in the kinds of financial chicanery that the western world indulges in. The concept of sukuk says that investment must be transparent (roads, railways, products etc) and therefore hedge funds, equity houses and so on find it very difficult to attract money from the gulf. In addition, by the way, the concept of haram prevents Islamic firms from investing in alcohol, tobacco, arms trading, pornography and gambling - which can also be applied to hedge funds. Islamic funds can only invest in things that provide social benefit.

The concepts of mudaraba and musharaka promote the idea of investment leading to mutual ownership and cooperation. So, an Islamic bank will invest in a business in order to gain a share of that business rather than taking interest on a loan. Also, Islamic investment is more concerned with functionality than strict profit-and-loss in a financial sense. So, an Islamic company would see nothing strange in building a college in order for a British educational company to come and use it to educate the citizens in their country. Money is seen only as a tool to an end, not an end in itself.

And now, the big investment funds such as DIC in Dubai are looking for such investments in the west - such an influx of money may provide the stability that the world economy needs in order to see it through the current crisis.

Monday, March 10, 2008

Folk Market

I recently came across a stock market for horses. People buy and sell shares in horses in exchange for a percentage of their earnings on the racetrack or in stud.

Immediately, I thought 'What a great idea for people!' There are many extremely clever young children in areas like Southern India or Bangladesh who could never afford a good education - what a waste to society! Instead, we could identify these children through a maths and logic competition and then people could buy shares in them - folk shares - the shares paying for their education. In exchange, the investor would get an appropriate percentage of their earnings later in life for a limited period (let's say a 25 year bond given at 10 years old would provide payback between the ages of 25 and 35)

The 'bond' could also be bought and sold on a folk market, the price going up-or-down as their school results and reports started to come in.

It's an idea.

Thursday, March 06, 2008

World's Richest Person

It's that happy time of year again when we get to look at the Forbes rich list to see who is the World's richest person. In 2008, the top ten are:

Warren Buffett (US): $62bn
Carlos Slim (Mexico): $60bn
Bill Gates (US): $58bn
Lakshmi Mittal (India): $45bn
Mukesh Ambani (India): $43bn
Anil Ambani (India): $42bn
Ingvar Kamprad (Sweden): $31bn
KP Singh (India): $30bn
Oleg Deripaska (Russia): $28bn
Karl Albrecht (Germany): $27bn

How appropriate that we are doing inequality at the moment! Warren Buffett's earnings last year, for example ($10 billion) is equivalent to the earnings of HALF THE WORLD's population - the poorest half of course - the richest half earn a bit more than that.

So, Warren Buffett earned the same as 3,ooo,ooo,ooo people last year. But Warren is a nice guy and when he finally cashes in his chips, his money will be going to charity.

Bill Gates we all know, of course, and Carlos Slim owns most of the mobile telephone companies in South America. Lakshmi Mittal practically owns the world's steel industry.

Mukesh and Anil Ambani run Reliance Industries who make most of the world's textiles. KP Singh owns a good deal of Indian real estate - he's the world's richest estate agent. I predict that as the Indian economy expands, he may soon become the world's richest man.

Ingvar owns IKEA and Karl owns Aldi - the leading German supermarket chain. Finally, Oleg Deripaska practically owns all of the Russian aluminium industry.

By the way, the world's youngest billionnaire is 23-year-old Mark Zuckerberg, the founder of Facebook. You see, all you need is one good idea - now where did I leave my design for the rotating bowler hat............

Tuesday, March 04, 2008

Universal Sustenance

One of the disadvantages of doing the A-level Economics course in the UK is that it is almost entirely about western capitalist economics. Of course, there's a good reason for this in that this form of Economics is now prevalent throughout the world.

However, there are other approaches that can be taken to the universal economic problems of what to produce, how to produce it and who we are producing it for. Within the course, we take a very brief look at the command economics prevalent in the Soviet Union and mid-century China, but one economic train of thought that is almost completely ignored is the Islamic concept of universal sustenance.

Let's look at oil for example. Because of the strong capitalist tradition of property rights, it is assumed that natural resources belong to the country which just happens to sit on top of them - so the Middle East states and Russia own most of the world's oil. They get rich because it is a scarce resource - other countries with huge populations, such as Bangladesh get poor because they have to pay huge prices for this oil.

The Islamic concept of universal sustenance, however, argues that natural resources belong to everyone in the world and should be shared fairly. The concepts of Justice (Al-Adl) and Indemnification (al-Ihsan) in the Koran require a delicate and fair balance with regard to the production, consumption and distribution of resources, goods and services in the economy. In particular, Al-Ihsan requires a genuine concern for the poor and downtrodden in society.

Following the teachings of the Koran, we might suggest that a world commission be formed to marshal our natural resources that benefits all citizens of the world fairly. This would also tie in with the Islamic concept of trusteeship - an alternative to ownership. Under trusteeship, for example, a rich man might not own his house outright, but would be holding it in trust for the next generation. If more of us considered land and property in this way, it might make us less energetic in our desire to use up all the world's natural resources in about three generations time!

So what does this all mean? Well, apart from anything else, I guess it means we can learn a lot of interesting things if we listen to what our fellow students from many different cultures are trying to explain to us - as I did.

As Harvard economist Dani Rodrik says in his new book - "One Economics, Many Recipes".