The origins of all economic activity lie in barter. Barter is the exchange of goods directly without the use of money as a medium of exchange. A barter economy is one that uses just barter to organise economic activity. Many subsistence economies will use barter as the main method of trading. We might be forgiven for thinking that, given the sophistication of a modern economy, barter is a long-dead medium of exchange. As the article below shows, we would be wrong. In fact, ironically, the very sophistication that has brought us this economic growth and technical development may also be bringing barter back into fashion. There is a wide range of web sites dedicated to swapping goods and services. Seedy People may not be a website you would immediately think of visiting, but in fact, it is an exchange for gardeners and allotmenteers to swap seeds. The author of the article (John-Paul Flintoff) may have failed to pay his council tax through bartering, but in these cash-strapped times, there may be lots of other opportunities to bypass the conventional market economy.
Money is dead – long live barter Times Online (11/1/09)
Questions
- Identify two weaknesses of organising economic ativity through barter.
- Explain why barter may be coming back into fashion.
- Identify the various functions of money.
- Discuss the implications for economic efficiency of more economic activity being organised through barter.
A key cause of the financial crisis is arguably Maths. Many of the innovations in the finance industry were driven by Maths and a desire to generate higher returns from the money available. The BBC programme, More or Less, looks at the Maths of the credit crunch and considers the extent to which the misuse of mathematical principles may have contributed to the crisis. The links below look at the issues raised by the programme and also give access to the archived audio from the programme.
The Maths of the credit crunch BBC News Online (9/1/09)
More or less – programe summary (9th January programme) BBC News Online (9/1/09)
More or less – programe summary (2nd January programme) BBC News Online (2/1/09)
More less – programme (audio) BBC News Online (9/1/09)
Questions
- Analyse the extent to which quantitative analysis may have been responsible for the credit crunch.
- Consider whether the system of paying performance bonuses to bank traders created a distortion of incentives.
- Explain what is meant by a derivative. Discuss the role that derivatives played in the financial crisis.
Economists never like to use simple words when there are more complex ones available! So, the new term for printing money is ‘quantitative easing’. This refers to deliberate increases in the money supply aimed at preventing deflation. The real concern is whether quantitative easing will stoke up inflationary pressures for the future – the balance between inflation and deflation is a fine line to tread. Quantitative easing becomes necessary when there is danger of deflation and interest rates have already been cut as far as is possible.
Another problem, in the short term, is that an increase in the monetary base may have little effect on broader money (M4 in the UK) if people do not want to borrow and thus credit creation is limited.
The articles below all look at various different aspects of quantitative easing.
Europeans Disagree Drastically On Fed Rate Cut Deutsche Welle (17/12/08)
Financial crisis: Free money coming your way! Telegraph (17/12/08)
Wondering what on earth Nils was on about? He’s written this for you BBC News Online (PM programme) (18/12/08)
Japan forecasts no growth in 2009 BBC News Online (19/12/08)
New economic policy: If you haven’t got enough of this stuff, just print some more Scotsman (18/12/08)
Ground Zero The Economist (18/12/08)
Fed throws out the rulebook Times Online (18/12/08)
Quantitative easing: the modern way to print money or a therapy of last resort? Telegraph (8/1/09)
Forget hard choices. We need pampering Times Online (18/12/08)
Jeremy Warner: Darling wants say on ‘quantitative easing’ Independent (8/1/09)
Questions
- Define the term ‘quantitative easing’.
- Explain the mechanism by which the monetary authorities can implement a policy of quantitative easing.
- Discuss the relative effectiveness of cuts in interest rates and quantitative easing to boost aggregate demand in a recession.
- Analyse the impact on an economy of a prolonged period of deflation.
Sir Alan Walters, one of Mrs Thatcher’s key economic advisers, has died at the age of 82. Though he always tried to shun media attention, Sir Alan attracted a considerable amount of it when he clashed publicly with the then Chancellor, Nigel Lawson, over the Exchange Rate Mechanism (ERM). When faced with the choice from Nigel Lawson that either Alan Walters went or he did, Mrs Thatcher famously chose her adviser over her Chancellor. This lent Sir Alan a degree of infamy in economic circles and he is perhaps known best as one of the most influential monetarists of the period. Sir Alan was an early advocate of money supply targeting and always argued that the money supply should not be manipulated for political reasons. His advice was also key in the budget of 1981 which raised taxes in the middle of a recession, something that in this current recession would appear to be unthinkable.
Thatcher’s economic guru dies Independent (6/1/09)
Nigel Lawson and Thatcher’s guru in a political bloodbath Telegraph (5/1/09)
Mrs Thatcher always agreed with Alan Times Online (5/1/09)
Thatcher pays tribute to Walters BBC News Online (5/1/09)
Thatcher economic adviser Walters dies The Herald (6/1/09)
Sir Alan Walters, Thatcher’s economic guru, dies aged 82 Times Online (5/1/09)
Sir Alan Walters Telegraph (6/1/09)
Mrs Thatcher’s monetarist guru The Economist (6/1/09)
Questions
- Write a short paragraph setting out the key influences of Sir Alan Walters on economic policy in the 1980s and 1990s.
- Explain what is meant by money supply targeting.
- Discuss the effectiveness of money supply targeting in combatting inflation in the 1980s.
- Examine whether money supply targeting might once again be an effective tool in the monetary policy ‘armoury’.
In successive months the Monetary Policy Committee of the Bank of England (MPC) has cut Bank Rate from 4.5% down to 2% – the lowest level since November 1951. The dramatic changes show that the Bank is concerned that inflation and economic activity will fall sharply. Indeed the Governor has recognised that there is a possible danger of deflation (defined, in this context, as negative inflation: i.e. a fall in the price index, whether CPI or RPI). To the extent that these cuts in Bank Rate are passed on in interest rate cuts by banks and building socities, they will reduce the cost of borrowing. It is hoped that this, in turn, will result in a boost to aggregate demand – particularly in the run-up to Christmas.
Below is a selection of articles relating to the interest rate cuts, with many commentators wondering if the cuts will be enough and whether interest rates have much lower to go. For some background on interest rates, you may like to look at the History of Britain’s interest rate published by the Times Online. Martin Rowson’s cartoon in the Guardian clearly summarises the view that this may not be enough to revive an ailing British economy!
Bank enters uncharted territory BBC News Online (4/12/08)
Q&A: The Bank Rate cut and you BBC News Online (12/12/08)
Where will interest rates go now? BBC News Online (4/12/08)
Bank of England still has ammunition for the new year Guardian (4/12/08) Video
Farwell, convention Guardian (5/12/08)
No doubt that we’ve got further to go in this rate cutting Guardian (5/12/08) Podcast
Bank cuts rate by 1% to historic low Times Online (4/12/08)
Analysis: Shock and awe of rate cut Times Online (4/12/08)
Rates cut again as recession deepens Times Online (5/12/08)
Unconventional steps may slow the slide into global recession Times Online (7/12/08)
Bank cuts UK rates to 57-year low Times Online (4/12/08)
Questions