The following articles look at a recently published book by George Akerlof of the University of California, Berkeley, and Robert Shiller of Yale. They examine the role of what Keynes called ‘animal spirits’ and is the title of the book.
The motivation to make economic decisions (to buy, to sell, to invest, etc) may not be ‘rational’ in the sense of carefully weighing up marginal costs and marginal benefits. Rather it can be one of over-optimism in good times or over-pessimism in bad times. Just as individuals have ‘mood swings’, so there can be collective mood swings too. After all, confidence, or lack of it, is contagious. This motivation that drives people to action is what is meant by animal spirits.
But are animal spirits a blessing to be nurtured or a curse to be reined in? Should governments seek to constrain them?
An economic bestiary The Economist (26/3/09)
Good Government and Animal Spirits Wall Street Journal (23/4/09)
Irrational Exuberance New York Times (17/4/09)
Animal Spirits: A Q&A With George Akerlof Freakonomics: New York Times blog (30/4/09)
Questions
- Describe what is meant by ‘animal spirits’ and their effects on human behaviour.
- Why may animal spirits make economies less stable?
- How may animal spirits help to explain exchange rate overshooting?
- Discuss whether governments should seek to constrain animal spirits and make people more ‘rational’? Also consider what methods governments could/should use to do this?
In a major break from the policy of the Bush administration, President Obama has announced that the US government will regulate greenhouse gas emissions. The US Environmental Protection Agency has found that CO2 emissions pose a ‘threat to public health and welfare’. This finding allows regulation to be imposed.
At the end of March the Democrats in the House of Representatives released a draft climate change Bill. Central to this would be a system of tradable permits. ‘Under this program, covered entities must have tradable federal allowances for each ton of pollution emitted into the atmosphere.’ (See 4th article below.)
U.S. in Historic Shift on CO2 Wall Street Journal (18/4/09)
Obama to regulate ‘pollutant’ CO2 BBC News (17/4/09)
US says CO2 is a danger to human health Financial Times (18/4/09)
House releases draft climate change bill Power Engineering International (31/3/09)
U.S. Carbon Emissions Trading Core of Clean Energy Bill Environment News Service (31/3/09)
Environmental Capital (see also) Wall Street Journal (31/3/09)
Who’s going to get the carbon pollution credits? Christian Science Monitor (14/4/09)
Questions
- To what extent is the EPA ruling compatible with the bill proposed by the Democrats?
- Is a ‘cap-and-trade’ system (i.e. tradable permits) the best way of dealing with climate change?
- What lessons can the USA draw from the European Emissions Trading Scheme in designing its own tradable permits scheme?
The ‘tragedy of the commons’ refers to the overuse of common land. If people can freely graze their animals on such land and have no responsibility for maintaining it, then the land will be overused and everyone will suffer. The problem is that the benefit of using the land occurs to the individual whereas the cost is collectively incurred.
There are many modern examples of the tragedy of the commons and the articles below look at some of them. Perhaps surprisingly, not all cases of the use of common resources end in tragedy; some common resources are used sustainably. A more thorough analysis must involve deeper questions of human motivation and behaviour.
IT’s tragedy of the commons Datamation (IT Management) (8/4/09)
The Tragedy of the Commons TechFlash (7/4/09)
Encarta’s failure is no tragedy Guardian (7/4/09)
How Self-Interest Destroyed The Economy The Huffington Post (23/3/09)
What does The Pirate Bay ruling mean for the web? Telegraph (17/4/09)
Tragedy of the Commons The Manila Times (23/3/09)
Questions
- Explain how the tragedy of the commons arises and give some examples other than common grazing land.
- How and why does the tragedy of the commons occur in information technology? Consider the benefits and costs of the ‘fix’ to the problem advocated in the first linked article.
- Does the case of Wikipedia (see the third linked article) disprove the proposition that common resources will be overused?
- To what extent is free access to content (music, newspapers, videos, books, etc.) a tragedy of the commons? Is the only solution to devise an effective charging model that rewards content creators?
There has been much discussion recently on the use of fiscal policy to combat recession. What measures should be used? How effective will they be? How will the resulting large budget deficit be brought back into balance in the future?
But what are the microeconomic implications of all the tax changes? Are the changes fair? What implications do they have for incentives? Perhaps it’s time for a completely fresh look at the structure of our tax system – a system that has been changed piecemeal over the past years to meet short-term macroeconomic and political goals. Can it be redesigned to meet the two microeconomic goals of efficiency and equity? The following article looks at what form a redesigned tax structure might take.
Our tax system is a mess. But Darling has a chance to fix it. (Peter Wilby) Guardian (11/4/09)
Questions
- In what ways does the present tax system fail to meet the goals of (a) fairness through redistribution and (b) creating appropriate incentives?
- Explain what is meant by “The whole system has been framed by Tory thinking to assist social engineering, Tory style”.
- Provide a justification and critique of the reforms proposed in the article.
Nationalisation has been coming back into fashion lately with the UK bank bail-outs. In other parts of the world though, it has been back in fashion for longer and the articles below look at two recent cases in Latin America: the nationalisation of the Chaco energy company and the renationalisation of Spanish-owned airline, Aerolineas Argentinas (AA).
Bolivia nationalises energy firm BBC News Online (24/1/09)
Argentina renationalises airline BBC News Online (18/12/08)
Questions
- Explain what is meant by nationalisation.
- Discuss the arguments for and against nationalising (a) an airline and (b) an energy firm.
- Assess why nationalisation has become more prominent in the media recently than privatisation.
- Discuss the arguments for and against privatisation.