At a three-day event from 27 to 29 November, people were given the opportunity to barter for works of art on display at the Rag Factory gallery in London. Works by many famous contemporary artists were displayed, although none of the works was signed and the artist’s name was not displayed.
The idea was that people would barter for works on their own merits rather than because of the name of the artist. People could offer anything they chose. They simply wrote the offer on a slip and then the artist would choose which ever offer appealed to them the most. Offers ranged from a lettuce, a curry and even a song, to a Ferrari and a person’s own kidney.
As Stephanie Hirschmiller writes in the third linked article below, “Bartering has long been a mechanism on which the art world spins – from Picasso exchanging sketches for meals and London’s YBAs running tabs at The Ivy in exchange for pieces of their work to adorn the venues walls. Even Manhattan’s Chelsea Hotel, home to a slew of famous residents including Bob Dylan, Allen Ginsberg, Dylan Thomas and William Burroughs would once accept art in lieu of rent from its cash strapped incumbents.”
So is barter a realistic alternative to the market – at least for works of art and some other items? Does it have any advantages? The following articles consider the issues.
Barter for Art (video) BBC Today Programme, Evan Davis (28/11/09)
Pick up an Emin for a song Independent, Annie Deakin (27/11/09)
Barter Economy The Handbook, Stephanie Hirschmiller (24/11/09)
Don’t believe the hype New Statesman, Stephanie Hegarty (27/11/09)
Saving on Art the Old-Fashioned Way New York Times, Alice Pfeiffer (23/11/09)
Questions
- What are the necessary conditions for successful barer to work? Can it ever be an efficient form of exchange?
- What are the advantages of barter over normal market exchange with money and prices?
- For what other products and services might barter be an appropriate form of exchange?
- Do you take part in barter at all? If so, under what circumstances and why?
Over the past year, the world has seen a massive change in the fortunes of Dubai. At one time, it was as if Dubai was immune from the credit crunch. Property prices rose and then rose again. Credit checks barely existed and anyone seemed to be able to get on the property ladder, including a large number of foreigners. Indeed, 75% of property in Dubai is owned by foreigners.
However, those living their dream in Dubai have entered their worst nightmare. Property prices have already fallen by 50% and further falls are predicted. Debt levels are at about $85 billion, although some suggest they could be closer to $100 billion. Oil prices have fallen as a result of the situation in Dubai, although they have recovered slightly in the past few days, partly boosted by an announcement by the United Arab Emirates central bank that it was providing additional liquidity to banks. Share prices across the world have also been adversely affected, but these also have experienced a recovery.
Dubai has acknowledged the extent of its debts by asking to delay repayments, but whilst some hope that the worst has passed, others are speculating that further debts may be revealed. Dubai asked for a six-month repayment freeze on debt issued by Dubai World and its unit Nakheel, a property developer. The fear of Dubai defaulting on its debts has continued to affect global markets and how quickly Dubai is able to recover may depend on the generosity of Abu Dhabi, its oil rich neighbour. It might be that Abu Dhabi only offer help in exchange for more control over Dubai.
Read the following articles and try answering the questions about this new example of a global issue that highlights the increasing interdependence of economies across the world.
What spoiled the party in Dubai? BBC News (27/11/09)
Dubai says not responsible for Dubai World debt Reuters, Rania Oteify and Tamara Walid (30/11/09)
Oil jumps on positive US data, waning Dubai worries AFP (30/11/09)
Dubai debt crisis should be a lesson to us all Times Online, John Waples (29/11/09)
US shares slide over Dubai fears BBC News (27/11/09)
European shares fall on Dubai fears, banks slip Reuters, Atal Prakash (30/11/09)
Dubai Debt Worries CNBC (30/11/09)
Questions
- What are the main causes behind the debt crisis in Dubai?
- If Abu Dhabi does step in, what do you think it will demand in return?
- Explain why oil prices have suffered as a result of Dubai’s debt crisis. Why have they recovered slightly? Illustrate this using demand and supply – don’t forget to consider elasticity!
- What lessons should we learn from this debt crisis to prevent it from happening again?
- Following Dubai’s debt crisis, share prices fell around the world. What’s the link between debt levels and share prices?
- Having listened to the CNBC report, do you think that tourism is enough to rescue Dubai or will intervention be required?
Should economists have foreseen the credit crunch? A few were warning of an overheated world economy with excessive credit and risk taking. Most economists prior to 2007/8, however, were predicting a continuation of steady economic growth. Inflation targeting, fiscal rules and increasingly flexible markets were the ingredients of this continuing prosperity. And then the crash happened!
So why did so few people see the downturn coming? Were the models used by economists fundamentally flawed, or was it simply a question of poor assumptions or poor data? Do we need a new way of modelling the economy, or is it simply a question of updating theories from the past? Should, for example, models become much more Keynesian? Should we abandon the new classical approach of assuming that markets are essentially good at pricing in risk and that herd behaviour will not be seriously destabilising?
The following podcast looks at these issues. “Aditya Chakrabortty’s joined in the studio by the Guardian’s economics editor Larry Elliott, as well as Roger Bootle, the managing director of Capital Economics, and political economist and John Maynard Keynes biographer Robert Skidelsky. Also in the podcast, we hear from Nobel prize-winning economist, Elinor Ostrom, Freakonomics author Steven Levitt, and UN advisor and developmental economist Daniel Gay.”
The Business: A crisis of economics Guardian podcast (25/11/09)
See also the following news items from the Sloman Economics news site:
Keynes is dead; long live Keynes (3/10/09)
Learning from history (3/10/09)
Macroeconomics – Crisis or what? (6/8/09)
The changing battle grounds of economics (27/7/09)
Repeat of the Great Depression – or learning the lessons from the past? (23/6/09)
Animal spirits (30/4/09)
Keynes – do we need him more than ever? (26/10/08)
Questions
- Why did most economists fail to predict the credit crunch and subsequent recession? Was it a problem with the models that were used or the data that was put into these models, or both?
- What was the Washington consensus? To what extent did this consensus contribute to the current recession?
- What is meant by systemic risk? How does this influence the usefulness of ‘micro’ financial models?
- What particular market failures were responsible for the credit crunch?
- What is meant by ‘rational behaviour’? Is it reasonable to assume that people are rational?
- Is macroeconomics too theoretical or too mathematical (or both)? If you think it is, how can macroeconomics be reformed to improve its explanatory and predictive power?
- Does a ‘really good economist’ need to have a good grounding in a range of social sciences and in economic history?
On 26 November, the water industry regulator, Ofwat, published its decisions on the price caps that will apply to all the 21 water companies covering 23 areas in England and Wales from 2010 to 2015. Despite calling for average cuts of £14 in draft proposals released back in July, Ofwat is now requiring an average cut of just £3. This still means that average water prices will be some 10 per cent lower than those sought by the water companies. Note that all these figures are in real terms: i.e. after taking inflation (or deflation) into account.
But while customers in some areas will see their bills frozen in real terms, or even significantly cut, others will see a rise in theirs. The average price change varies from a fall of 7 per cent in Wales, East Anglia and Portsmouth to a rise of 13 per cent in Essex and Suffolk. There is also variation within regions, depending on factors such as whether or not you have a water meter. Thus, in the South West, customers without a meter could see a rise in bills of 29 per cent.
Not surprisingly, Ofwat’s decisions have received mixed reactions. The water companies claim that the price cap is too high to allow them to make the necessary investment in water infrastructure, such as replacing old pipes to cut down on leakages. Water customers, on the other hand, claim that Ofwat has been ‘captured’ by the industry and, as a result, has been much too lenient.
So who is right? And is the current system of 23 separate regional monopolies, regulated through price cap regulation, the best way of structuring and running the water industry? The following articles and videos look at the issues
Ofwat delivers flat bills for customers Ofwat news release (26/11/09)
Ofwat Publishes Its Decisions Regarding The Prices To Be Charged By Water And Sewerage Companies eGov Monitor (26/11/09)
Water prices to remain flat Financial Times, William MacNamara (26/11/09)
Water bills in England and Wales to be cut (including video) BBC News (26/11/09)
Water price cuts ‘could stop leak programmes’ BBC Today Programme (26/11/09)
The Big Question: Should water bills be going down even further than they are? Independent, Martin Hickman (27/11/09)
Water boys the winners with Ofwat? Independent, James Moore (27/11/09)
Households face higher than expected water bills Telegraph, Myra Butterworth (26/11/09)
There’s trouble in the pipeline as Ofwat boss fails to spot the cracks Telegraph, Damian Reece (27/11/09)
Water bills set to drop by only £3 a year Guardian, Tim Webb (26/11/09)
Regulator must find better way to fix water prices Guardian, Nils Pratley (26/11/09)
Water regulator bows to lobbying on bill price cuts (including video) Times Online, Peter Stiff (26/11/09)
Ofwat ruling on water bills will hit millions of unmetered homes Times Online, Robin Pagnamenta (27/11/09)
Water company shares buoyant after Ofwat ruling Guardian, Market Forces blog, Nick Fletcher (26/11/09)
Severn Trent leads water company shares higher after regulator’s review Telegraph (26/11/09)
The full report can be accessed from the Ofwat site at:
Final determinations on price limits Ofwat (26/11/09)
Questions
- Is price cap regulation of the RPI–X variety the best form of regulation? Explain with reference to both incentives and the issue of uncertainty.
- Explain whether water companies are natural monopolies.
- To what extent can competition be introduced into privatised utility industries as an alternative to regulation? Is increased competition a practical alternative to price cap regulation in the water industry?
- What are the arguments for and against installing water meters in each home so that people pay per litre used rather than paying a flat charge depending on the property value?
- Explain what is meant by ‘regulatory capture’. Is there evidence of regulatory capture in the water industry? Consider with respect to the November 26 ruling.
In a recently published book, Scroogenomics, Joel Waldfogel, Professor of Business and Public Policy at the University of Pennsylvania, examines the economics of giving presents and considers whether we would be better off being Scrooges. This book brings to a general audience some of Professor Waldfogel’s work on giving. In a 1993 paper, he argued that holiday gift-giving involves a deadweight welfare loss. “I find that holiday gift-giving destroys between 10 per cent and a third of the value of gifts.” (See The Deadweight Welfare Loss of Christmas. Note: you should be able to access this from a UK university site if you are logged on.)
The core of his argument is that many gifts we give are not really what the person receiving it would have chosen. If you give someone a gift costing £10 for which the person would not have paid more than £6, then that is £4 wasted – a deadweight loss of £4.
So should we all be Scrooges and stop giving? Think of all money that would be saved and which could be spent on things that were more wanted. But wait a minute. What about the pleasure (i.e. utility) of giving? And what about the pure pleasure of receiving a gift, irrespective of the gift itself? Should these be added in to arrive at the total utility? Then there is the pleasure (or hassle) of shopping for the gift. Shouldn’t this be taken into account too? In other words, to establish deadweight loss, we need to take into account all the pleasures and displeasures of the process of giving and receiving.
Finally there is the question of whether better research on the part of the giver into the tastes of the receiver would enable them to choose more wanted gifts. Or should we simply give cash or gift tokens: at least these can be used by the recipient for whatever they choose?
Interview with Joel Waldfogel Princeton University Press, on YouTube
See also the following articles:
It’s not just Scrooge who wants Christmas abolished Financial Times, Tim Harford (20/11/09)
Stop blaming Grandma for cruddy Christmas presents Seattle Times, Joel Waldfogel (20/11/09)
It may not be the thought that counts Washington Post (22/11/09)
Economics of gift vouchers BBC News Magazine, Ruth Alexander (17/12/07)
The high cost of ugly, useless Christmas gifts Globe and Mail (Canada), Erin Anderssen (13/11/09)
Author’s argument that unappreciated gifts drag down economy isn’t Scroogish, it’s foolish Mlive.com, Nancy Crawley (8/11/09)
Give gold, not myrrh The Economist (21/12/09)
Questions
- What factors would need to be taken into account in attempting to measure the true deadweight loss of giving? Would this involve inter-personal comparisons of utility and, if so, what problems might arise from this?
- Examine whether it is better to give cash or gift tokens rather than a physical gift?
- Consider whether charitable donations would be the best form of gift to a friend or relative?
- One practice used in many families is the ‘secret Santa’. This is where everyone in the family secretly draws the name of another family member at random. They then buy a gift for this person and put the gift under the tree (or in a box). Thus each person gives just one gift and receives one gift and nobody knows who has given them their gift. Normally a maximum value of the gift is determined in advance. Consider the advantages and disadvantages of such as system. Is it a more efficient way of giving?
- What are the macroeconomic arguments for giving presents at Christmas time or at other festivals?
