Refresher course

A review of the WinEcon economics learning software, part one

With the eventual aim of undertaking some modest empirical descriptions of the economic transition in eastern Europe and the former Soviet Union over the past 15 years or so, concentrating—though not exclusively—on the topics of economic growth and the economics of labour markets, about a month ago, I took a week off work to study economics again from scratch.

The course I chose was the WinEcon software (version 7.1), which can only be bought and downloaded over the Internet. This process was quite straightforward. By right-clicking on the desktop shortcut icon so installed (a little red-blue-green bar chart), I was able to enlarge the display to fill the whole screen (640 x 460 screen resolution), making on-screen reading easier (mind you, this disables the program's calculator, I think). By right-clicking the “start” button in Windows desktop and then “properties”, it is also possible to prevent the Windows taskbar from intruding over the top of the WinEcon software.

During my study week, I completed about a quarter of an undergraduate economics course—that is, six out of 25 chapters: two on microeconomics (chapters 1 ands 2), two on macroeconomics (chapters 9 ands 10), and two on maths and statistics (chapters 22 ands 24). Later, I read chapters 11 (the circular income-expenditure economic model), 12 (theories of money supply and demand) and 13 (mostly Keynesian short-term macroeconomics).

Although quite standard in terms of content, chapters 1, 2 and 10 were reasonably thorough and lucid, and the bit-by-bit interactive presentational style helped to sustain interest.

Chapter 1 presents definitions of basic economic “oppositional” terms (macro vs micro, nominal vs real, positive vs normative, command vs the market) and develops a familiar definition of economics as the study of rational agents forced to choose between competing resource uses in conditions of scarcity. Some of the rather abstract ideas involved are usefully conveyed by means of concrete examples and game-like illustrations. The most interesting section, however, was the exposition of economic modelling, in which the process is broken down into the following stages:

• statement of the problem;
• whittling down of influences to leave us with a set of simplifying assumptions;
• development of a theory to answer the question(s) posed at the "problem" stage;
• testing the theory against evidence; and
• provisional acceptance of the theory, if it comes through the test.

These stages are then illustrated using two well-known economic theories: the Keynesian consumption function (household consumption is mainly influenced by changing levels of income) and the Fisher hypothesis (interest rates rise and fall with inflation).

What quantity of a good will buyers and sellers purchase and supply at each price? Chapter 2 familiarises the student with the basic tools of supply and demand analysis: how to construct supply and demand curves, and an account of the factors that affect each (for demand: product price, household income, prices of complements and substitutes, consumer tastes, the number of outlets and advertising; for supply: the product price, the price of inputs, the scale of taxes and subsidies, technology, the weather and the number of outlets); the difference between movements along the curves and shifts in the curves; the interaction of the two to produce equilibrium product prices and quantities, and how tools of this kind can be used to predict likely changes in price and quantity under changed market conditions ("comparative statics"; the examples used are polices for the support of domestic agricultural prices and other kinds of government intervention). Lastly, the concept of elasticity is introduced.

At this point, I switched to the macroeconomic sections of the program.

The second of the macro section, Chapter 10 runs through the main conceptual problems of measuring output in a national economy—seen as the level of productive activity overall, or as the total product of that activity. The first pitfall to avoid is to exclude transactions, such as transfer payments to pensioners or the unemployed, that do not represent payments for productive activity, as well as those that denote only changes in ownership of an item, since no new production is implied; the second is to count only new value added at each stage of the production process, from the extraction of raw materials to the sale of final goods—ie to avoid double counting.

The picture of the circular flow of income between households, firms, the government and external actors is built up gradually as the basis for the three alternative measures of national income accounting. (In this model, injections into the economy exactly match withdrawals from it, by definition.) The expenditure method measures the spending of households, government, investors and foreign buyers on goods and services in the domestic economy, to arrive at gross domestic product (GDP) at market prices. The output method measures what firms actually get for their production (and therefore have available to spend on factor services), and differs from the expenditure measure by subtracting indirect takes (those levied on the prices of goods and services themselves, rather than on factor incomes) and adding any production subsidies, to arrive at the gross value added (GVA) at basic prices. The income method aims to total up the payments received for the various factors of production (land, labour and capital); summing together the factor payments from firms to household, subtracting direct taxes on this income—which are siphoned off to the government—but then adding the redistribution to households of some of this tax via transfer payments, we arrive at the measure for personal disposable income (PDI). One of the advantages of having three measures of national income, each gauging monetary flows at different points in the cycle, is that they act as “checks” on one another, helping to reduce errors.

Next, the module details some of the practical problems of data collection and estimation for each of accounting method. Simplified layouts of the tables that are the end result of the data-collection process for each of the methods look something like this:

Expenditure	Output	Income
Consumption	Agriculture	Salaries, wages
households	Production	Firms' profits
non-profit institutions	utilities	non-financial
Government consumption	manufacturing	public firms
Fixed investment	Total production industry	private firms
Change in inventories	Construction	financial firms & other
Acquisitions less disposals	Service industries	Mixed income
Total domestic expenditure	distribution, hotels, repairs	GVA at factor cost
Plus exports	transport & communications	Net product taxes
Total final expenditure	business & finance	GDP at market prices
Minus imports	government & other	-
Statistical discrepancy	Total services	-
GDP at market prices	GVA at basic prices	-

Moving snapshot
Presented sequentially, these structural snapshots of the economy allow us to glimpse something of its changing character over time, to describe broad changes within it—for instance, many Western economies once dominated by manufacturing now predominantly specialise in services. From the information so compiled it is possible to get a picture of the structural features of the national income in the UK in the post-war period, as follows:

• nominal GDP had reached £1.7trn by 2004 (from £1.1trn in 1996);
• close to 60% of national income takes the form of wages (compensation to employees);
• exports make up a growing share of expenditure (19% in 2004)
• investment makes up a falling share (13% in 2004);
• aside from the government, business and distribution services are now the dominant sectors and their share of output is rising; and
• manufacturing, utilities and agriculture accounted between them for only a fifth of the UK productive activity in 2004 and the share of all of them was on a trend of long-term contraction or decline.

The reason that any of this is useful is that an accurate description of a country's economic structure, as well as the changes to its economic structure over time, is an essential basis for sound analysis, as well as for meaningful international comparisons.

Other useful topics in the chapter include instruction in two methods for calculating real output changes from nominal data (the first values output in later years at base-year prices, whereas the second multiplies the change in quantity of goods in later years, compared with the base year, by product weights established in the base year), as well as a brief look at alternative methods of national income calculation—gross national income (GNI; GDP plus net income from abroad) and net national income (NNI; GNI less depreciation)—and the possible grounds for the inadequacies of these measures for capturing accurately economic welfare more broadly.

That’s enough for one day.

72

If you want to work out how long it's going to take a country to double its income, you have to divide 72 by the country's average growth rate. Thus, at India's average annual growth rate of 1.8% in 1950-75, its economy would double in 72/1.8 = 40 years; China's, at 6% in 1975-2000, would double at a much foreshortened 72/6 = 12 years.

I also liked the one-size-fits-all coffee-cup lids as an example of the myriad kinds of rather bland, but cumulatively significant, kinds of innovation that characterise economic growth.

Movement without change

Neo-classical growth theory is an attempt to explain the conditions in which dynamically stable, or equilibrium growth, may be achieved. A key feature of the method of analysis used in neo-classical economic theory is the application of marginal techniques to the demand side (explaining commodity prices in terms of variations in marginal utility to consumers, for example) as well as the supply side (factor returns explained by their marginal products), rather than just to the supply side, as with classical theory.

Very broadly, the picture of the growth process envisioned in neo-classical theory is as follows. The level of savings in the current period is conditioned by the level of income from the previous period of production. This determines the size of funds available for current investment, all current savings being absorbed for this purpose. Investment may be used either to equip new workers with the same level of capital as all other workers, in this way maintaining the capital-labour ratio (capital widening), or to increase the level of capital per worker, in this way increasing the capital-output ratio (capital deepening). Capital widening can increase the absolute level of output produced, but not the rate of growth of output per worker. Capital deepening can increase productivity in the short run, but market mechanisms will adjust the relative prices of capital and labour in such as way as to encourage firms to economise of one or the other, bringing the capital-labour ratio to its long-run average—that is, the one consistent with dynamically stable, equilibrium growth—so that, without technological progress, only capital widening can occur.

In the long run, therefore, for a given level of technology, an economy will tend to grow at a rate determined by the growth rate of the population (the causes of which lay outside the field of enquiry of the model), because, assuming full employment of all factors of production, all other variables with potential to influence the level or rate of growth of economic output will adjust. To put this in another way, in the long run, only technological progress can permanently increase the rate of growth of output and income per head, because it increases the average product of labour for any given capital-labour ratio, raising also the capital-output ratio. Counter intuitively, the rate of saving has no effect on the long-run rate of growth of the economy.

To reach these conclusions, the neo-classicists make a number of simplifying assumptions; some of the most important ones are as follows.

1. Output is of a single homogeneous commodity. The level of output depends on the quantities of inputs of labour and capital, and is subject to constant returns to scale (ie by doubling the quantity of inputs of capital and labour, output is exactly doubled).
2. The supply of labour—which is also homogeneous in character—grows at a constant rate. This is the most important “exogenously determined” variable, the one to which the other variables, conditioning one-other within the confines of the model, must adjust. There is always full employment of labour, such that any extra contribution to productive capacity from this source translates exactly into actual contributions to output.
3. The rate of saving is constant. Whatever the level of income from the previous production period, in each new period, the same proportion of income is saved and the same proportion consumed. The current level of saving is determined by the level of income achieved in the previous period—that is, it is explained by processes at work within the model.
4. All current savings are employed as current investment in capital. This is so because interest rates on the capital market adjust to equate the two; if there is an excess of savings, interest rates will fall, raising the relative profitability and thus attractiveness of investment.
5. Capital does not to depreciate, but the “capital-deepening” process is subject to diminishing returns; that is, as the average capital per worker increases, the increase in output for each new unit of capital added to the production process is less than the last (ie the capital-output ratio begins to decline). The explanation for this for neo-classical economists lies in the low substitutability of labour and capital inputs.
6. The rates of reward to production factors are not constant; on the contrary, the movement of relative prices is the mechanism of adjustment by which a steady-state growth path is achieved.
   
   

Left well alone

Marx versus the nostalgists
Marx thought that inequality was the tool by which humanity would pull itself up by its bootstraps and in this way, eventually, escape the "realm of necessity"; only then would human history really begin—ie a history in which we would be able to break out of the stultifying "predestination" of the class system. But class inequality was the harness by which freedom would be earned.

Looking about, it is possible to spot potential new economic forms growing in embryo in the womb of the old society (eg open-source software development, where status among one's peers, rather than profit, seems to be the strongest motive for innovation). However, the old social relations are clearly still "forms of development" of productive power—which will have to be at an extremely high level if socialism is not to be maintained by force, if it is to be "stateless"—rather than its fetters.

Andrew Murray's kind of left, on the other hand—looking back for inspiration to the stark semi-poverty of the Soviet Union, with its bread queues and drab uniformity, the built-in "excess macroeconomic demand" or "sellers' market" that was the lot of your average Soviet citizen (in the good years, that is)—often seems to me to be one of the possible fetters, or brakes, on the broad trend towards progressive social change and worldwide material improvement.

Why so? How did this extraordinary situation come about? Is it not one of the most puzzling conundrums of the day?

Certainly, there are many things wrong with today's mainstream left, and Mr Murray's political praxis, I would argue, has as good a claim as anyone's to exemplify some of its least attractive features.

And yet I think that, despite itself, this nostalgic, slightly provincial, slightly chauvinist left may still serve a useful role—in as much as a thoroughgoing critique of its positions is likely to suggest what a useful left might look like, by way of contrast. Engels calls this "the power of the negative".

Instrumental anti-racism. Sometimes this school portrays free speech as merely a devious bourgeois device to protect the expression of racism. This seems to me an error of historic proportions, for when you give an inch to the state or to the dominant civic culture, it is more often than not the weaker social elements who get it in the neck, and to whom the restrictions or "protections" are thenceforth applied. Plus Mill's point applies: the more ideas, the more likely we are to come to good conclusions. Bad ideas had best be let out into the open, there to be hunted down. If only Mill had been able to put this dialectically, or, better still, in the unnecessarily complicated manner of modern French philosophy, I believe that it might have better caught on with this brand of radical conformism. In fact, far from opposing racism, of late, this left has teamed up with far-right racists, whose aim it is to impose their highly restrictive values on other Muslims.

Smash the machines! This strand of the left typically decries potentially poverty-reducing globalisation, instead of proposing an alternative kind of globalisation—one in which the undeniable benefits of international trade are more equally distributed. (By "exporting" good working conditions, for example.)

Down with this sort of thing! This leads me on to the chief failing of this clique: they have no plausible and appealing alternative to the "neo-liberalism" that they despise, but which they can't be bothered to understand—hence the disastrous faith-based appeals to "more of the same", the posthumous rehabilitations of the Soviet Union (and, by the way, the official Soviet policy of the equality of the races and sexes bore a similar relation to reality as the 1936 "Stalin" constitution to the everyday practice of Soviet democracy), and of the 1970s ("when unions was king"), the starry-eyed adulation of General Chávez, because "anything but this".

And yet, even with its unconscionable level of inequality, and the relatively harsh restraints it places on all-round human development—chiefly, perhaps, by the length of the working day—this society now, here in the West, is the best, economically and politically, the richest and the freest, that there has ever been in the 6,000 years since someone put up a clock tower in Uruk and said to themselves, "I think I might stick around"; which only shows what a long way there is to go and that we are probably living in an early stage of human history.

Two faces are better than one. Finally, the leftist of the kind I am thinking of tends to shed crocodile tears over the small successes of fascist parties at home, while carrying out extensive PR campaigns for similar or much worse ones abroad—by playing up the crimes of the imperialists, and playing down or skating over the crimes of the resistance death squads in Iraq, for instance. Hence my suspicion that anti-imperialism itself, at least in its current manifestation, is perhaps one of the most serious barriers to the development of some kind of humane and productive socialism in the future.

Frankly, I'd be very afraid of any kind of socialism in which this left had too much of a hand, as it has appallingly low standards for what a society based on the free association of the producers might be like, and it is usually quite prepared to trade off a bit more bread for a bit less freedom, whereas it seems likely that more of one leads to more of the other, and vice-versa.