| Editorial |
| The horsemen of the apocalypse are abroad in the land, but your Journal remains a haven for scholarly reflection. This is not entirely your Editor’s stoicism: the three articles in this issue were written last year, as entries to the Rybzcynski Prize, when Armageddon was still only a tale to frighten the guests in City dining rooms. Nor have we entirely ignored the unfolding calamities. In Speakers Corner we report on the Society’s Annual Conference, which addressed the question: ‘Will the US sub-prime crisis derail the world economy?’ Well, we pretty much know the answer to that question now, and, to be fair, Gillian Tett and Willem Buiter in their discussions of what was happening in credit markets both warned of the risk of a very nasty downward spiral and called for reform of Britain’s financial regulatory system. David Miles agreed that reces-sion was the most likely prospect for the British economy, and Gerard Lyons considered that even the Chinese behemoth might grow more slowly. It was left to Paul Ormerod to offer some hope: his study of some 255 recessions in 17 countries over some 135 years showed that even the worst had recovered within a decade. As Gillian Tett had remarked, a shock is an event, not a habit. |
| But suppose the world is to end, not with a bang, but a whimper? That is the possibility that Tim Congdon raises in his article on the free market both as a form of economic organisation and as an ideology. He traces the origins of the idea in the work of Adam Smith and John Locke, and argues that its adoption, more or less deliberately, more or less completely, as the basis for the development of the modern industrial economy over the past 250 years has enabled the almost unimaginable multiplication of output which allows so many people “to lead safe and healthy lives, and to fill our time with interesting and enjoyable pursuits.” But, he asks, will it continue to do so for another 250 years? There are he suggests two critical conditions for the effectiveness – and the moral and political acceptability – of the system. The first is that resources are not so scarce that they give rise to pervasive and extensive economic rents. The second is that economic activities do not generate widespread and large ‘externalities’ – divergences between the costs to society and those to the economic agents involved. In their absence there is increased scope for political interventions in the economy with adverse effects on its optimising character. These conditions have generally obtained over the past two centuries, but Congdon suggests there are serious questions whether they will continue in future. He believes that the scarcity of resources will grow, and he examines in particular the case of oil, such that the proportion of income based on economic rents will increase substantially, bringing with it every kind of politicking to capture them. And ‘global warming’, in the sense of the effects of man-made carbon emissions, threatens an externality that is “difficult to measure and potentially vast”, and that will generate massive political interventions in the economy. He continues to believe that a free market economy remains the system most likely to improve the lot of the world’s under-developed countries and to sustain our own well-being, but he is concerned that these changes will make it less efficient and successful in the future than in the past, and may threaten its survival. |
| Market failure is also the theme, on an altogether more domestic scale, of our other two articles. First, Benedikt Koehler examines the retail market for investment products, which has seen “recurring instances of mis-selling and poor advice” to its clients, and in particular the claim that these failures have their roots in the payment of commissions to those who sell the investment products by the firms that offer them. He believes that this claim is misconceived and seeks to demonstrate this by the application of the concept of transaction costs. But first Koehler explores the implications of the concept – first introduced as an explanation of the structure of firms and industries by Ronald Coase – through studies of a number of other industries, ranging from fishing to the selling of shoes, in order to apply them to the crucial questions regarding the efficiency of the retail investment market. This application suggests that the typical business model for retailing investment products will be through independent agents who are rewarded by commission, which is, broadly, how the industry is structured. Moreover, that structure “is consistent with that of every other market where commissions enhance efficiency”. There may be good reasons for consumer protection, but they do not lie in the inefficiency of the market. |
| There is not really a market in the supply of economics teaching, as the government funds and controls the structure and operation of most schools. Yet there is a substantial independent sector, and Samuel Tombs has undertaken some very interesting original research into the differential opportunities to study economics at various levels between types of school, which suggests that, if there were a market, it would exhibit symptoms of failure. What he found following a series of requests for information from universities and schools under the Freedom of Information Act is that what school you go to makes a substantial difference to your chance to study economics. A substantially higher proportion of those studying economics came from independent schools than would be expected from the overall numbers advancing into higher education from each type of school. Yet there was evidence that more in state schools would have studied economics if they had the opportunity; the problem is one of supply. Now, there were almost as many questions raised by this research as answered: what of the role of sixth form colleges where the numbers sitting economics at A-level seemed to be increasing? And how did the supply and demand for economics teaching sit alongside the teaching of business studies – for which there were almost twice as many sitting A-levels as for economics? We remember the concerns expressed by the Bank of England a year or two ago about the falling numbers of economists coming into the profession, and there would seem scope to take this research further. |
| What else? Well, Speakers Corner also includes reports of Jill Leyland’s discussion of the gold market, which has done well out of the crisis that has engulfed other financial markets, and of DeAnne Julius’s discussion of the findings of a study of the Private Finance Initiative, which had looked further into the parallel development of the public service industry – the firms and other organisations engaged in the provision of public services on behalf of the government – and had found that, despite many problems, the introduction of contestability into the provision of services had improved their delivery. |
| Finally, our Book Reviews bring us full circle: half of the books reviewed are about the pathology of the financial markets and the possible remedies. Economists may not have seen the crisis coming, but publishers seem to have spotted the opportunity! |
| Jim Hirst Editor |
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