The Teen Economists

Was the Brexit referendum a good reflection of "the will of the people"? Possibly not.

2016-07-07T17:58:00.002+01:00

by Viva Avasthi

There's something both Leave and Remain supporters have missed. Discussing it matters for the short and long run of this country.

Two weeks on, there is still furious debate among and between Leave and Remain supporters. Yet there appears to be consensus on one thing: that the referendum result was "the will of the people" and therefore "must be respected". Leave supporters are brandishing this as their infallible weapon against attempts by the Remain side to prevent or soften Brexit. Remain supporters, broadly conceding, are limiting their actions to lamenting the lies told by the Leave campaign and attempting to find (varying degrees of) obscure methods to prevent our leaving the EU.

Both sides miss the point.

There is a case for the referendum not being a good reflection of "the will of the people". The reasons come under two umbrellas. First, the problems with the information provided prior to the referendum; second, the problems with the structure of the referendum itself.

Missing: democracy featuring an informed electorate

For democracy to function well as a reflection of "the will of the people", it is essential that voters are well-informed. The first thing that the electorate should have been informed of was where to turn for an impartial and - crucially - thorough and accessible analysis. This did not happen. Instead, they were offered lies from the Leave campaign, list after list of influential figures backing the Remain campaign, and an extremely poor quality of public debate. Not a mix conducive to effective democracy.

The reader might justifiably wonder whether such impartial sources even existed. In fact, they included: The UK in a Changing Europe, a website based at King's College London and funded by the Economic and Social Research Council; fullfact.org, a non-partisan fact-checking charity; and, produced by the libraries of the House of Commons and House of Lords, this impartial analysis.

There is also some ground for criticising the BBC's role. In attempting to fulfill their remit of being non-partisan they gave roughly equal air-time to both sides on each aspect of the debate (the economy, immigration et al.). In reality though, if we take, say, the analysis on the economy, the sheer volume and quality of argument was on the Remain side. The BBC's coverage, therefore, may well have harmfully distorted the public's views by diluting some critical arguments.

All this matters immensely. Those who condemn Leave voters as "stupid" or "racist" do not appreciate how little information was actually provided to people to help them vote in an informed matter. They do not appreciate how little time people had to uncover and then analyse the intricacies of the UK's relationship with the EU once they'd come home from each hard day's work. Is it really a surprise, then, that large numbers of people brought sheer emotion rather than reason to the ballot box? Had people been aware of the facts, they might not have confused what lies within the remit of the EU and what does not; which problems were caused by our being in the EU and which were not; what our position might be outside of the EU and what it will not.

Then there is the issue of so-called "apathy" among young people. Rather than laziness, the very low turnout among 18-24 year olds was more likely a result of the paralysis stemming from simply not knowing which was the "right" side to vote for. Again, a sign of an uniformed electorate. That paralysis was possibly exaggerated by the fear created by the knowledge that the outcome would affect them for the longest of any of the voting categories. A low turnout necessarily means that such a referendum is only a limited reflection of the "will of the people".

Second, the electorate should have explicitly been made aware or reminded of the crucial difference between voting in a general election and voting in a referendum. This would have reduced the numbers of people voting Leave simply because they did not think we actually would (protest voting) and increased voter turnout - making the referendum a far better reflection of "the will of the people" than at present. Effective democracy depends on the electorate knowing how the system works. It is not acceptable to simply assume that the electorate surely must.

When is a referendum any good?

There's another angle. Even if we ignore everything said above, there are further legitimate reasons why we might not accept the referendum result as being a good reflection of "the will of the people".

First, the Condorcet paradox applies in the case of this referendum. In his fantastic (and accessible) article written prior to the referendum, Jonathan Portes outlines what the Paradox is and how it is relevant to the British case.

The introduction to his article reads:

The problem with referenda, writes Jonathan Portes – and especially this one – is that they often present binary choices which do not necessarily reflect voters’ true preferences. This can force politicians to implement policies that are at odds with the will of the majority. He uses the Condorcet paradox to illuminate the difficulty, and asks what it mean for Parliament after the referendum.

Second, we must not forget that the choice of referendum-winning majority was an arbitrary one. Cameron decided that a "win" for either side would require gathering over 50% of the vote. Other countries choose a best-of-three-referendums system, or a two-thirds majority system, for example. Was our choice necessarily the best one? As the Economist puts it:

[...] what about the 16,141,241 voters who endorsed remaining in the EU? The 52% of those aged 35-44? The 56% of Northern Irish voters? The 60% of Londoners? The 62% of Scots? The 62% of those aged 25-34? The 67% of Asian voters? The 73% of 18-24 year-olds? The majority of Britons in full- and part-time work who voted to Remain? And the large minorities of most other groups, as well? Not to mention the 1.1m Leave voters who, one poll by Survation suggests, now wish they had voted differently. Or the millions of Britons abroad who could not vote in Britain. Or the roughly 3m residents of Britain—who work, pay taxes and contribute to society like everyone else—who by dint of their foreign EU passports may soon be pawns in Ms May’s negotiation.

The long and short of it

The are two things to take from this.

If MPs have the chance to vote on triggering Article 50, as is likely, they have a difficult decision to make. Should they vote to Remain, which they overwhelmingly believe to be right, based on their expertise? Or should they honour "the will of the people" and vote to Leave, despite personally believing the opposite outcome to be best for the people they represent? If the referendum does not really reflect "the will of the people" this decision is no longer so difficult. Britain is a representative democracy and MPs should follow their professional judgement - as they have been elected to do.

In the words of Burke (1774):

To deliver an opinion, is the right of all men; that of constituents is a weighty and respectable opinion, which a representative ought always to rejoice to hear; and which he ought always most seriously to consider. But authoritative instructions; mandates issued, which the member is bound blindly and implicitly to obey, to vote, and to argue for, though contrary to the clearest conviction of his judgment and conscience,--these are things utterly unknown to the laws of this land, and which arise from a fundamental mistake of the whole order and tenor of our constitution.

The second thing to take away is this: we as a society need to collectively reconsider how democracy can work best for us. We need to understand that there are different forms of democracy and that each of these forms is more or less appropriate depending on the context. We need to actively consider how to ensure that the electorate is provided with the vital information it needs to make decisions, and that young people aren't left confused or disinterested. In the context of an increasingly globalised world with the rise of technology in forming and shaping debate and opinion, we are likely to find that, upon observation, our democracy cannot and should not continue in its present form.

Special Relativity

2015-10-13T11:29:00.000+01:00

By Caitlin French

Introduction to Special Relativity

Special relativity, developed by Albert Einstein in 1905, completely transformed our ideas about space and time. Although Newtonian mechanics provides good approximations at low speeds, Einstein corrected mechanics in order to handle situations involving motion near the speed of light. Einstein replaced the Galilean transformations of Newtonian mechanics with the Lorentz transformations in his theory of Special Relativity.

Einstein’s theory is based on two main postulates, from which many interesting things follow. But the main idea of Special Relativity is that, if you move fast enough through space, the observations you make about space and time differ from the observations of other people who are moving at different speeds.

The Two Postulates of Special Relativity

Special Relativity is based on two postulates:

1. The laws of physics are invariant (identical) in all inertial systems (non-accelerating frames of reference moving at a constant speed).

2. The speed of light (c) in a vacuum is the same in all frames of reference, regardless of motion relative to the light source. This is required for the laws of electrodynamics to apply equally for all frames.

Searching for the Aether

Are you moving right now? In your current reference frame, you may think you are stationary. However, relative to something floating in space, you are moving: you are sitting on the Earth, which is rotating on its axis and orbiting the Sun at 30kms^-1. This made people think: is there an absolute reference frame against which to measure all motion? Is there something in the universe which is always stationary? Physicists postulated a “luminiferous aether”: a stationary, absolute reference frame which is also a medium for light waves to travel through.

Experiments at the time, such as the Michelson-Morley experiment, had results which suggested that the Earth was always stationary relative to the aether – something which was difficult to explain. But Einstein’s solution was to discard the notion of an aether and instead say that all motion is relative.

The Michelson-Morley Experiment

The Michelson-Morley experiment was conducted to settle the debate about the aether. It involved a beam of light splitting at a beam splitter (a half-silvered mirror), where one beam travels parallel to the supposed “aether drift” (which we take to be along the horizontal line from the source to the mirror) and the other perpendicular, where the distance between the beam splitter and both mirrors is the same. The two beams reflect off the mirrors, recombine at the beam splitter and then travel to a detector where an interference pattern forms. If the equipment is at rest in the aether, then the times for the light beams to travel from the source to the detector will be equal, so the light beams will constructively interfere. However, if the apparatus moves to the right with velocity u relative to the aether, then there will be a difference in the times. Any difference in time for the beams to travel to the detector means a change in phase, and therefore a different interference pattern.

We can think of an analogy of boats on a river, where there is a current to the right (the aether drift). For the boat travelling parallel to the current, the amount it is aided by the current on the way out is cancelled by the amount it is slowed down on the way back. For the boat travelling perpendicular to the current, it has to travel a little further as it has to aim slightly to the side, so it takes longer to travel out and back.

Looking at the horizontal beam:

The time taken to go from A to B is t₁ and the time for return is t₂. The distance travelled from A to B is L + ut₁ (Shown by the top red arrow. This is the fixed distance between the mirrors added to the distance travelled by the mirrors in the time t₁ using distance = speed x time). This will be equal to the distance ct₁ (c, the speed of light, multiplied by time).

In a similar way, we can write an equation for the return distance, but this time we subtract ut₂.

This gives us the total time to travel from A to B and back again, which is t₁ + t₂:

ct₁ = L + ut₁t₁= L / (c - u)

ct₂= L – ut₂ t₂ = L / (c + u)

t₁ + t₂ = L / (c - u) + L / (c + u) = 2Lc / (c²- u²)

Dividing the numerator and denominator by c², we get:

Now looking at the vertical beam:

You can see from the diagram that, relative to the stationary aether, the light travels along the hypotenuse of a right-angled triangle. We use Pythagoras’ theorem to form an equation, which we then rearrange for time, and multiply by two (as the light must travel from A to C and back again). So:

(ct₃)² = L² + (ut₃)² (Pythagoras)

L² = c²t₃² – u²t₃² = (c² – u²)t₃²

t₃ = L/√(c² – u²)

2t₃ = 2L/√(c² – u²)

Dividing the numerator and denominator by √(c²), we get:

But, these times are not equal: t₁ + t₂ ≠ 2t₃. They are wrong by a factor of:

From our calculations, we would expect some interference effects to be detected. However, experimentally, this was not the case. Experimentally, no time difference was found – the velocity of the Earth through the aether could not be detected. There was no aether!

The Problem with Newtonian Mechanics

In Newtonian mechanics, we add velocities. Consider a car approaching you at 30ms^-1. A passenger throws a ball towards you at 5ms^-1. The ball travels at 5ms^-1 relative to the passenger. However, if you measure the speed of the ball, it approaches you at 30 + 5 = 35ms^-1.

Now if the car approaches you at 30ms^-1and turns on the headlights, at what speed does the light approach you? Applying the same logic, we would expect it to be travelling at c (3.0 x 10⁸ms^-1) + 30 = 300,000,030 ms^-1, which is faster than the speed of light, which isn’t possible!

As speed is distance/time, that means there is something wrong with our notion of distance and time.

Lorentz Transformations

Einstein said that there are actually four dimensions, three of which are spatial dimensions (up/down, left/right, forward/backward) and one is time. We define an event to have spacetime coordinates (t,x,y,z) in system S and (t’,x’,y’,z’) in S’, where S and S’ are two inertial frames of reference.

An un-primed variable (without a dash) is a measurement relative to you, whilst a primed variable (with a dash) is a measurement relative to the object you are measuring.

We are only considering relative motion parallel to the x-axis, so only the x and t coordinates are transformed, whilst the y and z coordinates remain unaffected.

Lorentz Transformation

We assume that a transformation γ is performed on the distance x’ + vt’ (adding the vt’ to account for the motion of the object) to give us x.

x = γ(x’ + vt’)

x’ = γ(x-vt)

To go from a primed (S’) to an un-primed (S) frame, switch the primed and un-primed variables and change the sign of velocity v. This is because, if the S’ frame is moving right with respect to the S frame, then the S frame is moving left with respect to the S’ frame.

If a light beam travels in both frames and we assume the speed of light is constant in all frames:

x = ct

x’ = ct’

Which implies:

ct = γ(ct’ + vt’) ⇒ ct = γ(c + v)t’

ct’ = γ(ct – vt) ⇒ ct’ = γ(c – v)t

Multiplying these together:

ct(ct’) = γ²(c + v)(c – v)tt’ ⇒ c² = γ²(c² – v²)

From this we can derive the Lorentz Transformation:

So:

Time dilation

Time Transformation

By squaring γ and rearranging, you can show that:

(1 – γ²) = - (v²γ²)/c²

We now set up a different equation where we substitute x into the equation for x’:

x’ = γ(x – vt) ⇒ x’ = γ(γ(x’ + vt’) – vt)

Multiplying out, rearranging and substituting in our result for (1-γ²):

γvt = γ²vt’ – x’(1 – γ²) = γ²vt’ + (v²γ²x’)/c²

Solving for t:

t = γ(t’ + vx’/c²)

t’ = γ(t – vx/c²)

Light Clock

If a clock is in motion, then relative to another observer, time passing on the clock slows down. Note that, as far as the clock is concerned, in its frame of reference, time passes at the same rate. So, time slows as speed increases only when viewed from another frame of reference.

Let’s use the example of a light clock, where, from the clock’s own reference frame, a light beam bounces up and down as it is reflected between 2 mirrors. However, from the point of view of an observer on the ground who watches the clock move past with a velocity v, the light beam appears to take a diagonal path.

From the point of view of the moving clock, the time for the light to travel up and then down is:

t’ = 2d/c

From the point of view of someone on the ground, this time is (using pythagoras, just as we did to explain the Michelson Morley experiment):

(cΔt/2)² = d² + (vΔt/2)²

Multiplying through by 4 and rearranging for t’²:

Δt² = 4d²/(c² – v²)

Taking c² out of the denominator and square rooting:

Therefore:

∆t=γ∆t'

If we plug in the speed of light, c, into the formula, the time dilation factor becomes infinite, so time stands still.

Examples

Time dilation explains the presence of cosmic ray muons reaching the Earth’s surface. Mesons are particles which spontaneously decay after an average lifetime of 2 microseconds, meaning they should only be able to travel about 600m from the top of the Earth’s atmosphere. However, the distance from the atmosphere to the Earth’s surface is 10km – much longer. So how can we still detect muons? Muons travel close to the speed of light, so, from our point of view, time passes more slowly for them, so they live for long enough to travel the 10km distance.

Time dilation also raises an interesting question in the twin paradox. Imagine the situation where a twin (Amy) flies off in a spaceship travelling near the speed of light, leaving her twin (Bob) on Earth. On Amy’s return, she discovers that Bob, who stayed on Earth, has aged much more. This has been explained using the fact that Amy travelled at a very fast speed, so from Bob’s point of view, Amy’s time passed more slowly, so Amy aged less. But there is a problem: we could say that, from Amy’s point of view, Bob travelled away at a very fast speed, so Bob’s time passed more slowly, so Bob aged less. However, this is not really a paradox. The answer is that, if this were possible, Amy would age less, but for a different reason: in order to return to Earth, she must decelerate, turn around and then accelerate back, causing her to age less.

Length Contraction

When an object is in motion, its measured length, relative to another observer, shrinks in the direction of its motion. Note that, as far as the object is concerned, in its frame of reference, it remains the same size. So, objects shorten as speed increases only when viewed from another frame of reference. For instance, if we are stationary on the ground and watch a spaceship fly past at a speed close to the speed of light, the people on the spaceship will think that the spaceship is the same length as it is when it is stationary, whilst it will appear shorter to you.

If a light pulse is fired from the back to the front of a train and is reflected back, with Amy standing on the train and Bob watching from the ground as the train travels past, the time measured by Amy is:

Δt’ = 2L’/c

We can then use the equation to get the time for Bob:

∆t= γ∆t'= γ 2L'/c

From Bob’s point of view, when the pulse is travelling with the train (t’¹), the time will be longer, whilst when the pulse is travelling in the opposite direction to the train (t’²), the time will be shorter.

Returning to our example of the Michelson-Morley experiment, where we got the result:

We then set these times equal to each other, so we get:

(2L/c)γ² = γ(2L'/c)

So therefore:

This shows that the length of the train is different in different inertial frames of reference. As γ > 1, L < L’ meaning the length L as measured by the outside observer is less than the length of the object with respect to itself. This explains the name of this effect: length contraction.

If the spaceship was approaching the speed of light, then, measured relative to you as you stand on the ground, its length would shrink to nothing. If v (the speed of the spaceship) approaches c (the speed of light), then 1/γ approaches 0, so L (as measured by you) approaches 0.

The Relativistic Velocity Addition Formula

Using the effects of length contraction and time dilation, x = γ(x’ + vt’) and t = γ(t’ + vx’/c²), we get:

Imagine a spaceship travelling at half the speed of light, which then transmits a light pulse at half the speed of light relative to the spaceship. According to Newtonian mechanics, these velocities would add to c. But using the relativistic velocity addition formula where v = u’ = c/2:

u = (c/2+ c/2)/(1+ 1/4)= 4/5 c

It would actually travel at 4/5 the speed of light.

The Universal Speed Limit

If a spaceship moving at a velocity v transmits a light pulse at speed c, we can show that the light pulse will always travel at the velocity c in all reference frames. If we use the velocity addition formula for any v, making u’ equal to c:

u = (c+v)/(1+ vc/c²) = (c+v)/c(c+v) = c

Whatever the speed the spaceship is moving at, the speed of the transmitted light pulse will always be c.

Contrary to popular belief, it is possible to be travelling faster than the speed of light, but we have not yet discovered anything which does travel faster than light. However, what is impossible is to accelerate to or past the speed of light. This is because, as the speed of an object approaches c, from an observer’s point of view, relativistic mass increases, meaning an infinite amount of energy is needed to make the object faster from within the observer’s frame of reference.

Relativity of Simultaneity

Another consequence of relativity theory is that there is no such thing as simultaneity between two events when viewed in different frames of reference.

Imagine a train moving at a constant speed with a torch in the middle. Amy stands on the train holding the torch, whilst Bob watches from the ground. Two light pulses are simultaneously sent out to the front and back of the train. Imagine this is a universe where the speed of light is much slower so that the time the light reaches each of the ends can be easily measured. From Amy’s point of view, the light reaches both ends at the same time. This is no surprise because the distances the light travels and the speed of light is the same:

t’_left = t’_right = L’/2c

However, from Bob’s point of view, these times are different. If the torch is turned on when Amy passes Bob so that the front end of the train moves away from Bob and the back end of the train moves towards Bob, then from Bob’s point of view, the light hits the back of the train first since it has a shorter distance to travel. They do not agree about the time of an events.

From Bob’s point of view:

t_left = (L/2)(1/(c+v))

t_right = (L/2)(1/(c-v))

Whilst these two events are simultaneous from Amy’s point of view, they do not occur at the same time for Bob. This shows that the order events happen in is different in different reference frames. There is no absolute time!

An interesting example of length contraction is the ladder-garage paradox. A person claims that they can fit a 20m ladder into a 10m garage, despite the fact that, when stationary, the ladder is much longer than the length of the garage. Imagine that there are guillotines at either side of the garage which are released when the ladder is inside the garage. When someone runs at a speed close to the speed of light towards the garage, from the garage’s reference frame, the length of the ladder would decrease so that it would be able to fit, and would not be cut by the guillotines. However, from the ladder’s reference frame, the length of the garage would decrease so that the ladder would not be able to fit and would be cut by the guillotines. This creates a paradox. However, the solution to this paradox is explained by relativity of simultaneity. The answer is that the ladder is not cut by the guillotines. From the point of view of the garage, the ladder shrinks and fits inside. From the point of view of the person with the ladder, the guillotines drop at different times. As the ladder approaches the garage, the front guillotine comes down and goes back up again. After the ladder has passed the back of the garage, the back guillotine then comes down and misses the ladder. The paradox is resolved, but only as a result of realising that simultaneity of events is no longer true in special relativity!

References

Six Not-So-Easy Pieces, Richard P Feynman

Einstein’s Mirror – Tony Hey and Patrick Walters

http://science.howstuffworks.com/science-vs-myth/everyday-myths/relativity1.htm

https://en.wikipedia.org/wiki/Special_relativity

https://archive.org/details/ASimpleDerivationOfTheEquationsOfEinsteinsTheoryOfSpecial

https://www1.maths.leeds.ac.uk/~serguei/teaching/gr.pdf

https://www.youtube.com/watch?v=kGsbBw1I0Rg

Thermodynamics, Entropy and the Arrow of Time

2015-10-12T23:20:00.002+01:00

by Caitlin French

The Arrow of Time

Why does a pane of glass smash but it doesn’t piece itself back together again? Why can an egg scramble but not unscramble? Why does an ice cube melt but it doesn’t spontaneously become solid again? In our everyday macroscopic world, we experience time asymmetry. Time only flows in one, forwards direction, creating the arrow of time. However, physical laws at the microscopic level have time reversal symmetry – it is theoretically possible for events to run both forwards and backwards. If you played a video of a swinging pendulum in a vacuum, you would not be able to tell whether it was running forwards or backwards.

Imagine you filmed a particle falling towards the ground, accelerating downwards due to gravity. If you then watched the film in reverse, the particle would decelerate upwards, which would be possible, provided the particle was given an initial velocity. By giving it an initial velocity, momentum is conserved. This initial velocity in the time-reversed scenario would be provided by the vibrations of atoms as the particle hit the ground in the initial falling scenario. The fact that these vibrating particles have kinetic energy means that energy is conserved in both scenarios as well. This is all theoretically possible. However, we don’t see these time-reversal effects in everyday life. Evidently, there is a conflict between time-reversible microstates and the one-way time of macrostates.

Thermodynamics

Thermodynamics is the mathematical physics of gases, including the study of heat and energy, as “thermos” means heat and “dynamic” means power. Its four laws define temperature, energy and entropy in thermodynamic systems.

The first use of steam to do work was a machine built by the Greek mathematician and engineer, Hero of Alexandria. It worked by heating a water-filled sphere to make the water evaporate to steam, which escapes through the tubes and makes the sphere spin.

Thermodynamics became extremely important in the Industrial Revolution as steam engines much more complex than this were developed by Savery, Newcomen, Watt and many others. Many individuals, like Clausius, Joule, Kelvin and Carnot, led the development of thermodynamics, with the task of maximising the efficiency of these steam engines.

Kinetic theory was developed by Bernoulli and later Krönig and Clausius. Inspired by Clausius’ work, Maxwell and Boltzmann later created a formula for the probability that a molecule will travel at a given speed, based on the normal distribution or bell curve: the Maxwell-Boltzmann distribution. Boltzmann used kinetic theory to reinterpret thermodynamics, founding statistical mechanics and also the statistical interpretation of entropy.

The Laws of Thermodynamics

0th law: Heat transfer is only possible when fluids are at different temperatures. It is important to note that temperature is a fluid property which measures states, whereas heat is a measure of energy transfer and measures changes. Also note that this is called the 0th law because it logically precedes the 1st law, but was historically recognised later.

1st law: A form of the law of conservation of energy: energy cannot be created or destroyed, only transferred. The change in internal energy of a system (ΔU) is equal to the heat added to the system (Q) minus the work done by the system (W)

∆U=Q-W

Entropy is a measure of the amount of energy unavailable to do work, or the disorder of a system. The change in entropy of a closed system (ΔS) is the amount of heat absorbed (ΔQ) divided by the temperature (T) at the point where the heat transfer took place.

∆S= ∆Q/T

2nd law: Going forward in time, the net entropy (disorder) of a closed system must stay the same or increase. There is a natural tendency towards disorder, because disorder can be achieved in many more ways than order. Note that, in systems which aren’t closed, entropy can decrease (for instance in planet formation) as long as the net entropy of the whole universe increases. Note that this is more a statistical principle than a fundamental law. This is summarised by:

∆S ≥0

3rd law: As temperature approaches absolute zero (0 Kelvin or -273.15 degrees Celsius), the entropy of a system approaches a constant value.

The entropy of a system (S) is equal to Boltzmann’s constant (k = 1.38 x 10-23 JK-1) multiplied by the log of the number of distinct microstates that make up the overall macrostate.

S=k logW

The Consequences of the 2nd law

The 2nd law implies that perpetual motion (100% efficient) machines are impossible, and instead only a maximum efficiency can be reached: the Carnot efficiency. It is also why, in a closed system, heat flows from hot to cold and not the other way around. Note that although refrigerators appear to break this rule as they freeze things to a lower temperature than the air around them, they are not isolated systems. Fridges require input electrical energy to force a coolant liquid to evaporate as it enters the fridge (so the coolant temperature falls so it can extract energy from the fridge), to then compress the coolant as it leaves the fridge (to heat it up so that it’s heat can be released to the room). Finally, the arrow of time arises as a consequence of the 2nd law. The entropy of the universe will increase until it eventually faces a “heat death”, where entropy has reached a maximum value, everything is the same temperature and no work can be done.

Statistical Examples

Why should entropy increase? Probability dictates that, if there are more disordered states than ordered ones, it is more likely for something to be in a disordered state. Returning to our example of the particle falling towards the ground, if a tennis ball (made up of billions of atoms) was used instead of a particle, the time-reversal of this scenario would seem less plausible. This is because, for the tennis ball, there are more microstates of the system; more disordered possibilities. With a single particle, the time-reversed initial conditions are easy to implement, whereas the tennis ball scenario requires the very precise control of billions of atoms to get it to jump upwards. Using S = k logW, we can see that the greater the number of microstates (W), the greater the entropy (S).

Let’s use another example using six playing cards: 2,3,4,J,Q,K. If we split this into two piles with low-value cards (2,3,4) in one and the court cards (J,Q,K) in the other, we have an ordered (low entropy) arrangement. However, if we shuffle both piles together, it becomes more disordered (higher entropy), for example Q42J3K. Relating this to Boltzmann’s formula, there are 36 ways to arrange the two piles: 3! = 6 for each pile, so 6x6 = 36 for both. However, there are 720 ways (6! = 1x2x3x4x5x6) to arrange all 6 cards in order. The type of ordering (2 piles or 1) is analogous to the macrostate of the system, whilst the exact order is the microstate. The more ordered macrostate has 36 microstates, whereas the less ordered one has 720. Using logarithms: log36 = 3.58, but log720 = 6.58. So, the more microstates there are, the less ordered (the higher entropy) the macrostate.

Now considering the whole pack of cards, these effects become more obvious. If we split 52 cards into red and black. There are (26!)2 = 1.63x1053 possible arrangements. Shuffling both piles gives us 52! = 8.07x1067 microstates. The logarithms are 122.52 and 156.36 respectively, and again the second is larger.

However, although extremely unlikely, it is still theoretically possible that a shuffled pile of cards could become ordered – there is nothing in the laws of physics which prevents this.

Entropy and the Big Bang

If entropy increases, this suggests that entropy was initially low. But from the viewpoint of entropy, ordered states are rare. This makes the Big Bang the ultimate low-entropy, high-order event in need of explanation.

Interestingly, the reasoning used to argue that entropy increases towards the future works the same when applied towards the past. Not only is there a high probability of high entropy in the future, we also expect entropy to be high in the past. This would suggest that the universe exists as a statistical fluctuation – a low-entropy fluctuation within a high-entropy background. Given enough time, a statistical fluctuation to a state of low entropy would be inevitable.

However, this idea is not very widely accepted. Sir Arthur Eddington dismissed this idea using the fact that whilst low-entropy fluctuations are rare, large fluctuations are ever rarer. So, either the universe is a random fluctuation – which then resulted in intelligent humans developing, all before entropy could reach a maximum again – or this very second is a statistical fluctuation. The more likely of these two possibilities is the latter, which would make us “Boltzmann Brains” that exist for long enough to perceive our own existence before disappearing again.

Many people explain the existence of the universe by inflation. From Hubble’s discovery that space is expanding came the idea that the universe expanded from a singularity – the main concept of the Big Bang theory. But this still doesn’t explain the initial low-entropy state of the singularity.

Maybe we should just accept a low-entropy beginning as a brute fact... Or maybe this low-entropy state is in need of a different explanation. Some scientists contemplate a time before the Big Bang, with quantum fluctuations producing new universes expanding out in both temporal directions. When you next open your fridge to get an egg, you could ask yourself why it exists in such an ordered state. How did the egg come to exist? The answer is that it is not a closed system: a chicken created the ordered egg, whilst the second law of thermodynamics was not violated as net entropy still increased. Extending this analogy to the universe, could there be some “universal chicken” or event before the Big Bang responsible for the low-entropy beginning and the arrow of time? The answer: we don’t know!

References

The Fabric of the Cosmos, Brian Greene
17 Equations that Changed the World, Ian Stewart
https://en.wikipedia.org/wiki/Laws_of_thermodynamics
http://www.scientificamerican.com/article/2-futures-can-explain-time-s-mysterious-past/
http://www.exactlywhatistime.com/the-arrow-of-time/
http://preposterousuniverse.com/eternitytohere/faq.html
https://www.youtube.com/watch?v=rEr-t17m2Fo

The Schrödinger Equation

2015-09-15T07:00:00.000+01:00

By Caitlin French

Introduction to Quantum Mechanics

Quantum Mechanics is the mathematical description of the structure and interactions of particles on atomic and subatomic scales.

It developed from Planck’s suggestion that energy is made up of individual units (quanta), Einstein’s photoelectric effect, de Broglie’s proposal of wave-particle duality of both energy and matter and Heisenberg’s uncertainty principle.

There has been much philosophical debate about the different interpretations of quantum mechanics, ranging from Bohr’s Copenhagen interpretation (criticised using the Schrödinger’s cat thought experiment) to the Many Worlds theory. Different formulations of quantum mechanics came about, including Heisenberg’s matrix mechanics and Feynman’s sum over histories or path integral approach.

Quantum mechanical processes are extremely important, having applications in computers and also in keeping us alive, as quantum tunneling allows nuclear fusion in the Sun.

Postulates of Quantum Mechanics

1. Particles can behave as waves (wave-particle duality), and their state is described by a wavefunction, Ψ(x). It can be solved using the Schrödinger equation.

2. The wavefunction is related to the probability density of the particle’s position. The area under the line gives the probability.

Probability density = P(x) = |Ψn|2
Probability = ∫|Ψn|2.dx = ∫P(x).dx = 1 (normalisation)

Normalisation is when we say the total probability of a particle being between two points is 1.
In other words, we are certain that the particle is somewhere in that region.

3. Observable classical quantities A correspond with quantum mechanical linear operators Â:

ÂΨ = aΨ

4. Operators have hats on them, and are often differential operators, like d²/dx². Here, an operator (Â) acts on the wavefunction/eigenfunction (Ψ). This returns the same Ψ, but multiplied by a scalar constant/eigenvalue (a), which is the physical value for the variable.

For instance:

Ĥ is the Hamiltonian operator. The eigenequation for energy is: ĤΨ(x) = EΨ, where E (the eigenvalue) is the observable energy of the wavefunction.

Energy

There are two main types of energy: kinetic and potential. We see this in a simple pendulum. The total energy in this closed system (ignoring air resistance) is constant, being the sum of (gravitational) potential energy and kinetic energy.

E = T(x) + V(x)

where:

E is total energy

T is kinetic energy

V is potential energy

Take a particle confined in a box. When confined, the particle may have some potential energy (for instance Coulomb energy, which is the attractive energy of the electron to a proton, for example) and some kinetic energy of confinement.

Heisenberg’s Uncertainty Principle

Heisenberg’s Uncertainty Principle states that we cannot simultaneously know the exact position (x) and exact momentum (p) of a particle. The smaller the uncertainty (or more the precise the measurement) of position, the higher the uncertainty (or less precise the measurement) of momentum, and vice versa.

When a particle is confined to a small space, there is a small uncertainty in position ∆x, meaning for the Heisenberg Uncertainty Principle to hold, ∆p (uncertainty in momentum) must increase. If momentum increases (∆p ≈ p), then velocity increases (as p = mv, where p is momentum, m is mass and v is velocity), so kinetic energy increases. This is the kinetic energy of confinement.

Schrödinger Equation

Time-independent Schrödinger Equation:

Note that we take the hat off the V for simplicity of writing and that, again, ћ = h/2π.

(-ћ²/2m)(d²Ψ/dx²) is the kinetic energy.

If we rearrange this in the form of an eigenequation, with an operator on the left and an eigenvalue on the right, we get:

The Infinite Potential Well

We confine our particle in a box of width a between 0 and a on the x-axis. The y-axis shows the potential energy (V). Fitting a wavefunction into a box is like making a standing wave on some string.

x < 0 V = infinite

0 < x < a V = 0

x > a V = infinite

Inside the well, V = 0, so Schrödinger’s equation becomes:

where k = √(2mE)/ћ

Differentiating the function twice needs to return the same function back again, multiplied by –k2. So we can solve this second order differential equation to get Ψ. (Note that this is the same differential equation as for simple harmonic motion.)

In order for this to be an eigenequation, we need solutions where the second derivative returns Ψ multiplied by a constant eigenvalue.

We then find that a solution which works is:

Ψ ∝ sin(kx) and Ψ ∝ cos(kx)
So the general solution is Ψ = Asin(kx) + Bcos(kx) where A and B are constants

Checking this:

Ψ = Asin(kx)

dΨ/dx = Ak cos(kx)

d²Ψ/dx² = - Ak² sin(kx) = - k² Ψ ✓

Ψ = Bcos(kx)

dΨ/dx = - Bk sin(kx)

d²Ψ/dx² = -Bk² cos(kx) = -k² Ψ ✓

In the same way you use boundary conditions to find the +c when you integrate, we now set boundary conditions to find our solution.

From the diagram, Ψ = 0 at x = 0 and x = a. In the same way you would fit standing waves on a string:

Let’s first look at when x = 0

We can discard the cosine solution as cos(kx) becomes cos(0) = 1 (and we want it to be 0)

On the other hand, sin(0) = 0, which is correct. That is why the diagram shows a sine curve.

Now look at when x = a

To meet our boundary conditions, we must have sin(ka) = 0. This will only be true for certain values of k, where ka is a multiple of π (π radians = 180^o)

So kn = nπ/a for n=1,2,3…

This is quantisation! There are only certain, discrete values of kn (wavevectors) and E_n (energy levels) for which a standing wave will fit in the box.

Therefore, the width a must be an integer or half integer number of wavelengths. If we rearrange:

a = nπ/k

When n = 2 (Ψ2), 1 full wave fits in the box with wavelength λ, so a = λ and

kλ = 2π

So k = 2π/λ is the wave vector, kx is the angle and θ = kx = 2πx/λ is the phase.

Now the probability of finding the particle in a certain position will be:

P(x) = |Ψ(x)|2

which looks like:

Note that for a well centred at the origin with edges at –a/2 and a/2, the wavefunction of the particle is the cosine solution.

So what are the energies of a particle of mass m in an infinite potential well?

This shows that energy is also quantised and its magnitude is determined by a quantum number n.

We can calculate the energy levels by substituting in for a (the width of the box) and n (the number of the energy level).

If we now normalise the wavefunction (set the total probability of the particle being in the box equal to 1), we can find the constant A_n in our solution, which we will find is the square root of 2/a. This value for A_n is also the constant in front of the cosine solution, if we instead integrate the square of the cosine wavefunction between –a/2 and a/2.

So the quantum wavefunctions for a particle confined to a box of length a have the form:

Ψ_n(x) = √(2/a) sin(nπx/a) for n=1,2,3…

The Finite Potential Well

This is a finite well of depth V0 and width 2a.

Classically, if the energy of the particle, E, was less than V0 (the height of the well), then the particle would not be able to escape. However, in quantum mechanics, the particle can escape even if E < V0.

Rearranging the Schrödinger equation:

In region B, V₀ = 0. So, as before:

with solutions Ψ_B ∝ sin(kx) and Ψ_B ∝ cos(kx)

In regions A and C, V = V₀. So:

In regions A and C, E < V₀, so these are classically forbidden. If the total energy E is less than the potential energy V₀, then the particle would have negative kinetic energy T.

The e means it is no longer oscillating but is exponential decay (as shown in the above diagrams in the regions outside the well).

When the solution inside the well is an even function like cos (for Ψ₁ or Ψ₃), we know the constant A = C. When the solution inside the well is an odd function like sin (for Ψ₂), A = -C

As the wavefunction extends to areas outside the well, there is a small probability that the particle could be found outside the well.

Quantum Tunneling

So what does this mean?

Imagine a ball on a hill. It does not have enough energy to roll over the top of the hill to the other side. This is the classical view. However, in quantum mechanics, the ball (if this was on a much smaller scale) would be able to tunnel through to the other side, “borrowing” energy before quickly paying it back. This is quantum tunneling!

References

A Cavendish Quantum Mechanics Primer, M. Warner & A.C.H. Cheung

The New Quantum Universe, Tony Hey and Patrick Walters

http://abyss.uoregon.edu/~js/ast123/lectures/lec06.html

Third bailout for Greece - at what price?

2015-07-16T21:43:00.000+01:00

The land of olives. The country that gave us the Olympic Games. The birthplace of democracy...and now the sick man of Europe. We’ve all been watching the Greek tragedy unfold over the past few months. What an economic nightmare! My question here is; will the latest bailout really help the Greek people?

There are some positive aspects of the latest bailout. Greece could be privy to €50 billion from privatisation, which would go towards paying off debt and helping the Greek economy recover. The downside, though, is that the money would come from the selling off of some of the Greek government’s assets. Yes, the money is much-needed in the short-term but this measure means that some wealth is lost. In the long run the government may be losing a source of revenue.

In order to even have a third bailout seriously considered the Greek government had to pass a severe reforms bill in Parliament yesterday. This included harsh economic policies such as increasing VAT, other tax rises, as well as reducing pensions; the latter would be partly achieved by raising the pension age to 67. Unpalatable prospects for anyone but more so for the Greeks, who have been used to retirement at 62 and a lax tax enforcement system. Economically, labour would become more demotivated as less salary could be taken home. This could result in lower tax revenue for the government and reduced economic growth. Moreover, Greece may be subject to further spending cuts.

To further rub salt in the wound these reforms were passed through by a grand majority of 229 to 64. This is despite the Greek people voting against similar measures just one week previously in their referendum. Greece, the birthplace of democracy? Indeed. In fact, 32 members of the ruling Syriza party voted NO; an uncooperative government is neither a stable nor an efficient one. Political instability is a further turn-off to potential investors.

My verdict is that even with up to €86 billion coming in Greece will not be able to truly prosper. I accept that it will deal with the immediate issues of upcoming payments to their creditors. Following the parliamentary vote the European Central Bank (ECB) agreed to deliver urgent liquidity assistance to Greece’s banks. The banks may finally be able to reopen.

Yet in the long run Greeks will have to live under a huge burden of debt with a substantial amount of revenue going towards repayments. Former finance minister Yanis Varoufakis likened the current situation to the Treaty of Versailles. That, quite ironically, was when Germany was subject to huge reparations after the First World War – and after the Second World War still had more payments outstanding. Eventually some of Germany’s debt was written off and this allowed more of the government’s money to go on current and capital spending, thus boosting economic growth. This may have been one of the reasons why the International Monetary Fund (IMF) suggested some debt relief for Greece. However the idea was turned down by the other creditors; the European Commission and the ECB.

Was this the right move, considering that distinct parallels can be struck with post WW1 Germany? The Nazis rose to power in the Great Depression that followed the Wall Street Crash of 1929. Greece is struggling in the aftermath of the global financial crisis of 2008-9. While there may not yet be an extremist party even close to being in charge it must be remembered that the seeds of extremism have been successfully sown in similar circumstances in the past.

Antimatter and CERN's Large Hadron Collider

2015-03-25T11:17:00.000+00:00

If you watch a lot of the popular sitcom, 'The Big Bang Theory' or if you're a big science nerd like me, you've probably heard about these terms, but failed to understand. Let's see if I can be of any help :)

So, lets start with the most popular physics equation, E=mc².It basically says that mass is concentrated energy and mass and energy are interchangeable, kind of like two currencies but with a huge exchange rate. 90 trillion joules of energy is equivalent to 1g of standard mass. If we concentrate huge amounts of energy in a tiny space, new particles will come into existence. If we look closer we see that these particles always come in pairs, like twins. That's because particles( each and every one of them) always have their counterpart an 'antiparticle' and these are always produced in exactly equal amounts (1:1 ratio). This might sound like science fiction, but it's actually true and is the daily life at particle accelerators, CERN LHC (We'll discuss that soon).

In the collisions between two protons between CERN's LHC, billions of particles and antiparticles are produced every second. Consider for example the electron. It has a very small mass ( in physics we call it infinitely small) and a negative charge. It's anti particle, the positron has exactly the same mass but an opposite positive charge. But apart from the opposite charges, both particles are identical and perfectly stable. And the same is true for the heavy cousins, the proton and the anti-proton. Therefore, scientists are convinced that a world made of antimatter would look, feel and smell just like our world. In this anti-world, we might find anti-water, anti-gold, anti-food and maybe anti-you & me!

Now imagine a matter and an antimatter particle are brought together. These two apparently if are in contact, would completely disappear into a big flash of energy, equivalent to an atomic bomb! Because combining matter and antimatter would create so much energy that it can run future spaceships like in Star Wars, cause energy content of antimatter is a billion times more than the conventional fuel. The energy of 1g of antimatter would be enough to put a rocket in our orbit. So why not use antimatter in energy production? Well, antimatter isn't just sitting around. We have to make antimatter before we can combust it.

And creating antimatter takes a billion times more energy to make antimatter than you get back. So some of us might say that why don't we just dig some antimatter from the space? A few decades ago, many scientists believed that this might be possible. But today, observations have shown that there is no significant amounts of antimatter out there, which is weird cause it was already established that there should be equal amounts of matter and antimatter. Now that is a real mystery. To understand this better, let us go back to the Big Bang.

The Big Bang suggests that the universe was created in an instant as huge amounts of energy transformed into mass, and our initial universe contained equal amounts of matter and antimatter. But just a second latter, most of the matter and all of the antimatter had destroyed one another producing enormous amounts of energy in forms of radiation, that can be still observed today. Now you might say,"Where the hell did all that antimatter disappear and only matter was left? It seems that we were somehow lucky that there existed a tiny amount of asymmetry between few of the matter and antimatter particles which when collided, matter won and was left. Hadn't been so, there would no matter at all, and obviously you wouldn't be able to read this right now cause you don't exist. But what causes this asymmetry? This is one of the biggest mysteries of the universe ( Baryogenesis- http://en.wikipedia.org/wiki/Baryogenesis) for which the the CERN LHC was created.

The CERN LHC

CERN, or the Conseil Européen pour la Recherche Nucléaire is actually the worlds largest physics laboratory located at Geneva, Switzerland. The 'LHC' stands for the Large Hadron Collider. It basically a particle accelerator, and serves as Mecca to all the physicists around the world. The whole setup is actually of a circle, 27 kilometers in circumference! What it does is pretty neat.

Hydrogen atoms from a gas cylinder are fed at a precisely controlled rate into the source chamber of the LHC, from where their electrons are stripped off leaving only the protons, or the hydrogen nuclei. These protons are then accelerated using an electric field. This acceleration from the external electric field has caused the protons to attain the speed of a rocket. The packet of protons then slowly reach 1/3rd the speed of light and enters a booster which is another small part-circle(157 m in circumference) of the LHC circle which increases the speed of the photons to 91.6 % of the speed of light and squeezes them closer together , using powerful magnets and electric fields. From there, it enters into another part-circle of the LHC called the proton synchrotron. Let us follow two such protons. Proton is 627m in circumference and they circulate for 1.2 seconds, reaching about 99.9% of the velocity of light. It's here that a point of transition is reached (this is crucial), a point where the energy added to the protons by the electric field cannot increase the velocity of the protons, cause they are already reaching the limiting speed of light(which is maximum). Instead the added energy increases the mass of the protons. In short, the protons can't go faster so they get heavier. At this point, the energy of each proton is measured as 'electronVolts' and is 25 giga eV. The protons now become 25 times heavier then they are at rest.

LHC. Notice the small Proton Synchroton(PS)

The protons are now transferred to the main orbit of the Large Hadron Collider, circumference of 27 kilometers. There are two vacuum pipes in the LHC, containing the proton beams travelling in opposite directions, clockwise and anticlockwise. For half an hour, the PS keeps transferring protons in the LHC. The velocity of the protons is now so high, that it goes round the 27 km circumference, over 11,000 times per second, becoming 7000 times heavier than at rest. The magnetic force needed to bend the protons in the right circular direction of the orbit is so high that the entire LHC is kept colder than the outer space so that the elector magnets present inside the circular tubes become superconducting.

Now the protons are made to collide. The collisions emit matter and antimatter particles similar to that of the big bang and the asymmetry is studied.

Deflation: What's in Store?

2015-02-15T19:56:00.001+00:00

Everyone likes to treat themselves to a little something now and again and one such way to do this is with some chocolate. Gone are the days when you could buy a Freddo bar with your spare change of 10p since its current price is now a huge (well, relatively) 20p.

This price rise, not sudden I hasten to add, is inflation in action. Inflation is a persistent increase in the level of prices and we measure what level inflation is at by comparing prices to the same month the year before. And not just any old prices are measured either, the Office of National Statistics has its own ‘basket of goods’ of about 600 different goods and services which are used for this comparison.

The target rate of inflation set by the Bank of England currently stands at 2.0%. This is also the same for many other central banks. This particular rate ensures that there is just enough economic growth and thus paves the way towards a ‘Goldilocks economy’.

However not all inflation is positive. We can also get deflation which is negative inflation. This has already set in, in the Eurozone and is a threat looming on the horizon for the UK.

Just to clarify; low inflation is not the same as deflation!

What causes deflation?

Deflation is caused by the supply of goods being higher than demand. We currently have a glut of crude oil in the markets. As a result the price of this commodity is very low. This then links to our energy bills being lower and it's also cheaper to fill up your car with petrol at the pump. This is also know as a positive supply shock as markets are able to provide goods to consumers at lower prices.

A price war is taking place between Britain’s major supermarkets as they compete for customers, slashing prices in order to look more attractive. Falling food prices have also contributed to inflation becoming lower and reaching its current rate of 0.5%.

The Pros & the Cons

The effect of deflation on consumers is one very similar to a tax cut. However this is only really the case in the short term. Once consumer prices start falling it is likely that wages will follow suit, ending that feel-good feeling. This feeling comes from groceries and fuel costing proportionately less which then leaves more disposable income to spend on other things. People feel richer.

Deflation, by its very definition, means that prices are falling. A person might hold off on buying an elastic/luxury good e.g. a new television right now, if they feel that it’ll be cheaper fairly soon. Durable goods e.g. cars and computers are also particularly affected because they'll last for a long time. Consumers have this future expectation that prices will continue to fall so they put off spending.

People are also more reluctant to spend because low inflation increases the real burden of debts i.e. the cost of repayments gets higher. This is because the amount that is needed to be paid is fixed (regardless of the rate of inflation) whereas the earnings of the those in debt may actually decrease.

The main aim of firms is to maximise profits. Companies will consider cutting prices and maybe even make some workers redundant just to ensure that they still get their profits. This cutting of prices only worsens deflation further.

What can we do about it?

Right now in the UK we are experiencing very low inflation, the lowest levels seen in decades. The possibility of sinking into deflation, i.e. negative rates of inflation, is very real.

Normally interest rates are used to influence consumer spending - the lower the interest rate, the greater the incentive to spend.

However this may not always be such a good solution. The nominal rate of interest cannot go below zero, thus rendering this kind of monetary policy ineffective. If interest rates cannot be reduced further AND inflation is low then demand will further weaken. This dilemma is also known as the deflation trap. Also, if there is low consumer confidence people may anyway be more inclined to save rather than spend, due to the negative future expectations, regardless of the interest rate.

Another method which can be used to combat deflation is by using quantitative easing. This has recently been implemented by Mario Draghi (President of the European Central Bank) in order to deal with the Eurozone deflation. This money is used to buy up government bonds from the 19 Eurozone nations. Interest rates are already quite low in the UK at 0.5% and it has been at this level since March 2009.

Hence a better policy for the UK might be quantitative easing. This is a policy that has been implemented in the UK long before it began in the Eurozone. There have been positive reports of QE being ‘economically significant’; £200 billion worth of bonds bought between March and November 2009 led to an increase in economic output from 1.5 – 2%.

EDIT: 20/02/15

The rate of inflation in the UK is now 0.3%, one of the lowest levels it has ever been at. After reading this week's issue of the Economist I felt there were some further key points which would be useful to add.

Risk of further deflation is also present, coming from a large (economic) slowdown in China etc (Monetary) policymakers have hardly any room for manoeuvre i.e. in many countries the interest rate cannot be reduced further.

It is also suggested that it is best to set a completely new target - aiming for a particular level of nominal GDP. GDP is the total value of spending in an economy and the 'nominal' part means that it is adjusted for inflation. Therefore we would not be so affected by price shocks.

Molecular Inactivation and the role of PTHrP

2014-12-13T15:40:00.000+00:00

by Maharshi Chakravortee

Ever wondered why male Homo sapiens have nipples on their chest? Are they vestigial like the appendix, the wisdom teeth or body hair? Or they’re just present for weird piercings or to taunt hungry infants? Well, the answer is quite interesting. Turns out, human males have nipples because at some point of the embryonic stage, we were all girls. Yeah, you heard me tough guy!

Unlike the other vestigial organs, nipples aren’t those organs that are just left overs from any evolutionary event where male humans used to breast feed, at any point in the course of evolution male humans did not have mammary glands to do so. So the evidential fact that male humans have nipples is kind of flattering. With that in mind, male mice are the only mammals that do not have nipples, so one might think they’re probably tougher than us guys! Thus the question still remains, why do males have them?

The human gestation period goes from zygote, to embryo, to foetus and then to a baby, which is either a male or a female. As the sex of a baby is determined whether one chromosome from the dad is either an X or a Y, what’s interesting to know that all human embryo’s start off with a female blueprint, i.e. presuming to have two X chromosomes. (Yes, we were all girls at one point of our life). Up until the sex is determined (activation of the Y chromosome), the process of a typical female embryo development is already started. Within the first several weeks, pair of ‘milk ridges’ or milk lines form on every embryo, either male or a female, which serves as the foundational mammary tissue for the development of nipples and mammary organs. After the sex is determined, i.e. one of the sex chromosomes becomes a Y, a protein called PHTrP is synthesised which causes the embryo to develop male hormone receptors.

Thus, those male hormones that bind to the PTHrP produced receptors effectively destroy the mammary tissues, but interestingly fail to disintegrate the already formed nipples. This is because the PTHrP synthesis in human embryonic stage is actually quite late, thus giving male and females similar internal structures in the breast region. However one might note that male mice do not have nipples, due to their PTHrP signals are quite fast, according to a 1999 Yale University Research. Thus it could be said that male nipples are just genetic by-products of female breasts.

In the sex determination process, two X chromosomes make a female, and an X and a Y make a male. What’s of vital importance is that since males have different chromosomes, both can remain active for the rest of the life. However females have a pair of similar chromosomes, and one of them needs to be inactivated in order for proper development to occur.

When a female embryo is in a 100-celled blastocyst stage, the two chromosomes in every cell undergo a tiny molecular battle, which silences any one of the X chromosomes, either from mum or from dad. This is done by packing one of two chromosomes in such a way that it cannot be read. This un-readable from of DNA is called a Barr body. Extreme close packing of DNA by histone protein tails and addition of methyl groups, which makes it impossible for RNA polymerase to transcribe it, thus not coding for any protein makes that Barr body structure.

It is interesting to know that in that 100-celled female embryo, it is of random chance that which chromosome is silenced, either the one from the mum, or the one from the dad. Thus this 100-celled embryo ends up with a mixture of active X chromosomes, and from this point forward as these cells divide, they maintain the active X chromosome that they had inside. Thus the cells with dads active X chromosomes further give rise to the similar type of cells with dads active X chromosomes, and same with the cells having active X chromosomes from the mom. And this continues into adulthood.

This can be very nicely seen in Calico cats, that’s because the gene for coat color is on the X chromosome. Just by looking at the pattern of their different colored spots, it can be seen where the mums or dads X chromosome has been inactivated. And this also shows that only female cats can be Calico cats, because only female cats can inherit two X chromosomes, thus having two color genes.

Source(s):

1. http://en.wikipedia.org/wiki/Barr_body
2. http://en.wikipedia.org/wiki/XY_sex-determination_system#Humans
3. http://health.howstuffworks.com/human-body/parts/why-men-have-nipples.htm
4. http://www.livescience.com/21513-vestigial-organs.html
5. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC408525/
6. http://en.wikipedia.org/wiki/Parathyroid_hormone-related_protein
7. http://en.wikipedia.org/wiki/Y_chromosome
8. http://www.bio.miami.edu/dana/dox/calico.html

Thoughts on the Royal Economic Society Annual Public Lecture 2014

2014-12-04T14:26:00.002+00:00

By Viva Avasthi

Last week I attended the RES Awards Evening and Annual Public Lecture at the Royal Institution in London. As you may be aware, my essay for the RES Young Economist of the Year competition was awarded joint third place. Below you can see some pictures from the evening. I end this post with some thoughts on Stephanie's lecture and the event as a whole.

Receiving my award from Sir Charlie Bean.
He is the President of the RES and was one of the judges.

With Stephanie Flanders, who was another judge, and
who I believe is an excellent role model for young women.
"Hooray for women in economics!"

After an interesting discussion with Sir Charlie Bean on reforms
to the undergraduate economics syllabus, the economic situation in Japan,
and how the most important recent contribution of economics has arguably
been the rapid development of the Asian and sub-Saharan African countries.

Stephanie gave a fascinating lecture entitled
“What journalists should know about economists – and vice versa”.

Stephanie's lecture and the slides from her presentation can be accessed from here and I highly recommend you take a look. She gave an engaging and coherent lecture and answered the audience's questions admirably.

Her talk particularly resonated with me because it covered many of the same bases as my essays for the RES and Cambridge Marshall Economics Society had done. Both she (in parts of her lecture) and I looked at whether the advanced economies had entered a new downwards trend or whether this stagnation we are seeing is just part of a cycle, and at the problems with economic forecasting.

I was very interested in whether in her role at JP Morgan she could see any promising developments which might significantly improve economic forecasting: developments such as nowcasting, for example. I asked her this question during the Q&A session following her lecture. Rather than read my paraphrased version of her answer, you can hear her exact response from 66:40 to 68:40 in the video of the lecture. In my essay on economic forecasting I acknowledged that it is only the minority of economists who make forecasts, and that forecasting by its nature is immensely difficult and so forecasts should never be taken too seriously. I completely agreed, therefore, with Stephanie's comment that the role of economics shouldn't be to allow economists to make forecasts but should be to do with illuminating why changes in economies occur. However, I would have really liked it if she had highlighted any other new techniques (besides nowcasting, that is) being developed to improve forecasting. Perhaps she did not name any because there haven't been any substantial developments yet? If you are aware of any important developments, please do share them with me in the comments section below.

Overall, the evening was a wonderful one. It was great fun meeting the other essay competition winners, listening to Stephanie Flanders' lecture and discussing topics of interest with Sir Charlie Bean. It was also lovely having a chance encounter at the event with Mag Paczocha, an author on this blog, whom I had never met in person before!

John Nash: Game Theory and the Equilibrium

2014-11-02T13:54:00.002+00:00

By Calvin Price

In 1950, John Forbes Nash Jr. earned a doctorate for his work on game theory. His dissertation focused on what players do in non-cooperative strategic games. Since his original work, game theory has been hailed as one of the greatest intellectual advances in economics and has had applications on a vast range of fields. It was truly a worthy cause for Nash to win the Nobel Prize in 1994.

Game theory can be summed up in a disarmingly simple question: what will the other guy do? It focuses on what a person will do when confronted with the move of another person. This is called game theory because that’s where it can be most obviously applied. While it’s unnecessary in games such as rock-paper-scissors or tic-tac-toe, game theory becomes much more useful for something like chess. This has clear implications as a mental construct for thinking about complex games, but it otherwise seems like an exercise in mathematical thinking. What about real-life situations?

The most famous of game theory applications is called the prisoners’ dilemma:

Two men have been arrested. The police have them on minor charges, but suspect a larger crime. If they get the testimony from one of the men, he will be freed and the other will be locked up for 10 years. If neither man betrays the other, they both get 1 year imprisonment. If both men talk, then they each get 5 years.

So, what do you do?

Beyond incarceration, game theory applies to all aspects of non-cooperative interactions for n-people. International relations are guided by game theory, so are business strategies in competitive markets and traffic patterns (where can I go to avoid traffic? Should I take the subway?). Besides providing a structure to formulate your own strategies, game theory gives an insight into an opponent’s options and creates predictability, one of the most important things in any market.

Besides contributing to the overall field of knowledge, Nash demonstrated a special case of game theory known as the Nash Equilibrium. The Nash Equilibrium is a situation in which all parties have perfect information about the situation and do not benefit from changing their strategy. There is a Nash Equilibrium is X is making the best decision she can, knowing of Y’s position, and Y is making the best decision he can, knowing of X’s position.

For example, in the Prisoners’ Dilemma, a Nash Equilibrium would happen if both prisoners knew they were getting the same deal:

Since each prisoner has perfect information about the situation, they’ll both end up in a situation that is not optimal. This is what makes the Prisoners’ Dilemma a classic equilibrium problem: both have an incentive to cooperate. In other words, the outcome of the situation depends on the people involved.

The issue with equilibriums is that perfect knowledge about a situation almost never exists. In tic-tac-toe, one can be pretty certain about what the other player will do, but what about chess? Some moves are better than others and not everyone sees the best move or strategy. The matter becomes even more complicated when businesses, markets, or nations are involved. The knowledge available to people in those situations is anything but perfect.

Nash was a genius who made many significant contributions to game theory and mathematics. The Nash equilibrium is an invaluable tool for estimating the outcomes of situations with mostly perfect knowledge. Traffic conditions, for example are predictable and are a case of a Nash Equilibrium, even though there is never perfect knowledge about the exact conditions. For all his efforts, human error is beyond modeling.

A Golden Opportunity

2014-10-31T11:11:00.001+00:00

By Daniel Longenecker

Market analysts would love know the future. The problem is—they can’t. So how can a prospective investor know what to expect in the coming years? I believe that investors should investigate proven market factors like supply and demand. In the gold market, several factors have surfaced that indicate shifts in the supply curve and demand curve for gold. Market forces of supply and demand can be trusted to accurately predict prices in a free enterprise system. Thus, decreases in gold supply, increases in gold demand, and the history of demand spikes all suggest that the price of the precious metal will rise in coming years.

How could gold supply decrease when gold mines operate around the clock? The answer lies in the decreasing available supply. China recently has bought up billions of dollars worth of gold from the west. One estimate states that China has increased its gold holdings by more than 1,600 metric tons in the past five years, a change worth more than 77 billion dollars [1]. Instead of allowing gold price to rise, gold ETFs (commercial commodity hoards, often comprised of natural resources, which trade ownership similarly to corporate stocks) have exported heaps of gold to the Far East, to meet their demand. But since gold is a scarce good, the ETFs are depleting irreversibly [2]. Thus, this supply shifter, the move from commercial ownership of gold to governmental ownership of gold, indicates that available supply is decreasing dramatically, and when supply decreases, price rises (Figure 1).

Figure 1. Supply Decrease Curve [3]

Secondly, an increase in demand will increase the price as well. With the massive United States government debt and the U.S. government’s credit rating demotion [4], trust in the dollar has decreased. James Turk writes, “An erosion of trust means that people are less willing to accept the counterparty risk that comes with financial assets … People as a consequence move their wealth into tangible forms of money, which of course means gold.” [5] His statements make sense, since people are most likely to trust a five thousand year old, tangible asset with trusted scarcity. Thus, the diminishing trust in the dollar will increase the demand for gold, and when demand increases, price rises (Figure 2).

Figure 2. Demand Increase Curve [6]

Lastly, history states that financial panic attacks tend to drive up precious metal prices. Even after the inevitable price spike, like shown here in 1980, the price of the precious metal tends to stay significantly higher than from before the spike (Figure 3).

Figure 3. Price of Gold from 1974-2004 [7]

Although no one can tell if a price escalation will occur in the near future, several events could tip off a panic attack. If some event caused some people to distrust the credit rating of the U.S. government, it could easily result in a run on the government, which would spiral out of control. Another possibility of a panic attack could occur if an ETF or commercial gold holder defaulted on or could not fulfill a moderate sized gold order. Whether or not the ETF had the gold, people would worry that they might not be able to obtain gold. This would produce the same type of price-spiking panic attack.

Even though humans have sought after gold for thousands of years, indications show that gold might become even more precious in the coming years. Decreased available supply due to China’s gold-hoarding policies may increase the gold price. Likewise, gold price might rise due to enlarged demand. And lastly, the gold holder’s dream: a financial panic attack could shoot gold price through the roof. All in all, investing in gold now seems like a golden opportunity!

References:

[1] http://www.zerohedge.com/news/2014-01-19/shanghai-daily-china-expected-announce-it-has-more-doubled-its-gold-reserves

[2] http://www.wallstreetdaily.com/2014/06/11/gold-demand-rising/

[3] http://2012books.lardbucket.org/books/economics-principles-v1.0/s07-applications-of-demand-and-sup.html

[4] http://www.foxnews.com/politics/2011/08/05/us-official-says-sp-reconsidering-us-credit-downgrade/

[5] http://www.zerohedge.com/news/2014-02-15/james-turk-erosion-trust-will-drive-gold-higher

[6] http://2012books.lardbucket.org/books/economics-principles-v1.0/s06-demand-and-supply.html

[7] http://www.finfacts.ie/Private/curency/goldmarketprice.htm

Pareto Optimal and Perfectly Disgusting

2014-10-30T23:28:00.000+00:00

By Daniel Gurevich

One of the fundamental measures of efficiency in economics is Pareto efficiency (or Pareto optimality). A society is called Pareto efficient if resources have been allocated in such a way that it is impossible to redistribute them so that at least one person is better off and nobody is worse off. In other words, Pareto efficiency implies that any “improvement” requires a value judgment. One could argue that any Pareto efficient distribution could be considered optimal by some definition.

In 1951, Nobel Prize-winning economists Kenneth Arrow and Gerard Debreu published a mathematical proof that a perfectly competitive free market results in Pareto efficiency in the long run. So there is proof that free markets really do work! But not so fast – according to 1998 Nobel Prize winner Amartya Sen, Pareto efficiency is not all it is chalked up to be. In his 1970 magnum opus, 'Collective Choice and Social Welfare', Sen writes, “An economy can be optimal in this sense even when some people are rolling in luxury and others are near starvation as long as the starvers cannot be made better off without cutting into the pleasures of the rich. . . . In short, a society or an economy can be Pareto-optimal and still be perfectly disgusting.” Sen asserts that freedom and equality are far more important than Pareto efficiency, and he is right.

Consider Qatar. With the world’s highest GDP per capita (over $100,000), an official unemployment rate of 0.1%, and no residents below the poverty line, it could pass for a Pareto efficient paradise. Pareto efficient it might be, but a paradise Qatar is not. The restrictions on freedom in Qatar, especially for non-citizens, are appalling. According to the United States Department of State’s Trafficking in Persons Report (TIP) for 2014, immigrants who come seeking unskilled work live in conditions of effective slavery:

“Approximately 1.2 million men and women . . . voluntarily migrate to Qatar to work as low- and semi-skilled workers . . . but many subsequently face forced labor . . . Instances of delayed or nonpayment of salaries are a leading driver of forced labor, including debt bondage, in Qatar. Many migrant workers also face denial of exit permits, threats of deportation, physical or financial harm, physical, mental, and sexual abuse, hazardous working conditions, and squalid living accommodations . . . 86 to 90 percent of expatriate workers’ passports are [illegally] in their employers’ possession.”

But, the report continues, “the government has yet to take increased action to investigate, prosecute, and punish trafficking offenses for forced labor and forced prostitution.” It is not especially surprising that Qatar has done next to nothing to improve the conditions of its migrant workers or reduce inequality between natives and expatriates; that would mean sacrificing its utopian economic status. Hence the exploitation of non-Qataris, who comprise 94% of the country’s labor force, continues.

Of course, unbridled capitalism rarely leads to such an economically successful but perfectly disgusting situation as in Qatar. However, we must always make sure that our focus on prosperity does not interfere with basic human rights. Economists may mostly talk about maximizing growth or keeping prices stable, but we should never forget that the most important goal of economics is to help people, not help the economy for its own sake.

The Old Lady of Threadneedle Street

2014-10-22T21:46:00.000+01:00

By Deepa Mathew

She is comfortable in her position in Threadneedle Street, having been there since 1734. Walking up from the depths of Bank Underground Station one quickly makes her acquaintance. Her nickname came to be only in 1797, created from the creative mind of the cartoonist James Gillray. Yet there is much more to the Bank of England...

Her birth came in 1694 in order to help the government with raising funds during King William III’s war with France. This was achieved by collecting money raised from private investors. She has evolved over the years to give many more uses; issuing bank notes, storing gold and protecting the economy from shocks – as befits her job as a central bank.

Conflicts have always taken a toll on the Bank. Back during the Napoleonic Wars (late 18^th century – 1815) their withdrawals had to be restricted in order to maintain sufficient gold reserves. It was around this time that James Gillray drew up the famous cartoon. Erstwhile Prime Minister William Pitt the Younger is depicted as trying to persuade the elderly lady, that is the Bank, to release some gold.

Despite changes some things have always stayed the same. Take any pound sterling note today and you will find the assurance that the Bank will ‘pay the bearer on demand the sum of’ money. This ‘promise to pay’ has been found on bank notes for over 300 years.

Our modern banknotes were based on goldsmith’s notes. These previous banknotes were essentially IOU notes for gold deposited in the bank. They were handwritten before being authorised by a bank’s cashier and were made out for exact values.

Nowadays the legal tender is printed in a factory in Essex and in the denominations of: £5, £10, £20 & £50. This is under the authority of the Royal Mint.

Over 400,000 gold bars are stored in her coffers with each one averaging a hefty 13 kilograms. The Bank itself owns very little as it is merely a custodian, looking after the bars for many clients including the London Bullion Market and central banks of other countries.

The Bank of England is also in charge of introducing quantitative easing. Essentially this is putting more money into our economy to boost spending. Interest rates are used to control inflation. The Bank of England has its own Bank Rate. This is the interest rate at which it lends to financial institutions. When the risks of very low inflation, or even deflation, appear then this Bank Rate is cut. The problem is further avoided by injecting money into the economy.

Why does money need to be injected? The supply HAS to be growing at a certain rate in order to keep up with the economy’s expansion. This in turn will ensure that inflation will remain close to our government’s 2% target.

How is it carried out? Printing more banknotes is NOT the answer. The Bank buys assets from private companies e.g. insurance firms/banks. This results in the seller having more money in their bank account because they have been credited by the Bank of England. With their extra wealth these sellers can then go and spend, which helps to boost economic growth. Or perhaps they will buy other assets instead e.g. shares which in turn push up the price of those assets. This extra money trickles its way down through the economy, extrapolating the spending and growth. Helpful isn't it?

Step outside, head towards the junction of Princes Street and Lothsbury and look into the air. You should find a small gilded statue which looks a lot like a little fairy. This is in fact known as Ariel, after the spirit in Shakespeare’s work ‘The Tempest’. Much like its namesake the statue represents ‘the dynamic spirit of the Bank of England’; which carries credit and trust all over the world.

Minimum Wage Raise: Hurt or Help?

2014-10-22T11:52:00.000+01:00

By Caroline Kimbro

An overview of the minimum wage rates across the US.
(Click to enlarge image.)

As the possibility of raising the minimum wage from $7.25 to $10.10 an hour is discussed by US government officials, we hear much about the extra money it will provide for households all over America and the ways it will strengthen the economy. However, we know that most changes come with an opportunity cost and this change in wages is no exception. If businesses are required to pay their workers $2.85 more than they currently do, most will reconsider who they’re hiring. Since they have to spend extra money on employees, many businesses will want workers they think are worth this higher wage: in effect, a raise in the minimum wage will cause a shortage of jobs, particularly for the average American teenager, unskilled worker, and minority worker.

If businesses are currently paying their employees $7.25, the money for this 39% wage increase has to come from somewhere. After the minimum wage is raised, many businesses will not have the money to keep on all of their current employees, much less hire new ones. According to basic economic principles, as soon as the price of labor goes up, the demand for laborers will fall, causing an increase in the unemployment rate. If a price ceiling is set above the equilibrium price, quantity demanded for that certain item (in this case, jobs) will go down and the amount available, quantity supplied, will rise. The supply of workers looking for jobs will go up if the minimum wage is raised and finding a job for those workers will be harder than ever.

For teenage workers looking for their first job experience, finding a business willing to hire them will be nearly impossible. Unless someone has a lot of extra money they’re just dying to spend, it doesn’t make sense financially for a company to spend $10 an hour on an untrained teenager who doesn’t have any job experience or certain skill to offer. Many employers already require that potential employees have previous job experience, but a raise in the minimum wage would make it nearly impossible for teenagers to find their first job. Consequently, it would be even harder for those students who need to work to pay for college or trade school to gain a skill that employers demand.

Although some workers and their families will be better off with a raise, many workers will potentially lose their jobs - particularly unskilled workers. If the wage a company has to pay their workers goes up, most companies will in turn demand workers of a higher skill level to meet the expectations of that wage. That’s not only bad news for teenagers, but also those who can’t afford to go to school for training - often minorities. Because of this, the main idea behind a minimum wage - making sure workers of all skill levels and economic standings receive decent pay - is essentially defeated. The very people you would be trying to help with a raise in the minimum wage, are actually those who are most likely to be laid off or unable to find work as a result of the change in wage.

In theory, a raise in the minimum wage sounds like a good idea, but the cost of this raise has to be considered - it will not only force businesses to change how they look at employees, but it will cause a shortage in jobs for American workers. For the most part, minorities, teenagers, and unskilled workers will not benefit from this raise; instead, it will make it even harder for them to find and keep a job.

Works Cited:

Richman, Raymond and Howard. “The Minimum Wage is a Racist Law.” American Thinker.5 July 2014. Web. 3 October 2014.

Perry, Mark. “Raising minimum wage would be disastrous for minorities, especially black male teens, whose jobless rate is now 44.3%.”American Enterprise Institute. 11 December 2013. Web. 3 October 2011.

The Evolution of the Capital Asset Pricing Model: How an Economic Model Evolves and Improves

2014-10-21T18:35:00.000+01:00

by Calvin Price

In 1964, William Sharpe and John Lintner developed a formula called the Capital Asset Pricing Model (CAPM) for predicting the pricing of stocks. It was mathematically simplistic and intuitive; it asked the right questions; it was an immediate success in the economic community. It was taught in virtually all business schools as the stand-alone method for pricing stocks. There was just one problem with the model: it didn't work.

Models attempt to simplify the real world, find a rule, and then apply that rule in reality. Through this stringent means of testing and retesting, hypothesizing and theorizing – applying the scientific method - researchers can find rules that govern economics. To reduce the complex system of variables that apply in any situation into a linear formula is no easy task – but it is especially difficult, and probably impossible to do so for the stock market. The stock market is subject to a complex scheme of crowd psychology, moods, global affairs, and seemingly unrelated topics all have the potential to shift prices. It is highly doubtful that any theory would be able to accurately measure these effects and create a theory from that.

In 1994, a famous investment company called Long-Term Capital Management (LTCM) was founded and was praised as being the largest gathering of academic and practical knowledge on the stock market in existence. It had several Nobel Prize winners, professors from prestigious academic institutions, and weathered pit traders and quantitative analysts from Wall Street. They enjoyed risk-free borrowing from banks and had access to the latest technology. Within three years they were hailed as possibly being the greatest investment company ever founded having made unheard of returns on investments. In 1998, the company flamed out of existence in a period of less than a month in a relatively non-volatile market. They are one of the most well known examples of trading errors, are frequently examined in case studies, have been the subject of a book and numerous academic articles, and relied heavily on the CAPM.

The CAPM’s mistake, as Fama and French contend, is in both its formula and in its underlying assumptions. One of the key assumptions underlying the Sharpe-Lintner model is that there is borrowing and lending at a risk-free rate. This is obviously an over-simplification of the market, there can never be sustained borrowing and lending at risk-free rates, but the motivation for including this is to contain the risk of the market to merely the movement of stocks and not interest rates. In 1972, another economist named Fischer Black, who would later become famous for the Black-Scholes model for pricing stock options, altered the CAPM that did not include the assumption of risk-free borrowing. Instead, he allowed for the possibility of unrestricted short sales of risky assets – essentially saying that if investors felt there was risk in a situation they could unload it onto another investor. Black’s model is not correct either, but it is more accurate than the original CAPM.
CAPM’s simplicity is derived from its brief algebraic formula (as defined in the original Sharpe-Lintner model):

E(R_i) is the expected return (how much money you expect to make) on any investment _i. R_f is the assumption of risk-free borrowing and lending. E(R_M) is the expected return of the market portfolio. The market portfolio is a theoretical construct, it is a selection of stocks that minimize the variance of the return (meaning profits will be relatively consistent) and maximize profit per risk. β is the correlation of a stock to the market average. If β = 1, the stock will be perfectly correlated with the market. If it is greater than 1, the stock will be more volatile than the market. If it is less than 1, it will move less than the market. Thus, if the beta of a stock is 1.50, it is considered 50% more volatile than the market. Betas that are equal to zero are uncorrelated to the market. For its apparent origins in a foreign language, the CAPM relies on relatively few variables to predict a potentially accurate price.

Unfortunately, the equation appears to fail immediately as soon empirical testing occurs. The CAPM predicts low profits for investments with low beta and high profits for investments with high betas. In reality, the returns for low beta portfolios are too high and the returns on high beta portfolios are too low. After extensive tests, Black’s theory that market betas can predict expected returns seems to hold. However, the precise predictions of Sharpe and Lintner beta calculation, expected market return minus the risk-free interest rate, is consistently rejected. Further debates over CAPM range from considering it to be completely useless and unreliable to be merely a slightly-flawed model. Fama and French attempt to prove the latter.

In 1973, Robert Merton, who would later become a highly influential figure with LTCM, created the Intertemporal Capital Asset Pricing Model (ICAPM). The ICAPM assumes that investors are interested not only in the end-of period payoff, when they cash in on the stocks, (as had been assumed in the original CAPM) but also in the value of the asset at any specific time. Thus, the ICAPM introduces a generic element of time into the equation. The ICAPM also assumes that optimal portfolios are ‘multifactor efficient’, implying the assumption that risk-free borrowing and short-sales of risky assets are both possible.

Fama and French extend this theory with one final idea: the overall market movement is not necessarily correlated to the movement of specific portfolios. In other words, the betas that Sharpe, Lintner, Black, and Merton had been using were all potentially inaccurate. To deal with this Fama and French use the betas from the overall market, from specific portfolios with small and big stocks, and diversified portfolios with high and low book value/market value (B/M) stocks. Book value is the price at which that asset was bought and market value is the price the asset would sell for. This gives the Three-Factor Model:

In this equation, the first β is the original one that was preserved from the first CAPM adjusted for time. The second β is the expected return on a portfolio of small and big stocks (SMB means ‘small minus big’). The third β is the expected return on a portfolio with high and low B/M stocks (HML means ‘high minus low’). Fama and French’s model has been an empirical test and, since proposed, has withstood numerous tests.

Although the Three-Factor Model has been a success, it still does not predict everything in the market. The stock market is a complex system of pricing that, at times, relies as much upon human emotion and mistakes as it does empirical data and knowledge. Things as inane and intangible as stock momentum and popularity can have a huge and often nonsensical impact on the pricing of a stock. An equation can never accurately account and predict every movement that occurs on the market, but the Three-Factor Model is about as close as anyone has ever come to doing so.

Friedman & Health Care: A Modern Look

2014-10-20T19:13:00.000+01:00

By Sarah Becker

Milton Friedman

In 1996, when Milton Friedman wrote an article for the Wall Street Journal entitled "A Way Out of Soviet-Style Health Care," Milton very well describes America's current state of affairs when it comes to health care. How did he perform this feat? Did Milton know that recent legislation such as "Obamacare" would be passed or that we'd currently be facing a shortage of physicians? Probably not, but it seems that Milton saw America walking down a healthcare path that we have only continued on.

In this article, Milton argues that employers should no longer provide health insurance plans of the type that are currently being offered. In the current model, resources from the employer, or part of an employee's salary, is used to pay for a health insurance plan. Because a worker is enrolled in the plan through their employer, taxes on this money are able to be avoided. Americans, myself included, always want to evade the notorious and always-prowling tax man!

When someone goes to the doctor, they pay a small co-pay, perhaps in cash or a check, and the insurance covers the rest. In the patient's mind, this lowers the opportunity cost of going to the doctor. Because patients pay less out of pocket, the quantity demanded for health care goes up tremendously. For those who are receiving this supposedly free care, they'll demand an even greater supply of healthcare! Americans, myself included, always want to take advantage of a supposedly free good!

On the supply end, however, this demand is not always able to be met. An increased quantity demanded means that--for the most part--the same amount of doctors have to do the same amount of work. The quantity supplied is lacking. When the supply of doctors is low (low compared to the greater quantity of patients demanding services), care quality decreases. Furthermore, doctors now use their limited resource of human capital to focus not on patients--the new focus is not only on the insurance--whether a doctor will get money from a patient's insurance company and the process of figuring out insurance bureaucracy. In order to be competitive and receive the greatest possible wage for one's labor, in the healthcare market, insurance has to be a huge consideration for a physician.

So what's Milton's normative statement on health care? Allow Americans to evade the tax man on the money they spend on health care (through a new law), but reconsider these healthcare plans that drive up demand and sap doctor's resources so heavily. Personally, I think that this is a great idea. Health care can sometimes be a necessity (that shouldn't be taxed, just like food and clothing), but Americans often drive up healthcare consumption just because they can. They go beyond their true level of necessity. Implementing Milton's theory, we will provide an incentive to and reward those who are willing to be frugal with their money. Want to spend less on unnecessary health care services and visits? More money in your pocket. Americans love having more money in their pockets!

While it's certainly not true that physicians are only focused on money and insurance policies, re-thinking our current healthcare insurance system would be beneficial. Patients won't waste their money on treatment they don't need, doctors won't be recommending more treatment than is necessary (providing them with increased income at little or no expense to the patient, but someone's paying for it), and doctors can focus more on the patients that actually need help. And if we can bypass part of the insurance system, we won't be worrying so much about which services are covered and which ones aren't. This system will increase healthcare efficiency, especially on the administrative level. We won't have to choose a hospital or doctor based on whether or not they'll accept our service. We can return to that fantastic, old-fashioned cash. If you want a medical service badly enough, you'll pay for it because an investment in your health and your personal human capital is of value to you.

Some might argue that the poor aren't factored into this equation, but if we can ease the workload of our doctors by decreasing the overall quantity demanded, maybe they'll have more time to do something positive by offer free or reduced services to those who can't pay the full price.

When he wrote his article back in 1996, Friedman probably didn't know the specifics of Obamacare, how the supply curve and demand curve of healthcare would shift from 1996 to the present, what the equilibrium price of a doctor's visit would be, or what the current labor market situation would be for physicians. What he did know, though, is that resources are limited and free goods in the healthcare system are nonexistent. Money isn't endless, and an individual's cash reserves and savings only go so far. Everyone loves free health care, but we need to make sure that people are going to the doctor when they really should be going to the doctor. As we've demanded more health care from the same amount of doctors supplied, our care gets worse and worse. America demands expansion in the amount of health care supplied but really can't shift the production possibilities curve without more doctors. We need to put the burden back on the consumer: make a choice at the margin and then directly, from your own pocket, invest your own resources in your own healthcare. Ceteris paribus, at least we'll hopefully become just a little bit smarter with our money on the microeconomic level, too.

Vietnam over China?

2014-10-19T17:46:00.001+01:00

By Dennis Fisher

Image Credits: english.vietnamnet.vn

Where do most of your goods come from? If you asked anyone this question a typical response would probably be China. It feels like every time you look at a tag on a piece of clothing, shoe, toy, car part, or even furniture it will simply state “Made in China”, and in fact, the US spends about $29 Billion dollars on imports from China (1). Most big name companies will have at least some of their goods produced in China. Corporations such as AT&T, American Eagle, Coca-Cola, Dell, Gerber Foods, Hershey Foods, Honda Motor, Huggies, Ikea, and LG produce in China (2). The list goes on and on. The benefits of producing in China have been cheap labor on large scale orders, but recently another Asian nation has been attracting business away from China.

With wages in China increasing 14% in 2012 (3), many companies have begun to look outside of China for means of producing their goods. Vietnam looks to be the next big producer in Asia. As Josh Feinkind, president of New York-based RefinedKind Pet Products said, “Vietnam will be the next China.” (4) Now, Vietnam looks to have a lot of upside in the Asian market of production. The rapidly expanding economy offers significant cost advantages as well as an eager workforce, and with Chinese wages rising Vietnam offers a work force who can produce at less of an expense. Currently, Vietnam is also offering numerous tax benefits to draw corporations into the company. For example, Samsung Electronics was granted four tax-free years and 12 half-price years for a $2 billion plant in northern Vietnam (5). Not only that, but Nike, one of the largest shoe manufacturers in the United States, had Vietnam produce 42% of their footwear compared to China’s 30%. More and more countries seem to be looking in the direction of Vietnam as foreign investments have dropped from nothing in Vietnam ten years ago to nearly $11 billion dollars annually invested in the Southeastern nation.

Though with all this upside some corporations are still avoiding Vietnam. Why? Well Vietnam’s workforce is still young and inexperienced. They do not have the experience Chinese manufacturers have of producing large scale orders. The nation is also still adapting to the expectation of standards by companies. Also with a weaker educational system than that of China, Vietnam is lacking skill in their factories. Many company heads will also point to corruption and previous risk in Vietnam. A factory owned by the aforementioned Josh Feinkind was subject to this risk. He once lost a $20,000 deposit with a small factory that first failed to meet his quality standards, then ran out of cash to make replacements for him (6). Yet he still has faith in the country.

A lower cost of production, more willingness to work with small companies, and a bright future is giving Vietnam a hopeful outlook in mass production, but at what cost? The opportunity cost of most of these corporations moving from China to Vietnam will not be too much, especially for multibillion dollar corporations. If a company could receive some tax benefits from Vietnam and was able to receive labor at a third of the cost of Chinese labor then the shipping would not be too much more expensive, considering both countries are on Asia’s eastern seaboard. Moving from Vietnam to China would cost some Chinese workers their jobs, but it also gives the Vietnamese more employment. Overall the cost of moving looks to be worth it if a company is simply willing to take the risk. In five years, production in Vietnam could be equal to that of China.

Sources and references:

(1) http://www.npr.org/blogs/money/2011/08/10/139388532/only-a-tiny-sliver-of-americans-personalspending- goes-to-china
(2) http://www.jiesworld.com/international_corporations_in_china.htm
(3)-(6) https://globalconnections.hsbc.com/us/en/articles/manufacturinginvietnam
http://www.chinalawblog.com/2012/03/vietnam-over-china-for-small-scale-manufacturing-why-didnt-ithink- of-that.html

Quantum Fluctuations and Cosmic Inflation

2014-09-22T19:45:00.000+01:00

By Maharshi Chakravortee

Let me ask you a question. Has it ever struck your curious mind as to how all these incredibly beautiful structures - these planets, stars, galaxies - came from a mere singularity, or in simple words the ‘Big Bang’? Since the Big Bang was hypothesised, all theoretical, experimental and astronomical physicists went bonkers to find out exactly how ‘inflation’ (I will come to that) can be proved to cement the Big Bang Theory, or if the Big Bang Theory is just a crazy idea to satisfy our minds temporarily about the origins of the universe. Are we all in a state of oblivion, or does science actually play God in this?

Look at this image for starters:

This is a baby photo of our universe, from when the universe was about 380 thousand years old. Now if you’re thinking that 380 thousand years doesn’t sound that young and asking yourself why we can’t get an image of the universe before that, this is because at that time the universe was so hot, that all matter, including protons and electrons, were in a state of plasma, a sort of jumbled mess. Any light that passed through it would be scattered or absorbed. This made the universe opaque, until 380 thousand years ago when the universe was cool enough to make these protons and electrons, allowing the formation of Hydrogen atoms and allowing light, or photons rather, to spread out. So from the 380 thousandth year to the present day, roughly 13 billion years, these photons would travel through the space-time continuum until it hit our detectors, which made us this image.

Now if you think about it, these photons travelled as the universe expanded. So what might have started as ultraviolet or blue light, ended up as microwaves by the time they got to us. The wavelength of the light expanded as our universe expanded. That is why we can’t see this radiation but we can detect them using microwave telescopes.

The discovery of the microwave background image started off as a funny incident. Two radio astronomers, A.A. Penzias and R.W. Wilson, were observing certain radio images at the sky, but they always got this annoying background noise while taking results. So maybe they thought a cable was loose, or maybe it was bird poop on their telescopes. Triple checking everything, all they got was one uniform image, wherever they pointed their telescopes. So the real early baby photo actually looked like this:

That was the early state of the universe, where all of it was completely uniform, and variations only occurred in about one part of a hundred thousand. To observe these variations, we built better telescopes and sent them to space to get a better-refined image, and what we got was this:

Thanks to the curious human brain, we liked that image so much that we built better telescopes and got this further refined image with incredible details of the variations, which looked like this:

This is the perfect baby image with variations of dark red-hot spots and orange-yellow cold spots, showing the higher density regions and lower density regions respectively. Now this lumpiness and non-uniformity (variations) are very important as these show that the parts, which are red or denser, have a stronger gravitational pull, pulling mass around it, forming clusters of stars or galaxies. So basically without these variations, we wouldn’t even exist.

Now, where did those lumps come from? The idea seems to come from quantum fluctuations, the basic idea that every matter is made up of quantum fields, and it is impossible to keep those quantum fields at a state of uniformity, there will be particles popping in and out every instant, the very idea of Heisenberg’s Uncertainty Principle. This actually gives us the fact that we exist due to this: quantum fluctuations is the mother of our existence.

Now coming back to the problem of the true baby photo, the uniformity. How can the universe be of the exact same temperature after the Big Bang? Isn’t that weird? That is when physicists proposed ‘inflation’, the idea that this uniform image is actually an expanded version of the real image. Consider this for an example.

This is a picture of a dog. I know, cute right? Now what would happen if I expand or ‘inflate’ this image a million times? You’ll end up with something like this.

This looks rather more uniform, kind of like the early baby photo. So what scientists presumed was that the uniform image was an inflated version of the true photo, a photo that we cannot take. But this is kind of a crazy idea created to deal with the problem with that picture. I mean is it really true, did inflation really happen? Or is it just a convenient fiction to try to explain the uniform baby photo? I mean how can we get an answer to this hypothesis, when we can’t get detect any light older than 380 thousand years?

This is where an incredibly interesting term of gravitational waves comes in. Gravitational waves are nothing but the fluctuations or the rippling in the space-time continuum that are caused due movement of bodies. According to calculations, the gravitational waves that accompanied inflation should have been strong enough to have left an imprint on the cosmic microwave background, an imprint in the form of polarisation of light, a kind of a ‘swirl’, around the hot and cold spots. This means scientists were studying the Cosmic Microwave Background to see if it contains polarised patterns, which would have been made by gravitational waves much earlier.

Arriving to the drumroll of this article, scientists obtained a polarised pattern while studying the CMB in the South Pole. And how did the pattern match with the predicted pattern? EXACTLY HOW IT SHOULD HAVE!

This is one of the HUGEST discoveries in a lifetime. Of course this result has a lot of debate to face, but this certainly cements the idea of the Big Bang, the Origin of the Universe and inflation. It really is an exciting era of science to live in!

References:

1.Wikipedia- Cosmic Background Radiation

2.Wikipedia- Gravitational Waves

3.Wikipedia- Inflation

4. http://www.spaceref.com/news/viewpr.html?pid=42804

5. http://phys.org/news/2014-03-evidence-universe-early-growth-spurt.html

6. http://www.space.com/25092-cosmic-inflation-gravitational-waves-complete-coverage-of-major-discovery.html

The Legacy of The Worldly Philosophers

2014-09-21T14:57:00.000+01:00

By Viva Avasthi

In the wake of Scotland's historic referendum on whether it should become an independent country, and the many discussions of Scotland's important contributions to the United Kingdom, now is a great time to consider the history of economic thought, which began with a Scot, Adam Smith. (Incidentally, how would Adam Smith have voted, if he were alive today? It is most likely that he would have chosen "No".)

Despite being a relatively young subject, economics has an extremely rich history of thought, and Robert Heilbroner's The Worldly Philosophers is an excellent read for anybody interested in it. It serves not only as an accessible introduction to some of the most influential economists' most important theories, but also as a fascinating and sometimes entertaining insight into their characters and the context of the formulation of their ideas.

The "worldly philosophers" were the great economists of the past who, united by their curiosity of human interaction and the complexity of the world around them, sought to understand mankind's drive for wealth. It is worth noting that the last economist the book covers (it works through them in chronological order) is Joseph Schumpeter, who died in 1950. Notably, the book does not mention Friedrich Hayek and is of no use for those interested in learning about the work of contemporary economists such as Daniel Kahneman. For such readers, I believe that Phil Thornton's The Great Economists: Ten Economists Whose Thinking Changed the Way We Live would be more helpful, though I have not read the book myself.

This article is less of a book review and more of a reflection on my part of a few of the ideas of the great economists and their implications and relevance today. For this reason, this article may be of greater interest to those readers of this blog who have already read the book or have some understanding of the great economists' ideas.

One thing which the "worldly philosophers" spent a great deal of their time considering was the future of the society they lived in and how and why society and the economy might evolve over time. Their task was an immensely difficult one, and this is partly reflected in the varying degrees of success they had. One factor which hampered thinkers such as Thomas Robert Malthus, who incorrectly argued that the human race was doomed as human population would eventually outstrip food supply, was their inability to know what circumstances and innovations might arise in the future. Unfortunately our predictions must be constrained by the limits of what is knowable and we are forced to extrapolate what we can from trends seen in the past.

In addition, as pointed out by Joseph Schumpeter, one of the "worldly philosophers", our predictions may be tainted by our inability to always see the present for what it is:

"Analytic work embodies in the picture of things as we see them, and wherever there is any possible motive for wishing to see them in a given rather than another light, the way in which we see things can hardly be distinguished from the way in which we wish to see them."

However, this certainly does not mean that making predictions about the future of society was or is a useless task. For example, as the book highlights, some of Marx's ideas on the tendencies of capitalism have been proved right a time has progressed. There is indeed a "propensity to crisis" in capitalism, as indicated by the existence of business cycles. Though few imagined that it could happen when Marx declared his views in 1867, large firms do now dominate the economy. These are just a few of his insights which have come to pass and are clearly visible in our contemporary world. It is therefore worth considering what some of the key thinkers from the book thought would happen in the future, whether their ideas have come to fruition, and to what extent their ideas might be applicable today and in the future as we can imagine it.

In the chapter on Marx, Heilbroner quotes the following passage from Engels' Anti-Dühring:

"The ultimate causes of all social changes and political revolutions are to be sought, not in the minds of men, in their increasing insight into eternal truth and justice, but in changes in the mode of production and exchange; they are not to be sought in the philosophy but in the economics of the epoch concerned."

This is an intriguing and powerful statement to make, and it would be very interesting to investigate to what extent it is true. Do material concerns affect us more now than they did in the past? Was there ever, or is there currently, a society somewhere in the world which cares more about the 'truth' than material goods? Is such a society possible? Regardless of what the answers to those questions might be, it was certainly changes in the mode of production and exchange which led to the Industrial Revolution. Through the formation and expansion of the market system famously exposed by Adam Smith in his 'Wealth of Nations', massive social and political changes occurred.

Looking to today, could it be that we are at the cusp of great social change stemming from changes in modern modes of production and exchange? As our society and economy become more digitised and as our technological capabilities develop, what might we expect for the future? Jeremy Rifkin, author of The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism, puts forward a fascinating idea. He argues that before the middle of this century, capitalism will be have been destroyed by a range of factors including the development of fully-automatic self-replicating machines allowing goods to be produced at virtually zero marginal cost, and the internet serving as a platform for a global "sharing economy". As explained in this article in the FT, Rifkin's book closes with the idea that people will therefore no longer need to work, largely, and so we will be able to lead more fulfilling lives and spend time developing ourselves as individuals and communities.

I have not read the book, only familiarised myself with Rifkin's ideas by watching several interviews, but I am not sure how we would make the transition from a capitalist society to a collective commons one. Surely businesses would do their best to maintain their profits and would try to restrict consumer access to self-perpetuating technologies in order to preserve demand for their products? If we did make the transition to a collective commons society, who would pay for the fixed costs of getting the machines going in the first place? I hope that the book contains answers to these questions and any others which I may come up with after this article has been published.

The future that Rifkin outlines - a future of very little work, the death of profits and a far less materialistic society than our current one - is this the future that Keynes, one of the "worldly philosophers" envisaged? In his essay published in 1930, Economic Possibilities for our Grandchildren, Keynes contemplated that by 2030 the economic problem would be solved (at least in the advanced economies) due to improvements in technology and greater productivity as a result. This, he believed, would eventually lead to people working for only a few hours each day and society moving on from capitalism because everybody's absolute needs would be fulfilled.

"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. [...] We shall be able to afford to dare to address the money-motive at its true value. The love of money as a possession - as distinguished from the love of money as a means to the enjoyments and realities of life - will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard."

How fascinating that Keynes saw capitalism as a form of necessary evil! Perhaps he would have been pleased by a future of the kind which Rifkin expects. For further reading on Keynes' Economic Possibilities for our Grandchildren I highly recommend How Much is Enough?: Money and the Good Life by Robert and Edward Skidelsky. Their book explores how far Keynes' vision has become reality and how we might improve our lives by re-considering what it is we want and need as individuals and a society.

The Worldly Philosophers introduced me to further interesting ideas such as John A. Hobson's conclusion that capitalism must lead to imperialism (which in modern terms might perhaps be viewed in terms of China's firms and elite supposedly "buying up" Africa). For me the book also raised the question of what profits really are and where they come from. I hope to write an article on the matter soon, because the conflicting theories are intriguing, from Marx's idea of "surplus value" creating profits to Schumpeter's ideas of innovation being the source of profits and profits therefore being very short-lived and elusive. Schumpeter's ideas particularly engaged me and I aim to write several separate articles on those. I find it very exciting that two of the academics predicted to win the Nobel Prize in Economic Sciences this year are Philippe M. Aghion and Peter W. Howitt for their contributions to Schumpeterian Growth Theory.

In an ideal world I would be able to put down all my thoughts on the ideas discussed in this book, and in future articles I shall certainly explore my thoughts on particular aspects further. However, with such little time on my hands, I am limited to sharing only a few of my thoughts on a very small selection of the ideas of the "worldly philosophers". I cannot recommend the book highly enough, and welcome comments on the book, this article, or anything related to the topic of economic thought.

Will Scotland make history?

2014-09-08T20:47:00.001+01:00

By Magdalena Paczocha

On 18 September, voters in Scotland will be asked in a referendum whether they want the nation to become independent from the rest of the United Kingdom. The reason behind the willingness to take Scotland's destiny into Scottish hands was the landslide victory of The Scottish National Party in the 2011 Scottish Parliament election. Independence is a main goal of this party. An agreement was signed on 15 October 2012 by the Prime Minister of the United Kingdom, David Cameron, and the First Minister of Scotland, Alex Salmond, which provides a legal framework for the referendum to be held. The referendum question will say: "Should Scotland be an independent country?" The principal issues in the referendum are the economic strength of Scotland, defence arrangements, continued relations with the UK, and membership of supranational organisations, particularly the European Union and NATO.

(Source: BBC)

One of the reason why Scotland wants to be an independent country is that Scotland sees itself as currently heading in a different political direction from the rest of the UK. This is because Scotland is represented to the world by the Conservative party which it has rejected for years.

Moreover, Scottish people argue that Britain is founded on extremely undemocratic ideologies. For example, 26 seats in the House of Lords are taken up by bishops purely because they're members of the Church of England. The Scottish parliament has a much more democratic system, which does not reserve places for church members and uses a proportional electoral system for appointing members of parliament. Becoming independent would therefore arguably be a step for democracy.

Furthermore, many laws which are enforced in Scotland are decided and passed in England, and are intended primarily for England without much consideration for the Scottish people. For example, the winter allowance for pensioners in Scotland is the same as it is in England, despite the much colder and harsher climate which exists in Scotland.

On the other hand, Scottish Parliament has many devolved powers given by The Scotland Act 1998 and The Scotland Act 2012, therefore Scotland already has some freedom to make political decision about important issues, for example: education and training, environment, health and social services, housing, law and order, tourism and economic development, and many aspects of transport. This shows that it is not fair to say that Westminster has a supreme control over Scotland.

In terms of the House of Lords, many people actually find this part of Parliament very useful because Lords and bishops are able to share their expertise in their fields as well as ensure checks and balances in government. They do not pose any veto power, so do not necessarily threaten the UK.

Another argument in favour of independent Scotland is that it could result in a much stronger Scottish economy. Scotland owns huge shares in oil, which it wouldn't have to split if Scotland becomes independent.

(Source: http://www.yesscotland.net/#theReality)

However, there has been speculation over how Scotland will survive if the country will no longer have access to the British "money pot". Many people say that going independent is an extremely large economic gamble, especially in the light of the latest recession and unemployment. Moreover, Britain owes very large debts to foreign countries, which Scotland is partly responsible for. In becoming independent Scotland would have to negotiate which debts it is responsible for and how much to pay. Scotland has been so closely tied to the rest of Britain that this would be a very difficult process and would take several years.

For the past few days I was looking for the best and easiest way to explain these arguments, but what I found is just too funny, too amazing and too amusing to try go beyond that.

I have provided a link to the YouTube channel called "UNITED QUEENDOM". The above arguments and many others are presented in the form of comedy:

https://www.youtube.com/playlist?list=PLprj6DlPksbOqLrAbJNMJlyuRYKIqoSFj

Additionally, the National Institute of Economic and Social Research (NIESR) has produced a very informative and easy to understand clip about the issue of currency in the independent Scotland and why it matters. You can find it here:

https://www.youtube.com/watch?v=mBC0mLFz91o

You might also be interested in the two main campaigns: Yes Scotland and Better Together.
You can find their websites here:

Yes Scotland: http://www.yesscotland.net/
Better Together: http://bettertogether.net/

DO NOT FORGET TO VOTE IN OUR POLL ! JUST SCROLL DOWN TO THE BOTTOM OF OUR BLOG !!!

What is Quantum Tunneling?

2014-08-21T18:31:00.000+01:00

Erwin Schrodinger
Source: http://fineartamerica.com/

by Sparshita Dey

Quantum Tunneling is a quantum phenomenon where particles with less energy than that of a potential barrier can still cross the energy barrier, by “tunneling” through. This means that the particle, which according to classical mechanics, cannot possibly end up on the other side of the barrier, has a chance of being found within or on the other side of the barrier – corresponding to a finite probability of being found in these “classically forbidden regions”. This will be explained in a more simplistic manner later on.

In this article, I will aim to explain how some concepts in quantum mechanics means that tunneling is possible. This will involve having a look at various examples of tunneling phenomena, what wave functions are and also the time-independent Schrodinger Equation.

As with any unfamiliar concept, I find that the best place to start would be with an analogy featuring objects we are very familiar with in everyday life.

So imagine you and your friend standing either side of a solid wall.

Neither you nor your friend can see each other through or over the wall.

Your friend now throws a tennis ball at the wall.

In this case, it’s obvious that the ball will fly through the air until it reaches the wall and then bounce back towards your friend. This is the view we are all familiar with: the classical view.

Now imagine if this did not happen. Imagine if instead, the ball, on reaching the wall, appears to disappear into the wall (according to your friend) and then appears to be coming at you (on the other side of the wall).

This is the view put forward by quantum mechanics, a view deemed impossible by classical mechanics. The ball seems to have “tunneled” through the wall! This is therefore known as Quantum Tunneling.

I think it is safe to say that no one has ever experienced throwing a ball at a wall and seeing it miraculously appear from the other side of it. However, following the analogy, if we relate the tennis ball to an electron, and the wall to a potential/energy barrier, we see that there is actually evidence of electrons being able to tunnel through potential barriers to cross over to the other side.

Alpha Decay

A more realistic example where tunneling plays a significant role is in alpha decay, where an unstable nucleus releases an alpha particle (a Helium nucleus with 2 neutrons and 2 protons). In this situation there are two forces we need to consider: the Coulomb force (repulsion of two positive charges) and the strong nuclear force.

The Coulomb force arises due to Coulomb’s law, which states “any two point charges exert an electrical force on each other that is proportional to the product of their charges and inversely proportional to the square of the distance between them”. As the alpha particle has a charge of 2+ due to having two positively charged protons and the nucleus of an atom is also positively charged, this force must be an electrostatic repulsion.

Source: en.wikipedia.org

The strong nuclear force is the strong (but short-ranged) attractive force, which acts within the nucleus between hadrons (protons and neutrons) keeping them together.

We can now see that the Coulomb force acts to “help” the alpha particles to escape from the nucleus, while the strong force (which is stronger than the repulsion) acts to keep the alpha particles within the nucleus. Therefore, the alpha particles, with less energy than required to overcome the nuclear potential barrier, should not be able to escape the nucleus following the classical laws. However, quantum mechanics also predicts wave-particle duality (so a particle can act as both a wave and a particle) meaning that if the alpha particle were to be a wave (its behavior modeled by a wave function), there would be a finite probability of the alpha particle overcoming the potential barrier and escaping. As we all know that alpha decay does occur and a Geiger counter definitely clicks when placed in front of a source, which decays to release alpha particles (can be tested by observing beams in electric/magnetic fields), there is nothing to say that this explanation is false.

From this example we see that the wave characteristic of a particle must be very important as this allows there to be a probability that a particle can tunnel through a potential barrier. Due to this property, a quantum mechanical system / a particle e.g. an electron or an alpha particle can be completely described as a wave function ψ(x,t) - which is a single-valued function of position. This wave function has the characteristic that when squared, it gives the probability density P(x) (the probability per unit length) of finding a particle at position x. This is shown graphically:

From GCSE knowledge we know the area underneath a histogram with y-axis frequency density gives frequency, similar the area under the graph with y-axis probability density must give probability. This can also be represented by the integral

As we know that probabilities of all outcomes must add to make 1, one further characteristic of our wave function must be that:

But how does the wave function help us to work out the probability of tunneling?

This is where we need the Time-independent Schrodinger equation:

which is in the form

Which according to Wikipedia means: “When the Hamiltonian operator acts on a certain wave function Ψ, and the result is proportional to the same wave function Ψ, then Ψ is a stationary state, and the proportionality constant, E, is the energy of the state Ψ.”

The function ψ is thus known as an Eigen function where E is known as the Eigen value – this shows how E can only take specific/discrete values i.e. the Schrodinger Equation gives quantized energies of the system.

The Hamiltonian operator is defined as:

It operates on the energy E of a particle = kinetic energy + potential energy of the particle.

In order to satisfy the time-independent Schrodinger equation we know that the solution ψ may only take certain values as it is an Eigen equation. The specific solution for the above has been calculated to be in the form of ψ = Ae^±ax (similar to the wave function of a plane wave).

Using this, we can now investigate whether or not there is a probability of tunneling for an electron trying to cross a potential barrier:

So the energy gap between that of the particle and the barrier is given by E – V₀

Meaning that the equation we are trying to solve looks like:

We also know that the solution is of the form ψ = Ae^±ax in this case negative because the amplitude A of the wave will have to decrease after tunneling (exponential decay). However, we don’t know what the constant “a” is. Hence, to calculate this, we can substitute the wave function into the Schrodinger equation and rearrange/ simplify:

so for ψ = Ae^-ax

where E is the energy of the particle in Joules

m is the mass of the particle in Kg

V₀ is the height of the potential barrier in Joules

d is the thickness of the barrier in m

The ratio of the incident to exit amplitude of the particle as a wave is e^-ax where a is as calculated above.

The probability of a the particle having tunneled through the barrier is proportional to amplitude squared.

Therefore the probability of finding that the particle has tunneled through is (e^-ax )²

For example:

if E = 5 eV = (0.80 x 10^-18) (to 2 s.f.)

m = 9.11 x 10^-31

V₀ = 6 eV = (0.96 x 10^-18) (to 2 s.f.)

d = 0.5 x 10^-9

Then a = 0.51 x 10¹⁰
(just by substituting into our previously calculated expression for a)
So the ratio e^-ax = 0.77 x 10^-1

And therefore as Probability is proportional to Amplitude²

The ratio squared gives the probability = 0.60 x 10^-2

Therefore we have finally shown that the probability of a particle like an electron tunneling in a scenario is finite and non-zero.

Source: www.gosunstove.com

Overall, tunneling is not just a phenomenon, which applies in a few isolated cases here and there. Tunneling is also very important in computers/ circuits – objects we use everyday. However, most importantly (arguably), tunneling allows fusion to take place in our Sun - as although the Sun may be very hot, the hydrogen atoms still don’t have enough energy to fuse. So essentially tunneling allows the Sun to burn its fuel and release its energy as light, without which there would be no life on Earth.

References:

http://physics.stackexchange.com/questions/9842/where-is-the-particle-during-a-tunneling-event?lq=1

http://hyperphysics.phy-astr.gsu.edu/hbase/quantum/wvfun.html

www.youtube.com - What is Quantum Tunneling?

YouTube Quantum Tunneling – Minute Physics

YouTube How Quantum Tunneling works by Ivar Giaever

Wikipedia – Quantum Tunneling

Wikipedia – Heisenberg Uncertainty Principle

Wikipedia – Wave function

Wikipedia – Schrodinger Equation

http://www.sciencedaily.com/articles/q/quantum_tunnelling.htm

A Cavendish Quantum Mechanics Primer – M. Warner and A.C.H. Cheung

http://www.physicsoftheuniverse.com/topics_quantum_uncertainty.html

Are the advanced economies in for a long period of economic stagnation?

2014-08-20T21:55:00.000+01:00

by Viva Avasthi

I submitted this essay last month as my entry for the Royal Economic Society's Young Economist of the Year essay competition. I was delighted that the judges (a panel of teachers initially, and then Sir Charles Bean, RES President; Stephanie Flanders from JP Morgan; and Professor Tim Besley of the London School of Economics) thought it deserving of joint third place. I am now sharing it with you and hope that you enjoy reading it. Clicking on each graph will allow you to see it more clearly.

Since submitting the essay, reading this and this provided me with further insights into the 'secular stagnation' argument and other ways in which it might potentially be flawed. Please refer back to this when you reach the relevant point in the essay. I have marked that point with **
In hindsight, perhaps I didn't give enough credit to the ability of technological developments to boost growth, particularly considering how badly the impacts of growth in that sector are reflected in GDP... Unfortunately, the word limit (and the limited amount of time I had to write the essay after exams had finished!) prevented me from exploring a lot of ideas in as great a depth as I would have liked.

-----------

31/07/14

The future: a murky blur of possibilities, problems, and potential shifts in paradigms. Attempting to make sense of our collective experiences in the past and present to make informed predictions about the future is one of the difficult tasks faced by economists across the world. At present the key question haunting economists and leaders of the advanced economies is the one which this essay attempts to answer.

Setting the stage for analysis

Since we are constrained by the word limit, let’s consider the advanced economies to be the US, UK and European economies. Most notably, Japan has been omitted. Several key reasons for this must be condensed into the following: Japan is structurally quite different from the other economies since it has a far stronger manufacturing sector, far better standards of education, and a greater social cohesion. Its prospects seem much brighter than the rest of the advanced economies’ for these reasons. Thus (perhaps rather controversially!) it was felt that there was no need for it to be included in this analysis.

Traditionally, economic stagnation is considered a prolonged period of little or no growth in the economy, often with annual GDP growth of less than 2-3%. High unemployment is generally perceived to accompany this low growth. However, perhaps such GDP growth benchmarks become redundant when one considers that ‘normal’ growth might not actually be normal at all. Pre-crisis levels of GDP growth can be described as being not normal for the entire period between today and the 1980s because of the existence of various bubbles providing artificial boosts and drags on GDP. Even before then, we were living in a world boosted by the massive demand created in the aftermath of the world wars, and so it would be irrelevant to compare the growth levels of today to those of that time. So perhaps measuring economic stagnation by looking at GDP growth alone doesn’t make much sense.

To measure economic stagnation we must consider what we value as important for an economy: growth levels in themselves, or standards of living, equality and sustainability of growth? A better measure of economic stagnation than GDP growth may be real median income levels. With 95% of the increase in American income since 2009 having gone to the top 1% (Saez and Piketty, 2012), it is clear that just looking at GDP growth can cause issues, since the sort of growth occurring does not benefit the economy as a whole. More suitable measures, perhaps, are unemployment levels (accounting for those who have given up actively seeking work), investment levels and productivity levels.

The secular stagnation argument

As economists we might try to look back at history to provide us with some idea of what to expect for the future. Lawrence Summers (2013) recently looked back to the ideas of Alvin Hansen (1939) who argued that the end of the Great Depression would mark the start of a future of ‘secular stagnation’. Hansen wrote: "This is the essence of secular stagnation – sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment." He feared that future investment levels would be poor because he thought that: the US’s invention engine had run out of steam; the population would decrease as fertility reduced; and the US was highly unlikely to discover new territories or new resources. Hansen turned out to be spectacularly wrong. The baby-boom years followed the War, technological development was phenomenal during the 30s, and in 1941 the US economy produced almost 40% more output than it had in 1929.

Summers looks at things slightly differently. According to him the advanced economies are in a secular stagnation situation where the natural real rate of interest (i.e. the rate at which desired savings and desired investment would be equal at full employment) is pretty much permanently negative, and has declined over time (see Fig. 1), but central banks have been and still are constrained by the zero lower bound. He argues that it’s only through the creation of bubbles that the natural real rate of interest is raised from negative levels. This explains why the advanced economies have had trouble in maintaining full employment, strong growth and financial stability simultaneously since the 1980s.

But what’s the link between Hansen and Summers’ ideas? The ageing population argument. When the US economy was last able to sustain full employment without bubbles, during the period from 1960-85, the US labour force grew 2.1% annually, on average. Looking forward, the working population is expected to grow at an annual rate of just 0.2% between 2015 and 2025. Thus, linking to Hansen’s point, sustaining investment will be difficult in the future, considering the accelerator effect. In support of Summers’ natural real rate of interest theory is the Samuelson consumption-loan model (1958) which suggests that the natural rate of interest equals the rate of population growth. Although the model seems a tad over-simplified, the general connection seems to make sense, in which case Hansen’s factor of decline in population growth will affect the natural rate of interest in the way Summers expects.

This idea of a declining natural rate of interest is a fascinating one, but one which others seem to have accepted far too readily. One wonders whether the actions of central banks could have led to this trend emerging artificially. Digging into research reveals that low interest rates may be self-reinforcing and therefore not ‘natural’ (Borio and Disyatat, 2014). Figure 2 indicates how policies which do not tighten against booms, but ease aggressively during busts force a downwards bias in interest rates over time and an upwards bias in debt. This might be considered a sort of "debt trap" which could have serious implications for financial stability in the long term.

Taking this alternative approach into consideration, Summers’ ideas of how secular stagnation may have arisen might be flawed. ** Regardless, the underlying solution to the issues raised is the same: monetary policy should be used very little and the focus needs to be on fiscal and structural policies to improve growth potential in the long term and strengthen demand in the short term. While politicians remain hostile to increasing budget deficits in the short term, however, the risks for the long term seem very real indeed.

Risks from unwinding QE

What Andrew Haldane of the Bank of England calls "the single biggest risk to global financial stability" is something too many people ignore when considering the future of the advanced economies. Quantitative easing, that is. Whatever the BofE and Fed might say, QE has no real precedent at all. "But Japan," people often cry, "used QE measures in the 2000s!" The difference, though, is that whereas the US and UK engaged in QE using long-term bonds, Japan largely used short-term ones, so the complications which may arise for Britain and America when they begin to unwind QE are some which never existed for Japan.

The trouble is that the UK and US central banks are now the largest buyers of their own government bonds. This means that it is impossible for them to sell back into the market since, their being the biggest players in the market, if they sold, everybody else would start selling and interest rates would surge. This potentially massive rise in interest rates could make government borrowing more expensive for years to come, impacting long term growth. The alternative, writing these debts off, doesn’t seem feasible either, since that might damage the UK and US’ credibility with international debt markets and so potentially raise borrowing costs for a long time.

Figure 3 indicates how Koo (2013) thinks the tapering of QE will lead to instability in the long term. Initially, long term interest rates fall much further than they would in a country without a QE policy, leading to a faster economic recovery. However, as the economy picks up, local bond markets anticipate the central bank will unload its holdings of long-term bonds, so long-term rates rise sharply. Demand then falls in sectors sensitive to interest rates, such as housing, leading to an economic slowdown and forcing the central bank to relax its policy stance. Again, the market heads towards recovery but again, the market fears that the central bank will absorb excess reserves, and so the long-term rates surge in a cycle Koo calls the QE "trap". Unfortunately, Koo’s analysis seems to make an awful lot of sense, and, despite much pondering, not a single solution springs to mind, at least, not at the moment…

Therefore, QE (which will have to be wound down at some point to prevent the risk of massive inflation once liquidity eventually enters the economy) clearly provides a significant threat to the long-term recovery of the advanced economies. But by exacerbating the already existing issues of inequality, it provides further risks…

Inequality bites economies where it hurts

Stan Druckenmiller (2013) called QE "the biggest redistribution of wealth from the middle class and poor to the rich ever". But how much of a problem is inequality for an economy in the long-term? A recent (2014) paper by some IMF economists draws some fascinating conclusions. It appears that inequality functions as a significant determinant not only of the pace of medium-term growth, but also of its duration. More surprisingly (or not, depending on your previous knowledge!), redistribution measures, which many on the right of the political spectrum argue are harmful to growth, apparently only have direct negative impacts on growth in extreme cases.

What should we take from this? Consider Figure 4. It shows that inequality has been on the rise for some of the key advanced economies and that even after the financial crisis, it looks set to grow. Tying this in with the conclusions drawn by the IMF report, inequality seems to be a considerable threat to long-term economic prospects. It is one which governments should seriously aim to tackle to ensure the welfare of their people and economies. One slightly radical long-term approach might be for governments to equip badly performing schools with the tools to incentivise students to pay better attention during lessons. This might be through liaising with theme parks and offering well-behaving or high-achieving students free tickets to such places. The idea behind this would be that by paying closer attention in lessons, students might come to realise how fascinating the topics taught at school actually are, and educational attainment levels might increase. Perhaps using ideas from behavioural economics more commonly could allow governments to find better, smarter solutions to the issues they face.

The spectre of hysteresis

What about the long-term effects of the financial crisis? As Figure 5.1 indicates, potential output for most countries is far below pre-crisis trends: 11% below for Britain and 4.7% below in America. The chart seems to suggest serious structural issues at play, particularly in the Eurozone, which might be fixed through massive increases in investment and immense structural reform. One reform of the Maastricht Treaty which ought to be pushed is allowing European countries’ deficit to GDP ratio to be increased from the current 3% limit when they are in serious recessions. This would potentially allow individual countries to stabilise their economies without having to turn to the ECB for help.

Looking at Figure 5B, the biggest problem going forward for the US seems to be labour-force participation, and a third of this drag is due to ageing (Hall, 2014). In addition, the US and the other advanced economies face the issue of providing the long term unemployed (who have now given up searching for jobs, thereby lowering the unemployment figures) with the incentives and skills to try to get back into the labour-force. The severity of the situation is illustrated by the following: if the US unemployment rate were adjusted to include people no longer actively seeking work, it would be over 9%. If it were adjusted to include those working part time involuntarily, it would be over 12% (Stiglitz 2014).

Worse, senior Fed economists argue in a working paper (2013) that fewer businesses are being created and existing ones are spending less on R&D, so productivity could suffer in the long term. Real R&D has grown only 1.6% per year since 2007, compared to 3.6% on average from 1990 to 2007. The fact that R&D investment has reduced at a time when many argue that we aren’t advancing technologically at the pace that we should anyway does not bode well for the future. But to what extent can it really be argued that the advanced economies aren’t doing well in terms of technological developments?

Technology engine running out of steam?

Some economists (Gordon 2012) and others (Kasparov, Thiel 2012) have argued that technological progress is far more limited today than it was during the industrial period until 1970. While our inventions today might be ‘cool’, they are incomparable in their usefulness and potential to generate employment to the ones of the past. Gordon wrote: "The rapid progress made over the past 250 years could well turn out to be a unique episode in human history". This approach seems to be too pessimistic. It takes time before a new discovery is found which revolutionises technological development, but when that happens, development is very rapid indeed. It could be that robotics, which has really lifted off as an industry recently, with the number of industrial robots sold globally hitting a record high of 179,000 in 2013, will lead the next tech revolution. Frey (2013) predicts that 47% of existing US jobs are at "high risk" from work automation over the next two decades, but agrees that automation will improve people’s livelihoods as companies’ extra revenues will feed back to shareholders and employees, increasing consumer spending and creating more jobs. Rather than worrying about the perceived lack of technological progress, governments might do better to invest in R&D and STEM education to prepare the labour-force for the future.

Heading into the mire of stagnation

Where does our analysis bring us? Almost all the factors we’ve considered seem to suggest a bleak outlook for the advanced economies. Yet sound policy-making has the potential to move us in the right direction. That governments need to step in and stimulate demand in the short-term and make structural improvements for the long term is a given. They also need to consider the importance of microeconomic-level policies in ensuring stable economic environments in which businesses and consumers feel safe to spend. Could the British government, for example, consider imposing a larger tax (maybe of 90-100%) on second homes which aren’t being rented out, but have only been bought to accumulate wealth because people are speculating that property prices will rise? Though it is probably politically unfeasible, it could do a great deal to stabilise the housing market and the economy as a whole. With serious economic reform not on the horizon, though, the advanced economies seem to be headed towards a not-too-bright future.

Bibliography and references:

Alvaredo, Atkinson, Piketty, and Saez. Summer, 2013. "The Top 1% in International and Historical Perspective", Journal of Economic Perspectives, 27(3): 3-20 http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.3.3
Appelbaum, Binyamin. June 11, 2014. U.S. "Economic Recovery Looks Distant as Growth Stalls", The New York Times http://www.nytimes.com/2014/06/12/business/economy/us-economic-recovery-looks-distant-as-growth-lingers.html?hp&_r=1
Boesler, Matthew. October 23, 2013. "RICHARD KOO: I Can't Find Anyone To Refute My Argument That America Is In A 'QE Trap'", Business Insider http://www.businessinsider.com/koo-says-no-one-can-refute-the-qe-trap-2013-10
Borio, Claudio and Disyatat, Piti. June 25, 2014. "Low interest rates and secular stagnation: Is debt a missing link?" Vox http://www.voxeu.org/article/low-interest-rates-secular-stagnation-and-debt
Crossley, Rob. June 30, 2014. "Will workplace robots cost more jobs than they create?" BBC News http://www.bbc.co.uk/news/technology-27995372
Frey, Carl and Osborne, Michael. September 17, 2013. "The Future of Employment: How Susceptible Are Jobs To Computerisation?" Oxford Martin School http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf
Gordon, Robert. August, 2012. "Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds", NBER Working Paper No. 18315 http://faculty-web.at.northwestern.edu/economics/gordon/Is%20US%20Economic%20Growth%20Over.pdf
Halligan, Liam. October 21, 2013. "Quantitative Easing: Miracle Cure or Dangerous Addiction?" BBC Radio 4
Hansen, Alvin. March, 1939. "Economic Progress and Declining Population Growth", The American Economic Review, 29(1): 1-15
Kasparov, Garry and Thiel, Peter. November 8, 2012. "Our dangerous illusion of tech progress", Financial Times http://www.ft.com/cms/s/0/8adeca00-2996-11e2-a5ca-00144feabdc0.html#axzz2m8I4M2uL
Krugman, Paul. November 16, 2013. "Secular Stagnation, Coalmines, Bubbles, and Larry Summers." The New York Times http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/
Leonhardt, David. April 12, 2011. "When Hard Times Led to a Boom", The New York Times (interview of Alexander Field) http://economix.blogs.nytimes.com/2011/04/12/when-hard-times-led-to-a-boom/?_php=true&_type=blogs&_r=1
Ostry, Berg, and Tsangarides. April 2014. "Redistribution, Inequality and Growth", IMF http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
R.A., J.S. and L.P.. September 12, 2013. "The rich get richer", The Economist http://www.economist.com/blogs/graphicdetail/2013/09/daily-chart-8?fsrc=scn%2Ftw%2Fte%2Fdc%2Frichgetricher
Reifschneider, Wascher, and Wilcox. 2013. "Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy", Working paper, Finance and Economics Discussion Series, Federal Reserve Board. http://www.federalreserve.gov/pubs/feds/2013/201377/201377pap.pdf
Stiglitz Joseph. May 22, 2014. "The North Atlantic Malaise: Failures in Economic Policy", Oxford Martin School talk http://www.oxfordmartin.ox.ac.uk/videos/view/388
Summers, Lawrence.2014. "U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound", Business Economics, 49(2): 65-73 http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf

June 14, 2014. "Wasted potential", The Economist, http://www.economist.com/news/finance-and-economics/21604188-counting-long-term-costs-financial-crisis-wasted-potential

MPC: Success or Stalemate?

2014-04-05T17:40:00.003+01:00

By Shivani Maru

Mark Carney with prominent members of the UK's Monetary Policy Committee.
Image credit: cityam.com

The MPC is short for the Monetary Policy Committee; a committee in the Bank of England that controls the base interest rate in the UK. They meet every month in order to discuss what they believe the interest rate should be.

The main aim of the MPC is to alter the rate of interest in order to meet the inflation target. In the UK, the inflation target is 2% CPI, which has been set by the government. Although this may seem like a simple task, it actually is quite daunting.

Many factors are taken into consideration by the MPC such as the size of the output gap, economic growth etc. which guide their decision to alter the interest rate.

We can assess the success of the MPC by looking at its use of monetary policy as well as considering how well it has achieved the inflation target.

Monetary policy is when the level of interest rates and/or the money supply is altered in order to change the level of total demand within the economy. Therefore, the MPC is able to respond to changes in the economy via monetary policy.

It seems that the MPC has been successful through its implementation of monetary policy, as it has made some sensible reactions to changes in the economy. For example, during the 08/09 recession, the MPC reduced interest rates from 6% to around 0.5%. The recessions was caused by a significant fall in consumption and investment, thus it would only seem logical to reduce interest rates in order to stimulate demand again.

As shown in the UK Consumption graph below, consumption fell at the start of 2008. This correlates with the interest rates graph, which illustrates that when interest rates fell to 0.5% at a similar time to when consumption fell, consumption began to rise slowly. Thus, the MPC can be considered successful as it’s execution of monetary policy appears to have achieved its aim of stimulating demand when the economy was weak.

In general, it appears that consumer spending and interest rates appear to have a strong correlation, however pre-08, the changes in the interest rates don’t appear to have had too much of an effect on consumption as it continued to rise.

Nevertheless, the interest rates have remained at 0.5% for the last 5 years. This raises questions as to how successful the MPC is because the MPC can only go so low with the policy. This is known as the ‘liquidity trap.’ The liquidity trap occurs when interest rates are close to 0, like the UK. The problem with this trap is that it begins to prove that monetary policy is becoming ineffective. Interest rates can’t go negative because that would be impractical, therefore other polices such as fiscal policy need to be used because it’s clear that the MPC can’t reduce interest rates any further to stimulate demand further. This suggests that in the long term, the MPC haven’t been successful with executing monetary policy as it has lead to a dead end. Perhaps, quantitive easing could be used, but the effectiveness of this part of the monetary policy is still unproven. Thus, it can be concluded that the MPC haven’t been as successful in the long run.

Another reason to back this up is the idea that the UK government appears to be looking at other methods of stimulating demand, as interest rates and quantitive easing don’t seem to be working. One of these methods is the pension reform. It was announced recently that pensioners would now be able to take out as much as money from their pension as they want without having to pay an annuity cost. Hopefully, this will be effective in boosting demand as the marginal propensity to consume will increase for pensioners.

Now, let’s look at the MPC in terms of inflation. As mentioned before, the MPC’s aim is to achieve a 2% CPI inflation target. Before going any further, here are some limitations of the inflation target.

Your inflation is different to my inflation

Inflation is simply a number. Some of the goods that Consumer A may spend on are different to that of Consumer B. Therefore, a change in inflation may not affect Consumer A, yet inflation reaching 2% was a big deal.

What happens when the inflation target is reached?

Reaching 2% is a great success for the MPC, however it’s unlikely the inflation rate will continue to be 2% over the next few months, so what’s the point?

Although the MPC have only hit the 2% CPI inflation target twice within the last two years, another way of measuring their success is through the number of open letters that have been written by the government. If the level of inflation is 1% lower or 1% higher than the 2% target, then the government has to write an open letter highlighting the reasons for its occurrence as well as what the MPC propose to do about it. This occurred a few times, but mostly after the recession. Therefore, it can be said that the MPC have been successful in keeping inflation stable because even though they haven’t hit the target many times, they have managed to control its range. Furthermore, there are many factors that can affect consumption other than interest rates; the recession and the recovery of the recession are incidences, which are out of the control of the MPC.

All in all, it can be said that with regards to monetary policy the MPC haven’t been very successful in the long run. However, there is a chance that interest rates may rise if unemployment reaches 7%. Furthermore, the MPC’s role in targeting inflation has been successful but it’s hard to really measure the success of their role, as there are various limitations to the inflation target and many factors that affect inflation other than interest rates.

Thanks for reading!

Masdar City: The Answer To Sustainable Economic Growth?

2014-02-22T06:59:00.001+00:00

By Shivani Maru

Masdar City: the future of sustainable living. Initiated back in 2006, Masdar City (located in Abu Dhabi) is a city that will only run on renewable resources. Although some may argue that this initiative will be ineffective as it is surrounded by ‘some of the world’s most unsustainable developments,’ Masdar City is helping to correct this. Masdar City is another way of raising awareness to residents of the UAE and the world about green technology.

Sustainability is very important for the economy, especially for the future. What’s the use of producing goods from natural resources that will eventually run out? Especially, when natural resources are being consumed faster than they are being produced. They are going to run out, and also considering that Abu Dhabi is a net exporter of oil, this raises questions as to the sustainability of the country. Often, governments use higher taxes on petrol as a way of becoming more sustainable. However, the truth is is that we need these resources regardless. Therefore, it’s better to look at renewable resources as an alternative.

But what makes Masdar City sustainable? Well, for one, the city only uses clean technology. A main feature of a city is transport. In Masdar City, people move around the city using electric cars. Also, there will be a connection between the main Abu Dhabi areas and Masdar City through the use of their light rail. Abu Dhabi is making great use of the sun as well. It’s a huge advantage, especially considering that they are building the world’s largest solar power plant. The city is also making use of other renewable energy resources such as wind power.

Masdar City already has provided many advantages. One key factor is that it has changed the attitudes of society. Back in 2006, Masdar City was just one initiative, however now many other countries are aiming to create new technologies. It’s not only countries though; firms and consumers are being influenced as well. For example, in Dubai, the Change Initiative recently opened. The company aims to provide consumers with methods of being sustainable in all sorts of ways. This is especially useful in a country where the carbon footprint is so high. Furthermore, a university was opened in Masdar City which looks at creating new green technologies. This will prove to be vital for the future, or even now, when looking to reserve natural resources. Masdar City has also inspired the idea of launching a Food City, a city which is self sufficient in providing itself food.

In addition to these factors, Masdar City is a hub for green companies. I recently watched a video as to what made Masdar City economically beneficial to firms. For one, it provides these firms with some great market opportunities, particularly for those who wish to target the Middle East and Asia. These companies will be able to work together and test their products. This will definitely help to increase innovation. I mean, ‘two brains are better than one.’ Also, Masdar City and Abu Dhabi both have great infrastructure and Masdar City is internationally recognised.

Nevertheless, Masdar City is still a working progress, where the official completion date won’t be until around 2030. Some consider Masdar City to be a city designed for the elite. A city in such a developed and rich economy may not benefit developing and poorer economics. However this, in my opinion, isn’t what Masdar is about. Masdar is about spreading the wealth of green knowledge to the rest of the world. I do understand how Masdar City can be considered this, as it could widen the development gap, whereby developing economies may be left behind.

Overall, Masdar City has some incredible benefits. Even though it started as a vision, it is definitely developing into something real. In the long term, I believe that Masdar City can contribute greatly to creating a sustainable economy and environment, and will help to develop some great technologies, especially if you consider the huge amount of funding that it has. However, perhaps Masdar City shouldn’t be the only option for promoting green technology. In the UAE, I find that there is, in general, a lack of promotion of green technology. I mean recycling is somewhat promoted, but not to the extent that it encourages people to go to their local supermarket and recycle. Instead, of focusing solely on Masdar City, the UAE could maybe look at promoting green technology throughout the country as well.

Thank you for reading!

The Shifts and the Shocks: Lessons of the Global Financial Crisis

2014-02-08T10:46:00.000+00:00

By Viva Avasthi

"In economic terms, the only other disaster that matches this is a world war. [...] This wasn't some minor event. We will be living with the consequences of this possibly forever."

The quote above is from Martin Wolf, the associate editor and chief economics commentator at the Financial Times, specifically from the highly passionate and immensely thought-provoking lecture he delivered at the University of Birmingham on Wednesday (5th October). Mr Wolf is, as his Wikipedia page puts it, 'widely considered to be one of the world's most influential writers on economics' and so it was with great excitement that I came to listen to him speak on what he is most passionate about: the financial crisis of 2008. I was not disappointed.

In outlining the key arguments which shaped his lecture, I will follow the same structure which he did by looking first at where we are post-crash, then how we got here, and finally what we should learn. Along the way I will insert my own comments and also some references to books, videos and ideas which I feel have already contributed well to the existing debate and which you readers may want to look into. In an effort to keep this article of a moderate rather than excessively long length, I have taken the liberty to condense Mr Wolf's arguments as much as possible, so please do forgive any ambiguity present. Comments are, as always, very welcome and I will be delighted if you make the effort to share your thoughts with me.

Martin Wolf can be seen here on the far left.

1. Where we are

Mr Wolf stressed that despite pursuing the most stimulative monetary policy in history (by which he meant extremely low base interest rates and the use of quantitative easing, which I have explained in another article) the high income countries have not recovered very well at all in the years following the crisis. In 2013, the Eurozone's output was 13% below its pre-crisis level; the US's was at 15% below the pre-crisis level; the UK's was at a shocking 19%. The loss in GDP for the UK has been between 5 and 6 times the size of our GDP, and since nearly all the lost output was in productivity, we have now had six years without productivity growth.

"This is the slowest recovery in British recorded history and we still haven't got [back] to the starting point."

Mr Wolf went as far as to compare the devastating impacts of the crash on the high income countries' economies as equivalent to those created by a world war - and he didn't make that comparison lightly.

Fig 1. Central banks' interest rates hit rock bottom after the crash.

It is clear that all these governments did as much as they possibly could in terms of monetary policy as the graph below shows, with money having been effectively close to free since 2009. Mr Wolf argued that, in fact, from 2008 to 2010 the Federal Reserve had in essence become the United States' credit system, which I found incredibly shocking, especially since, as Mr Wolf said, "this, remember, is the country which strongly believes in the free market".

Despite all these attempts to prevent their respective countries' economies from collapsing, it is truly horrifying to see (as already demonstrated by the statistics I've mentioned) that those economies have been doing so badly (until very recently). It makes me wonder just how awful the situation might have been had the governments not stepped in and literally taken over the banking system.

2. How we got here

How did we get into such a terrible state? There have been numerous outstanding books and documentaries on this subject, but I personally recommend the 2010 documentary film 'Inside Job', which is very well-made and which made me feel utterly outraged when I saw it. In his lecture, Mr Wolf called the financial crash the result of "a complex interaction of two forces: a global savings glut and a fragile financial system". Let's explore that further:

A global savings glut

The 'global savings glut' manifested in the form of a housing bubble after real interest rates on 10 year government bond yields plummeted and so real house prices began to soar upwards. When the real interest rates on assets started becoming negative (note that 'real' interest rates are interest rates after accounting for inflation), all the net capital importer nations using the surplus savings of the world went into crisis. (Even now, the return for China on US assets will be "monstrously" negative as the US is defaulting on its debts.) There were huge increases in the gross debt levels of debtor countries, especially in those sectors which had been highly leveraged, such as the household and financial sectors.

A fragile financial system

The financial sector, as already mentioned, had been (and still is!) highly leveraged. But the figures themselves are staggering. The normal pre-crash leverage ratio was 20:1, which was already a precarious figure as it meant that banks could lend £20 for every £1 that they had in 'hard cash' (which is also known as narrow money, or M0). Just before the crisis, however, the ratio had become something close to 50:1. The banks were creating money which they did not really have (known as 'fiat money') with the belief that everybody would not come knocking for their money all at once. However, once the economy started to falter and people began to lose confidence (what Keynes would have referred to as low 'animal spirits') there was a comprehensive run on the banks, leading to those institutions collapsing as they simply did not have enough money to pay all the 'hard cash' being demanded.

Fig 2. Banks are failing to carry out what should be their primary duty.

Not only was this the case, but banks were, and indeed still are as Figure 2 shows, failing in their primary and most basic duty: that of lending to businesses so that they might improve their productivity. The graph shows that in August of last year, financial institutions in the UK were making 43% of their loans to individuals for their mortgages, 34% to other banks and only 9% to non-financial businesses. This last statistic is outrageous.

At the very moment that his audience was wondering why the British government doesn't put some sort of control on mortgage lending, he proclaimed:

"No British government will consider a lower housing policy. Sorry. If they did, the banking system would implode."

Unfortunately, this is completely true.

The Eurozone

Mr Wolf focused on the Eurozone at this point and said that in his view, "the core of the Eurozone crisis is not fiscal", but rather that the fiscal crisis was a "symptom" of the financial crisis. Countries with budget deficits faced the largest difficulties as a result of the crash. For example, though Ireland's net public debt had only been around 10% of GDP in 2007, it rapidly escalated to over 100% of GDP by 2013.

3. What we should learn

I felt that this was the most important and most interesting part of Mr Wolf's talk. The things mentioned up till this section of the lecture were shocking, yes, but not really things I hadn't really heard before. It was Mr Wolf's personal opinions on what he feels we need to do now that I was most interested in. So what did Mr Wolf tell his (by now thoroughly scared) audience?

There are five key things which Mr Wolf feels we should learn from the financial crisis:

A) The financial system is fragile and crisis prone

Mr Wolf believes that we have made a huge mistake in allowing private institutions to serve a fundamental public service: that of creating money. The result has been a fragile, explosive system. He also emphasised the idea that the financial system is always part of the state and that it is foolish to think otherwise. For this reason we need to have higher capital ratios and "workable macro-prudential policies".

B) Large current account imbalances virtually always suggest a crisis is on the way

Mr Wolf mentioned that the concern Keynes had raised over imbalances at Bretton Woods (where a new agreement was formed between 44 countries aiming to reshape the world's international financial system after the shock of the Great Depression) remains valid today. He feels that unlike then, there is not currently a mechanism to ensure global balance, but that the role of the dollar actually seems to make balance "impossible to achieve". This has a clear link with his point D).

C) We may be moving into secular stagnation in the high-income countries

The combination of weak demand in the private sector, slowing trend productivity growth, deteriorating demographics, debt overhangs and financial repression is one which may be the cause of stagnation in the high-income economies according to Mr Wolf.

D) Management of the world economy has become more difficult as the economic and political weight of the West has declined

We are in a period of transition between hegemonic powers according to Mr Wolf, and just as the old transition in the 1920s and 1930s from the UK to the US was deeply uncomfortable, this period is also difficult. He feels that China cannot become the hegemon of a global market economy, but didn't really get the time to explain why. His assertion is intriguing, and it would have been brilliant to have heard his arguments in its defence.

E) The Eurozone is a 'bad marriage' but divorce would be costly

Mr Wolf feels that things that have not yet happened but which might save the marriage are: the restructuring of debt to tackle the large debt overhangs; financing, largely supported by the ECB (European Central Bank); a symmetrical adjustment of income and spending; and a banking union with a minimum fiscal union to ensure the success of the banking union.

Some interesting points from the Q&A session

There was only time for a couple of questions, but some of the key things which emerged from the session were that:

Mr Wolf would ideally like us to follow the 'Chicago plan', which he didn't go into any detail about as he didn't have the time, but which I have briefly outlined here. The Chicago plan was actually suggested in the 1930s by US economists as a method to escape the Great Depression, but was brought to the fore in 2012 by the IMF (International Monetary Fund). The plan was really quite radical as it required banks to put up 100 percent reserve backing for their reserves (no more 20:1 or 50:1 leverage ratios) and no longer to have the ability to create money from nothing. The Week magazine has written an excellent article on the matter, which is definitely worth a read, as it explores the key issues clearly and succinctly.
We (the UK) are the only country which implemented ring fence policies where we separated the retail and investment sections of banks to reduce the risks associated with investment banking from contaminating retail banking. Other countries are now considering following suit. Mr Wolf was himself involved in pushing the legislation through and says that although it is quite far from the ideal, in his opinion, it "can be made to work".

My own thoughts...

I think the financial crash has illustrated that our entire system needs reform. By this I don't just mean our financial system, which certainly needs more reform than has already occurred, but our entire way of life in the high-income countries. Do we really need to have a system of economics which acts as though we never, ever have enough and constantly need more? We live in a 'Story of Stuff' world, and this is not making us any happier. Indeed, inequality levels have sky-rocketed since the crash, and the people who seem worse off are the (relatively innocent) general public who were duped by those with power, influence, and huge amounts of money. I realise that these comments have not been supported with evidence here, but I will be writing a detailed article exploring my thoughts once I have finished reading 'How Much is Enough: Money and the Good Life' by Robert and Edward Skidelsky. I highly recommend you read the book and please look out for my article on the matter which I will write as soon as possible.

Many thanks to Mr Wolf for his passionate lecture and to the University of Birmingham for organising and hosting it!