Wars as a tragic learning opportunity in Economics (and beyond)

Wars (the World Wars, the Spanish Civil War, the Balcan Wars...) are a tragic learning opportunity about history, politics, economics and their interaction (there is free coverage in the Financial Times of the War in Ukraine). These notes are based on what I tried to share with my students on Introductory Economics in my last class session.

Peace is the ultimate public good: it is non-rival and non-excludable (the provision of public goods requires external intervention or cooperation). Well-functionning markets for private goods rely on this and other public goods.

Wars are a reminder that markets are not the only mechanisms of resource allocation (there is also central and military planning, among others).

Multidisciplinary studies can contribute to better understanding (and preventing) wars:

•Wars are treated as exogenous if one studies the economy as isolated: an external shock that triggers economic crises through lower growth or de-growth and higher inflation with corresponding pressure to increase interest rates (and many other changes).

•As endogenous if one (correctly) studies the economy as part of society and history. The best economists know this (Keynes wrote “The Economic Consequences of Peace,” about the factors that could lead to a second world war)

Wars (through market disruption: destruction, supply chain bottlenecks, sanctions –should oligarchs be better targeted as suggested by Zucman and Piketty? Russia is one of the countries in the world where the richest 0.01% concentrates a higher proportion of wealth, and most of it is off-shore) have an impact on 

•Energy and Commodity Markets: oil, gas...

•Asset prices (the expectation about the profitability of firms changes, for example Gazprom).

Sadly, we’ll have to talk much more about this in the immediate future.

Cheques and unbalances in institutions: the example of sports

All organizations and institutions should have checks and balances, to avoid concentrations of power and risk in a few -or even in a pair of-  hands. Sports organizations and institutions are no exception.

Simon Kuper in his book “Barça,” wrote about the rise and fall of FC Barcelona, the soccer club. The book ends with the departure of Leo Messi, with the institution unable to keep paying his high salary. The management debacle that led to that financial disaster is not clear that has been rectified by the current club officials. Head coaches (of first and youth teams) and CEOs have shorter and shorter tenures, and the elected president shows no sign of resisting populist pressures and of running the club in a professional way.

The agents of the most promising young players, Gavi and Araujo, do not undestand the high expenses of the January transfer window before negotiating the new contracts with them, the talented young stars who are sustaining the team in this transition period. The club will suffer to retain them. Too much looking to the past glory days makes it difficult to commit to renovating the roster and tell the old stars that their time has come.

Continuous managerial changes mean that nobody takes responsibility for the time until the last change. Meanwhile, the club has taken an enormous loan to rebuild the stadium, something that is long due, but which will require a degree of financial and managerial discipline that is nowhere to be seen.

The same need for discipline and commitment is required for Olympic Games and other big sports events. As the special issue of the journal “Nature Sustainability” argued last year, the proposition that Olympic Games can be environmentally and financially sustainable is not totally an illusion, but it is very difficult to verify. It requires very serious reforms that can only take place under strong discipline and cooperation. The importance of alliances, inside the public or the private sectors, and among the two sectors, goes hand in hand with the need for strong governance.

In British English, a cheque is a printed form on which you write an amount of money and say who it is to be paid to. In American English, this word is spelled check. Too many cheques and too few checks and balances in Sports institutions.

Training Foxes

Isaiah Berlin distinguished between hedgehogs (those who know one big thing in depth) and foxes (those who know a little bit of everything). In the new degree on Contemporary History, Politics and Economics at my university, we train foxes (I am a fox myself)... trying to improve the terms of the trade-off between scope and depth.

Our very motivated and endogenously self-selected students have a predisposition to look at the multidimensionality of social phenomena, and have the opportunity to be exposed to the basics of the three disciplines in four years. To improve the terms of the trade-off, more than teaching them a bit of everything, we try to focus on some key issues. I teach them introductory economics with the CORE materials, which have themselves a multidisciplinary approach.

In the first term, we covered in sequence the eight first chapters of the (excellent, and free) e-book "The Economy," which finish with the standard graph of market supply and demand (the starting point of tradititonal textbooks), after discussing the importance of inequality, history, social interactions, institutions or the environment. In the second term that will be starting this week, more on macro issues (but emphasizing the connection to micro), I will do more than mechanically follow the structure of the e-book. I will cover together units 10, 11 and 12, to emphasize financial markets and financial market imperfections, so that they have an introduction to money and monetary institutions in the context of financial markets and other assets. Then we'll do units 9, 13 and 14, to explain in a sequence labor markets, unemployment, business cycles and fiscal policy. Next we'll go back to monetary policy and inflation with units 15 and the capstone unit 17 (on the great depression and the global financial crisis, and I will ask them to do work on the macroeconomics of the coronavirus crisis). After this, we'll do technological change, growth and the global economy (unit 16 and capstone unit 18, where I will ask them to do work on the European Union and the eurozone as a particular response to Rodrik's trilemma; perhaps we'll make some reference to the capstone unit on the digital economy), to finish on the last days discussing political economy (the interaction between politics and economics) with capstone unit 22. The capstone units on climate change and inequality have to some extent been covered in the first term but we may go back to parts of them.

I will also ask them to choose to do one of the empirical projects from the e-book "Doing Economics" units 4, 8-10 and 12, which are more related to the contents of this second term. I know it sounds ambitious, but as I said, we are foxes, and we are not embarrassed by it.  Reality does not have academic departments. There must be both foxes and hedgehogs, but it's more fun to be a fox. Hopefully, we'll have a good time learning together.