Issue # 11 December, 2015

Interview with Massimo Motta

Nobel Corner: Roger Myerson New: Memoir Reports Jazz in the Third Reich Contents

À la une 4 Interview with Professional 40 Interview with Miguel Massimo Motta de la Mano by Lorenzo Ferrari and Adrien Raizonville by Agne Pupienyte 44 High-Frequency Trading Academic 8 Interview with Roger by Daouda Ngack Myerson Nobel Corner 46 Business Talk by Georgios Petropoulos Laboratoires Pierre Fabre by Stefan Peuchen 12 Interview with Elhanan 47 The Challenges of Energy Helpman Regulation Recipient of the Jean-Jacques Laffont Business Talk by Jean-Yves Ollier Prize 2015 Commission de Régulation et d'Energie by Fei Yeu, Wei Lu and Russell Black by Romain Mongeau

15 Interview with Richard 48 Internship & Memoir Reports Blundell by Emil Palikot

19 On Campus Social Experiments in 54 IAST Distinguished Lectures Development Economics

Svante Pääbo: Modern Human Origins from a The past, the present, and the future Genomic Perspective by Matteo Bobba by Philip Hanspach Janet Currie: The Long Term Consequences of Childhood Health and Circumstance 21 On Post-Crisis Europe by Luise Eisfeld Contemporary monetary policy and its underlying modelling foundations by Christopher Sandmann 56 Coffee Talks The Refugee Crisis in Europe by Philip Hanspach 25 What Caused the Industrial 57 BDE Revolution? by Sarah Lacroix Book Review by Russell Black 58 Junior Etudes 31 The Crucial Role of Automatic Stabilizers No 35 Names and Mentalite by Romain Mongeau Economics by Russell Black in the Title 33 The (Re)Search of the 37 Heil Benny! A brief look at jazz during the Third Reich Correct Statistical Model by José M. Alvarez 59 Picture Quiz by Elia Lapenta Editorial Note

The Team Projects to come Welcome to the eleventh issue of The TSEconomist. It is the last one Editorial Board of the year, but a first for a lot of our new members. The editorial team continues to grow, with a strong presence of incoming José Alvarez master students and undergraduates. I am very happy to welcome Gregory Beaumont Hussein Bidawi them to the team, and look forward to seeing how their ideas will shape the magazine. Safira Chavez Daniel Coysh The current issue has all the elements that have made the magazine Luise Eisfeld great: interviews with distinguished economists, contributions Jacint Enrich from students and faculty, and campus life news and events. It Tilman Graff also features a new section, “Memoir Reports”, dedicated to the Kristina Hagen testimonies of students who chose to write a Master thesis. We hope this section will be as popular as that of “Internship Reports”, Philip Hanspach Max Langer and we encourage you to write to us if you wish to contribute to Wei Lu future issues.

Friedrich Lucke In addition to our work with the print edition, we continue to be David Montoya active in the student life of TSE, having hosted already three of our Veera Nissi Coffee Talks. Next semester, we will also be hosting the second Georgios Petropoulos TSEconomist Writing Workshop and the third TSEconomist Public Aurelie Prefumo Lecture. Professor Jorge Padilla (BGSE, Compass Lexecon) will Xuzhou Qin present “Intellectual Property: Licensing Complemetary Patents”. Catalina Salas If you want to learn more about our speaker, you can read his Tristan Salmon interview for the ninth edition of The TSEconomist. Marina Sanchez del Villar There is one last project that we have started working on and Fabio Schmidt-Fischbach we hope to launch in early 2016. We will be posting in our Christina Sintek Apurav Yash Bhatiya blog (tseconomist.wordpress.com) a series of interviews and testimonies regarding the recently announced tuition increase of Huang Yixin the Master programs at TSE. By doing this, we hope to stay true Li Yu to our purpose of being a platform for discussion and interaction Shuyu Baoli within our community. Please feel free to contact us if you wish to Photographer participate or know more about the project.

Executive Board Finally, I would like to thank the current team and collaborators María Paula Caldas for all their hard work. I am grateful to have the opportunity to Editor-in-Chief work with such a dedicated group of people. I wish you, and all our readers, a relaxing Christmas break. Ange Pupienyte Russell Black María Paula Caldas Deputy Editor Editor-in-Chief Hussein Bidawi Deputy Editor for Design

Teresa Aguilar Rojas Deputy Editor for Organization

Shape Your Magazine! Remark The TSEconomist is a magazine by the students and for the students. It All the writings in this issue remain the is thus open to all, and every contribution is highly appreciated! strict responsibility of their authors and in no way represent the opinions of TSE Send us your thoughts and feedback, attend one of our weekly and its members. meetings, volunteer to cover a Business Talk and interview a speaker, Contact us: write to us or join the team as a board member, proofreader or [email protected] designer! www.tseconomist.com > À la une À la une < Interview with Professor Massimo Motta

by Lorenzo Ferrari and Adrien Raizonville

Prof. Massimo Motta

The TSEconomist team would like to thank Maria Carolina, Moreno Droguett and Dao Thu Ha for their helpful inputs for this interview, and Georgios Petropoulos for coordination.

Massimo Motta is the Chief Economist for Directorate-General (DG) Competition at the European Commission. He is ICREA Research Professor at Universitat Pompeu Fabra and Research Professor of the Barcelona Graduate School of Economics. He founded the GSE’s Competition and Market Regulation Program, where he still teaches. Professor Motta’s main areas of research are industrial organisation and competition policy. He has also worked on international trade and multinational firms. His work, widely cited and influential, has been published in the leading international economic journals. His book Competition Policy: Theory and Practice is the standard international reference on the economics of antitrust, and is used by teachers, scholars, and practitioners.

4 5 > À la une À la une < 1. Before being the Chief Economist at DG Competition, you Restraints, when there was a huge effort to incorporate eco- were the director of the Master programme in Competition nomics into the assessment of vertical agreements. However, I and Market Regulation at the Barcelona Graduate School of think that the main force driving the change was probably the Economics. What elements did you take into account while Merger Regulation of 1989 – different firms were coming to organising the programme? the Commission with lots of economic arguments: the Com- mission understood that they were not well prepared to assess The programme was designed to prepare people to work for these arguments. Another landmark was some judgments by consulting companies and antitrust and regulatory agencies. the Court of First Instance, which were very critical towards the My main purpose was to give students a good theoretical ba- Commission, starting with Airtours. These judgments said the sis but also to familiarise them with how these organisations Commission made material errors of assessment in the eco- work and how to apply the economic techniques they learn to nomic analysis, and they were very critical. The Court of First real-life competition and regulation cases. Instance thus annulled some merger decisions and it was clear at that point that there was the need for more economic anal- 2. Would you make changes in the programme after your ysis and for the creation of the office of the Chief Economist. experience as Chief Economist because you changed your Mario Monti had at that time very good arguments to push for views on certain competition issues? this, although he had already thought about it before. There were a lot of backs and forths, it was not always a straight No, I don’t think so. This is not the first time I have done applied path, but I think that it is clear overall that economics now- work and advised competition agencies. I advised the South adays has more impact in the Commission than in the past. African Competition Authority for six years and I offered training courses to several competition agencies. I have also taught 6. What is the main constraint you face as Chief Economist lawyers, trying to explain economics to people who do not while carrying out competition enforcement? have a background in economics. Meeting practitioners gives you a more applied outlook than the typical academic work. It is a dialogue, a process of interaction. There are lawyers who For these reasons, I do not expect my latest job to dramatically are less sensitive to certain arguments than others, but there change my way of organising academic programmes. are also lawyers who are very sympathetic with effect-based approach and economic analysis, so I think it would not be fair 3. Is it difficult to teach competition economics to lawyers? to talk about constraints. It is up to the Commissioner to recompose the different views. It is not like the lawyers are on It’s not that difficult, but you need to go beyond the jargon one side and the economists on the other. and link economic models to things people can understand. In essence, it’s like translating; you need to focus on economic 7. We imagine that your life as Chief Economist is very differ- insights and intuitions and use a different language to carry ent from the one you had in academia. Could you please tell the message across. It’s a refreshing exercise. We economists us in what they differ, and, even if it is a difficult question, benefit a lot from this reality check; it helps us understand which one do you prefer? what is going on in the real world. When economists talk to each other, they inevitably tend to use their special language First of all, my life has changed because my family is in Barce- and focus on very specific aspects. In contrast, translating the lona and I have to commute every week-end [laughs]. More outcome of a model in plain words disciplines you as an econ- seriously, I am a professor, I am an academic, and I will be very omist to understand the main points of what you are doing. happy to come back and to teach and to do research after the And translating economic models into plain words turns out end of my mandate here. However, I have no regrets for hav- to be very important also here at DG Competition. When I ad- ing accepted this position: this is an experience I wanted to do vise the Commissioner, or when I talk to my colleagues who to have a more complete view about what competition policy are lawyers, I have to translate all the time if I want to be un- is. I was also very interested in looking at how the Commission, derstood. certainly the most important institution in Europe for competition policy, works from the inside. 4. Was it after these professional experiences that you started writing your book Competition Policy: Theory and Prac- On the merits, the two jobs are clearly completely different: tice? one thing which is a little bit frustrating here for a researcher is that you do not have time to go into depth of many things I wrote it while I was doing those teaching and training expe- because, as the Chief Economist, I am involved in all the cases. riences and I clearly drew from them. The book is addressed I direct the economic analysis done by the Chief Economist to two categories of people; economists who want to under- Team, but I also have to advise the Commissioner on cases we stand the models, and competition lawyers. have not worked on. On the other hand, what happens in DG Competition is extremely interesting and you are exposed to 5. Do you think that the role of economic assessment a lot of different cases and industries (some of these I did not has changed in DG Competition during the years? Do have a clue existed); some are very interesting, like the tele- you think it has become more important and influential? coms or energy industries, or State Aid cases, that I have never before had the time to study in depth. Well, if you take competition policy in general and DG Com- petition in particular even only 10-15 years ago, it was very different in the sense that economics had a very marginal role. It started to change in the 90s, first with the policy on Vertical

4 5 > À la une À la une < 8. Which one of the branches of competition policy, namely is a valid argument. Yes, in an industry where firms are finan- Antitrust, Mergers, Cartels, and State Aid, do you think is the cially constrained, it is possible that a merger by creating more most demanding in terms of economic analysis? profit may mean the possibility of pushing projects that otherwise would not be pursued. But it is difficult to see these finan- I would say that the marginal benefit of investment in State cial constraints for mobile network operators, otherwise how Aid research is higher because there was very little economic do they spend billions of euros buying another company… analysis until a short time ago. In one sense it is then more challenging because State Aid analysis developed in a differ- From the empirical point of view there is a well-established ent way to what an economist would have done. This means literature that looks at what is the effect of competition on in- that you really have to make an effort to try to put more eco- vestment and innovation and more generally on productivity. nomics into it, but that is an ongoing process and it is very It is really clear from this literature that competition fosters in- promising. vestment, innovation and productivity. Antitrust is an area where there is still a controversy about what exactly should be the role of economics, and of an ef- From the theoretical point of view, it turned out to my surprise fect-based approach. In a way it is more challenging as well, in that there was very little on the effects of mergers on invest- respect to Mergers for sure, as there is more effort into trying ment. There are some papers about, for instance, the effects to bring economic insights into cases. In Mergers this has al- of increasing the number of firms on investments or, if firms ready been done to a larger extent.Of course there is a lot we are selling products which are more or less substitutable with do but there is still room for improvement. each other’s, what are the effects on investment or on innovation. In all these cases you look at a situation in which you 9. Have you done any research at DG Competition which is have symmetric industry before and symmetry after. You do relevant for cases? a comparative static exercise. What happens when you don’t have symmetry afterwards? I am working on a paper, with Emanuele Tarantino from Uni- versity of Manheim, which is a policy-driven project. It is about We find mergers do not favor investment, unless you have the impact of mergers on investment. This is coming from a very strong economies of scale or of scope. Though even policy debate which started with all these mergers in the mo- then, you can reach the same benefit in terms of investment bile telecom industry. The mobile network operators claim by using another instrument which in the telecom industry is that unless there is consolidation, they don’t have profits and the “network sharing agreement”. It is a bit like R&D coopera- if they don’t have profits they cannot invest. I don’t think this tion, where you have firms deciding about investment or R&D

Prof. Massimo Motta

6 7 > À la une À la une < jointly but then compete on the product market. A network 12. And on the regulation of platforms? sharing agreement means that the mobile operators will share the network but then they would compete at the retail lev- There are lots of aspects that cannot be dealt with by competi- el. If there are important efficiencies to be reaped by joining tion, for instance if we talk about privacy issues. It is clear that forces at the investment level then a merger is not necessary. privacy issues are not for competition rules. When it comes to A network sharing agreement allows you to reach to a great issues which are more related to competition it is for compe- extent those efficiencies but at the same time without distort- tition authorities that should intervene and I don’t think that ing competition too much because firms continue operating it’s for politicians, government, or even the Commission to de- in non-cooperative way. cide who should have access to platforms, and how a platform should be designed. You should let the market develop in its 10. What is the role of research in enforcement? own way.

Research is fundamental. If you don’t have a very rigorous ap- 13. Do we know enough to deal with platforms? proach both at the quantitative level and at the theoretical The theory is mature enough to deal with two sided platforms level then you don’t have the proper tools to analyze policy and related issues. An important step forward to analyze issues in a rigorous and proper way. two-sided platforms was done by Jean-Charles Rochet and Jean Tirole. They created the basis and now we have good ba- There are always new challenges, new things to understand, sis to analyze two-sided markets. and research will help you in, pushing the frontiers and understanding better. It doesn’t mean in a competition agency you can incorporate what comes out of research directly into “A final recommendation: someone who is interested in policy. What generally happens in economics is that you start competition policy has to understand the institutional with an idea, a mechanism. Before it is applied you should and the legal framework.” verify that the concept is robust enough. You should arrive at the policy only if this particular idea or new piece of research is general and robust. This is the part of the exercise we do, 14. What would you suggest to a competition economics stu- making the links between very different models, perhaps with dent, and especially to a budding PhD in the area? competing assumptions, into something that can be used for application and policy. This is also what I tried to do in my I do think a PhD is worthwhile. It is an area where there is still book Competition Policy and with Chiara Fumagalli and Clau- interesting work needed to be done. When approaching a dio Calcagno we are finishing writing a book with the same PhD I always say to my students that they should not be mo- approach on exclusionary practices. There is a new literature tivated by filling a gap in the literature, but motivated by real on exclusionary practices and we are trying to see what gener- world questions and by more applied and policy problems. al and robust conclusions we can draw from these models that That doesn’t mean that they shouldn’t invest both at the lev- can be translated into policy. el of theory and in quantitative tools. Try and think what are the interesting problems and issues, and move from there. It 11. Do you think there are justifications for practices such as is usually the opposite of some people who mainly focus on MFC (Most Favoured Customer) clauses in which there are fancy tools or “I know that my supervisor works on a model, investment by platforms? let me relax some of the model’s assumptions and see what happens”. MFC clauses can have an efficiency effect as well. Imagine a And I do think that it is worth doing a PhD in competition eco- platform which is investing so it manages to have the hotels nomics. It is an area that opens lot of opportunities not only in on board, but also consumers who write reviews, which gives academia but also in agencies, consulting companies, possi- all users a very useful tool. Then what would happen is you bly in large firms. It is also an area which is really rewarding in can look at other platforms, see the hotel you are interest- other respects if you are not a pure theorist and that you are ed in, and go online and book the hotel with this new piece more interested on applications. There is this interaction be- of information with a lower price. There is an element of in- tween research and cases in particular industries which I find vestment protection but there is also an element that could really exciting. This is what attracts me in competition policy. be an obstacle to entry, therefore an anticompetitive effect. Is not only abstract, there are lot of things that you learn a lot Suppose you have a platform which is dominant and you have about industries work. MFC on price, or best price clauses. A new platform, which has At a more abstract level, I find competition policy attractive for got a new idea, does not have the possibility to compete on another reason. I believe that people should have equal op- prices. Especially when you have a network externality, we portunities. In a way competition policy is giving firms equal know that there is an installed base. There is huge advantage opportunities. That doesn’t mean that you may not have infor the dominant company. The issue is how to balance these equality ex-post, based on merits. The important thing is to anticompetitive effects with the pro-competitive effects and give equal opportunities, so that firms can contest the posi- this is not something easy to recompose. The French, Swedish, tion of a dominant firm on equal ground. The firms that are Italian competition authorities in the settlements that they better profit more, and so prevail on the others. Even from that signed two months ago have tried to balance these two ef- point of view, competition policy for people who believe in fects. equal opportunities will be interesting. A final recommendation: someone who is interested in competition policy has to understand the institutional and the legal framework.

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Nobel Corner Interview with Roger Myerson by Georgios Petropoulos

Roger Myerson is the Glen A. Lloyd Distinguished Service Professor of Economics at the University of Chicago. Myerson has made seminal contributions to the fields of economics and political science. In game theory, he introduced refinements to Nash’s concept of equilibrium, and he developed techniques to characterize the effects of communication among rational agents holding different information. His analysis of incentive constraints in economic communication introduced several fundamental concepts that are now widely used in economic analysis, including the revelation principle and the revenue-equivalence theorem in auctions and bargaining. Myerson has also applied game-theoretic tools to political science, analyzing how political incentives can be affected by different electoral systems and constitutional structures. Myerson is the author of Game Theory: Analysis of Con- flict (1991) and Probability Models for Economic Decisions (2005). He also has published numerous articles in professional journals, including Econometrica, Journal of Economic Theory, Games and Decisions, American Political Science Review, Mathematics of Operations Research, and International Journal of Game Theory. He has served as president of the Game Theory Society (2012-2014), president of the Econometric Society (2009), and vice president of the American Academy of Arts and Sciences (1999-2002). He was awarded the 2007 Nobel Memorial Prize in Eco- nomic Sciences for his contributions to mechanism design theory, which analyzes rules for coordinating economic agents efficiently when they have different information and difficulty trusting each other. We interviewed Professor Myerson after the death of John Nash in June 2015. 1. Let me start with a very unfortunate Cournot, after developing his one-shot The most remarkable think I would like event. John Nash was recently killed in competition game, started talking you to know is that John Nash was a a car accident. What would your life in about a dynamic model of competition friend. Not such a friend that I was often academia have been without him? in which firms may collude, effectively going out for dinner, though actually acting all together as a monopolist. The he was once at my house for dinner. This is a good question. John Nash’s idea that Cournot was missing was that We were professional friends who were contribution in economics is extraor- you can reduce the dynamic game to a meeting in conferences and talking dinary important. My 1999 Journal of one stage game by talking about strate- about research and life in general. Nash Economic Literature paper on the his- gic analysis – ex ante strategic planning was influencing my work from when I tory of Nash Equilibrium in economic by the decision makers that should be first started thinking about game the- thought is a non-technical paper, but non-cooperative. This is the key insight ory in the early 1970s, and from then it is one of the papers I am the most and Cournot did not have it. until the mid-1990s. I assumed that I proud of. would have never been able to meet It is hard for me to imagine how my life In some sense the key idea of the Nash him – he was ill and you had to respect could have been without John Nash. equilibrium is actually in the first 4 pag- that and keep your distance. His work My research life would have been enor- es of von Neumann’s 1928 paper. But, became vastly more important after he mously different without Nash equilib- by the end of that paper, von Neumann left economics because of his illness rium. Who knows in what topics and went to cooperative game theory and and there was no way for those of us fields I would have been working. I was lost track of the original insight of his who were using his work to thank him a student starting to do mathematical first pages. Nash’s equilibrium concept for it. You cannot thank people who are economics in the middle of college was certainly coming – it is remarkable dead, it is too late. But, people who are around 1972. I doubt very much that if that it had not been there 100 years ear- alive but ill, you want to let them know Nash had not been born the concept of lier. Not like Nash’s bargaining solution, that you honor their work, and yet it Nash equilibrium would have been left which I am not sure would have been in seemed that there was no way to do for me to discover. I think others would economics if Nash had not done it. that. have figured it out earlier. Maybe Vick- One could argue that Cournot had the rey would have figured it out. Harsanyi And then he suddenly came back to us idea of noncooperative equilibrium, and Selten are other people to look for. and we did those conversations and but he did not see its fundamental Anyway, he was important to me. that was wonderful. To me that was an generality. Cournot used Nash equi- incredible miracle. If I influenced your 2. Could you share with us the high- librium because it was such a natural work in any way, I hope we would meet lights of your professional and per- idea but he did not see it as a general at conferences and, although we might sonal interaction with him? solution concept for economic analysis. not become close buddies, hopefully

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we would talk about research together honor him and he appreciated that. For that people will see my name next to at some times, and if you wanted to ask me it was a privilege not only to build to theirs in the history of this prize. I had a me about how I came up with ideas that his work, but actually to have the oppor- co-authored paper with Maskin but not meant a lot to you, of course we should tunity to honor him in a way that such with Hurwicz. When you co-author a pa- have those conversations. But with Nash contribution should be honored. per, your name appears in a permanent it was impossible, and then it became record of your profession together with 4. Given what you said I am not sur- possible! your co-authors. So when first hearing prised by the fact that when Nash won the news of the Nobel Prize, I suddenly I got to speak at the American Economic the Nobel Prize (together with Harsanyi thought that this is like being published Association’s event in honor of his Nobel and Selten) in 1994 you opened a bot- in a very special publication where my Prize in January 1996. When such an tle of champagne and you celebrated it name will be permanently linked to Eric event happens, where one senior mem- in very warm way. How did you react to Maskin and Leo Hurwicz. ber of the profession stands up to honor the news that you won the Nobel Prize a more senior member who just won a in 2007 together with Hurwicz and I have to tell you that my subsequent Nobel Prize, obviously since they are Maskin? experience is that winning a Nobel Prize both senior people and the person who is first of all a wonderful thing! Anybody When I opened the champagne for Nash is speaking is someone who has a lot of who is reading this and says “I want to it was flat. I was saving the bottle in my standing in the same field the usually do great work and win the Nobel Prize” refrigerator for 6-7 years. But we still those people will have met many times is right. It is a great fun to win the Nobel drank it [laughs]. I did not open cham- before. But I met John Nash at breakfast Prize. But, it actually is quite different pagne when I won the Nobel Prize. I re- that day. We have not met before. And from other professional publications, ceived a call from the Nobel committee then during lunch I stood up in front because when you win the Nobel Prize in Sweden, and Torsten Persson was part of 400 people in a large banquet hall you are also viewed as having some of the group calling, and it was wonder- in a hotel in San Francisco and talked importance by people outside of our ful to hear his voice. My first thought about why is Nash important in eco- profession who do not know you and do when they said that I was winning to- nomics. This may be greatest topic that not even want to know anything about gether with Hurwicz and Maskin was I have ever been given to speak about! The scene was not highlighted in the movie “A Beautiful Mind” [the 2002 film inspired by the life of John Nash], but it was a highlight for me. 3. What was your first impression about John Nash, the person, behind the academic giant, when you first met him? He was speaking slowly and tentatively sometimes. And I could believe that he took some effort to escape from his illusions and hold on to reality. First he seemed fragile but then he became more talkative, and it became clear that he was really a strong person. He was someone who had still dreams of doing more great work. Every doctoral student dreams of having a brilliant little idea that can transform the profession. The odds of actually achieving your dreams of making a brilliant contribution to economics get a bit better if you live long time and work very hard throughout a long career. It is not likely to do it just in your PhD dissertation. For example, the big problem that I originally hoped to solve at my PhD dissertation, I actually did not man- age to solve until 7 years afterwards. But, Nash got a big historically important result in his PhD dissertation! And yet he almost did not have the chance to receive the acknowledgement and glory for his contribution. But then he came back, and we were able to really Roger Myerson

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Flickr.com Chess Pieces Stand Over The Slain King by Ari Lowenthal what the substance of your contribu- no one can say right now who of the proportional representation and single tion was, because it will be too technical couple of hundreds of people working member districts with runoffs or first- and they do not want to be bothered on this area will be awarded, but I know past-the-post, are game theoretic ques- with those details. That is very different that I have been part of something that tions. So I worked on that first. Later on, from having a paper published in a is recognized as important. Now let’s I came to believe in the last decade that prestigious journal. It is something that go to something else.” Political science moral hazard within political systems opened doors for me, because some seemed like an area that there were is really important in understanding people outside of this profession (for many game theory applications can governments. Because, after all, in hu- example, in the government, media, be done. To be more specific, I began man history most governments did not governmental agencies) that actually with the simple intuition that game have democratic elections, and power I wanted to talk to were willing to talk theory was not only about the question had been allocated by other means with me because I became a Nobel of resource allocations, but it was also than popular votes. Understanding Laureate. It is indeed really great to be about competitive interactions. There the means of such allocations is also a Nobel Laureate and even meaningful are competitive interactions in markets important. in some ways. about resource allocations, but also 6. One of the applications of political competitive interactions in political 5. Even before your Nobel Prize, you science is foreign policy. During the competition, and that is another im- started being interested in political previous decade we experienced portant arena in which game theory science. What was your initial moti- major wars. I guess that was the should be applicable. vation to enter this field? Why not motivation for you to start working continue focusing on information I was looking for a good doctoral stu- on issues related to military conflict. economics for example? dent in political science for many years You have publicly expressed your to try to encourage him or her to study disagreement with excessive military For every member of our profession, game theory at my university and even- force like the one we had in Iraq. How from the moment you become a doc- tually I began finding such students. do you see the picture from now on? toral student, your greatest asset is your But at first, as there were not too many Should US foreign policy continue intuition about where the interesting of them, I began to think that I should being based on the military threat? questions are and how you can use your also work in this area myself, so I start- methodological skills to derive some Certainly, I was very strongly opposed ed reading some general background new insights. In the 1980s I was part of a to the American invasion of Iraq. But I books in political science, including group of people who revolutionized in- wanted to be a constructive critic of some old-fashioned institutionally-ori- formation economics. In my university, our occupation, and I became actively ented comparative politics books. in Northwestern, there were a few doz- involved by talking to people in the en of us working on it and around the I should say that my first intuition about military and in the State Department world there were hundreds of people game theory and political science was about counterinsurgency doctrine. The who were working on basic questions that elections are the most important argument I am trying to make about on information and economics. By the part of political science and political military force (based on ideas that I late 1980s I thought “Ok, we made that process, and that the rules of the elec- find in the work of Thomas Schelling) is advance, we will have Nobel Prizes in tions are the rules of a game. All chang- that the primary goal of using military this area, and I can be a candidate; but es of the electoral system, say, between force is to deter attacks on our country.

10 11 > Academic Academic < This involves two things, one is that you invasion. So, the best answer for Ameri- Within a country we have to get along want to say to your potential adversary ca is to simply say to Iran: “There is no to each other, and one of the things we “If you attack me them I will harm you”, way to invade you unless you invade should do to get along with each other but you also need to say, “If you do not another country. If you invade another is to agree about laws and leaders and attack me then we will be able to live country, we will come to the aid of that some basic concepts of justice. And I together very well”. other country, but if you do not, whatev- think that, in questions of international er nasty things you say about us, we are relations, people may systematically Deterrence actually depends on both not going to invade you, because we do project a bias that is functional within force and restraint. I want my potential not do that”. In the long term that would a country but dysfunctional in interna- enemies to know that I have the resolve be a much better strategy. Not just for tional relations. Within a country, we to use force if harmed under certain Iranians, but it would also make America need to assume that everyone within conditions, but, I also want them to safer. That is the main point I wanted to our country shares a basic concept of know that they can count of me being make. justice that is arbitrated by the leaders restrained when they do not attack me. of our country. But, that is not true when And the more powerful I am, the more So, it is really strategic. And strategic we are talking about international con- important it is that I have a reputation means I influence you by your under- flict. You should assume that potential for restraint. So, for America’s invasion standing what I would do under two international adversaries may have of Iraq in 2003, the President of the different circumstances. If I want to de- fundamentally different views of justice. United States often spoke about why ter you from bad behavior, I need you to People from each nation assume that he was invading Iraq, but all of the rea- think that not only am I somebody who what they think is justice is universal. sons had to do with his own personal would be unpleasant to be with if you If you look at two countries that are in judgment. If he woke up tomorrow and behave badly, but also that I would be conflict, you will probably find that each thought some other random country much more pleasant to be with if you side can justify, by selective use of his- was a threat to the United States, he behave well. If it is just that I am going torical record, why they are right accord- would have invaded it. I will give you to invade you no matter what, then ing to “universal principles.” one specific example. We invaded both you better get your best weapons, and Afghanistan and Iraq in the early 2000s that goes to an equilibrium, where I I think that the assumption of game the- and Iran is in between. Under what cir- start fearing your weapons, and I think I oretic rationality, common knowledge cumstances we would not invade Iran? If would be better off by invading you. So rationality, may fail here. It would be a Iran had nuclear weapons, we would not you are right to think that I am going to better world if we could make it better invade Iran. Are there any other circum- invade you – that is the kind of equilib- approximated and teach people that, stances? Based on the statements by rium that we should be trying to avoid. when you are in international conflict President George W. Bush, who was re- Restraint is an equally important deter- with another country, you should al- sponsible for those invasions, you could rence as force. It is game theory. ways consider how the other side sees not see any particular reason. What I am justice in your conflict. That may be a 7. But in game theory we assume that arguing is that it is extremely important limitation of the application of game we have rational actors and this is when the United States uses force to in- theory, but perhaps an understanding common knowledge. If everyone was troduce it only subject to restraints that of game-theoretic assumptions can exactly game theoretic, would they not can be objectively judged by the rest of help to make this important violation of have understood that it was wrong? the world. The United Nations, or other those assumptions clearer to people. Why do we observe in reality such fail- multinational bodies should approve ures in international conflicts? it, or we should have at least this fraction of the Security Council endorsing. The President always wanted to say to American people: “I am a strong candidate for reelection because anybody who I think threatens United States I will invade them”. But if you believed that I was the kind of person who would pull out the gun and shoot anybody whom I thought was a threat to me, then you would not want to invite me to have this interview. You would think that I was a dangerous person, and I would not have this privilege of talking to you. I think that our invasion of Iraq really drove the Iranians to respond against a perceived American threat. I know that the Iranian nuclear program had existed, before the invasion, but I think that the real motivation of the Iranian government to get nuclear weapons has been inoculation against a potential American Pixabay.com

10 11 > Academic Academic <

Interview with Elhanan Helpman by Yue Fei, Wei Lu and Russell Black

pursues some policies or experiences some demographic changes - impacts every other country in the system, not only through trade, but also through its growth. Then there was the third big revolution, which started in 2003: the introduction of heterogeneity into the trade system, so that one could talk about what are the types of firms that participate in foreign trade, and how does the change in the composition of these firms impact productivity and trade. In parallel, in a way disconnected from this development, there has been a development of quantitative models which are much more amenable to analysis with current data sets, which was not the case earlier on. In combi- nation, the changes have been huge. Obviously it is still believed that neoclassical elements play a role, but that they are overwhelmed to a large extent Elhan Helpman by all the new components that have 1. What first drew you to trade and 2. What do you think have been the been factor in into the way we now international economics? biggest changes in the trade literature view the world system. since you have started research in the I guess it started with the fact that topic? 3. What are your suggestions for when I was an undergraduate at Tel young researchers who are interested Aviv University I took a course in in- In a way, it’s almost unrecognisable in trade? ternational trade and the teacher was today, compared to the way the field My advice is twofold. First, learn the fantastic. I became very interested in was when I started. The core of the field subject. This is not trivial advice. It’s the subject, and when I went to Har- when I started was neoclassical trade often the case that courses cover just a vard I naturally took trade as one of my theory, and there was a big disconnect little bit of what’s available in the field, fields. I took many other courses, but between the way people did empirical and so you have to do a lot of reading eventually I developed an attachment work, and the way people did theory. In on your own, beyond the coursework, to trade. I think what interests me most fact, the people who did theory were in order to understand and develop a in this topic is an extension of why I very different people from the people competence in the field. came to economics in the first place. I who did applied work. The overlap chose economics because after read- among these scholars was quite minor. Second, don’t look necessarily for a top- ing books, especially Paul Samuelson’s Since I started to be interested in this ic, which is currently fashionable. Try to Introductory Economics, I realised that subject, there were essentially three or find a topic that interests you the most economics is a subject that can deal even four major revolutions. and allows you to address a meaning- with broad social systems in a system- In the early 1980s there was the mo- ful question. The more meaningful the atic way, and international trade is one nopolistic competition revolution - or question, the better. Then use all your of the few applied fields that takes a what was called at the time new trade knowledge and ability to address this system type approach and uses, for theory. Then, in the early 90s, there was question professionally. It is much more example, general equilibrium theory an integration of this view of the world likely that you will do better work if the more than any other applied field in into economic growth, and the explora- topic interests you and the question is economics. So this sort of system-wide tion of the extent to which growth rates meaningful, than if you try to marginal- approach and the nature of the issues is of countries are interdependent. There- ly improve on something many people what attracted me. fore, whatever one country does - if it have already written about.

12 13 > Academic Academic < Professor Elhanan Helpman is the Galen L. Stone Professor of Internation- complications that may have been al Trade at Harvard University. He has written many of the landmark papers triggered by the original financial crisis. Therefore there is a constant race be- in trade economics along with co-authors such as Gene Grossman, Mark tween research and events. On the one Melitz and Paul Krugman, and is this year’s winner of the Jean-Jacques hand this is good, it keeps us alert; on Lafont Prize given by the IDEI. In his invited lecture, Professor Helpman the other hand, one cannot really hope presented some of the newest research in international economics link- to have breakthroughs fast enough to ing large quantitative industry surveys with workers’ surveys. Researchers understand these phenomena. So we can now see with an unprecedented cross-sectional detail the effects of keep working hard and do what we can. changes in international trade - initially, that trade increases inequality. Over time firms that are not used to competition will not be productive 6. Some countries, particularly China, enough to survive and will have to exit the market. Gradually, inequality seem to have done very well from will be reduced, as the increased market allows the more productive firms increased trade and globalisation over the past few decades. Do you think to expand and take over the resources freed by exiting firms. 4. How do researchers see the change 5. Can you tell us about these most these gains will continue and increase, in trade over the past thirty years? recent discoveries? or level off and decline? Changes, such as firm structure and organisation. The research in the last decade is very Well, it’s typically the case that initially different from what we did in the the gains are bigger, because you collect There are two related trends over the 1980s, because the structure of the the low hanging fruit. This is what China past few decades. One is the disintegra- multinationals has changed, and the has done. China has done very much tion of production. In the international supply chains in the world economy the same that South Korea has done, or context, this means that different parts have changed as a result. And so there as Taiwan has done; this is what we call of the production chain can be located has been a lot of work on this, trying to structural transformation. It helps to go in different countries, and that the com- understand what has happened, what through this stage of structural trans- ponents produced in different countries has caused these big shifts in the supply formation if you have access to foreign can be traded and assembled into final chains. markets, because you can better special- products. This generates supply chains ise. But then, once you have done the that are very different from the way they For example, if you look at the big obvious, developing a manufacturing were in the past. changes in trade between the US and sector, having people move from rural Japan and China together, this hasn’t areas where productivity is low to man- The second is that due to the techno- changed a lot. But, trade between the ufacturing where productivity is high, a logical feasibility of the disintegration of US and China has grown a lot while process that raises productivity and the production, two things have happened. trade between the US and Japan has growth, it becomes much harder to raise One is that not only is offshoring much declined in relative terms. At the same the standard of living. Because once more common than it used to be, but time, Japan has increased its trade with you have done all of this, you need to the role of multinational corporations China. In this case, the breaking up of improve productivity by improving or- is much bigger than it used to be. Big the supply chain has generated a situ- ganisations and institutions, by adopt- corporations outsource intermediate ation in which Japan buys intermediate ing better technologies, by developing inputs both in their home countries and inputs from China and sells final goods new technologies, and these are much in foreign countries. So they buy these produced from them to the US, and the harder tasks. Indeed, historically, it has goods at arm’s length from foreign US is also buying a lot of intermediate always been the case that the begin- suppliers. But in addition, they have inputs from China. This is just an exam- nings of structural transformations are expanded the market for foreign direct ple of such changes. This is a fascinating very successful in terms growth rates investment by acquiring for the most topic, but it also is very difficult to anal- (obviously, they involve other problems, part foreign companies that cater to yse. People are still trying to understand such as inequality, and hardships that the needs of the multinationals. So the this evolution. they reinforce.) And then, when most of role of multinationals in foreign trade is the structural transformation gains have much bigger than it used to be. For ex- In economics – and especially in a dy- been exhausted, growth typically slows ample, about one third of foreign trade namic field like international trade – the down, because you have to do the hard is intra-firm trade, i.e., trade between events change very fast. There are areas work after the easy work has been done subsidiaries and the parent firm or one in which changes have been slow. But already. subsidiary with another. In the US, the in trade the changes were fast and dra- multinationals dominate trade in man- matic. So it is very hard for research to 7. Can we see that there have been ufactures, to a degree that is unprece- keep up with events, and there is this specific detriments and specific bene- dented compared to what it used to be. constant race between research and fits, such as the increase in inequality And as a result, obviously, there has events. I think that as a profession we in other developed countries, or other been a lot of research trying to under- have a very difficult time handling this countries that find it more difficult stand the evolution of these large firms situation. This is also true for financial to structurally transform and start and their supply chains. There is a whole crises; macroeconomists have not yet manufacturing? new subject looking at the boundaries been able to fully explain the latest one, of these firms and the way they conduct while in the meantime the economies We don’t know that China per se has their business. It’s an exciting area. change and there are all sorts of other increased significantly inequality in

12 13 > Academic Academic < other countries. There are many bene- dynamic and find the right niche for some agreements have restrictions on ficial effects in the sense that Chinese themselves, and adjust their economic child labour, at least as far as devel- growth has relied heavily on resources structure to take advantage of areas oping countries are concerned. Some and they have increased the demand in which they can benefit as a result of agreements include protections on for resources produced by many poorer developments in the world economy. intellectual property rights. In NAFTA, countries, in Africa for example. In order Chinese growth is not beneficial to ev- there were political elements; the US to have access to these resources they erybody, neither across countries nor was happy to include Mexico expecting have also invested in these countries, across people within countries. But the that Mexico will liberalise its political and a number of these countries have same can be said, as I said before, about system. done very well as a result. The benefits many economic developments, includ- Because tariffs on manufactures are of Chinese growth have been spread to ing the development of the iPhone, the low, the tendency of the agreements is some degree. computer, the car, or robots. They are now to move more and more towards all developments that are beneficial other economic and non-economic Now, and this is usual, when there is a overall, but they endanger jobs of cer- issues. major change in the world economy, in tain people, and we as a society have to this case the growth of China, which is find ways to handle the distributional Agriculture is a big issue. There are still comparable to the growth of Japan in consequences. very big restrictions on the trade in the 70s, then its competition has some agriculture. This is true in the European negative impacts. In the US there are Union and in the US. The average ag- studies that show that this has hurt ricultural US tariff is close to 10%, and some workers, who had been employed there are very strange arrangements, in the industries, which compete with such as quantity tariffs, where you have Chinese exports to the US. Some oth- one tariff up to some ceiling and then it er studies have shown, however, that jumps up a lot. But these apply mostly among the poorer workers there have to agricultural products, like peanut been benefits from Chinese exports to butter or cheese, because agricultural the US, because these exports were tar- lobbies are very strong in most coun- geted particularly at products that were tries. In Japan, for example, it is very extensively consumed by the poor. So hardto convince the Japanese to re- there are people who are hurt, there are duce tariffs on rice. I think that it is very people who benefit; there always are important to try to settle these issues, distributional issues in foreign trade. because low tariffson exports of agri- flickr.com Trading by epSos.de Moreover, similar issues arise with cultural products from less developed technological change – new inventions 9. Compared with fifty years ago, countries can help them develop and don’t benefit everybody equally, some there are not as many tariff barriers to grow. From this point of view, reducing people gain, some people lose. For this international trade, and so there is a tariffs is quite desirable, but there are reason a society must find ways to deal movement from agreements lowering politically obstacles to overcome. with such distributional issues, at least tariff agreements to regional trade societies that believe that inequality is agreements like TPP and TIPP. What 10. Finally, what do you think about not desirable. They have to find mecha- do you think will be the effect of these the Nobel Prize this week, to Angus nisms that handle these situations, and agreements? Deaton? it’s not always the right thing to prevent rises in inequality by stopping develop- The recent agreements are quite differ- It is a wonderful prize. Angus Deaton’s ment either in technology or foreign ent from the past agreements. The past research is very distinguished; he has trade. But even when there are ways agreements were directed against bar- done a lot of tremendous work. He is to moderate the impact on inequality, riers to trade, primarily tariffs barriers at the pioneer in bringing microeconomic these policies are politically difficult, the beginning, and non-tariff barriers analysis to the understanding of eco- which is a big obstacle to desirable later on. The old set of rounds, such as nomic development, for example. The adjustments. the Kennedy round, the Tokyo round, view of economic development used to and the latest Uruguay round that was be macro-oriented. While this approach 8. What about the effects on other completed in 1994, basically eliminated is still relevant and important, Deaton developing countries, which aren’t tariffs on manufactures. There still are pushed hard over many years to think resource exporters? Countries like some, but they’re low – the average about development issues from the Vietnam, which are competing against tariff on manufactures in a country like perspective of microeconomics, and he China? the US is about 4%. has done a lot of work both empirical and theoretical, to substantiate this Obviously, some countries suffer. It’s al- What they have not done is to elimi- approach. By building datasets and ways the case that, if there are shifts in nate restrictions on trade in services developing methods to analyse them, terms of trade, i.e., the relative prices at and agriculture. Many of the regional he helped us to understand how vari- which goods are traded in world mar- agreements are targeted towards ser- ous microeconomic elements feed into kets, this will benefit some countries vices. And agreements now include development and the their impact on but be to the detriment of others. For many other elements that are not poverty. So I am very happy with this this reason countries have to be pretty trade barriers per se. For examples, prize.

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Interview with Richard Blundell by Emil Palikot

Richard Blundell holds the David Ricardo Chair of Political Economy at University College London where he was appointed Professor of Economics in 1984. Since 1986 he has also been Research Director of the Institute for Fiscal Studies (IFS), where he is also Director of the ESRC Centre for the Microeconomic Analysis of Public Policy. He has held visiting professor positions at UBC, MIT and Berkeley. Blundell holds Honorary Doctorates from the University of St.Gallen, Switzerland; the Norwegian School of Economics, NHH, Bergen, Norway; and the University of Mannheim, Mannheim, Germany. He was awarded a CBE in the Queen’s New Year’s Honours List 2006 and a Knighthood in 2014. He is a Fellow of the Econometric Society, 1991; Fellow of the British Academy, 1996; Honorary Fellow of the American Economic Association, 2001; Honorary Member American Academy of Arts and Science, 2002; and Honorary Fellow of the Institute of Actuaries 2003. He was the President of the European Economic Association in 2004 and the President of the Econometric Society in 2006. He was the President of the Royal Economic Society, 2010-2012. His research includes the fields of microeconometrics, public economics, consumer behaviour, labour supply, taxation and welfare policy evaluation. In 1995 he was awarded the Yrjö Jahnsson Prize for his work in microeconometrics, labour supply and consumer behaviour. The paper ‘Estimating Labour Supply Responses using Tax Reforms’ was awarded the Econometric Society Frisch Prize in 2000.He was awarded the CES-Ifo Prize in 2010 and the Sandmo Prize in 2011. He was recipient of the IZA Prize in Labour Economics in 2012. He was awarded the 2015 BBVA Foundation Frontiers of Knowledge Prize in Economics. He was also the 4th recipient of the Jean-Jacques Laffont Prize in 2008. He was editor of the Journal of Econometrics from 1992 to 1997, and co-editor of Econometrica 1997-2001. He was an editor and author of the Mirrlees Review of Tax Reform.

1. Recent decades have brought a potential payoff. Understanding these optimal for them to face a high average number of important social changes human capital investment decisions tax not necessarily a high marginal for example emancipation of women, and the impact on life-cycle career pro- tax. With the standard structure of tax increasing share of parental duties files, family structures and retirement bands and the shape of the taxable among parents, delayed entry to decisions is a central research question. income distribution, this does not have the labour market by youth, in some any practical bite. Typically optimal More generally, human capital invest- countries end of compulsory military top tax rates are likely to be high, just ments have formed the underpinning service. How have these changes quite how high is the difficult question. for many advances in modern Euro- influence labour supply decisions The main idea behind the Mirrlees pean economies and there is still plenty and how important are these and approach is to make explicit the trade- to do to understand how the labour other social phenomena in economic offs between a desire for equality, the market will adapt and how policies can research on labour supply? need to raise revenue for public goods best be designed. and the effectiveness of economic There is a lot in that question. The incentives. There are many ways in changes you refer to are part of what ”A strongly desire for equality which the Mirrlees approach has been continues to make labour economics will produce a more redistrib- refined but it remains an attractive a very exciting field of research. The utive tax system.” framework for thinking about how best increase in women’s employment, and to improve the tax and welfare system. the increase in human capital investment by women, are two of the most 2. After James Mirrlees was awarded In the Mirrlees Review organised by the radical changes in society. We now have a Noble Prize for his research on opti- Institute for Fiscal Studies and chaired a labour market where new cohorts of mal tax design one of the renowned by Sir James Mirrlees, we tried to high- women are entering work with equal, newspapers wrote that he received light some of these trade-offs. The or if anything better, education qualifi- a noble price for claiming that the Review brought together a high-profile cations than the same cohorts of men. wealthiest part of the population group of international experts and In a way this is creating one of the key should be taxed at a zero rate. How early career researchers to identify the untapped resources in the economy. close together are economic research characteristics of a good tax system for If these skills could be fully utilised in and policy design? Or to put in other any open developed economy in the the economy then productivity could words how good are economists in 21st century. The aim was to assess the be significantly enhanced. However, explaining their research to policy extent to which tax systems, like that in there is the trade-off between work life makers and to the general public? the UK, conforms to these ideals, and and family life. The question is whether The Mirrlees zero rate point is a bit of a recommend how it might realistically there are coherent policy reforms that theoretical abstraction. The key point is be reformed in that direction. can enhance the role of women in the not that those with the highest incomes If you think about the Mirrlees model, skilled labour market while recognising should not be taxed, but that it may be it is pretty straightforward, the demands on time use. There is huge

PB 15 > Academic Academic < Other aspects of inequality growth may reflect a growing exploitation of pure rents. Still others may reflect growing tax avoidance and evasion. Which of these it is will require different policy responses. Growing underlying inequality in earnings and in wealth puts additional pressure on the tax and welfare system. If society has a preference for equality, then, as inequality increases, the tax system and welfare system will have to do more redistribution. Indeed, the trade-off between incentives and redis- Differences in national income equality around the world as measured by the national Gini coefficient tribution becomes even more critical. The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone Society will need to design a tax base has the same income) and 1 corresponds with absolute inequality (where one person has all the income, and that captures all returns and design a everyone else has zero income). system of tax rates that balances incen- Source: Wikipedia.org tives and redistribution. The Mirrlees Review is a good place to start! underlying objective is equality. In fact, income of different people at different if there were no binding incentive com- points of the income distribution. A The recent underlying inequality trends patibility constraints you would choose strongly desire for equality will produce have left those with low skills in an a policy which delivered equality. What a more redistributive tax system. As increasingly poor lifetime position, often happens though, in the real world, economists we can say little about requiring the tax and welfare system to is that disincentives get in the way of what the social welfare weights should do more to help maintain their incomes. designing a purely equality-based sys- be but, through an empirically founded This suggests the discussion of inequal- tem. We end up willing to accept some analysis, we can suggest ways to ity should be balanced. It is not just degree of inequality in exchange for a improve the design of the tax system the top 1% that is of interest. There larger and more productive economy. incorporating preferences for equality. are dramatic differences between the Perhaps this is an example of econom- bottom 20 % and the rest in a variety ics is often portrayed as a ‘miserable of outcomes such as health, happiness, science’ - you start with a great ideal 3. You said that economists have child development. We should not lose and incentives get in the way! nothing to do with social weights our focus on the poor and on the design that we put on income of differ- of appropriate policies to reverse their What happens in a modern empirical ent parts of the society. However, situation and that of their children. policy work is that microeconometric recently, especially in the last year, techniques and detailed micro-data My own view is that the prospects for we heard a lot from economists sources come together to measure those that enter the labour market with about inequality, especially rising how important are incentives and how low skills is increasingly bleak. Early inequality in developed countries. strongly individuals and firms respond investments in human capital will be We can expect that this will put to them? This requires careful knowl- increasingly important for policy. The pressure on tax design. Do you think edge of the institutional arrangements tax system too will be required to do we should expect changes in tax underlying the tax system and rigorous much more work and this puts pressure schemes because of rising inequality econometric analysis of the data. By on policy design to make sure the sys- and what in your opinion would be estimating the response elasticities of tem works as effectively as possible. economic effects of these changes? labour supply, of savings and of human Any discussion of inequality brings up Inequality is one of the great chal- capital investments we can see how important issues of intergenerational lenges for current economic policy and people will respond to tax changes on transfers of wealth and inheritances. I for society at large. Economists should different margins. The elasticities might think there is a clear role for a well-de- certainly not shy away from the issues by dynamic, they might be static, but signed wealth transfer tax. In fact, we around policy design to tackle growing they tell you how changing marginal suggested one in the Mirrlees Review. inequality. I guess there are two points tax schedule will affect behaviour. Put- That resulted in some key ideas to here. One is to understand what is driv- ting these together with social welfare improve the way we tax capital trans- ing inequality growth and the other to weights produces a very nice summary fers across generations. This must be help design policies that best address of the trade-off between equality and of growing importance in tacking the inequality. incentives. In turn we can capture inequality. different aspects of the way the tax sys- Some of the increasing inequality we tem impacts on behaviour and better have experienced in the last two or improve the system. three decades is presumably reflecting In the end the “optimal” design will changing returns to investments in depend on how society weighs the skills and risky investments. Especially, in an increasingly globalised economy.

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”Some of the increasing inequality we have experienced in the last two or three decades is presumably reflecting changing returns to investments in skills and risky investments. Especially, in an increasingly globalised economy. Other aspects of inequality growth may reflect a growing exploitation of pure rents.”

4. The way many tax systems want to Map of world poverty by country, showing percentage of population living on less than $1.25 per day. Based address the issue of inequality is by on 2009 UN Human Development Report. the use of tax relief. It often results Source: Wikipedia.org in a very complicated tax design with multiplicity of possible reliefs. to increase debt and there is no good in the economy, whether this refers to Sometimes, tax payers might be economic reason for that. Individuals firms making decisions on investment confused because of this complexity. may face a lower tax rate if the earn and labour demand, or families and Is it an issue in economic research, income through capital gains rather individuals in their decisions on labour how likely are the agents involved to than regular earned income. That also supply, human capital investments respond to tax incentives? seems bizarre. and consumer behaviour. Then there is IO research which focuses on the I think the issue of complexity is a key When delivering welfare benefits to interactions between firms and con- one. If you go back to the very early dis- poor families it is often the case that sumers. Empirical microeconomics is cussions on mechanism design there poor families do not take up these where some of the most exciting areas was always an issue that optimal mech- benefits because they don’t under- of economics research are to be found. anisms can be very complex. There stand the system or face some kind Many issues in microeconomics can be is nothing necessarily optimal about of stigma. Reducing stigma and com- only studied when you take models simplicity, but you do have to worry plexity to make the benefit system, of agents’ behaviour to the data and whether individuals and firms under- and tax system generally, transparent uncover how they actually behave. stand the mechanism. It is sometimes and fair seems a prerequisite for good important to have a simple transparent policy reform. In fact in the Mirrlees What is what makes a good empirical design. Review – I keep coming back to the model? I guess, there are 3 components Mirrlees Review – one of key reform to that. The first is to have a really good Certainly, when we did the Mirrlees recommendations was to integrate the question, if you don’t have a good Review we felt that transparency is a key different means-tested welfare benefits question to answer you very rarely issue, that the tax welfare system should that poor families face. In the UK that develop a good model, because it is be set up in a way that is relatively easy might be 13 different eligible benefits. just too hard to think about model that to understand, and ‘understandability’ Antoine Bozio from Paris School of covers everything. So start with a well should be one of the key objectives for Economics says that in France there are defined question. Indeed, I think that the authority. Remember that many at least 17 eligible benefits available some of the weakest papers in empir- hidden tax changes happen along the for single income parent. That’s pretty ical research are those that didn’t start lines of those you mention. Some of complicated and cannot be optimal. with a clear, well-defined question. them increase complexity because the This is an area where economists have Once you have refined your question tax authorities have an incentive to put in far too little attention. then you use economics to get the increase tax rates on sources that are key insights. That usually tells you the less salient than the headline income type of data and the type of empirical tax rates. 5. Let’s move from area of taxes to approach you want to follow. It is difficult to really argue that you want some more general questions. Most The data must in a sense lead every- to have different marginal tax rates on of your research is in the field of thing: you want to let the data speak similar income sources, whether they empirical microeconomics. Why do and tell you what behaviour is really are asset incomes or earned income. you think this field is particularly going on. It is always an difficult balance Many tax systems don’t have that. For interesting and important to be between data and model. With so much example firms face different effective studied? What are the key features data available you do not want to drown tax rates on raising funding through of a design of a good model of micro- in data. On the other hand you don’t debt or equity. Typically much lower economic behaviour? want to ignore the key patterns in the effective tax rate on raising funds Empirical microeconomics is where we data. If you ask the right question at the through debt, which gives an incentive are really in touch with decision making outset that should tell you how much

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detail you have to put into the model. households. That underpins much of What is your personal view on the That is what type of assumptions you work we do at IFS. issue? Under the current conditions, have to add to identify the key param- what is the best for UK, stay or leave? eters that will answer your question. A Should we stay or should we go? I central aspect of doing good empirical 7. Today you have participated in the strongly prefer to stay in, for both microeconomics is really choosing the meeting of the TSE scientific council. intellectual and personal reasons. right microeconometric approach that Where is, in your opinion, the place From the academic point of view the will robustly identify the answer that of TSE on the map of economic European research environment is a you seek. departments? What are the biggest good one. From an economic research successes and what are the biggest perspective: the European Economic challenges it faces? Association, the Econometric Society 6. You are Research Director in Insti- Well, I should say TSE is very much European-wide, the PhD networks tute for Fiscal Studies in London. on the map. It’s one of the strongest like ENTER, are all important. The way Could you say a couple of words economic departments and research research is funded through European about this institution? groups in Europe and in the world, Research Council is also very valuable. IFS is a fairly unique place. It was set more generally. It is a very exciting and Most of all is the growing ease with up more than 35 years ago and aims to successful place, you should be sure of which we do joint research, exchange be at the interface of rigours academic that. It has maintained its place for a ideas and work on shared policy issues. microeconomic research and public long while now. It has been a phenome- I can’t imagine the UK and the EU apart. policy. By the way, a similar aim and nal success, building a red-hot research There are plenty of obvious reforms motivation to that Jean-Jacques Laffont department that trains the top-level that should happen within the EU, had when he set up the ground-break- PhD and graduate students. within our individual countries too. As ing industrial organization and regula- The system of higher education in economists we should be arguing the tion research group in Toulouse. At the Europe, especially continental Europe case for open door policies that make outset we even collaborated together is not that well-aligned to a task of our economies flourish. I will be looking in thinking how to do this best. developing successful economic forward to UK staying in the EU! The IFS is an independent institute that research departments, partly because operates separately from the university we are competing often with top level and has the ability to run its own admin- US departments. Their structure of sal- istration. That way we can be more agile aries and flexibility of contracts makes References and we don’t have to worry so much that quite a big challenge. Some places, about an external bureaucracy. The IFS UCL-IFS, TSE and a few others in Europe, For more information about relevant is really about microeconomic policy unfortunately far too few, have man- research, please refer to Richard Blun- research very broadly defined. It works aged to stand up to those challenges. dell’s personal website at UCL: on the way government policy interacts The challenges are training the best http://www.ucl.ac.uk/~uctp39a/ with firms and households. Especially young scholars, hiring the best people fiscal policy, but not only fiscal policy. and attracting the really best research We draw on leading researchers at students. We have to make sure that UCL but also from around the UK and the administration of the university Europe too, in fact Pierre Dubois from understands that. The best way to do TSE is a Research Fellow of the IFS and that is to show how a stunning success Thierry Magnac is a member of the Sci- places like TSE can be. I think TSE has entific Advisory Board. to be congratulated, it is a fantastically The idea is to get top-notch academic important part of economics research research to address key policy debates. and PhD training environment in the To do really good academic research, world. you need to have some key motivating ideas, and many of those come from ”I think TSE has to be con- policy questions. I always liked the gratulated, it is a fantas- way policy questions drive academic research and then academic research tically important part of produces some kind of an answer, economics research and the policy questions get refined and the interaction between policy and PhD training environment research continues. in the world. ” Perhaps, the biggest change that we 8. The last question is on the verge have seen in empirical economics, or of politics and economics- more and even in economics as a whole, in the more voices in UK call for leaving EU. last 20 years is the growth of ability to There will be a referendum asking if access very large dataset on firms and UK should leave the European Union.

18 19 > Academic Academic <

Social Experiments in Development Economics: The past, the present, and the future by Matteo Bobba

here is a long tradition in devel- Matteo Bobba is an Assistant Professor at Toulouse School of Economics Topment economics of collecting since September 2015. He has received his PhD from Paris School of Eco- original data in order to test a specific nomics and prior to joining TSE worked as a research economist at the In- economic hypothesis or to study a ter-American Development Bank (IDB) in Washington DC. His most recent particular setting or institution. This research looks at market frictions, such as credit market imperfections, on is perhaps due to the historical con- occupational or schooling choices in developing countries. junction of the lack of readily available “internally” valid estimates of the causal high-quality, large-scale data sets, effect. commonly available in the industrial- ized countries, and the low cost of data The last few years have seen a veritable collection in the developing countries. explosion of randomized experiments It may also have something to do with in the development economics and the peculiar tendency of development with it, perhaps inevitably, a rising tide economists to let questions determine of criticism. Given the long history of the data to be obtained, instead of the randomization in the medical and so- data determining the questions that cial sciences, much of those criticisms can be asked. are also not new. Indeed, most of the standard objections may be found in a The increasing availability of both cen- single seminal piece based on the pre- sus and survey data from developing vious generation of randomized eval- countries have clearly expanded the uations (Heckman, 1992). More recent array of research questions and the set critiques, directly addressed at the re- of empirical tools (mostly borrowed cent wave of randomized experiments from labor economics and industrial in developing countries (Deaton, 2010), organization). Yet, many empirical de- tend to confound the experimental velopment economists today pose the Professor Matteo Bobba approach with the realm of empirical question first, and then find the original social constraints that poor people face, methods that partly mimic the process data by doing a fieldwork to answer it. and to inform social policies about var- of random assignment in the presence Such an influential group of scholars ious ways to partly alleviate them. The of observational data - such as instru- – also known as the “randomistas” – ad- wide array of topics across a variety of mental variable techniques and natural vocates the prominent role of social ex- settings and countries span from the experiments. This and other arguments periments as the main tool for studying study of corruption in the process of paved the way to false oppositions development effectiveness. obtaining a driving license in India to between experimental work and other ”Yet, many empirical develop- the effects of charging different prices forms of empirical research, which rely for antimalarial bed nets in Kenya or ment economists today pose on restrictions justified by the econom- providing information about the labor ic theory in order to identify certain the question first, and then market returns to schooling in the parameters of interest from realized find the original data by doing Dominical Republic (Banerjee and Du- variations in the data. a fieldwork to answer it. ” flo, 2011). The methodology of random assign- Randomization and its discontents ment was first established by medical Natural randomized experiments Randomized evaluations assess the and biological experimenters in the A middle ground and somewhat more impact of an intervention by randomly 19th century and pioneered by econ- balanced view to social experiments allocating individuals to a “treatment” omists in the late 1960s in the context is the capacity to engineer credible group, comprising individuals who re- of the evaluation of large-scale social sources of exogenous variation in real ceive the program, and a “comparison” programs in the US. Experimental re- world economic environments. This group, comprising individuals who do search in development economics, like variation (if the experiment is con- not, at least for some period of time, earlier research in labor economics and structed carefully) can then be used receive the treatment. Comparing health economics, started from a con- not only to assess the effectiveness of average outcomes across different cern about the reliable identification of the program or the policy intervention groups chosen at random has allowed program effects in the face of complex under study but also to test economic researchers to test a variety of hypoth- and multiple channels of causality. Ex- theories that would allow researchers eses about some of the economic and periments make it possible to vary one to better understand the mechanisms factor at a time and, therefore, provide behind the experimental impacts of the

18 19 > Academic Academic <

intervention. The influence of the randomistas in aimed at testing the effectiveness of the policy world social policies using the experimental A recent paper of mine, co-authored approach. Even non-profits have recent- with another TSE researcher (Bianchi Beyond the heated debate among ly started to collaborate with third-party and Bobba, 2013), may be viewed as a academic economists about the role researchers to measure the impacts of suitable illustration of this approach. of social experiments in development their core operations using randomized We consider a randomly assigned cash economics and other “applied micro” evaluations. transfer program in rural Mexico aimed fields, the randomistas have gained re- at fostering children’s schooling and markable influence in the development Whether this is just another temporary family members’ health behaviors (Pro- community. Given the crucial impor- fad or a more established long-term gresa-Oportunidades) and show that tance of the implementing partners in paradigm is difficult to tell. What is clear the program also increased entry into the practical execution of social exper- at this point is that both development entrepreneurship for adult individuals. iments, leading scholars have created economists and practitioners are likely We thus analyze whether this effect their own partner agencies – like MIT’s to get increasingly exposed to social is due to improved access to start-up Poverty Action Lab, Yale’s Innovation for experiments, at least in the short term. capital or rather to an improved ability Poverty Action and Berkeley’s Center From the viewpoint of researchers (and to insure against entrepreneurial risk. for Effective Global Action, which rou- Ph.D. students who are often looking We develop a simple model to highlight tinely conduct randomized evaluations in vain for “something to randomize”) how liquidity and insurance constraints to test and improve the effectiveness this is bound to generate a variety of respond differently to the time profile of programs and policies aimed at re- promising new opportunities for natural of expected income shocks, and exploit ducing poverty. Within a decade or so, randomized experiments! the variation in the timing of these those labs have grown dramatically in shocks in order to evaluate the relative both size and scope, employing a large importance of these two constraints. research staff in support of the affiliated References The evidence suggests that financial professors and featuring an extensive Angelucci, M. and De Giorgi, G. (2009), barriers to entry into self-employment number of country offices scattered “Indirect effects of an aid program: How do not appear as the most important across four continents. do cash transfers affect ineligibles’ con- obstacle in our setting. The possibility sumption?” American Economic Review of better insuring against future income ”The randomistas have gained 99(1), 486–508. fluctuations may be instead what induc- remarkable influence in the de- es some individuals to undertake the velopment community. Given Attanasio O. P., Costas M. and Ana S. risky choice of setting up a business. In the crucial importance of the (2012). “Education Choices in Mexico: this view, promoting entrepreneurship Using a Structural Model and a Random- may require reducing households’ expo- implementing partners in the ized Experiment to Evaluate PROGRESA,” sure to risk in other dimensions. practical execution of social Review of Economic Studies, vol. 79(1), pages 37-66. Alternatively, one can use the experi- experiments, leading scholars mental variation in one or more vari- have created their own partner Banerjee A. V. and Esther D. (2011). ables to estimate behavioral models agencies – like MIT’s Poverty Ac- “Poor Economics: A Radical Rethinking that are possibly richer and use weaker tion Lab, Yale’s Innovation for of the Way to Fight Global Poverty”, Pub- assumptions than the models estimated Poverty Action and Berkeley’s lic Affairs. without the luxury of the experimen- Bianchi, Milo, and Matteo B. (2013), “Li- tal variation. For instance, Attanasio, Center for Effective Global Ac- quidity, Risk, and Occupational Choices,” Meghir and Santiago (2012) use the tion, which routinely conduct Review of Economic Studies, 80, 491–511. same randomized evaluation design dis- randomized evaluations to test cussed above to identify and estimate a and improve the effectiveness Deaton A. (2010). “Instruments, Ran- dynamic model of schooling decisions. of programs and policies aimed domization, and Learning about Devel- In particular, the random assignment of opment,” Journal of Economic Literature, the Mexican cash transfer program acts at reducing poverty. ” vol. 48(2), 424-55. as a shock to the opportunity cost of Heckman, J. J. (1992). “Randomization schooling, which is shown to have a very Both governmental and non-governmental aid agencies are quickly follow- and social policy evaluation,” in Evalu- different impact on schooling decisions ating Welfare and Training Programs, than a comparable (non-experimental) ing the trend. Philanthropic donors are sometimes unwilling to fund non-ex- editors Charles Manski and I. Garfinkel. increase in children’s market wages. The Cambridge, MA: Harvard University authors then use the model to simulate perimental evaluations (and relatedly researchers often turn down opportuni- Press. (also available as NBER Technical the schooling impacts of changes to Working Paper No.107, 1991). some of the parameters of the program, ties to evaluate public programs when thereby illustrating the potential syner- randomization is not feasible). The World Lalonde Robert, J. (1986): “Evaluating the gies between social experiments and Bank’s largest fund (to date) devoted Econometric Evaluations of Training Pro- structural models for the design and to impact evaluations gives an explicit grams Using Experimental Data,” Ameri- evaluation of public policies. preference for randomized designs. can Economic Review, 76(4), 602–620. Several national governments have now instituted independent evaluation units

20 PB > Academic Academic < The flight of the bumblebee

A comment on post-crisis Europe and its renewed institutional foundations

by Christopher Sandmann

And the first thing that came to mind was something that people said many years ago and then stopped saying it: The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing. Mario Draghi, 26 July 2012

Looking back in (not so) contemporary history creditors in order to sustain the war effort in North America. The debate remains unresolved whether Necker’s report was ario Draghi’s “whatever it takes” remarks at the height of trustworthy or whether his policies rather contributed to the European sovereign debt crisis in July 2012, are one M the decay of French absolutism, culminating in the French of the foremost examples of what was then commonly re- Revolution and the emergence of the modern state. Necker’s ferred to as “unconventional monetary policy”. His speech has mission was undoubtedly successful in its immediate aim. rightly been recognized as historical. At the Global Investment France obtained further credit (520 million livres in compari- Conference in London on 26 July 2012, Mario Draghi didn’t son to 254 million livres of permanent annual expenditures intend to signal a further adjustment of the ECB key interest excluding warfare). rates, but to shatter profound questions on the viability of the Eurozone itself. There are common themes that unite both discourses: Mario Draghi and Jacques Necker both attribute the difficulty to Following the Great Recession peripheral countries of the acquire financing to an unjustified assessment of default Eurozone underwent a major structural crisis. A significant risk. And they both advocate progress in terms of structural portion of peripheral countries’ growth and economic conver- reforms. In 1781 this involved both emphasising past reforms gence since the Euro began had merely relied on consump- as well as advocating further reforms. Under the Ancien ré- tion growth. This in turn had been financed by credit from core gime almost half of all tax revenue was raised by the Ferme member states of the Eurozone. In some cases this was accom- génerale, an outsourced customs, excise and indirect tax col- panied by inefficient governance and unreasonably high pub- lection franchise. The (renewable) agreement between the lic debt. Matters got worse when bailing out bad banks put French crown and private tax collectors was typically signed many states into deficit. By 2012 at the latest, the solvency of for a period of six years, during which tax collectors collected Eurozone member states was put into question. Naturally, this duties in exchange for paying a predetermined rent upfront. was reflected by extraordinary high levels of risk premia on Beginning with the great tax reform implemented by Jacques government bonds. Commentators, particularly from Britain Necker in 1780 there was no upper bound on the duties to be and the United States (whose debt levels, both at the public collected. One need not be an economist to gauge the hefty and a gross level had more than doubled in less than a decade bonuses obtained by tax collectors and the resulting distor- at that moment), couldn’t cease to stress the ill-conceivedness tions in the French economy. In fact, an important source of of the European monetary union. state financing collected by the Ferme génerale was the tax Many analogies to the summer of 2012 are possible. I like best levied on salt (the gabelle). According to Necker’s publication, 19th February 1781. That day Jacques Necker, the finance min- this source of income accounted for more than 21% of all fixed ister to the King of France, Louis XVI, published the compte government expenses (excluding singular costs such as war- rendu. This document provided openly accessible information fare that were not listed in the report). Interestingly, the level about the state of public finances for the first time in the mod- of the tax varied widely across regions. Some regions (the pays ern history of France. The approach in itself was not novel (in exempts) such as Bretagne did not have to pay, others, most Britain the government’s budget was publically scrutinized by notably the south-west of France obtained this status in 1549 Parliament). Yet its context is remarkable. Since 1778, France (the pays redimés), making salt ninety times more expensive was actively supporting the American independence move- in the Isle-de-France than in Bretagne. Naturally, smuggling ment. It was vital for France to ensure the continued faith of its was rife.

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Christopher Sandmann Reconsidering the banking crisis and subsequent institu- intervention. In that banks failed to extend credit to busi- tional reform nesses, the crisis finally transmitted into the real economy. In Europe, banks relocated their activities to their respective For contemporary Europe, many observers have stressed national level, considerably. Obviously this was detrimental to several key factors causing the current financial and its subse- efficient credit allocation. Yet it raised the political leverage of quent public debt crisis. One of the key events following the the banks that were now more likely to be saved in times of default of Lehman brothers was the run on the interbank mar- distress. ket. Many banks unknown to the business of mortgage origination had purchased securitized mortgages. Those in turn (Did subsequent credit constraints imposed on peripheral had been issued by mortgage originators that would sell off European businesses, in contrast with lending conditions the most risky tranches. As evidenced by several key indica- in core European countries, further dampen the peripheral tors such as salary disclosure, lending standards deteriorated countries’ growth prospects? Juncker’s emphasis on using the steadily throughout the preceding years of the crisis. European Investment Bank to provide guarantees for private investment implies his concern at that time about a shortfall In retrospect, it seemed obvious that moral hazard in mortgage in investment.) origination was at the core of the problem. One may however legitimately wonder why the financial sector could ignore this In pre-revolutionary France the parlements, the regional high problem in the run-up to the crisis. But it may be wrong at this courts, often quashed institutional reforms aimed to resolve stage to think of a bank as a single entity. Volkswagen is just the budgetary crisis. They were to some extent responsible for another example of how an in-house atmosphere may lead to forcing a political gridlock on the country, gridlock that result- a disastrous culture of cheating and manipulation. In finance, ed in calling the États général. Upon delivering his remarks incentivising contracts for traders rewarded trades that gener- Mario Draghi expressed his belief that contemporary Europe ated gains without changing the bank’s risk-measure. Despite was blessed with much stronger institutions. The aftermath of their good rating, securitized mortgages were traded at high- the Great Recession brought about three realizations. Firstly, it er yields than e.g. equally rated government bonds. From the proved to be disastrous that the European council had not en- viewpoint of any trader’s incentives, they seemed to be a good forced the stability criteria foreseen by the Maastricht treaty. deal, and it did not matter that their rating reflected at best Budgetary discipline was poor; Germany and France being poorly on their innate risks. On the other hand deregulation the first to break the rules were no exception. Secondly, the in the US housing market, most notably due to the abolition crises left a somewhat fragmented continent. While unem- of the national monopoly of Fanny Mae and Freddy Mac, an ployment soared in Spain and Greece, it fell to its lowest level abundance of money due to very loose monetary policy, and in Germany. Meanwhile, the growth outlook gave little hope poor regulation as a means of favouring ‘national champions’ for optimism. Thirdly, the financial crisis had shed significant in the banking industry contributed to the piling up of the doubt on the quality of financial regulation. New legislation bubble. introduced involved the re-enforcement of the Stability and Growth Pact (re-emphasising sanctions upon exceeding a When the interbank market broke down, that is trading in 3 % GDP fiscal deficit), the implementation of the European commercial paper between banks fell to very low volumes, Stability Mechanism (mandating instant access to financial banks significantly cut back on new lending. While it is true assistance programmes for member states of the eurozone in that banks could honour previous credit lines, it is believed financial difficulty), and the introduction of the banking union. that this was only feasible due to sufficient government (The various mechanisms introduced intend both to regroup

22 23 > Academic Academic < the supervision of big financial institutions at a European level, Possibly Deutsche Bank will never default. But why take on the introduce a systemic perspective on regulation and adminis- bet? What is the inherent value of having a global player in ter a single resolution fund generated by banks.) banking that ensures German participation in such illustrious activities such as manipulating Libor! Internal value-at-risk A rather sceptical assessment approaches continue to assess the ludicrously small three Indeed, the speed at which the European Union and the percent equity requirements. Most sophisticated statistical Eurozone enhanced its institutions is impressive. Yet I remain models seek to quantify the risk of processes that are non- sceptical whether the proposed changes will bring about the stationary. In a sense this is business as usual, with only some stability their name implies. After all, member states have trad- minor refinements. The most worthwhile question to ask is ed away the disciplining role of financial markets on govern- not which is the most adequate approach to measuring risk ment spending by a political control device that has already (a very difficult question in any case) and providing safety nets been weakened by the latest decisions on deficit procedures. once they are realised. We should go further: why do we con- It remains unclear to me how a slight change in mechanisms sider, at all, the equity ratio as a minimization problem subject would bring about an enforcement of rules that had been vio- to a default risk constraint? lated more than fifty times before without imposing sanctions. The too-big-to-fail dilemma emanates from two problems. Meanwhile tackling the problem of financial institutions that Firstly, banks are too big, and secondly, banks are too prone are too-big-tofail by a promise of better regulation, follows to fail. We should take this dilemma literally. Standford econo- the common belief on the state of regulation prior to the 2008 mist Anat Admati and Bonn colleague Martin Hellwig have financial crises. True, regulators are more attentive to systemic dedicated an entire book demasking and explaining the in- risks than before. Relocating activities to a European level was sufficiency of capital requirements, The Banker’s New Clothes. very sensitive. Yet will attention on regulation stay in place, In issuing very little equity, a bank’s their default risk falls on once central bankers perceive a conflict between the restruc- the public. Naturally the increased downside risk should be turing of the financial sector and the general growth outlook? reflected in higher risk premia on debt. This is not the case as These questions make me fear this to be just another flash in commercial paper debt typically has a short maturity, making the pan, fizzling out once memory about the crisis fades away. it essentially riskless for almost every moment in time except By means of establishing the single resolution fund it is be- for rare instances of a market breakdown. Meanwhile deposi- lieved that if a bailout becomes necessary, it will by no means tors do not consider the solvency nor liquidity of banks an is- impair the public budget. The single resolution fund builds sue either, as they are insured by deposit insurance. In a sense upon the presumption that the too-big-to-fail problem is un- bank financing is cheap because the public provides implicit solvable. In a sense it displays the belief that financial institu- insurance for it. tions must not default, and if they do creditors must not be held There is a corollary to this reasoning. If there is an implicit accountable for the counterparty risk. How many bailouts this public guarantee there must exist an equity ratio threshold, mechanism can sustain? Arguably it must be large. How large? such that above this threshold Modigliani-Miller would hold, €1,708,703 million is the total balance sheet of Germany’s larg- namely banks will be indifferent between equity and debt fi- est bank, Deutsche Bank. This against €296,500 million, the nance. Once this level is reached, regulators will not have to be federal budget of Germany in 2014, expressed as a ratio, about concerned about faulty internal risk evaluations, as the bank 17 % of the former. When we will arrive to the point that banks has no interest in downsizing its equity requirements. To my are not only too-big-to-fail but also too-big-to-be saved?

Mario Draghi ECB president www.flicker.com

22 23 > Academic Academic < mind raising equity requirements is absolutely necessary to with this financial fragmentation addressing these issues. avoid implicit public insurance to be called upon ever again. “I think I will stop here; I think my assessment was candid and I do not think however that this will be sufficient. In 1937 frank enough.” Ronald Coase published an extremely influential essay, “The Draghi had a weak legal argument, at best candid and frank. Nature of the Firm” in Economica. It rarely is the case that a Arguing that the risk premia did not reflect on counterparty single article has its own Wikipedia article. Here it is justified. risk is audacious. Insofar the ECB was not willing to act as a Ronald Coase wondered what justifies the existence of firms lender of last resort, it was questionable how a number of altogether. If markets were frictionless, the price mechanism countries could sustain their debt at the prevailing market would allocate goods efficiently. In contrast, firms eliminate rates of July 2012. The case is more than curious. At the mo- market transactions and substitute it by a coordination moment of his remarks it was neither clear whether the ECB did tive of the entrepreneur. It was Coase’s contribution to justify hold the mandate to buy government bonds, nor whether he the observation of firms as a way to circumvent transaction could gain a majority in the ECB council to do so. The founding costs. Speaking of banks the optimal size of the bank trades fathers of the European Union and the Eurozone had never off the frictions from not having markets internally against approved of monetary financing of any member state. the benefit of running, say, a common audit system or providing a single IT and ATM infrastructure. This had been famously stated in the no bailout-clause, first formulated in the Maastricht treaty from 1992 and reinforced Trouble starts if the very size of the firm creates negative exter- just three years before Draghi’s remarks in the Lisbon Treaty nalities that are exploited by the organisation. One example from 2009. Article 125 of the Treaty on the Functioning of the of this would be market power. In finance, market power is European Union provides that “The Union shall not be liable not the only issue. In addition to their ability to manipulate for [...] the commitments of central governments [...] of any interest rates or seek political influence through massive lob- Member State [...]. A Member State shall not be liable for or bying, banks reap profits by being too-big-to-fail. To be pre- assume the commitments of central governments [...].” In 2012 cise, a bank’s optimal size lies in between the no man’s land it was at least questionable how this formulation could be of too-big-to-fail and too-big-to-be-saved, leaving us with the compatible with the ECB buying government bonds, and thus good news that banks do not want to grow indefinitely. Yet, assuming the counterparty risk of sovereign default of one of the deeper the pockets of the national sovereign, the more its member states. In fact a prolonged court battle only came unlikely it is that a bank will be too-big-to-be-saved. In a sense to the end when the German Federal Constitutional Court de- the Eurozone has done everything to prevent the latter sce- clared their objection but abrogated their authority – on this, nario. The single resolution fund is supposed to be endowed they were not in charge. The Luxembourg court overhauled with very deep pockets, marking the frontline to just another the German objection this June. The ECB injecting €60 billion government bail-out programme. One may legitimately ask a month to buy government bonds on the secondary market whether this is just another invitation for banks to grow larger has now become a common feature of monetary policy in still, and render the size of government budgets negligible. Europe. Going back to July 2012 Mario Draghi may rightfully claim credit for having fuelled Since the onset of the crisis many European treaties have been another bull on European stock exchanges amid a stagnant reinterpreted to render them compatible with the political economic climate. Meanwhile highly leveraged financial actions that were deemed necessary. They can be justified institutions continue to satisfy government’s debt appetite. insofar it is a success to have maintained the single currency. In doing so they delay meaningful incentives to ensure the During the summer of 2012 the odds were high for Europe to future viability of the European welfare state to a post-crisis break apart. I tend to look more sceptical at the institutional Europe whose silver lining has been tragically anticipated for legacy that remains. years. Possibly July 2012 was a moment in history in which “whatever it takes” pushed the boundary of “whatever was During his speech Mario Draghi did not fall short of emphasis- feasible”. Unfortunately Mario Draghi didn’t prove to be very ing the previously outlined changes to the European institu- prone of containing what has emerged since. The floodgates tions. He advocated progress on a supranational level and remain wider than ever before, secondary market operations stressed the amount of political capital invested in the Euro. risk drying up the market for government bonds, the Euro de- Yet when risk premia on government bonds shot up, this was preciates to long unseen values. It seems that the short-run common knowledge. The ESM was well in place and the Greek view inherited from some unfortunate branch of economics government placed on a leash. But his speech is remembered has turned us into naïve slaves of short-term consumer price for the last part, ambiguous, short and seemingly improvised. changes. Arguably those will not happen to rise soon with What did move the markets was the last part, the Machiavellian the central bank anchoring its expectations at the zero lower part of his speech Here it is as a whole. bound. Meanwhile we are to wait for the next round of uncon- “Then there’s another dimension to this that has to do with the ventional monetary policy, challenging our legal understand- premia that are being charged on sovereign states borrowings. ing of the rules of this precious European house. It may bring These premia have to do, as I said, with default, with liquidity, some solace if next time we are to hear from it from inside our but they also have to do more and more with convertibility, own democratic institutions. For July 2012 didn’t take place with the risk of convertibility. Now to the extent that these in the parliament house of Strasbourg, it didn’t take place premia do not have to do with factors inherent to my coun- in the European Council or at the European commission in terparty – they come into our mandate. They come within our Brussels nor in the ECB council in Frankfurt, but one day at an remit. To the extent that the size of these sovereign premia Investment Conference in London. hampers the functioning of the monetary policy transmission channel, they come within our mandate. So we have to cope

24 PB > Academic Academic < Book Review What Caused the Industrial Revolution? by Russell Black

Russel Black

Russell Black reviews two books, both published in 2009 by distinguished economic historians at the height of their careers, that offer competing explanations for the causes of the Industrial Revolution: The British Industrial Revolution in Global .Perspective by Robert Allen and The Enlightened Economy by Joel Mokyr

irst look at the graph. the Industrial Revolution at its inception: how did this force that would sweep the world begin? FForget everything else. In our history as a species there have only been two events, events that have mattered decisively, My conclusion is that economists should prefer Allen: his book for everyone. The first is the Neolithic Revolution, beginning is 200 pages long, his explanation is an endogenous growth roughly 9,000 BC, when humanity switched from hunting and model, he embraces teleology and dismisses countering gathering to sedentary agriculture. The second is the Industrial explanations. Mokyr, twice as long, takes us through more Revolution, beginning for the UK in 1700 AD, when humanity historical facts, but less explanation. There is a five-year-old switched from sedentary agriculture to what we have today: a child constantly asking “but why!” and then “but why!” to ev- majority urban society, where most goods are not produced ery subsequent response: Mokyr smothers it in detail and re- locally, and that has a high rate of technological growth. peated assertions that we shouldn’t use hindsight, that history is complicated and not monocausal. I side with the child. The By the middle of the nineteenth century industrialisation was Industrial Revolution is important and things happened for a spreading rapidly in the US and Europe. Over the twentieth reason – tell me what these are and justify your argument! century it spread throughout the rest of the world – Japan, South Korea and Taiwan the stellar industrial performers, the Joel Mokyr argues in favour of the role of culture in his 490 USSR stagnating after the 1960s, and the rest of the world fi- page tour of the British economy from 1700 to 1850. nally accelerating in the 1990s. India and Sub-Saharan Africa British society in the 1700s cared deeply about science and have taken shockingly long to get to this point, but even they technology. It began the century with Francis Bacon’s formu- are now following the exponential trend. lation of the scientific method and Isaac Newton’s discovery But the cradle of the Industrial Revolution, where the first de- of calculus and the Laws of Motion, and went on in the same cisive industrial technologies were developed and adopted, fashion. A key institution is the “Society”, a club of interested in- was Britain. Joel Mokyr and Robert Allen both seek to explain dividuals (men, well-off and respectable) who discussed, gave

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GDP per Capita, 1990 International Dollars Maddison Project database (Bolt and Van Zanden, 2014) 30,000 20,000 10,000 0

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China India Japan Colombia South Korea South Africa The Industrial Revolution: when economic growth turned exponential. lectures and wrote papers. The Royal Society was the most because they were the cultural elite. Abraham Darby II and prestigious in 1700 (headed for a period by Isaac Newton) Richard Trevithick, inventors respectively of coke-smelting but soon eclipsed. The famous example is the Birmingham and high-pressure steam engines, both declined to patent Lunar Society, a club which linked the foremost scientists with their inventions. They were already wealthy and preferred the entrepreneurs at the technological frontier. Distinguished plaudits and credit – like open source software, this is some- “Lunatics” were Erasmus Darwin (an important agronomist thing our society can relate to. and the grandfather of Charles Darwin), Matthew Boulton Mokyr’s main argument is that this attitude permeated down (a leading industrialist important in developing the steam throughout society. The Enlightenment took place through- engine), James Watt (of the measurement), Joseph Priestley out Europe, but its roots in Britain were especially deep. The (who first discovered Oxygen) and Josiah Wedgwood (who Spitalfields Mathematical Society was founded by craftsmen revolutionised the ceramics industry). Other societies include and became popular with Huguenot refugees. They held their the Smeatonian Society, the Glasgow Political Economy Club, meetings in pubs in London’s East End. Superstar inventors the Society of Improvers, the Literary Society, the Manchester like Watt or Arkwright were important, but the factor that was Literary and Philosophical Society, the London Chapter Coffee transformational, and that other countries lacked, was the “un- House, the Society of Arts, the Geological Society, the Royal sung foot soldiers”: the craftsmen, mechanics and engineers Institution, the (literally-named) Society of Improvers in the who used new technologies and who pioneered to the point Knowledge of Agriculture in Scotland, … – there were hun- where they could be implemented in the economy. Matthew dreds of societies spread throughout the country, and despite Boulton corresponded with the leading scientists, and hired their names they covered every area of technology and sci- them as consultants – but his steam-engine-making firm also ence. Joseph Black first revealed the theory of latent heat in a employed hundreds of skilled workmen, trained thoroughly lecture at the Glasgow Literary Society; the Newcastle Literary as apprentices. and Philosophical Society in fact specialised in geology, per Newcastle’s place as the capital of the coal-mining industry. Culture gave Britain a large class of skilled, practical, workers. The French industrialist Jean-Antoine Chaptal complained Indeed the Societies cared more about Bacon than Newton. that even after he imported British machinery, his workforce If one thing summarises them, Mokyr chooses Diderot’s lacked the “turns of hand” – the acquired skill and experience Encyclopédie, the great Enlightenment effort to catalogue – to use it most efficiently. The nature of the first industrial- ma all human scientific knowledge into one disseminable – and chinery is important – it broke frequently, and required con- democratic – form. Their mission was to promote science and stant expertise to be kept running and for upkeep, so a factory progress, to varying degrees depending on the society from was best located where skilled mechanics were abundant. advancing the frontier of human knowledge to encouraging For instance the textile industry ecosystem concentrated in the practical application of this knowledge through the wider Lancashire, a world centre for clock-making. Clock-making, economy. Mokyr describes the inadequacies of the English shipbuilding and mining, industries where Britain was strong, education system (worse than in the Netherlands or Germany, all produced these skilled workers. its two universities smaller in the 1700s than the 1800s); the Societies were a redeeming feature, giving frequent and Knowledgeable and skilled manual workers abundant were well-attended public lectures. In 1700s Britain, science and essential – and this just for machinery bought off the shelf. technology were prestigious – you joined your town’s society To transform a new technology into economically useful 26 27 > Academic Academic <

machines required large doses more of skilled and experience Industrial Revolution? So in the 1600s Britain had lots of coal labour, labour that made full use of Baconian experimental mines, and also artisans who made clocks nearby – does this techniques and progress mindset. In some sectors this was mean that any other society with this particular economy enough. The key industrial technologies in textiles – the water would eventually invent steam engines? How close would the frame, the spinning jenny and Crompton’s mule combining two industries need to be? How much time would they need? the two – “would not have puzzled Archimedes” (Donald Cardwell, quoted by Mokyr). They did not require grand flights of scientific discovery, just patiently engineering a machine that workers in the rest of the economy could use. In other sectors, Mokyr argues that Britain imported “macro- inventions” – after all, Britain was small and the 1700s was a century of science throughout Europe – but generated “micro- inventions”, the small, unrecorded changes to make the technology viable. The reverbatory furnace was invented in Italy in 1540 for glassblowing: the British adapted it for non-ferrous metals in 1700. Silk-throwing mills were imported from Italy and perfected. Gas-lighting was invented by Phillipe Lebon in Paris, 1799, but refined and propagated by an employee of James Watt. Chlorine bleaching of cloth was invented by Claude Berthollet in 1786: James Watt and Matthew Boulton went to Paris in person to learn the technique and send the information to their contacts in Britain. Mokyr has a very high description/explanation ratio – if that is what you want, you should definitely read his book. Maybe In paper-making, plate glass-casting, candle-making, food- Mokyr is writing a sequel Craftsmanship and Artisanal Culture canning, the British took and developed French “macroin- in a Proto-Industrial Economy, and I should hold off all criti- ventions” – the greatest was the Jacquard Loom, invented cism until then. in 1806, the first ever programmable machine, which used punch-cards to weave patterns in fabrics. But elite French Probably, my criticism is not at all fair, and Mokyr only intends technological mastery was not matched on the ground, the to write a descriptive history book that doesn’t get bogged Jacquard loom was adopted widest in Britain. down in causal chains. Essentially it is a literature review of every study of the British economy of the period. Mokyr covers After listing many of the technological achievements of the whole of the British economy: agriculture, trade, finance, British industry in the 1700s, Mokyr quotes a metaphor from services, demographics, though devoting the most time to John Harris: a British worker absorbed his skills “with the sooty industry and technology. Households and gender roles is one atmosphere in which he lived”. And no other society in his- important topic covered, in this case summarising a series of tory had skilled artisans, otherwise they would have industri- articles by Sara Horrell and Jane Humphries, among other alised? The rest of the treatment is as light. Mokyr only gives studies. In 1700 everyone in the household worked except us so much explanation, and begs the question. What caused those who could afford not to; the industry that there was was the Industrial Revolution? A culture where everyone followed relatively decentralised. Work was “put out”, that is, done from the Enlightenment. So how did we arrive at this point, a so- home. In textiles, women and children spun the thread into ciety with skilled workers perfectly set up to implement the yarn, and men wove the yarn into cloth. But for an economy in

The revolutionary ironworks of the Darby family: Coalbrookdale by Night, Philip James de Loutherbourg, 1801. 26 27 > Academic Academic <

Dominating the British economy – London in the 1700s raced to become Europe’s largest city. The River Thames with St. Paul’s Cathedral on Lord Mayor’s Day, Canaletto, c.1746. 1700, Britain had an unusually large textiles sector. The spin- own technical and scientific societies, and a culture oriented ning jenny upended this completely: after the 1780s spinning towards science and progress. The best symbol of France in was brought into factories and spinning by hand was almost the period is the Montgolfier balloon; in the name of progress, eliminated. 800,000 were employed hand-spinning wool in the French transformed the state and society to an extent 1770. The textile industry that emerged in the 1800s, switched that terrified the British political class. It was a fairly impres- to producing textiles from cotton, employed at peak 100,000 sive list given earlier of discoveries made in France – is it really women in 1841. This is a case where the lump of labour fallacy true that France lacked skilled workers to implement these, holds. The spinning jenny was the first and biggest, but of a given the time and money. Yes, Britain industrialised first, but series of technologies that rendered household industry obso- Mokyr’s direct evidence is anecdotal. lete. A world was created where economic gender roles were And Britain’s commercial partners invested heavily in poach- delineated, more sharply than before: men working in facto- ing British workers and industrial espionage. Ineffectual laws ries, their wives managing the household, out of the labour were passed banning skilled workers from emigrating. In iron force. We shouldn’t leap to make judgements about welfare. and steel, it was the French attempting to adopt British macro- This is before household labour was automated, household inventions, for instance with the Le Creuset ironworks. Charles services were labour intensive; though on the other hand Gascoigne, a Scottish ironworks manager, ran foundries for these tasks still burdened women before the transformation Catherine the Great; Donetsk in the Ukraine, was founded by in the 1800s. (In the 1950s and 60s, washing machines were John Hughes who owned iron-works and shipyards in Wales. adopted faster than the internet or smartphones would be: The coal and ore-rich region became the heartland of Soviet the principle of revealed preference.) But in terms of bargain- industry. ing power from wage income, women were relatively worse off in the 1800s. And there is much more that is interesting. The first Newcomen steam engine was used for pumping water from mines, and was invented in 1712 – it took over a hundred years before the first steam engine-powered ships in 1821 were built. Between 1700 and 1850, the British population grew by a factor of five, from six to thirty million; similar magnitudes happened elsewhere in Europe but for different reasons, Britain’s was mostly due to a higher rate of marriage for a society where a small minority had previously died celibate. (From 1700 to 2000, China’s population grew by a factor of five; France, Europe’s laggard in population growth, grew by a factor of three in the same time.) The book is very far from dull. Allen’s book is more polemic. Mokyr hedges and emphasises the role of many economic and social factors in addition to Spinning before the Industrial Revolution, one thread at a time. culture. Allen argues for the primacy of a simple and completely economic argument and relegates culture. I looked Allen explains the British Industrial Revolution with the in- back at my notes taken during one of Allen’s lectures, and at duced innovation model. Firms minimise costs. If firms can, the top of the page I have “Culture is Endogenous!” written in they invest in technology that reduces demand for their cost- big letters, underlined for emphasis – Allen argues that if the liest inputs. incentives are sufficiently high, and your timescale is genera- The Industrial Revolution in Britain happened because labour tions, cultural barriers can be overcome. was expensive relative to other factors of production. We do Britain had excellent institutions, but so did most of Northern not need to rely on anecdotes for wages. I have smoothed the Europe. The Enlightenment was Europe-wide. France had its graphs, so the trend can be seen clearly. In the 1700s what was 28 29 > Academic Academic <

new, and what was limited to Britain were high real prices for exogenous – Britain profited from a large colonial empire and, unskilled labour. under the prevailing mercantilism, access to these foreign markets. Britain was a leader in trade, in the 1700s the slave Newcomen spent ten years trying to build the first steam trade especially. Britain was warlike and bellicose, mobilis- engine. Steam engines were invented for use in coal mines ing a relatively large proportion of its population. And above for very good reason: coal mines were the one place in the all building the world’s largest navy, at that point one of the world where human labour was so much more expensive world’s largest and most complex economic organisation. The than energy (coal), that it was financially plausible to research, main dockyards at Chatham were the country’s largest em- develop and build the steam engine. Coal mines in Britain ployer. All of these activities meant Britain’s ruling oligarchs faced the highest labour costs of any coal mine in the world. grew rich, and they spent their money building the monu- Coal mines in Britain were also covered by a strong market ments and private houses of London, or Oxford and Bath, in- on the demand side – labour supply was the most important creasing demand for construction labour. The city of London constraint on profit. was relatively marginal to the Industrial Revolution, at least Ceramics provides the nicest graphical example. In China, directly. Indirectly it drained the rest of the country of mobile since the 11th century, the main type of kiln was the “dragon labour – between 1700 and 1800 the population of London kiln”: a series of chambers running up a hill, heated by burn- grew from 500,000 to one million, possibly becoming the ing reeds at the bottom. Each chamber is successively cooler, largest city in the world after Edo (later Tokyo) in Japan. and the edges of each chamber cooler than the middle. China And then endogenous reasons: induced innovation is caused was populous and relatively urbanised, so fuel was expen- by higher wages; but if induced innovation raises labour sive – especially for Jingdezhen, the city which dominated productivity it also puts upward pressure on wages. (Factors Chinese ceramics production, in the lower Yangtze region. determining labour productivity may be as basic as diet – the Firing ceramics in a dragon kiln was a precise art: each piece English consumed more food and were taller than the French, must be located where temperature is high enough, but fuel and so could work harder and longer.) Put the opposite way, is too expensive to waste space, so lots of effort must be put in Allen’s argument is that the British economy had, constantly, maximising efficiency. In Britain, coal was abundant. Porcelain to raise labour productivity, to make up for labour being workers in Worcester, Britain’s centre of porcelain production, poached for all of the above reasons. All this does not contra- had better things to do with their time than precisely place dict Mokyr. Mostly, Allen’s model can explain Mokyr’s obser- pots. In fact the unfired pieces had to be placed in stone bar- vations: why is it that British workers have high productivity? rels to protect them from too much heat – the science and Why is it that British workers are open to new techniques, technique of firing was developed much further in China than and try to develop and adopt new technologies? Here is one in Britain. mechanism. And in textiles the logic was similar. Using the first spinning Mokyr praises (mainly) the British state for knowing when to jenny machines, output of yarn was roughly three times what get out of the way and fostering science where it could – pat- could be produced using a preindustrial spinning wheel. Allen ents, awarding prizes. Allen gives the state more leeway. The uses accounts from the period, and comparing with India, first order effect of wars and corruption damaged the econ- where spinning wheels were still common in the 1960s: for omy, but the second order effects bid up the price of labour the cost of the machine given wages, the rate of return to and facilitated induced innovation. buying a spinning jenny was 38% in Britain in the 1790s. For France, 2.5%. For India in the 1810s, -5.2%. Unsurprisingly, in Mokyr takes a few pages to challenge Allen’s argument di- 1788 there were 20,070 jennies in Britain. In France 900, all in rectly. None of the industrial technologies were explicitly sold state-aided factories. Allen: “Without the heightened incen- as “labour-saving”, and on that measure they failed. The labour tives, no one would have invented the Industrial Revolution demand in the British economy did not shrink. This asks Allen no matter how good were the culture and institutions.” to prove too much – the induced innovation claim is that high wages incentivise efforts to raise labour productivity to match So why were wages high? Crowding out. There are lots of rea- the wages, not that workers should be supplanted altogether. sons demand for labour, from Britain’s population of 7 million Of patents between 1660 and 1800, 4.2% list labour-saving as (against France’s 25) exceeded supply. Allen counts several as

Diagram of a Chinese Dragon kiln, from Allen (2009). Diagram of a standard British kiln, from Allen (2009). 28 29 > Academic Academic <

a purpose of the invention, while 30.8% list capital saving, the sooner, as you can tell from the graph of wages. Of all coun- opposite to what the Allen model would predict. But Mokyr tries in Europe, the Netherlands were the most similar to has already argued that the key British strength is “microinven- Britain. (Mokyr never asks this; relatively few comparisons with tions”, innovations to processes made at a lower down level, other countries is one drawback of his book.) In some respects and skilled British workers who could build and maintain the they did: coal-rich Belgium was the first to industrialise on machinery long after it had been patented. In any case, these the European continent. Mokyr admits that high wages were averages tell us little if the 4.2% had the greatest impact. a direct cause of the Netherlands adopting wind-powered Larger workers consuming more calories provided more la- sawmills from the seventeenth century. The Dutch were world bour – per worker, Britain looks labour-scarce, but per unit of leaders in agricultural productivity, and perhaps one could physical labour, Britain is more labour-abundant. The Allen-ite argue that Britain and the Netherlands, closely linked econo- rebuttal would be that the first spinning jennies were hand- mies, both underwent induced innovation in their different powered, so neutral in this respect; or see food as investment, specialisms. Allen argues that the Dutch economy adopted on another way that to fulfil the economy’s demand for higher burning peat as fuel, and that this was a dead end – this feels productivity workers. quite weak; I prefer that Britain had relative advantage in its existing clock and machinery industry. Mokyr has some better criticisms as well: the Newcomen engine replaced horses, not human workers, and development Why did Britain industrialise, beginning in the 1700s? Why of steam engines was directed at saving energy. Cornwall, didn’t France? Why didn’t the Netherlands? Why didn’t India, Britain’s south-west extremity and Europe’s largest producer or China? Why didn’t China industrialise in the 1700s, but also of tin, adopted steam pumps in its mines thoroughly – despite why not earlier, during China’s economic golden age under having some of Britain’s lowest wages and highest coal ship- the Sung Dynasty in the 12th and 13th centuries? Joseph ping costs. Why didn’t the British adopt wind-powered saw- Needham, the historian and authority on Chinese science and mills pioneered in the Netherlands, for which van Bochove technology, found that Sung Dynasty China had machines (2008) estimates there was an 85% return? In the Cornish case with mechanisms very similar to the early steam engines – for there is definite overspill from Britain’s coal industry. The best the reverse purpose: the operator turns the wheel and shoots the Allen hypothesis could respond is that it took a long time flaming oil at enemy soldiers attacking a city’s walls! (Cited for steam power to directly replace labour. Textile factories in Blunden and Elvin, 1983.) Mokyr gives broad, descriptive were powered first by fast-running water, and then by steam answers – a literature review, and its bibliography is fully 42 only in the 1800s. pages; Allen gets to the point, even if he cannot explain everything. Indeed the question of sawmills is a good one. An important rebuttal to Allen is why the Low Countries did not industrialise

Bibliography Joel Mokyr, The Enlightened Economy: Britain and the Industrial Revolution, 1700-1850, London: Penguine Books, 2009 Robert C. Allen, The British Industrial Revolution in Global Perspective, Cambridge: Cambridge University Press, 2009 Robert C. Allen, “The Great Divergence in European Wages and Prices from the Middle Ages to the First World War,” Explorations in Economic History, Vol. 38, October, 2001 Robert C. Allen, “The Industrial Revolution in Miniature: The Spinning Jenny in Britain, France, and India,” Journal of Economic History, Vol. 69, no. 4, December, 2009, Robert C. Allen, Jean-Pascal Bassino, Debin Ma, Christine Moll-Murata and Jan Luiten van Zanden, “Wages, Prices, and Living Standards in China,1739-1925: in comparison with Europe, Japan, and India”, Economic History Review, 2011, Vol. 64 J. Bolt and Jan Luiten van Zanden, “The Maddison Project: collaborative research on historical national accounts”, Economic History Review, 2014, Vol. 67 Caroline Blunden and Mark Elvin, Cultural Atlas of China, Oxford: Phaidon, 1983 Sara Horrel and Jane Humphries, “Women’s Labor Force Participation and the Transition to the Male- Breadwinner Family, 1760-1865”, Economic History Review, 1995, Vol. 48 Christiaan van Bochove, The Economic Consequences of the Dutch: Economic Integration arounf the North Sea, 1500-1800, Ph.D. Thesis, University of Utrecht, 2008 Paul Romer, “Crazy Explanations for the Productivity Slowdown”, NBER Macroeconomics Annual 1987, Vol. 2

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The crucial role of automatic stabilizers

by Romain Mongeau

he European public debt crisis of 2010, which remains a with aggregated data. Dolls et al. find that automatic stabiliz- Tstruggle for the European Union, highlighted the impor- ers are able to absorb up to 30% of simulated income shock on tance of having balanced budgets. In order to get to this state demand. Because of the less developed benefit system, this of equal revenues and expenditures, countries use discretion- figure is lower for the United States, where only up to 17 % of ary fiscal policy but also rely on the help of well-functioning the shock is counterbalanced. In a similar study, Auerbach and automatic stabilizers. Feenberg conclude that the federal taxes alone could offset 8% of such a shock in the US. This means that, for instance, an The terms “automatic” and “stabilizer” say it all: an automatic economic crisis causing a 2% decline in the Gross Domestic stabilizer is a component of the budget that is automatically Product of Europe would only result in a 1.4% decline in ag- adjusted depending on the economic cycle. It allows a sta- gregate demand (2- 30%*2) thanks to the existence of auto- bilization of the economy by working counter-cyclically. The matic stabilizers. easiest way to understand this mechanism is to look at some examples of automatic stabilizers. In general, one has to distinguish two kinds of stabilizers that can be encountered. They split up into spending oriented mechanisms and those that are more focussed on the revenue side of the budget. On one hand, social expenditures, such as unemployment benefits, constitute the “spendings side” of automatic stabilizers. Benefits distributed by the government automatically increase when the economy is in a recession, as more and more households face dire financial situations or become unemployed and are therefore eligible for government aid programs. The shock is then partly absorbed by the budget. A symmetrical point can be made when there is an economic boom. In this scenario, the increase in economic activity is counterbalanced by a decrease in governmental spending. On the other hand, the more revenue-oriented stabilizers typically involve taxes. The income tax is an automatic stabilizer of this type. When the economy is in a boom, the increase in the income of households generate larger fiscal revenues for Romain Mongeau the government, hence reducing possible budget deficits and moderating the cycle. The other kind of empirical research tries to determine the link between output growth and the size of automatic stabilizers How efficient are automatic stabilizers? I first review how by using aggregated data. To do so, Fatas and Mihov (2012) de- these instruments fare by looking at several empirical studies. compose the changes in the budget balance into discretion- Second, I examine how automatic stabilizers can be modelled ary and automatic changes. They then focus on the reaction of and integrated to economic theory. the automatic component of the budget to output volatility. The empirical results This allows them to examine the differences regarding the size Many studies have been conducted to assess the impact of of automatic stabilizers between OECD countries. In France, as automatic stabilizers on the economy. Most studies are ei- in Finland and Australia, when output growth falls by 1%, the ther founded on microeconomic models or on the examina- automatic component of the budget balance as a ratio to GDP tion of aggregated macroeconomic datasets. Auerbach and falls by 0.37%. Japan has much weaker automatic stabilizers Feenberg (2000) and, more recently, Dolls et al. (2012) rely on than the aforementioned countries and thus the coefficient is microeconomic data to determine the stabilizing effect of tax- only equal to 0.17, which is even lower than the US coefficient es and social expenditures. Their datasets are compiled in mi- (0.29). What these numbers show is that output volatility, mea- crosimulation models that evaluate the effect of fiscal reforms sured by output growth, is correlated with a worsening of the over time. This yields a more precise estimate of the effect of budget balance during a recession and with an improvement automatic stabilizers than the analyses that are conducted of the former in the case of a boom. If we take the example of

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a recession, the increased deficit is caused both by the auto- specifically, this problem can be solved by adding nominal matic decrease in taxes revenues and by the increase in social rigidities following the New Keynesian approach, and by intro- benefits delivered by the government. ducing a special class of consumers to the model. This is done in a paper by Andres et al (2008). A New Keynesian model is a Empirical studies confirm that the role of automatic stabilizers type of DSGE model which contains Keynesian features, for ex- in the economy is non negligible. We shall now take a look at ample, price stickiness. The authors additionally insert a class the way these instruments fit into economic theory. of deviating agents called rule-of-thumb consumers who can- Modelling automatic stabilizers not save as others consumers do, but who are instead forced to spend all their income at every period. Rule-of-thumb Until recently, it was difficult to incorporate automatic stabiliz- consumers represent a significant fraction of the total share ers into macroeconomic models in a satisfactory fashion. It is of consumers in Andres et al’s model (65%). Thanks to such through the emergence of dynamic stochastic models in the characteristics, this New Keynesian model predicts consistent late eighties that such a modelling became possible. A DSGE results on the role of automatic stabilizers. Output volatility is (Dynamic Stochastic General Equilibrium) model is basically reduced when government size increases. a macroeconomic model with microeconomic foundations respecting the Lucas Critique, introducing exogenous random The contributions to the theoretical literature have been scarce shocks to technology or economic policy. One of the first to on this topic of growing importance in Macroeconomics. use this relatively new approach to modelling is Gali (1994). He However, it is important to continue research on the model- examines the role of two automatic stabilizers on the business ling of automatic stabilizers in order to understand their func- cycle: a proportional income tax and government purchases. tioning better, and eventually help designing more efficient However, the predictions of his model do not match the instruments for fiscal policy. empirical evidence on the efficiency of automatic stabilizers. Conclusion Indeed, Gali finds that even in the best case scenario, output volatility is not affected by these instruments. It even happens To sum up, one cannot underestimate the crucial role of au- to be the case that taxes and government spendings act as tomatic stabilizers. Indeed, empirical studies demonstrate automatic destabilizers for certain parametrisations, that is how taxes and government purchases partly absorb shocks to to say that they amplify output volatility when their size in- GDP and at the same time help moderating output volatility crease. Therefore, it seems that a standard DSGE model is too . Moreover, in order to integrate automatic stabilizers to eco- restrictive to account for the role of automatic stabilizers in the nomic theory, the development of DSGE models is a promis- economy. ing area of research. One just needs to include Keynesian principles into these models so as to make credible predictions. Some refinements of this theory are then needed. More

References Javier Andrés, Rafael Doménech, and Antonio Fatás. The stabilizing role of government size. Journal of Economic Dynamics and Control, 32(2):571-593, 2008.

Alan J Auerbach and Daniel Feenberg. The significance of federal taxes as automatic stabilizers. Technical report, National Bureau of Economic Research, 2000.

Mathias Dolls, Clemens Fuest, and Andreas Peichl. Automatic stabilizers and economic crisis: US vs. Europe. Journal of Public Economics, 96(3):279-294, 2012.

Antonio Fatás and Ilian Mihov. Fiscal policy as a stabilization tool. The B.E. Journal of Macroeconomics, 12(3), 2012.

Jordi Gali. Government size and macroeconomic stability. European Economic Review, 38(1):117-132, 1994.

Lucas, R. E. (1976, December). Econometric policy evaluation: A critique. In Carnegie-Rochester conference series on public policy (Vol. 1, pp. 19-46). North-Holland.

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The (re)search of the correct statistical model

by Elia Lapenta

f you have choosen to study in a Master program at the nice sex the previous night, and so on. As researchers, we have IToulouse School of Economics, you already have a good data on the first element, but not on others that cannot be background in maths for analysing economic behaviour, screened. Such a problem is well captured in a statement by choices and mechanisms. an eccentric English economist who lived through the 1929 economic crisis and World War II, who once said: “When an When you study macroeconomic and microeconomic theory, apple falls in physics you are almost always able to say where the economic intuition is useful in order to overcome the it is going to fall, while in economics you never know whether mathematical burden. Although this approach works for it is going to fall either on the right or the left.” In other words, theoretical economics, it barely holds for econometrics. In the importance of unobserved components in economics, fact, as a graduate student, when you take early econometrics’ and social sciences in general, is great, maybe more relevant classes, you might wonder: “Why should I put myself through than in the exact sciences. this?” and mainly: “What is the point of studying such a subject which is only a field of statistics, and apparently has no direct To sum up, when we have a theory saying, for example, that link to economics?” consumption is a function of income, we can never be sure about the sources other than income that might impact con- All these questions are indeed legitimate and, like me, many sumption. Accordingly, we can conclude that there are unob- PhD students have wondered exactly the same. However, served components influencing the variable that we want to as soon as you begin your own research, or when you start study. Since these influential components are unobserved, we working in a consultancy company, you often realize the cannot predict their exact values. As a consequence, like the importance of this subject. In research a theory will never be example of tossing a coin, we will rely on “randomness” and powerful enough to explain all the elements of real life, which will assume that consumption is influenced by both income are often too complicated. You do not have enough informa- and an unobserved component, commonly denoted by the tion to provide a full description of the observed phenomena. error term. Due to the lack of information the use of randomness and stochasticity seem to be inevitable. Now, this simple and straightforward reasoning can be considered as the logical basis for the application of Probability In particular, imagine you are in a room alone. You have to toss Theory and statistics for economics. Many researchers, after a coin, and you want to know whether you will obtain heads Ragnar Frisch and Trygve Haavelmo, have started to make or tails. If you knew the level of air pressure in that room, the intensive use of statistics in economics, which has been exact force your finger provides to the coin, the intensity of prompted by the development of computer software that the wind entering the window (and the impact it has on the are more user friendly and efficient in terms of computational trajectory of your coin), the precise slope of the desk where capacities. Nonetheless, as often happens when a solution to the coin is going to land, then you would be able to exactly a problem is put forward, it is useful to check whether the rem- predict, i.e. to say ex-ante, whether your coin will fall either edy is worse than the disease. Thus, it seems correct to wonder heads or tails. Since you cannot know all these factors, you will whether the use of statistics in economics is indeed justified? have to rely on randomness, on stochasticity, and conclude that there is 50 per cent chance of observing either heads or Historically in mainstream Applied Econometrics, researchers tails. This example shows the real nature of stochasticity: “fate” often used to model economic relationships by assuming a does not actually exist and is just an artificial device, whose parametric form. For instance, let’s look again at the consump- origins stem from our ignorance, and inability to observe as- tion theory sketched above, considering consumption as a pects of reality. function of income. Researchers’ approach over the past years has been based on two points: first, they used to recognize that In economics, the problem of observability can be thought the theory might not be complete, so that consumption was of similarly: any economic theory that aims to analyse agents’ influenced both by income and an unobserved component, behaviour using a specific set of assumptions – like rationality, the error term; second, they used to assume that consumption for instance – that only captures a limited number of aspects is a linear function of income. So, within this approach we are of the agents’ decision process, while there are a bunch of using a statistical model. However, is such a use of statistics other elements that we cannot identify, will not be able to correct and logically coherent? explain them. Now, the controversial aspect of this approach is that we do Therefore, imagine you want to analyse a consumer’s decision. not have any economic theory telling us that consumption What you first come up with is probably that such a decision should be linked to income by a linear function: our economic will depend on income. However, since a single agent is also theory only tells us about the sign of these relationships but a human being with an irrational component, their consump- not about their form. So, why should a linear link be more cor- tion decisions might also depend on their mood, on whether rect that an exponential one? We cannot answer this question their favourite team won the day before, or whether they had

PB 33 > Academic Academic <

from an economic point of view, so the use of such a linear my research we build up tests for functions. And in particular, function is not justified at all, and the same holds for a loga- the test I am trying to build up can be seen as a statistical test rithmic form, for a quadratic form, and for any other functional for Bayesian Nash equilibrium in a free entry game. So, to ex- form we might impose within our consumption model. plain it briefly, imagine you have a typical Game Theory model of Industrial Organization analysing the decision by firms Furthermore, there is another important drawback with the on whether to enter or not to enter a market. You can verify adoption of a particular functional form. This approach gener- whether this model is correct or not by applying a specific sta- ates a relevant logical contradiction with respect to the lack of tistical test, which is the objective of my research. information problem outlined above, and that justifies the use of probability in economics. However, if in our mathematical model we include the elements that are not explained by our theory, i.e. the error component, for our modelling approach to be logically coherent, we will also have to recognize the presence of a fully unknown relationship between consumption and income, and therefore a general functional link between these two variables and not a linear one! In other words, we usually accept that our theory is lacking two things: first, it cannot explain what the impact of all the variables is on, say, consumption; second, it does not explain the functional form of our model, for instance that consumption must be a linear function of income. We justify the use of statistics by recogniz- ing the first problem. So, why should we ignore the second issue and impose a linear form without any justification? On which logical basis do we recognize the first problem and ex- clude the second one? This reasoning highlights an important lack of logical coherence in the modelling approach imposing unjustified parametric restriction: these functional forms are not only unsupported by the theory, but imposing them also contradicts the logical foundations for the use of statistics in Elia Lapenta economics. Of course, as highlighted above, the tools used in Now, such a problem finds its solution in a simple phrase – Nonparametric Econometrics are sometimes different from Nonparametric Econometrics. Even though, I admit, it might those you might have already seen in standard statistics sound more scary than simple. Within this approach no re- classes. In Nonparametric Econometrics you estimate the un- striction is imposed on the functional form, and the goal is to known function of your theoretical model – like the unknown estimate functions rather than a finite number of parameters. function linking consumption to income – by another func- In order to sketch what this field is about, consider again our tion, which depends on the data; but since the data is random, benchmark consumption theory, where consumption is a you will have to deal with a random function. This sometimes function of income. In Nonparametric Econometrics we as- requires nonstandard tools from Probability Theory, like the sume that consumption is a general function of income, with- Theory of Empirical Processes. This is a great subject that can out imposing, say, linearity. This therefore represents a better be considered as an extension of the “standard” Probability general framework than parametric models for two funda- Theory that many students might have already studied. In the mental reasons: first, it does not impose any restriction that is “standard” Probability Theory you have random variables, so not supported by the theory; second, it overcomes the logical that after the realization of a random event you obtain a real contradiction in the parametric approach outlined above, i.e. value (1, 2 or 3, or whatever); in Empirical Process Theory, in- the one about imposing parametric restrictions and the foun- stead, you have random functions, so that after the realization dations of the use of statistics in economics. of a random event you obtain a function (like an exponential, a parabola and so on). It is a fairly general theory and, accord- Nevertheless, the rule of “no free lunch” applies here as well, as ingly, it may seem far from many applied problems. But it is the logical coherence and generality of the framework comes the generality aspect that is responsible both the power and at the price of having more complex mathematical proof. the broad range of application. In all honesty, the first time I saw Nonparametric Econometrics As regards my personal experience with it, I did not study in my life I was scared of it, and said to myself: ”I will never learn Empirical Process Theory during my Master in Mathematical these proofs, they are just too complicated!” Nevertheless, Economics and Econometrics at TSE, and usually this subject the attraction of estimating functions, of building up a math- is not even studied in Statistics Masters, as it really is a field ematical setting which was general and powerful enough of Applied Mathematics. However, I have exploited the time I that it could therefore provide the researcher with the correct have spent the first year of the PhD (the DEEQA year) getting insights from the reality, was a good enough incentive to learn these tools and attending salsa classes, with great help of my about nonparametric economics. And it works! In fact, for my advisor, Pascal Lavergne, who, however only helped me with PhD I am doing research on the Nonparametric Theory of Test, Empirical Processes and not with salsa classes. Although it is and the aim of my work is to test functions. It is almost the sometimes complex – but rarely complicated – this is a great same principle studied in our Master’s econometrics’ classes: theory and this is the reason why it is so attractive to me now. we build up tests for a finite number of parameters, while in

34 PB > NO ECONOMICS IN THE TITLE NO ECONOMICS IN THE TITLE <

Names and mentalité

by Russel Black

A commodity-based boom for resource-rich countries as they fed China’s resource-intensive development. But now that China’s growth is slowing, these commodity producers are stuck. Developed countries have their manufacturing sectors hol- lowed out – their low productivity/labour-intensive firms were overwhelmed. China made its firms competitive by exchange rates as well as low wages – and now see where that led! China’s massive trade surpluses required equally massive accumulation of financial assets at the other end. Since 2007 the developed world has been fighting over-indebtedness; it was China who supplied them with the original loans.1 Developing countries have every reason to hate China. China “pulled up the drawbridge”. China all but monopolises the exporting of low-cost manufactures, and countries such as Vietnam and Bangladesh are now finding it much harder to do the same and ape China’s growth path. All this is new. From 1950 to 1980, China was autarkic. Its government did not want to trade with the rest of the world. Deng Xiaoping changed the direction, but in the 1970s Chi- nese average income was as low as the poorest countries in Africa. It took twenty years before China started to have an impact on the rest of the world. China has some tradition of autarky. New, vulnerable regimes that took over in periods of violence often react by closing the borders. Foreign influences are destabilising – cultural, economic or political. Mao was following in the path of the Yongle Emperor, who put a stop to the voyages of the Eu- Beijing 1914 nuch-Admiral Cheng He in the fifteenth century, or Tokugawa ’ve been wanting to rename China for a while now. Iemitsu who closed Japan to the rest of the world after winning the civil war in the 1500s. IWe need a new way to refer that country with 1.4 billion people in north-eastern Asia. “This is a G2 world” is an annoyingly Before 1950, China was still “small”. Ironically, this started just cliché peddled by overpromoted “thought leaders”. But it’s as China was forced open to foreign trade in the 1840s: Euro- still very true. I propose we replace the English proper noun peans gained access to Chinese markets at the same time as 2 “China” to mark this new era. Here are my reasons: the industrial revolution set in. Chinese demand for specie was the focal point of the Portuguese, Spanish and the Dutch “China” has long been the world’s largest country in terms of merchant empires; for nineteenth century Britain it was just population. one branch of a much bigger network. “China” will soon be the largest economy in terms of nominal China is old. China has three millennia of continuous state de- GDP; its eastern provinces are already breaking through the velopment, and this statement is not as platitude: for instance middle-income trap. It is the largest exporter. This century, we have detailed Chinese census records from 2AD, (which the world economy has essentially been dancing to China’s you can browse and overlay onto google maps thanks to digi- tune, viz: tisation by the Harvard University Library).

1 I don’t want to over-emphasize this point. China’s economy is huge in 2015, but this is from compounded growth. In the early 2000s it was a lot smaller relative to Europe and America. Say, 2/3 of America’s foreign debt build-up 2000-2006 was from Europe, 1/3 from Asia.

2 The unequal treaties of 1860 coincided with the start of the American civil war. The American South was blockaded, a windfall to Indian peasants who could grow cotton and take over supplying Manchester; opium cultivation, bound to China, quickly declined.

34 35 > NO ECONOMICS IN THE TITLE NO ECONOMICS IN THE TITLE < China has an equally venerable cultural and intellectual tradition, which I won’t belabour. The Western mental image of China was formed in the period when China was at its relative nadir. The West needs to ditch whatever assumptions and connotations the word “China” has picked up in this time. A new word will give us a mental blank slate. And we don’t know where “China” is from. The Wikipedia page says that the strongest claim is from the Persian for China. It’s a bit arbitrary.3 I propose a calque4, that is, we literally translate the Chinese word for China, 中国, “Zhōngguó”. (In the Wade-Giles system, which is pronounced closer how one pronounces in English, Zhōngguó is written as Chung-Kuo)5. Zhōngguó is usually translated as “The Middle Kingdom” in English and “l’Empire du Milieu” in French. Zhōng means middle, Guó state/country. So the second part is a bit ridiculous, a nineteenth century holdover. Today, the UK is the only country that actually refers to itself with “Kingdom”. We don’t say “The German Bund” or “The French Republic”.6 (The meridian through Beijing, through the Forbidden Palace in the centre. It takes I think that “Media” is much more natural. And very Latin, you 2 hours and 1 minute to walk, but be careful of traffic.) which is good, because imbuing venerability is the whole The point from which we measure longitude is arbitrary, so point of the exercise, and a Latin root gives English words different civilisations have always chosen points with sym- connotations of age and augustness as well as scientific pre- bolic political importance – the Greenwich Meridian through cision. The suffix –ia, from the Latin, is the most common way London was adopted when Britain was the dominant power of denoting a country or place name in English (Russia, India, in world trade, and the French only abandoned their own Par- Colombia, etc.); “Media” would be an acceptable shortening of is Meridian reluctantly in 1909. In China, the origin point of “medianus-ia”. This would also work in French and other Euro- longitude had much more important: cities were designed so pean languages, so “Médie” in French, etc. that the South-North7 axis is also the main road. The meridian Counterarguments would be that we already have the word itself ran directly through the Emperor’s throne, the Emperor “media” in English, which can mean artistic materials or the being the force that unites the Earth and Heavens, ruler of all industry that produces information for mass dissemination, people even if they do not yet know so. A glance at a map as well as “median”, and we could have sentences like “the of Beijing shows this clearly, the axis through the successive median Median income is $15,000 a year” or “Median media pavilions of the Forbidden Palace to the south and north gates blackout on …”. There is already a country Media, an ancient of the city; the character, 京, jing, “capital city”, from Beijing is kingdom in the southern Caucasus that was conquered by just an idealised pictogram of this: the palace, then an axial Persia, and a Medea in Greek Mythology. But the first is in long line running down through the city buildings. extinct, and Europe already names itself after a figure in Greek So, for our normal for the rest of the twenty-first century, it Mythology, so China – sorry, Media – too would be keeping would be best to name China with something that connotes with the theme. Or maybe “Media” is slightly too close to the its long history as the centre of its universe, for a new era in Chinese/Median for America, Měiguó. which China will very much not be peripheral, rather one hub Or we could go with “Meridia”. This is less of a calque – it is a in its own right. nicer English version of “middle country”, but as in the line on Media or Meridia, I shall let the market decide and see which a map, it is Ziwuxian in Chinese. catches on the most.

3 Chinese place names can be very non-arbitrary: Beijing – literally North Capital City; Shanghai – “On-the-Sea”; Shandong – East Mountains; Jiangxi – West of the River. Touchingly poetic is Yunnan province – ‘South of the Clouds’.

4 “Calque”, meaning a word that is translated literally, is a loanword, a loanword being a word taken without translation (in this case taken into English from French). The word “loanword”, though, is a calque, from the German Lehnwort. Linguists find this hilarious.

5 In modern China, Chinese characters are written in the Roman alphabet according to the Pinyin system. In several ways, Pinyin is pronounced differently to what would be the pronunciation if you were reading English – e.g. in Pinyin, ‘zh’ and ‘q’ are pronounced like the English ‘ch’. Also, guo is sometimes 国 rather than 國.

6 Though the Germans do say Österreich, “Eastern Empire/Realm”. So we’ve already done Europe’s 95 million German-speakers: they’re fine replacing “China” with “Mittelreich”.

7 In China, South was up, North was down, indeed the character for North, 北, is a pictogram of two people sitting with their backs to each other, to signify the opposite of the cardinal direction. (Since you asked, East, 东, is the sun rising through trees, South, 南, is the luxuriant plant-life found in the more tropical climate, West, 西, is a bird sitting in a nest, because that is what birds do once the sun sets. Chinese pictograms were more lifelike before the writing system adopted a system of straight line brush strokes.)

36 PB > NO ECONOMICS IN THE TITLE NO ECONOMICS IN THE TITLE < Heil Benny! A brief look at jazz during the Third Reich by José M. Alvarez t was early 1945 in Rennes, France, Iwhen lieutenant Dietrich Schulz-Köhn was sent by his company to negotiate an armistice with the allied forces that surrounded them. Once past enemy lines, Schulz-Köhn surprised his Amer- ican counterpart when he presented himself as a jazz fan and showed a greater interest in exchanging his camera for the latest Benny Goodman or Count Basie record than in discuss- ing the terms of surrender. Bartering amongst enemies was not uncommon during World War II; a high-ranking German soldier openly sharing his love for jazz music with an American officer, however, was unusual. Since the early 1930s, the Nazis had consistently singled out jazz as a cultural threat. Shortly after the appointment of Adolf Hitler as German Chancellor in January of 1933, jazz was victorious- ly pronounced dead, and publically attacked and condemned by officials throughout the Third Reich (1933-1945) as degenerate music. That was, at least, the official rhetoric. In practice, however, jazz could still be heard on the radio, Benny Goodman 1970, 25 years after the fall of the Third Reich in concerts and on records until 1945. challenger to classical music’s comfort- patriotic lyrics nor tunes that could be An ordinance on the general prohibi- able status in Europe. Racially speaking, sung by large anonymous masses. And, tion of the music was never enunciat- jazz musicians and bands tended to be most importantly, it was popular and ed. In fact, during the last years of the on average composed by those social preferred to traditional German dance dictatorship, Nazi officials ended up groups that were later targeted and music by the country’s youth. While producing their own version of jazz as annihilated by the Nazis. At the time, jazz’s influence was declining in France part of an entertainment program for black musicians formed the majority of and England by the late 1929, it kept the German public and later on only for jazz ensembles and some of the most growing and solidifying its influence in the troops. popular players were of Jewish-de- Germany, especially when Swing – one scent (e.g., Benny Goodman) or even of its most popular derivatives – arrived Roma-descent (e.g., Django Reinhardt). to Europe in the 1930s. It reached such Degenerate music As Joseph Goebbels, Hitler’s Minister popularity that even some music con- Why jazz? Viewed from almost any pos- of Propaganda, once put it: “Everyone servatories like Frankfurt’s prestigious sible angle, jazz was a considerable— knows, America’s contribution to the Hochsche Konservatorium included it and popular—threat to the Nazis’ music of the world consists merely of as part of the academic curriculum in cultural agenda. Culturally speaking, jazzed-up Nigger music, not worthy of 1928. a single mention.”1 jazz music was neither German nor It is worth mentioning that the hatred traditional in any sense of the word. It Jazz music also proved useless for Nazi towards jazz – as was the case with was American by origin and modern uniformity, as it favoured soloing and many other targets – was not a Nazi by construction, often viewed as an improvisation over rigid structure, creation. During the Weimar Republic example of America’s influence and as a could not be marched to and had no (1919-1933), although jazz was praised

1 Kater, Different Drummers, 33. 36 37 > NO ECONOMICS IN THE TITLE NO ECONOMICS IN THE TITLE < such as the British Broadcasting Cor- poration (BBC), Dutch Radio Hilversum, Poste Parisien, Radio Luxemburg, and even some American ones. In some cases, German stations started transmitting jazz, despite the negative implications, just to compete with foreign stations. On October 12, 1935, almost a month after the Nuremberg Laws, a frustrated Goebbels issued a proscription of jazz broadcasting, effectively banning the music from the airwaves. The ban was ultimately ineffective and short-lived. The commission of jazz experts – created to identify the music on the airwaves and consequently block the signal – had no idea what exactly they were looking for. The Ministry of Goebbels with the “People’s Set” Propaganda never formulated an offi- by some for its modernism, it was seen By the time the Ministry of Public En- cial definition of jazz, and the so-called by others as a symbol of urban depravi- lightenment and Propaganda estab- experts had trouble differentiating be- ty and moral decay, usually described as lished its Broadcasting Division in 1933, tween jazz and German dance music. too primitive and too modern – “a mix- jazz had already built a solid fan base, The few experts who actually could ture of jungle and skyscraper elements”. consisting mostly of young males from identify the music tended to favour it, as Criticism towards jazz was tainted with middle and upper class backgrounds – they were jazz fans themselves. some of whom would later form part of overt racism and racial clichés. Black By 1936, the Summer Olympics – held the fabric of the Third Reich. artists, seen as the symbol of jazz and in Berlin – and officials’ inability to block Americanism, became popular targets. Radio and records offered a private and foreign jazz signals forced the govern- Anti-Semitism also entered the equa- direct way of listening to jazz away from ment to make concessions. Goebbels tion since many artists, managers and government supervision. It did not help launched several German-sponsored middlemen in the industry were Jewish. that Goebbels saw great potential in ra- jazz productions on the radio – though The music was already seen by some dio for advancing Nazi propaganda. The the labels “jazz” or “swing” were avoided as part of a “Jewish-Negro plot” against Third Reich had already inherited a so- when broadcasting these substitutes Germanic culture; the Nazis legitimized phisticated working radio system from for jazz. Such attempts were futile since this existing cultural animosity. Such an- the Weimar years, and under Goebbels most German fans considered the gov- imosity also motivated German jazz mu- German radio expanded considerably, ernment-sponsored jazz second rate sicians to pursue their careers elsewhere, growing from four million users in 1932 and old fashioned relative to American as well as discouraged the further influx to almost ten million by 1939. In 1933, jazz. of other musicians into the country. Jazz the government began manufacturing music slowly started to become a net the “People’s Set”, a powerful and inex- cultural import for Germans, mainly “im- pensive radio set that was sold at the Swing kids ported” through radio and records. time for 76 marks against the average Third Reich jazz fans were divided into existing prices (150 marks) of other sets. two groups: the “purists,” who viewed By 1938, one in every second household Records, radio and Goebbels jazz as an art form and attempted to had a radio set capable of receiving gov- learn and recreate the songs, and the To make matters worse, the initial jazz in- ernment as well as foreign airwaves. “aficionados,” who gathered in large vasion during the Weimar years had co- More than once, the hands of policy- halls to dance to swing music. Overall, incided with the appearance of two new makers were tied due to the sizable the German jazz fan, purist or aficiona- technological developments: the record number of Germans devoted to jazz mu- do, was seldom over thirty, and by and and the radio. Before the arrival of these sic on the radio, as well as their inability large came from the solid middle-class, two technologies in the early 1920s, the to block foreign airwaves. Throughout with some representatives from the presence of jazz was virtually zero. By the 1930s, fans were able to get the elites and the proletariat. 1930, the German radio market stood as music through their privately owned the second largest in all of Europe, just During the 1930s, the purists formed receivers from mostly foreign stations behind Great Britain’s. Conveniently for small and elitist jazz clubs in most major jazz, the technological limitations at the “The Ministry of Propaganda never formulated an time made both German and foreign radio station and recording studios better official definition of jazz, and the so-called experts suited for contemporary music than for had trouble differentiating between jazz and German symphonic works. dance music”.

38 39 > NO ECONOMICS IN THE TITLE NO ECONOMICS IN THE TITLE <

jazz. Mölder also pointed out that, despite it being considered a capital of- fense to listen to foreign radio, the BBC had become a favourite among German soldiers because of its jazz programs. That same year, a worried Goebbels would write in his dairy about the need to relax radio programming with some light music, arguing “better light music than foreign propaganda.”2 Goebbels soon after ordered the creation of the German Dance Entertain- ment Orchestra (DTU) – the Nazis first serious attempt to create German jazz – and broadcasted its music continuously on the German airwaves along with some of the blacklisted songs he had once prohibited, including jazz. This continued up until the end of the war and after the fall of the Third Reich, Django Reinhardt 1946 marking jazz’s final triumph over Goeb- German cities. There was the Berlin Mel- a measure to be a harsh blow to jazz bels and the Nazis. odie-Klub, the International Swing and its German followers; still, the Nazi Rhythm Club from Düsseldorf, the Mün- government had no way of enforcing it. ster Club, and similar ones in Frankfurt Other than through denunciations from Heil Benny! and Hamburg. Members adopted En- a neighbour or housemate, the jazz fan Jazz never left the German airwaves, and glish names, and preferred foreign jazz was effectively protected by the privacy German fans never stopped tuning in. rather than the government’s attempts of his home. In 1939, for example, Ger- The inability of Nazi officials to control at jazz. They would gather in someone’s many had almost 11 million radio users. and target the spread of jazz proved to house and listen to the foreign records Only 69 individuals were convicted be as crucial in keeping the music alive they had purchased, or to foreign radio that same year as radio offenders. The as the persistency and loyalty of German to catch Benny Goodman and other practices that jazz fans had carried out jazz fans. Radio and records proved es- internationally known jazz artists. Jazz before the outbreak of WWII essentially sential for the survival of jazz, as well as aficionados, on the other hand, were continued throughout the war. the existence of a self-conscious group a bigger and more visible group. The Jazz had its moment of retaliation, if you of music consumers. Jazz fans, as the most famous example was the Ham- will, against those who had attempted to example of lieutenant Dietrich Schulz- burg Swings, which was later portrayed censor it all these years when it became Köhn illustrated at the beginning, re- by Hollywood in the 1993 film “Swing a propaganda tool for the Allies. Aware mained faithful to their music through- Kids”. Composed of individuals from of the popularity of jazz among German out the Third Reich. Hamburg’s upper classes, the group civilians and troops, some foreign radio met frequently in taverns and clubs, had stations started using jazz as a bait for their own dress code, and organized listeners in place of news broadcasts, dance parties in large halls. Though their challenging the Nazi government’s knowledge of the music was superficial, information monopoly amongst its they favoured foreign jazz over German people. The BBC, for example, became jazz, like the purists. In addition to a one of Goebbels’s greatest nightmares. shared taste in which type of jazz was The United Kingdom, unlike some of better, both groups were also known its European counterparts, never went for being apolitical. For example, many under Nazi control and so neither did its jazz fans abstained, even after it became radio stations. The BBC created its very compulsory in 1939, from joining the own German service, which offered pro- Hitler Youth. grams in both German and English and aimed to spread anti-Nazi propaganda. By 1944, the BBC estimated a daily audi- Jazz goes to war ence of 10 to 15 million listeners in the On the same day the Wehrmacht invad- Greater Reich. ed Poland, September 1, 1939, the gov- In 1941, Werner Mölder, one of Luft- ernment passed an ordinance prohibit- waffe’s finest pilots, complained directly ing Germans from tuning in to foreign to Goebbels about the lack of German Jose M. Alvarez. Master 1 Student radios. One would have expected such

2 Joseph Goebbels, Diaries: 1939-1941, ed. and trans., Fred Taylor (London: Hamish Hamilton, 1982), 377.

38 39 > Professional Professional < Interview with Miguel de la Mano

by Agne Pupienyte

1.Having settled at Compass Lexecon, can you compare your experience there and in the Commission? On substance, the analytical work done in the Commission and that, which is done by economic consultants on behalf of parties to a competition case, is remarkably similar. Both sides have to gather evidence, process it and evaluate it. The goal is the same to determine whether a merger, agreement or single firm conduct raises competition concerns. And in that case, how to best remedy such concerns without destroy- ing any associated efficiencies and with minimal interference with the market dynamics. Hence the daily routine for a competition economist at either side of the enforcement table is not all that different: it involves gathering the best possible evidence, identifying and reviewing the relevant economic literature, and of course, taking a page from our legal colleagues, evaluating and learning from past transactions and past enforcement decisions where similar issues came up. What did surprise me, however, was that both sides have a different default and this influences the starting point of the inquiry. The European Commis- sion´s default is a worst case scenario and hence the immediate interest is in understanding “What are the efficiencies that you expect to obtain from engaging in this practice?” From the perspective of the parties, however, the efficiency justifications and overall motivation for the practice is taken for granted so the first question their legal and economic representatives ask is “What is the likely competitive harm, if any?” This, of course, makes perfect sense given the respective incentives. But the irony is that when I had sleepless nights at the Commission worrying about whether an action would destroy efficiencies that I could not see, now, on this side of the table, I have sleepless Miguel de la Mano 40 41 > Professional Professional <

not fully recovered yet. When the crisis Miguel de la Mano is currently the Executive Vice President broke, one of the natural reactions was at Compass Lexecon. He completed his graduate studies at to retreat within domestic borders. That the Institute for World Economics and the European Institute was especially true for the financial at Saarbrucken University in Germany and conducted his sector, which was most immediately impacted by the crisis. This fragmen- PhD research at Oxford University. He has been working at tation and focus on national interests the European Commission for 15 years and is an expert in spread over other sectors as well, and it competition policy. He has co-drafted guidelines for setting became tough to coordinate a Europe- out the European Commission’s analytical framework on an-wide action to respond to the crisis merger control, vertical and horizontal agreements (Article and to persuade the member states that it was in their best interest to work 101), as well as single firm conduct (Article 102). From its together and support the European creation in 2003 Dr. de la Mano has been a part of the Chief project. The consequence of this was Economist team at the Directorate-General for Competition. a response to the crisis that was less efficient and effective than it otherwise could have been. nights worrying about theories of harm you may know it is different from the that I might have system in the US. In the US the agencies The crisis has shown the importance of missed but which the Commission are typically prosecutors, they take the a coordinated response and has shown might focus on. case to the court and the court makes a that we all lose out in its absence. The decision. In Europe we have an adminis- European Commission stepped up to The great thing is that in this job one trative system, where the Commission is the challenge. It has played a crucial role never stops learning. Last few months both the prosecutor and jury. The main over the years in repairing the banking here at Compass Lexecon have opened advantage of the latter enforcement system, and this was done on the back my eyes to a part of our EU competi- system is that it mitigates antagonism its extensive state aid powers. tion enforcement system that I could and confrontation. Instead, it incentiviz- only perceive but had not experiences es full cooperation from the parties. In this context, I believe economic con- directly. For example, I have now expe- sultancies can play an increasing and rienced first-hand in several cases that Of course, to maintain its credibility and important role both because they can it is very challenging to gather and pro- effectiveness, it is important that the advise member states directly, as to cess all the data and to make it available Commission makes every effort, in all whether the aid granted is likely or not for the Commission to assess a case. circumstances, to remain an indepen- to violate state aid rules – and what to dent and unbiased enforcer, balancing do about it. Moreover, they can advise More often than not the relevant infor- arguments from all sides during the companies that may have benefited mation required to make a determina- administrative proceedings. It must also from state aid, or companies who have tion of the effects in a competition case fully embrace judicial scrutiny, in par- seen competitors in other member is quite different to that collected by the ticular when, despite best efforts, type states or within their own member state parties in the normal course of business. 1 or type 2 errors are made. It has been benefit. In assisting one or other party, Moreover, much of that information is my long held view that even the best they can help advance the necessary scattered among market participants of systems cannot fully avoid enforce- evidence and the most relevant argu- and the parties may have severe diffi- ment errors - and indeed the total ab- ments to assist the Commission in its culties in making appropriate estimates sence of unintentional mistakes could enforcement of State Aid rules. (this can happen, for instance, in the cast certain doubts. But these risks are case of computing market shares, and minimized because cooperation and 3.The creation of the Chief Economist irrespective of the complications associ- dialogue between the parties and the Team (CET) at DG Competition has ated with defining markets). Commission is in fact very intense and strengthened the role of economics typically efficient. in solving competition issues at Having said that, economic consul- the European level. What could tants and competition lawyers have 2.State aid has recently been the be done to incentivize national developed significant expertise over center of attention in EU Competition antitrust authorities to follow the DG the years and in close cooperation with law. What were the key events that Competition’s example? Do you regard the parties can obtain the necessary brought people's attention to state it as a necessary reform? information and make appropriate in- aid? And what is the role of economic ference. It is reassuring, if not somewhat consultancies in European state aid surprising to me, how much effort and assessments? It goes without saying that I firmly energy goes into data and information believe that the creation of the Chief gathering to assist the Commission on State aid is a pillar of the single market Economist team had strengthened the its enforcement duties. and for that reason it has become es- role of economics in assessing (some pecially important in the wake of the would say resolving) competition cases. This has reinforced my view that the financial crisis Europe has experienced I would also add that it has improved European competition enforcement in the last 7-8 years - and in a sense the quality of decision-making in system on balance works well. Some of continues to experience, because it has EU competition enforcement. This is

40 41 > Professional Professional <

because in addition to providing eco- necessary because the authority is itself to the rescue: enforcement ought not to nomic support to case teams, another primarily staffed with economists or at be discriminatory and should support important duty of the CET since its least there is a good balance between the creation and maintenance of the EU creation has been to ensure that all economists and lawyers. In addition, Single Market. the necessary evidence is present in not all competition authorities have the In the past the Commission was criti- adjudicating a competition case. In this same enforcement system and proce- cized for favoring European operators respect the CET provides quality control dural rules, even if they follow the same and being more aggressive towards US for the economic analysis in a given analytical approach and the Commis- firms. These concerns are unfounded, case. This function is crucial because sion’s guidelines. in my experience. The Commission lis- the EU Courts, for example in the area I also think that competition between tens to everyone’s concerns and their of mergers, have given significant dis- national competition authorities can complaints are taken equally seriously, cretion to the Commission on so-called be very healthy – just like I believe it is whatever country they come from, in- “complex” economic matters. welfare enhancing to protect competi- cluding those outside the EU. tion among firms. Different authorities Indeed, it is well known the CET, in large follow different approaches as to how 5.What has driven the EU commission part, was created in response to sever- to use economic analysis or how to use to adopt a case-by-case approach al, consecutive annulments by the EU economists in the decision making pro- (rule of reason) and abandon per se Courts of merger decisions (concretely: cess. Over the years we can learn from illegality 1, which is relevant in the US? Schneider-Legrand, Tetra Laval-Sidel, each other and identify which models Do you think that such an approach Airtours-First Choice). In addition, the work better, spreading best practices. is inefficient? What could be done to General Court (CFI at the time) ruled Hence I do not think other authorities ensure the fairness and objectivity of that we had made several manifest er- should necessarily follow DG Comp’s the Commission's decisions? rors of assessment in the GE-Honeywell example and create a chief economist decision even if it was not annulled. EU team. Having said that, of course, it is Firstly, I should say that this has been judges ruled that the Commission deci- critical that economic analysis plays a prompted by the need to use more sions in these cases were defective, inter central role in the decision making pro- economic analysis in order to identify alia, because we had not advanced any cess, in whatever way is most suited to whether or not a particular merger, proper economic analysis of the mech- each individual authority. practice or agreement is anti-competi- anism through which the merger would tive, and to minimize the risk of error. harm competition or consumers (i.e 4.How important is politics when we no theory of harm) and/or we had not talk about the EU’s competition policy? However, it would be incorrect to say provided sufficient economic evidence that in Europe we have abandoned per in support of our conclusions. I was at Individual authority. I can safely say se illegality, because there has never the Commission when these decisions that politics plays a marginal role in been a system of per se illegality. For were handed down and I worked in EU competition policy enforcement. instance, in the area of Article 102 2, a defending a two of them. Despite the This is somewhat unexpected, because dominant firm has always had a possi- initial shock, upon reflection, like most by design the decision-making at EU bility to come forward with an expla- of us at the Commission at the time, I level is based on the idea that the nation (so called objective justification) welcomed and embraced these trans- Commission has a team that does the for its suspicious conduct. In the area formational judgements. It is fair to say, investigation, they reach conclusions, of Article 1013 , hardcore cartels (that is they humbled me for years to come and and the Commissioner for Competition to say, price fixing, market sharing and anchored my commitment as a com- puts forward these conclusions in front alike) are indeed almost per se illegal. petition enforcer to economic analysis of a College of Commissioners, which But this is only, because it is very diffi- as a tool to minimize the risk of error in is ultimately responsible for any com- cult to convey any efficiency that could competition cases. petition policy decision (at least, the justify such a practice. Beyond those, important ones). where there is a possibility to prove Notwithstanding the above, and my The College of Commissioners includes efficiencies associated with a particular own experience, I do not necessarily Commissioners with a wide range of agreement, the defendants can always think that all national competition au- portfolios. One might have expected ex advance efficiency arguments. thorities should copy or imitate the DG ante that this would really be an oppor- Comp in terms of creating a chief econ- tunity for all sort of objectives besides Secondly, I do not think this approach omist team. Each authority has its own competition policy to creep into the is inefficient, because bringing all the idiosyncrasies, and peculiarities; there decision making process: employment, parties together and inviting them to are different levels of expertise, they environmental issues, or even national deal with different cases. The balance 1 Inherently illegal – a category of anti-competitive interests. My experience over the years of economists and lawyers in some is that this virtually never happens. DG behavior in antitrust law. authorities is also quite different. In the 2 Article 102 of the Treaty on the Functioning of the Comp has a very good reputation of nineties, most civil servants at DG Comp European Union is aimed at preventing undertak- focusing exclusively on competition had a legal background or training, and ings holding a dominant position in a market from issues. Where political pressure may be there were few economists. The creation abusing that position. felt from time to time is when a case af- of the Chief Economist team was also a 3 Article 101 of TFEU prohibits cartels and other fects one country more than others. But agreements that could disrupt free competition in way to remedy this imbalance. In some here is where the foundations of the EU other competition authorities this is not the European Economic Area’s internal market. competition enforcement system come

42 43 > Professional Professional < advance the argument not only reduces in a position to comment on the merits of competition policy. They also play an the risk of a mistake for the authorities, of the Commission case against Goo- important role in gathering data and but also provides legal protection and gle but I am certain the Commission evidence on behalf of the parties. an opportunity to be heard to both de- would take great care in not distorting fendants and complainants. incentives to further invest and improve Indeed while still at DG Comp, I often In the past years the Commission has in the online search market, which is observed that whenever there was a made significant efforts to explain to critical for all modern economies and case where you had two consultancies the wider public, practitioners and sectors. working for different sides, the quality affected companies how it is going In any event I am certain that econo- of the economic analysis was typically to take decisions both in terms of the mists can help in assessing the compet- much higher than whenever there was substantive basis for intervention and itive effects of Google´s practices. Not just one single consultancy involved. its enforcement procedures. This has only in terms of identifying a theory been communicated primarily through of harm that applies in this case, but In fact, in some instances, realizing and guidelines, which are considered soft also identifying possible efficiencies anticipating this phenomenon, some law. Economists in the CET have played that would justify any alleged discrim- parties would hire not one, but two an important role in drafting these ination on Google’s part. If there is a consultancies, in order to foreclose a ri- guidelines to make sure intervention by justification for those, economists can val party from hiring a rival competition the authorities is well grounded in eco- certainly advance those arguments and consultancy. If that were to happen in nomic theory and empirical evidence. identify the evidence that is necessary a systematic way, all the benefits from to confirm them. Furthermore, I believe competition between consultancies 6. The Commission has recently that this is a case that requires intensive would be reduced significantly. Fortu- expressed concern over Google, one data gathering and processing to have nately, that trend has stopped. As far of them – having abused its dominant a better understanding about how the as I can tell from my new standpoint position by distorting Internet search market works, the type and evolution competition is fierce among economic results. How can the Commission of online search services, and whether consultancies, or, in any event, I cer- show that this was the case? Can the competition is dynamic. Also econo- tainly feel the discipline of the market economists be of any help? mists can use the data to compare dif- breathing down my neck when I come ferent search services and to evaluate to work every morning. Even in the case of a dominant firm, like competitive effects. Finally economic Google, the conditions required to es- theory and empirical analysis can play 8. What fields/industries will tablish that certain behavior constitutes an important role in assessing the become more relevant for economic anti-competitive foreclosure and ulti- possible unintended consequences of consultancy in the future? mately harms consumers, as opposed to possible remedies, if ultimately needed. just making it more difficult for rivals to This is especially critical in a market in It is worth pointing out that historically compete are quite strict. And rightly so, which end users have come to expect economic analysis has been most rel- in my view. Indeed dominant compa- free online search services. As behavior- evant in merger control and antitrust, nies, at least in new emerging markets al economics have consistently shown in particular Article 102. It has become tend to be dominant, because they are “free” is perceived very differently by more important in the area of cartels particularly efficient and innovative – customers than to any other “price”. In recently and this is because of the need or else they would not have become these circumstances, measures that to estimate damages and the compe- dominant in the first place. Excess en- fundamentally alter the quality of the tition authorities’ increasing interest in forcement in these circumstances can service or its price can have unintended information exchange cases. Informa- sometimes result in distortions to com- consequences that are difficult to pre- tion exchange cases are not as straight- petition, even if the dominant firm`s dict. forward as hardcore cartels. There is a conduct does not. need to determine whether information 7.How do European economic exchange can lead to greater efficiency Indeed, before concluding a firm has consultancies compete against each (and indeed very often they do), and abused its dominant position it seems other? Do you have any interesting therefore the role of economists has be- sensible that the authorities would con- experiences regarding this question? come more critical. sider whether there are efficiencies or procompetitive benefits associated with In my opinion, competition between As for individual sectors, my view is that the practice under scrutiny. For instance, economic consultancies is healthy and competition is important across the in some cases firms make significant has dramatically improved the quality board, whether it is high-tech or tra- investments in developing a facility or a of economic analysis to the benefit of ditional industries like manufacturing service, under the ex ante expectation European competition enforcement and or construction. In fact, in traditional that those investments will allow them ultimately to the benefit of the consum- markets, in particular, local markets, it is to achieve sufficient profits ex post. ers. Like in any other market, competi- often where competition may be weak- Before intervening, as reflected in the tion is beneficial because it drives con- er, or maybe even completely restrict- Guidance Paper on 102 enforcement sultancies to improve continuously the ed through a cartel in ways that make one has to balance the negative impact quality of their work on behalf of their it very hard to uncover even in cases on those ex ante incentives against pos- clients. They put the best economists to where the leniency system works well. sible benefits associated with increasing work on the most complex matters, and Here, economic analysis should increas- competition in the short run. I am not they can specialize on different aspects ingly play a greater role.

42 43 > Professional Professional < High-Frequency Trading

by Daouda Ngack

Approximately twenty years ago – with networks to get their share in this prof- regulating a world where winners and the advent of the information age in itable business. losers differ because of hundreds of a banks – financial transactions became second. How does HFT work? faster and the interconnections between markets got stronger. By nature, Given the tremendous volume of trades financial markets continuously seek – we are talking about transactions that ultimate efficiency, some factor that can be made in a matter of thousandths allows one agent to be ahead of all of a second – HFT needs appropriate the others. Hence the usefulness of networks that combine speed and high-frequency trading, denoted HFT. reliability. That is to say HFT traders had HFT is automated trading. It is invest- better not suffer from device failures, ment banks and traders employing PhD not even for a second. Automation. That physicists and paying millions of dollars is the key of HFT. Computers are meant to put computers as geographically to scrutinize the markets in order to close as possible to the stock market’s detect patterns, and more important, systems – the nanoseconds it takes for to react quickly to new information. information to travel along the fibre They are designed to do what no hu- optic cables can make all the difference man trader can do as fast. To do so, HFT in HFT. traders set up algorithms and strategies and optimize them continuously. The Mathieu Rosenbaum Where do high-frequency traders upshot is to maximise profits and mini- work? We talked with Mathieu Rosenbaum mise risks thanks to a spectacular speed who kindly volunteered some of his They work for large investment banks, of execution. time to contribute to this article. asset managers, hedge funds, HFT What is next for HFT? firms and prop trading firms. (“Prop” or 1.What are, in your opinion, the key proprietary trading firms are firms that HFT is a bone of contention for experts. aspects in HFT? trade with only their own assets.) In the Indeed, the well-known “Flash Crash” Now in the markets, you have the rise wake of the 2008 economic crisis, regu- showed to the finance industry how of a new type of agent that is able to lation got tougher towards investment bad things could still turn. On 6 May process information very fast and also banking and speculation. One can 2010, the U.S. stock market underwent able to react to it very quickly. think of the Volcker Rule, which bans a hard-to-qualify drop within a few proprietary trading for large investment minutes – of the order of $1,000 billion The thing is HFT is not an accurate banks. Prop trading consists of trading – that reflected into indexes like the expression in the sense that, almost with the entity’s own money – no S&P, the Nasdaq 100. Shares of firms like all agents of the markets are in a way clients’ interests or money is taken into Procter & Gamble literally crashed by “high-frequency”. Even if you are a account. Before, a bank could deceive 40% during that storm. Approximately traditional bank, you have a lot of data its clients and increase its own profit as 20 minutes later, things went back to and you have computers. Therefore, these two projects could be handled by normal. Lots of investigations, reports, you have the capacity to be fast on the two distinct business areas of the bank. debates, discussions occurred after this market. It does not mean your range of For instance, one business area of the event. None could say which the guilty action holds in nanoseconds or millisec- bank could advise the client to invest in entity was. Cause? Contribution? Or onds. Even though banks are not what a product while the prop trading team amplification? Considering the volume we usually call high frequency traders, was betting on its fall. – HFT now dominates over human they are acting “high-frequency”. Given trading – and/or the speed of HFT the technology progress, no agent HFT is not banned within investment transactions as an amplifier of states of can afford not to use it. I would rather banking, at least for the moment. Still, the markets, their effects are hugely im- say ultra-high-frequency trading with the strain undergone by investment portant. This article is not a trial for HFT respect to this topic. True, the speed banking paves the way for these trad- because, in my opinion, technology of execution in HFT is tremendous ers to go work for hedge funds, HFT does not “act” as such but “executes” the compared to what is done in traditional firms, and prop trading firms. There tasks assigned by its user. banking. But ironically, in terms of pure is much more wiggle room in those frequency, the frequency that one can little – compared to investment banks The future for HFT depends heavily on find in a car is higher that the frequency – structures. Hence more profitability. the evolutions of financial regulation. that HFT traders deal with. And investment banks have also made There are post-Flash-Crash restrictions large investments in HFT facilities and for HFT, but there is still room for Another way to see things is to focus on

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on speed to maximize profits. These a millisecond, by the time you are given Mathieu Rosenbaum is a lecturer devices are more reactive than human for your strategies – this gives you an at École Polytechnique and a traders. idea of the profitability that HFT traders professor at University Pierre can get there and the reason why they Yet, if you consider the automatic pilot et Marie Curie (Paris VI). He provide huge efforts to be quick. of a plane, it’s much smoother but less graduated from ENSAE Paris- reactive than the human pilot. It is just a Eventually, some are proposing to cre- Tech (officially École nationale de matter of the goal for which automation ate an auction-like platform. But since la statistique et de l’administration is designed. continuous trading is the only system économique) and obtained is we know, this paradigm shift would be Ph.D. from Université Paris-Est. His Now, let me expand on a specific point too radical for some. research deals with market micro- of HFT. Consider the Flash Crash of 2010. structure modelling and designing It was not a catastrophe compared But regulators are working on adopting statistical procedures for high to what can trigger a financial crisis. such measures and bringing a general frequency data, among others. Nevertheless, it was a serious event coherence in the markets. However, It also encompasses regulation, that lasted some minutes. But the good regulation takes time mostly if you want mostly in the context of high thing with HFT is that when things get a global rule. Something that is difficult frequency trading for instance. out of control you can stop things, un- given the differences in legislation plug, and then reboot. from one country to another, from one continent to another. What is most the survival time of HFT agents. It is way People questioned the involvement of urgent in financial markets regulation harder to survive in the markets as an HFT in the Flash Crash. But what is not is ruling out all toxic products or toxic HFT firm than as a bank. HFT firms need much said or known is that that in fact underlying parts of financial products specific networks and facilities that are almost no agent really lost money that that are free to move and very mobile as difficult to handle by themselves, given day. Even the firms which seen their we are talking. This should be the prime that many other people have made share price fluctuate. The Flash Crash concern for regulation. Not that HFT those elements their business and that was a result of orders whose origins run should not be tackled, but it is not the HFT traders have to focus on speed, the gamut. There is no investigation or most important imperative for safety algorithms, and strategies first. Another report about the Flash Crash that could and stability. constraint for HFT firms is having an im- specifically blame HFT. HFT contributed portant initial investment because the to it, but no one has been able to quan- 3. Some investment banks are nature of this business is dealing money tify that contribution. developing a HFT-focused strategy backed by substantial investments on your own account, not a client’s one. As for regulation, I am not worried about and the recruitment of specific people Most of HFT firms hardly last longer it because – contrary to what people to modernise their electronic trading than, say, six months. may think – it is very easy to regulate team. To what extent can this move 2. Regulators and policy makers HFT. A thing that could be implemented change the landscape of HFT? have voiced their concerns about is to add a small additional random time HFT. Proponents of HFT have argued to the timestamps of the orders, with a That is an interesting question in the that HFT makes financial markets magnitude of a few milliseconds. In that sense that we should not be naïve. Fi- more efficient. Are you worried about case a tiny speed advantage of a given nancial markets are so diverse – be it in regulation? Could you expand on how HFT trader would be blurred. This rule clients or products – that any project or HFT increases market efficiency? would slow down HFT and make things strategy is more than likely to deal at a steadier in that sphere. precise point with HFT. And this tenden- I do not believe that increasing reaction cy is increasing with the technology’s times by one millisecond is efficient Another idea has to deal with the tick, momentum. As every agent aims at for the markets as such. We are talking which is the gap between two succes- optimizing their efficiency, some banks about an entity where winners are win- sive quotations imposed by regulators. making this move does not come as a ners only because they are a number But there are plenty of ticks according surprise. HFT is hidden or, better said, of milliseconds faster than the others. to the stock exchanges, to the financial included in more important strategies It would be foolish to summarize the products you consider. Consider a in investment banking. markets or their efficiency within this security at time t that is worth $20, that tiny time frame, or consider it as a rule HFT deals with. The regulator sets a tick A thing to keep in mind is that there are of markets. However, there is until now of $10 for this security, meaning the watchdogs and regulators in finance, no empirical study or piece of evidence next quotation is either $10 or $30. As and they are checking what everybody showing that HFT moves have resulted possibilities of profits are bounded, HFT is doing. The line that separates an into a decrease of market efficiency. traders will not be very active on this activity from the illegal sphere is quite What could be dangerous is the fact product and things will be pretty stable. fuzzy. So, investment banks have to be very cautious and be very aware that the market could rapidly be cor- But today, not having a more or less of the legislation because proving to nered by a few high-frequency trading generalized tick paves the way for regulation institutions that you did not firms, only playing a speed concurrence. speed-efficient strategies. Consider a commit a fraud is harder than detecting Then the price concurrence mechanism tick of $0.01 which is closer to the HFT a fraud. Therefore having a team of spe- which was the aim of the regulation day–to-day frame. For one share, that is cialists preventing them from having a would not take place, to the detriment nothing. But if you multiply this by the discussion with regulators is more than of traditional investors. HFT traders amount X of shares that can be dealt in design algorithms and strategies based welcome.

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Business Talks Luc Peligry, Laboratoires Pierre Fabre Free Cash flow and value creation

by Stefan Peuchen

On the 8th of October the TSE commu- it significantly harder for competitors Internships and job opportunities: nity was eased into Business Talk season (e.g. L’Oreal) to take over the company with a kick-off account on Free Cash and merge Pierre Fabre into their oper- Internships are generally open to stu- Flow by the well-known pharmaceuti- ations. dents who are finishing their studies and cal giant Pierre Fabre. Constituting the who have completed 5 years of higher second largest employer for the South- Third, by means of the reorganisation, education. West of France (after AirBus), the compa- renewed emphasis was placed on the The internship can cover all our profes- ny plays a cardinal role in the provision importance of its employees. In addition sional disciplines: Research and devel- of jobs and the attraction of supporting to the Pierre Fabre Financial Fund, they opment, industry, logistics, marketing, industries. also issued shares to its employees. This sales, promotion and support services. markedly improved their commitment Up to 2013 the firm owned much of its to the improvement of the daily oper- business structure and success to Pierre ations. But restructuring its cash flow Key facts and figures: Fabre’s personal ideology. The small city and ownership setup did not suffice, •Founded in 1962 of Castres (an hour east of Toulouse) tes- for dwindling profitability from 2010 to •Operating in 130 countries tifies to this. In pursuing the pharmaceu- •Employing 10.000 people tical practice, Mr Fabre’s native city was For further information: •Annual turnover: 2 billion euros for him the obvious candidate for the (2012) settlement of the first laboratory and http://www.pierre-fabre. •Decomposed turnover: factory. Anno 2015, the Castres factory, Pharmaceuticals and phytotherapy remains to play a pivotal role for the re- com/en/internship-policy (47%) and cosmetics (53%) gional economy. Contrary to business relocation strategies observed for con- ventional growth paths, adhering to Mr 2013 compelled the company to down- Fabre’s beliefs, the company never left size on its staff, leading to a lay-off of 500 its village of nascence. of its employees. The dual novelty of a trimmed-down Whilst exerting due credit to Pierre Fab- employment pool and sound incentiv- re’s legacy, after seeing its profitability ised financial management has been crumble the pharmaceutical colossus conducive to recover its profitability in had to make the tough decision many 2014. More fundamentally, it has sus- firms have faced before: pushing for tained its operation in an ever increas- a (financial) reorganisation. The firm ing and globalised, competitive envi- transformed its ownership and gover- ronment. nance arrangement into a foundation structure. This was done to safeguard three core values. First, by internalising the cash flow it could govern profit more sensibly. The company realized it Excerpt from the website: needed to be able to tap its sizeable investment needs (with return on invest- “Internship is an integral part of our pre-recruitment logic. The ment from R&D in the industry being wealth and diversity of our professional disciplines means we notoriously volatile) from a reliable and recruit young graduates every year, everywhere in the world, and sustainable fund. Internalising several offer them short-term contracts, open-ended contracts or VIE financial operations it had never dealt with, the company invested heavily into contracts. Participating in an internship in Pierre Fabre Laborato- cash flow control and financial man- ries means integrating into our pool of young graduates, who are agement functions. It even incentivised given priority when we recruit.” proper conduct with a bonus system. Second, the foundation setup has made

46 47 > Professional Professional <

Jean-Yves Ollier, Commission de Régulation et d'Energie (CRE) The challenges of energy regulation

by Romain Mongeau

Energy regulation agencies have a short history. For example, • the capital expanses of EDF measured by its weight- the national agency of France, the CRE, was founded only ed average cost of capital fifteen years ago in 2000. Its creation was a response to the • incentive schemes so as “to encourage operators to European Union’s desire to have a European energy market. improve their performance particularly as regards the quality Nowadays the CRE plays a central role in the well-functioning of service provided […] and finding productivity improve- of the French energy market. ments” (French Energy Code, Article L.452.3). (ie, a bonus-ma- lus system on the cost of capital) “The powers of the French energy • time differentiation: peak hours are more costly than regulatory agency go beyond setting off-peak hours network access tariffs, the main mis- The accounting for time differentiation in the tariff is rela- sion of the CRE”. tively new (since 2009) and responds to the need for the CRE to control the demand of energy during high consumption periods. In spite of this mechanism, other services must be provided to battle against peak management issues. This includes automatic devices that are able to stop electricity or Historically, EDF and GDF (now ENGIE), have been the two gas consumption at night for households or firms, and “smart incumbents of the electricity and the gas markets in France, heaters”, which can be automatically activated when the state monopolies, owned 85% and 33% respectively by the ambient temperature is too low. French State. The CRE must therefore be independent from the government, so as to regulate the energy market without Another regulatory task performed by the CRE is making sure being influenced by the French State, the main shareholder that there is no confusion from the consumer’s perspective of these firms. This means that it should not take instructions between distribution system operators (DSO), in charge of from the government when performing regulatory tasks. maintaining the power distribution network and of connect- What are these regulatory tasks, and how are they executed by the CRE? First of all, the powers of the French energy regulatory agen- “Economists represent 30% cy go beyond setting network access tariffs, the main mission of CRE’s labor force”. of the CRE. Indeed, since 2011, the CRE also has the ability to unbundle1 a firm. Moreover, it sets the monopoly tariffs and has a role in the surveillance of retail markets, where it con- ing consumers to this network, and energy providers (EDF trols the price proposed by providers. Finally, even though and ENGIE). In 2015, the CRE forced the two incumbents to the CRE is independent, there is in-between governance modify their branding and communication so as to maintain with the government concerning the electricity tariff. The the independence of their DSO (ERDF and GRDF) vis à vis regulator makes proposals of electricity tariffs to the gov- their host company, which is mainly State owned. ernment that it can either accept or reject. A back-and-forth negotiation process occurs if the proposal is rejected, with Economists represent 30% of CRE’s labor force. They are very the government having the last word on the tariff’s level. useful and, depending on their areas of expertise, they can help elaborating economic models, but also participate in As previously discussed, the biggest regulatory task executed the creation of electricity tariffs or carry out datamining and by the CRE concerns the determination of the network access statistical analysis. A concrete example, Lloyd Shapley’s (2012 tariff. The tariff is set for 4 years and the CRE has full authority Nobel Prize in Economics) theory of cooperative game theory over it since 2011. The current regulated tariff on electricity is used at the CRE for allocating the cost of energy among (TURPE 4), effective on the 2014-2017 period, accounts for users. three major factors: If you think it might be interesting to work on energy regulation issues, the CRE offers internships on a variety of subjects 1 Unbundling is defined as “A process by which a large company with such as mission benchmarking of tariffs, study on incentive several different lines of business retains one or more core businesses and regulation, or financial analysis. sells off the remaining assets, product/service lines, divisions or subsidiaries.” (Investopedia). 46 47 > Professional Professional < Internship Reports Dan Coysh, Zidisha Online Microlending, Zambia

1. What was your role during your contacts in Lusaka, from which I had to internship? develop a network for promoting the organisation. Working for Zidisha in Zambia was a leap into the unknown for me: I had One of my first activities was to meet never been to Africa, I had no prior with existing account holders in Lusaka, experience working for a microfinance Zambia’s capital. Some of them re- institution, and this particular institu- quired guidance applying for their first tion had no permanent staff in Zambia. loans, whilst others had already applied for loans online and were enthusiastic Zidisha has provided a major inno- to meet a representative of Zidisha. This vation in the microfinance sector by provided me with the opportunity to minimising the role of the microfinance meet a fascinating selection of people institution (MFI) as an intermediary from various walks of life: a Rwandan between lenders and borrowers. Whilst refugee, who was successfully running traditional MFIs require a substantial a small grocery store; the manager of in-country workforce to screen loan ap- a roofing company; and a university plications and collect loan repayments, Dan Coysh student, who ran a manicure business the Microfinance, Land and Labour Zidisha allows these tasks to be carried to help fund her studies. elective next semester,which should out online. This drastically reduces allow me to supplement my real-world overheads and therebythe interest rates I went on to organise and carry out experience of microfinance with a more offered to borrowers. This is a crucial several workshops during which I gave theoretical perspective. innovation for a developing country introductory talks about our online in which bank loans are only available microlending service, responded to for the affluent and MFIs typically offer attendees’ questions, and helped those 3. How did you get the internship? loans with annual interest rates of over who were interested to apply for loans forty percent. on the Zidisha website. Each workshop Knowing that I was interested in doing was cohosted by an organisation with My role was to expand Zidisha’s bor- an internship in the field of microfi- an existing network in Zambia, which rower network by working with local nance, a friend at TSEput me in touch allowed us to promote the events. NGOs and the handful of existing with another student on the Master Among these organisations were the borrowers we had in the country. This 2 Public Policy and Development US Peace Corps, the Population Council was a fairly broad remit, requiring me programme who had done a similar in- and BongoHive (a technology hub and to organise workshops and one-to-one ternship with Zidisha. This student gave startup incubator based in Lusaka). meetings with entrepreneurs and small me the contact details of the director of business owners who were expected Ultimately, my work helped to kickstart the organisation, and the rest followed to be a good fit for our online peer-to- demand for Zidisha’s microlending from there. peer microlending service. The overall service in Zambia. When I arrived at the I would firmly recommend doing an aim of the internship was to help Zidi- beginning of June, our website listed internship with an organisation like sha’s operations in Zambia expand to a only seven successful loan applications Zidisha. Microfinance is playing an level at which further growth would be for the country, and this number has increasingly important role in develop- self-sustaining, with existing borrowers now been raised to thirty-five. ing countries, and working in the field recommending the online loan appli- can provide the opportunity to meet a cation process to friends and business diverse selection of local people, many 2. How did your experience at TSE help associates. with fascinating stories to share. More you on the job? Working independently for Zidisha, generally, an internship in international as the sole intern based in Zambia, My role was more hands-on than tech- development is a great opportunity to obviously presented some serious nical, which is whythe internship rather spend some time working and living in challenges. It was necessary for me to complemented what I had studied a developing country - an opportunity quickly develop a detailed knowledge in the first year of the masters,than that might not come around very often. of the organisation’s online micro- actively required me to useeconomic Whether you decide to pursue a career lending model in order to effectively techniques. Obviously, economic prin- in this field or not, you will develop promote our service when meeting ciples are the groundwork of the field some transferable skills, get a unique with prospective loan applicants and of microfinance, allowing me to apply insight into a different culture, and have partner organisations. In addition to concepts that I have learned before to a lot of fun at the same time. this, I arrived with only a handful of real life. In addition, I plan to choose

48 49 > Professional Professional < Janine Torrelli, UNODC

the work done by UNODC in the region 3. How did you get the internship? and participating in the preparation of Do you have any advice for students the bi-annual 2016-2017 budget of the looking for a job in a similar field? Regional Section. These two major du- I got the internship by persistently ties, combined with other small tasks, searching for opportunities in the allowed me to acquire a comprehensive field that interests me. I sent many overview of the work performed by applications to many other similar UNODC, its importance, and challenges organisations, although this opening it faces. was a better match for my experience. 2. How did your experience at TSE help First, I prepared a good, tailored cover you on the job? letter with sound examples, showing that I am a good match for the position. Although I did not directly apply the Second, when invited to the interview, knowledge from my Masters, TSE has I prepared other examples, which provided me with good analytical skills, showed that I am equipped with the which helped me understand the finan- skills they were looking for as well as Janine Torrelli cial complexity of the work and, among practised expressing my motivation other tasks, successfully compile the 1. What was your role during your and enthusiasm. My advice would be Regional Section’s budget. TSE has also internship? that when preparing your cover letters, equipped me with perseverance when you can already see if you are a good United Nations Office on Drugs and facing difficulties, a skill that is essential potential candidate for the position. Crime (UNODC) focuses on combating for performing good work. In addition, If you are not a good match, do not organised crimes and preventing drug TSE has exposed me to different cul- waste your time preparing applications use and terrorism. My six-month intern- tures as well as taught me tolerance that will not lead anywhere. If you are ship at UNODC, in the Regional Section and adaptability, which are essential a good match, be clear, concise, and for Latin America and the Caribbean, in a multicultural work environment. precise, and over all, prepared. was focused on providing assistance Therefore, TSE gave me the necessary for field offices. My two main duties tools to be able to perform a good involved preparing a briefing report of work.

Payal Soneja, German Development Institute (D.I.E)

1. What was your role during your main facets of development policy: the internship? objectives, concepts, instruments and modalities of fiscal transfers and the I carried out a three-month internship architecture of bilateral and multilateral at the German Development Institute development cooperation. In addition, (Deutsches Institut für Entwicklung- I helped my supervisor with compiling spolitik, D.I.E.), the department of a data set from different sources. When Bilateral and Multilateral Development the dataset was ready, I calculated eco- Cooperation. D.I.E. is playing a key role nomic indices using STATA. in shaping research and policy debates on results-based approaches in devel- I had the opportunity to attend inter- opment cooperation through academic national conferences and seminars. In research, dedicating its work to key addition, I also participated in events policy issues. relating to current issues of development policy. This internship has been a During the internship my aim was to great learning experience. gain exposure to development-related issues. I worked on the Policy Advice Payal Soneja Project “Results-based Approaches to 2. How did your experience at TSE help about development and less about sta- Development Cooperation”. I prepared you on the job? tistics. In this sense, I believe studying the literature review regarding fiscal courses like Development Economics Studying M1 Economics and Statistics transfer mechanisms in Ethiopia. In in my first year was useful for under- at TSE provided me with both theo- particular, I focused on how to channel standing the concepts I had to work on. retical and statistical backgrounds: aid from international donors using Also, attending the Internship classes for example, I gained experience in the links between the central and local conducted by the Business Relations working with statistical software, such banks. This project focused on the two Department at TSE was helpful, where as R. However, my internship was more

48 49 > Professional Professional < they help the students to prepare with getting in, as you have to compete with opportunities out there, one has to be the CV’s, cover letters and provide inter- hundreds of applicants. I did a lot of patient and active enough to catch view lessons. Studying at TSE provided research, looked for internships on the an opportunity. TSE has an extremely me with perseverance and the ability to web and applied to as many as I could. strong network, and it organizes a help- deliver results under pressure, skills that Finally, I received a reply from my future ful “Business Networking Day” where are essential to be a successful intern. supervisor at D.I.E with a three-months several international organizations take internship offer. I would also advise part. TSE Alumni website is another students to gather as much information platform to look for interesting intern- 3. How did you get the internship? as they can on the company and the ship opportunities. I advise you to make First of all, as hard as it seems, applying position they are applying for. Do not full use of it. Be ready for challenges!! early does increase your chances of be disappointed if you receive some Go for it. negative responses, there are always

Kevin Remmy, Frontier Economics

learn a lot about regulatory regimes, incentives, the Microeconomics course, their general concepts as well as their especially the part on incentive theory, detailed implementation. Another proj- proved quite helpful too. ect consisted of advising a company in Even though I was not directly involved an arbitration case revolving around in any econometric analysis during my the potential abuse of a dominant internship, the Applied Econometrics position. My work there concentrated project was still helpful in the way that on providing analytical analysis, such as it taught me how to work in a team and the calculation of various indicators of how to present your ideas in a clear and market power. understandable manner. I was also involved in several smaller projects, such as a due diligence for an investor planning to sell a wind park, a 3. How did you get the internship? case study on nuclear policy in Europe, Do you have any advice for students and the preparation of a presentation looking for a job in a similar field? on battery storage and its implications I first got into contact with Frontier Kevin Remmy on the electricity market which I gave at the Business Networking Day by 1. What was your role during your to the staff of Frontier. Within these talking to their representatives. Thus internship? projects, I was also able to participate my first advice would be to attend the in a number of calls with clients which Frontier is an economic consulting BND as it enables you to learn about were interesting experiences since firm with offices in London, Cologne, companies and to get to know them client relations is an important aspect Madrid, Brussels and Dublin. It offers better. This can give you a good idea of the work of a consultant. consulting services in disciplines such whether the company suits you. The as competition, regulation, or public internship sessions offered by TSE were very helpful as well. They taught me policy in energy, telecommunications, 2. How did your experience at TSE help transport, or environment sectors. a lot on how to properly write a CV you on the job? and a good cover letter. Also the mock During my time at Frontier, I partici- The most useful class was Industrial interviews we did during the course pated in a number of projects in the Organization. Although the work at were extremely helpful and proved to energy sector, mainly involving regula- Frontier does not require the use of be a great preparation for my actual in- tion and competition. One such project theoretical models, I nonetheless terview with Frontier. This prepared me consisted of creating a number of case profited from the models we saw in really well for the whole process and studies regarding the regulation of gas class. They provided me with concepts went a long way in helping me to not and electricity network companies in I encountered time and again during be too nervous during the interview. Europe. The focus was on estimating my internship and that I was able to un- My last advice would be to stay calm the cost of capital and risk factors the derstand better, thanks to the course. and be confident. Even though getting regulated companies are exposed to For understanding different regula- one might be stressful, an internship is in that context. This enabled me to tory approaches and the underlying a very rewarding experience!!

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(1) The LCL Visa Premier bank card for €1 a year for two years. Offer reserved to students of age who have subscribed to “LCL à la carte Étudiants”. After the 2nd year, the charge is €5/month. Terms applicable as of January 1st 2012. Card issued subject to LCL’s acceptance of your file. (2) Offer reserved to students of age subscribing to “LCL à la carte Étudiants”; for the first membership to the Sécurilion payment instruments insurance contract. €1 the first year, then €2.40/month. Terms applicable as of December 1st 2011 subject to change. The Sécurilion payment instruments insurance contract is provided by Pacifica, a company subject to “Code des Assurances”. The insured events and applicable conditions are specified in the contract. (3) Home and Contents insurance for €1 the first year then the standard terms in force apply. Offer reserved to students aged 18 to 30 inclusive, who have not benefited by the offer in 2011, who do not have an LCL home insurance and who have taken out the “LCL Mini Habitation” formula (including theft and Student special options if subscribed to) between January 1st 2012 and December 31st 2012 for a one or two room main residence as tenant. The first year LCL will refund the amount of your premiums minus €1 (the subscriber will be charged during 55 12 months from the effective date of his/her contract for the amount indicated in his/her application and refunded the same amount over the 12 months minus €1 the first month). Home onnais: a limited company with capital of €1,847,860,375; Insurance brokerage registered under ORIAS intermediary registration number: 07 001 878; Registered Office:rue de la Registered 18 under ORIAS intermediary registered registration Insurance brokerage number: 07 001 878; capital of €1,847,860,375; with company onnais: a limited and Contents insurance provided by Pacifica, a company governed by “Code des Assurances”, and sold by LCL. The insured events and the conditions are specified in the general terms and 954 509 74 number SIREN under Lyon in Register Trade the in d > Professional Professional < Memoir Reports Abhishek Samantray, Information Economics

1. How would you describe your experience writing the memoir? My memoir revolved around information conveyed to financial market participants by central bank policies. My goal was to characterize the equilibria of a sequential game with incomplete information of regime change under various information qualities for the players. In my model, the policy maker acts to maintain the current regime by choosing the policy, and in the next stage the market agents coordinate to overthrow the regime after interpreting the informational content of the policy. In addition to creating a signaling channel for the policy makers, the chosen policy also directly influences the regime’s survival criterion. In the simplest case, the policy maker knows the underlying economic fundamental perfectly. In the more general case the fundamental is uncertain to both the policy maker and agents. The idea for this topic was put forward to me by George Lukyanov, a PhD student at TSE, with whom I worked closely Abhishek Samantray during the memoir. Setting the model to allow for substantial macroeconomics like currency attacks, speculative bubbles, work was a bit challenging. To specify the parameters appro- cascades, etc. George had suggested some ideas for further priately, I had to do work through similar models to develop work. I discussed those remarks with him, and we decided to the required intuition. The solution concept I used was the work together on an extension of a prominently published perfect Bayesian equilibrium. Since it wasn’t taught in the paper. He introduced me to one of the authors of this paper, first semester’s Game Theory course, I had to devote some Professor Christian Hellwig. We didn’t have a concrete model time to understand it. setup when we first met him, but he was supportive enough and agreed to supervise the work.

2. Why did you choose to do a research memoir? 3. How did you find your advisor? Any advice for the I like econometrics and game theory, and I am interested in students interested in doing a memoir? applying econometrics to cases in competition economics. So I had applied to a firm specializing in competition policy For students interested in doing a memoir, I would say there for an internship. I was invited for an interview during the is no harm to wait until mid-March before deciding on a second semester, but it turned out to be more of a career particular topic. This would allow for coming across and sur- counseling suggesting me to continue in finance. At the veying new topics without worrying too much about finding same time, I was increasingly more interested in the course an advisor. I reported my official advisor to the admin around Topics in Macroeconomics, which was part of my elective mid-April. Another piece of advice, once you find a topic, you taught by George Lukyanov. should make sure you have enough time and resources to learn the mathematical and econometric tools that you will The part of my elective with George was mainly about need for the work. applications of global games to coordination issues in

52 53 > Professional Professional < Apurav Yash Bhatiya, Economic History of India

happened in my case, and I had to manually digitalise data from the Indian gazetteer registers of the 19th century. A lot of econometric techniques learned during the courses in M1 helped me with the memoir.

2. Why did you choose to do a research memoir? Doing a memoir rather than an internship is a better choice for a student who wants to do a Ph.D. in the future. It gives a good opportunity to learn about your research area and also have a lot of one-on-one discussions with the advisor. There is no stipend for doing a memoir and you will be in Toulouse only, which might be important trade-offs against doing an internship. For me, a very important reward from doing a memoir was when my advisor appreciated my ideas Apurav Yash Bhatiya and extensions to the research papers. It instilled in me the 1. How would you describe your experience writing the confidence to pursue a Ph.D. memoir? To be able to think about new research questions is The memoir is very similar to the Applied Econometrics an important part in anyone’s decision to do a Ph.D. A Project that students have in Master 1 at TSE. The student memoir can also be a very good opportunity to explore an works under the guidance of an advisor on a research topic of independent research idea, which your mind has stumbled his or her choice. The important components of the memoir upon during the lectures or academic/business talks. It might are the description and motivation of an original research also be of interest for some students to work further either question, followed by a critical review of the academic on their applied econometrics project or their undergraduate literature on the topic, the proposition of extensions, and, thesis. possibly, light empirical work on the subject.

I worked with Professor Mohamed Saleh on the economic history of India. My research focused on examining the 3. How did you find your advisor? Any advice for the impact of the connection of a previously isolated district to students interested in doing a memoir? the railroad network in the late 19th century on development I developed an interest in the economic history research outcomes like education and health. Using the difference- questions during the introductory classes of the Applied in-differences approach, I found a statistically significant Econometrics course given by Professor Mohamed Saleh. increase in the number of patients treated and new hospitals During the one-week break in February, I read some research built as the railway connected more districts. papers in economic history and approached him later I have spent my initial three weeks on finding a research with my research ideas. Professor Saleh appreciated my question. This process involves reading many research papers enthusiasm and agreed to be my advisor for the memoir. and thinking about their extensions and criticisms. I had For pursuing a memoir, it is really important to be motivated weekly meetings with my advisor to discuss and defend my enough to carry out a research project. Your advisor only acts research ideas. Specific to economic history, finding data as an instructor, you alone have to be the initiator. related to the research question can be very difficult. This

Indian railway

52 53 IAST Distinguished Lecture Series:

“Modern Human Origins from a Genomic Perspective” (Originally advertised as “Our Evolutionary Lineage”)

by Philip Hanspach

the ethical implications of cloning a Neanderthal. Dr. Pääbo named the creation of social groups, empathy and autism as possible fields that could be better understood in the near future due to his research. He, however, was more skeptical when addressing the question on cloning a Neanderthal. Although impossible with the present technology, he still considers it unethical. The lecturer also made an announcement about the release of his new book in the next few weeks. The IAST has made a great start into Comparison between Modern Human and Neanderthal skull their current distinguished lecture series, raising expectations for their next he first issue of this year’s indicated that 1-2% of our genetic speaker – Janet Currie, an economist TDistinguished Lecture Series in the information can be traced back to the from Princeton University. We are look- Social Sciences (topic: “The Human Neanderthal. That is roughly the share ing forward to her talk on November Family”) by the Institute for Advanced a sixth-generation ancestor contributes 5th on “The influence of families on the Study in Toulouse (IAST) on September to our genetic information. life outcomes of children”. 24th managed to attract a sizeable au- The lecture touched on a wider range dience despite of the attractive outside of interesting topics, such as the option of a warm and sunny evening. Denisova humans in Russia, which con- In no small part this was due to the tributed to the genetic pool of modern fact that Dr. Svante Pääbo from the humans in such far-flung places as Max Planck Institute for Evolutionary Papua New-Guinea and Australia, or Anthropology in Leipzig, Germany took the predisposal of Neanderthals to the stage. The leading authority in the type-2 diabetes as an evolutionary ad- field of Neanderthal-Homo sapiens vantage in times of food shortage. The relations, Dr. Pääbo gave a talk on the big take home message of the evening, relationship between modern humans however, was that there has always and older species such as Neanderthals. been intermixing between different How much modern humans are de- kinds of humans and that most likely fined by Neanderthals? While improved the last Neanderthals were somehow DNA sequencing technology allowed assimilated into what was later to for a better understanding of the become the modern human. Neanderthal genome, an experiment The presentation was followed by comparing human genomes from questions from the audience, ranging different places around the world from the field of paleogenetics to Svante Pääbo More information can be found on: http://www.iast.fr/activities/distinguished-lectures-2015/1st-distinguished-lecture

54 > On Campus On Campus <

"The Long Term Consequences of Childhood Health and Circumstance"

by Luise Eisfeld

oday, a substantial amount of public policy resources in pollution can account for equalizing outcomes. Tis devoted to raising the socioeconomic stand of underachieving adults by developing their abilities through All in all a vast amount of studies in very different settings training. In order to give some insight into this intriguing and have detected significant relationships between events new topic, the Institute of Advanced Studies (IAST) invited in very early life and long-term socioeconomic outcomes. Janet M. Currie to give a lecture on November 5th in the Cujas Intending to enhance overall welfare in the long run, it may lecture theatre. be beneficial to further distinguish the periods in life at which the seeds for later economic success are set. Furthermore, Janet Currie, currently a Professor for Economics and Public considering other settings for research in the fields such as Affairs at Princeton University, is one of the pioneers of biology, medicine and pedagogy can provide more insights to empirical researcher on early periods in life as determinants the topic in the future. of later outcomes. This research suggests that crucial long- term outcomes – namely cognitive, physical, educational, A stimulating Q&A session and discussion with the audience and ultimately economic measures – are to a large extent completed the evening. We would like to thank Janet Currie influenced by health conditions in early childhood and, for holding this thought-provoking lecture here in Toulouse interestingly, even before birth. Both nature and nurture, as and look forward to the next IAST distinguished lecture well as the interactions between nature and nurture, seem to that will be held by Emmauel Todd from INED Paris about be important determinants for childhood development and globalization and family systems on December 3rd. for outcomes later in life. Building upon what Janet Currie and certain fellow researchers suggest, numerous studies on this subject have come up over the last years. Those studies mostly employ existing long-term data and look at different settings. Various kinds of possible factors have been analysed on whether or not they shape an individual’s future educational attainment or labour outcomes.

Janet Currie began her presentation by reviewing a number of striking results. Studies have shown that birth weight seems to influence long-term outcomes: comparing siblings or even twins to account for fixed effects, researchers were able to link birth weight with educational attainment, IQ and earnings. Studies that analyse both factors influencing either maternal health or child health have been conducted in developing, as well as developed countries. Using advanced econometric tools, researchers have linked health circumstances like seasonal influenza, pollution levels, factors impacting nutrition such as weather shocks or even Ramadan fasting, as well as the effect of health programs such as immunizations, with later outcomes. Altogether, a vast amount of research indeed corroborates the idea that there exist „critical periods“ in life during which the human body goes through crucial stages of development. Furthermore, there is some evidence that bad health conditions in the early years can even be passed onto future generations. All this seems to have outcomes on inequality. However, why is it that inequality in many countries have decreased over the decades, if health conditions can be transmitted to later generations? Janet Currie cited studies that explore several possible channels explaining why inequalities have decreased. They suggest that long-run improvement in medical care or maternal health, changes in health behaviours, and reduction

PB 55 > On Campus On Campus <

Coffee Talks The Refugee Crisis in Europe First TSEconomist Coffee Talk of the semester by Philip Hanspach

brief glimpse on a newspaper reveals the current Amass-migration to Europe, labelled as the Refugee Crisis, "Many interesting questions were is the topic of the day. The first Coffee Talk that was held this posed. How much will the refugees semester by the TSEconomist gave TSE students a platform to discuss the political and economic implications of the change, but how much will the host exodus that many troubled parts of the world are currently facing. countries have to change? Where After a short primer on the facts and numbers, the Syrian do we strike the balance between civil war and the focal points of the public debate by the integration and assimilation?" moderator Philip Hanspach, the group raised their concerns, proposed solutions and discussed the underlying reasons The participants of the discussion agreed that keeping refu- behind the current state. gees in the camps had potentially disastrous effects on the Many interesting questions were posed. How much will the education and future labor market integration, which was refugees change, but how much will the host countries have widely seen as central to successful integration. Students to change? Where do we strike the balance between inte- also argued that standardizing the nominal benefits refugees gration and assimilation? Why does Europe (and to an even receive can be a way of preventing unbalanced migration greater extent, Syria’s neighboring states in the Middle East) movements in the context of the Schengen Treaty. Higher have to bear the burden of migration, whereas the USA and purchasing power of the Euro in Eastern Europe, as com- other regional players, such as, Saudi-Arabia have arguably pared to Scandinavia or Germany, might lead to refugees a greater responsibility for local instability? In reply to the spreading more evenly across Europe. latter question, one student remarked that the humanitarian An hour of lively discussion had brought together insights concerns are more important than pointing fingers. When and perspectives from the diverse audience that makes TSE future generations look back at how this crisis was handled, so special. Make sure to follow the TSEconomist on social Europe will not have created a legacy that lives up to its val- media to be informed about upcoming Coffee Talks, a great ues. The discussion often came back to the lessons learned opportunity to engage in stimullating discussions on topics from failed integration of migrants after the Second World that interest you. War.

Students present in the first TSEconomist Coffee Talk of the semester, and Philip Hanspach (to the right), moderator and coordinator of the Coffee Talks

56 57 > On Campus On Campus <

BDE Note by Sarah Lacroix

fter an amazing integration weekend, TSE students had Aa blast at the Halloween party. Some costumes were extraordinarily creative! We are now paving the way for two important events: a classy night at Les Ténors in Place du Capitole and our famous skiing weekend, which will take place January 15-17. Aside from the event organization, we have been working on the new hoodie collection, which is arriving very soon! Get ready to wear them during the Christmas break.

We are also forming a TSE football team to represent us, so if you were looking for other people to play with, contact us at [email protected] or via our Facebook page “BDE- TSE”.

The BDE team at the Integreation Weekend

Pictures taken by François Edison

56 57 > On Campus On Campus <

Junior Etudes Note

The Toulouse School of Economics has already taken up its routines, and so has the TSE Junior-Études!

he Junior Enterprise Association provides a vast diversity improve your theoretical skills, by applying them to real Tof Economic Consultancy services such as translations, cases. For this purpose, we are currently looking for more database analysis, market research, and Economic studies. motivated students. Since the beginning of this academic year, the student asso- In mid-November, the Junior Enterprise will attend the annu- ciation has been pleased to consider more than thirty stu- al Autumnal Regional Congress in Toulouse, which is being dents applications for a position. We would like to thank all held at the Engineering School the ENSEEIHT. This will be the applicants for their participation. Finally, 32 members will a great occasion to meet other students involved in Junior share interests, fun and commitment in the TSE JE with the Enterprises. At this congress, members will also have the newly elected president Jean-François Binvignat. opportunity to follow courses on management, accounting and audit which will be given by our national partner E&Y Many of the new missions have already started for different and professionals. clients, and you may have met some of the members of our team at the Job Forum on the 15th of October. Feel free to contact us at our office MF002 or via Facebook, Twitter, Linkedin or at [email protected]. All members of the TSE Junior-Études are constantly working to find new missions and give you the opportunity to For more info, go to www.tse-junioretudes.com

58 PB No Economics In The Title < Picture Quiz Can you guess these terms from the world of Mathematical Economics?

Submit your four answers by March 1st to www.tseconomist.com and enter the draw to win one of two TSE sweatshirts!

Last Issue's Answers: 1.Best Linear Unbiased Estimator Economic humour 2. Instrumental Variable 3. White Noise 4. Moving Average “An option value problem from Seinfeld“ Avinash Dixit, Economic Inquiry, 50: 563-565 (2011). Abstract: “This is a paper about nothing.” Want to share your favorite jokes? Send them to: “An‐arrgh‐chy: The Law and Economics of Pirate Organization” [email protected] ! Peter T. Leeson. Journal of Political Economy. Vol. 115, No. 6 (Dec 2007), pp. 1049-1094. TSEconomist Public Lecture Intellectual Property: Licensing Complemetary Patents Invited Speaker: Jorge Padilla, Head of Compass Lexecon Europe February 11th 2016, Amphi MB3, 6pm The lecture will be followed by a wine reception and appetizers