Cambridge Economics

Economics Cambridge Cambridge Faculty of Economics Alumni Newsletter Vince Cable - An Economist in Politics The Westminster Village is in a frenzy of self-recrimination and speculation. In the centre of it all, Vince Cable (Fitz. 1964 and President of the Union 1965) is calm and ready to refl ect on Economics and his time in Cambridge. He has represented Twickenham in Parliament since 1997 and is the Liberal Democrats’ spokesman on Treasury matters. In that role he has earned a well- deserved reputation as one of the few to foresee the looming fi nancial crisis, and as a scourge of political opponents at the highest level. Having fi rst read Natural Sciences, he switched to Economics for Part II of the Tripos. He stood in awe of the big fi gures who had emerged in Keynes’ wake – the list includes Joan and Austin Robinson, Richard Kahn, Frank Hahn, Richard Stone, Ken Berrill, James Mirrlees and James Meade. Their discourse was that of Keynes’ disciples, addressing issues of effi ciency, equity, employment, and economic growth. And, while acknowledging the current vitality and diversity of Economics in Cambridge, he points to the absence of such a clear public voice today. But Keynes’ liberal economics was soon to be captured and distorted by politicians whose main aim was to promote, or dispute, In the year that the University is celebrating its 800th the case for intervention in the mixed economy. Meade’s nuanced Anniversary, it is a pleasure to introduce the Economics balancing of the open market economy on the one hand with the Faculty's second alumni newsletter. We were delighted by the need for selective initiatives to compensate for market failure on the reception of the fi rst one last year, and particularly pleased other, was not acknowledged until it was too late. that it prompted interesting comments and reminiscences. Please feel free to let us have your thoughts on this one. You can contact us by email at: [email protected] Having been Chair of the Faculty from 1992 to 1996, I have been elected Head of the School of Humanities and Social Sciences of which it forms a part, from 2009 to 2012. Although I fi lled a comparable role in the 1990s, the subsequent devolution of budgets to the University's six Schools has increased the demands of the job substantially. In common with all higher education, Cambridge University is entering a period in which public spending will be under pressure. A major part of my task will be helping colleagues to generate more income through their teaching and research. In recent years the Economics Faculty has practiced what it has preached by taking a lead in innovative income generation. We are determined to continue to do so. William Brown Continued overleaf Issue number 2 Autumn 2009 Continued from page 1 By that time, Economics had become a branch of mathematics, annual tax on house values, house purchase would seem much largely impenetrable to the uninitiated. In his view, the inability of less attractive and people would be less likely to take out large sophisticated economic models to cope with shocks and persistent mortgages. dis-equilibrium has contributed to their loss of credibility among policy makers and the public alike. But now the fi nancial crisis is demanding a fresh approach. Economics, in the process of constructing a new architecture from the rubble of micro- and macro analysis, has become interesting, controversial and exciting. Vince takes up the challenge in his latest book, ‘The Storm’, arguing for a global regulatory framework that will encourage, and not impede, innovation and growth. In developing his economic commentary, he values discussion and dialogue with leading economic journalists – he mentions in particular Martin Wolfe and Gillian Tett of the Financial Times – and with think tanks, including the National Institute and the Institute for Fiscal Studies. But, sad to say, he gains less from academic Why are fi nancial institutions like banks particularly keen on debt economists, whose dialectic commitment and cautious even- rather than equity fi nance? Generous bonus arrangements mean handedness tends to obscure clear policy analysis and prescription. that equity investors risk having their return appropriated by management. So they insist on terms which make equity seem After gaining his doctorate from Glasgow University, Vince’s expensive and favours debt. A tax surcharge on non-contractual economic thinking was shaped fi rst by work in Africa on salary payments such as bonuses would make remuneration more development policy and then as part of Shell’s renowned team of transparent and equity fi nance cheaper. If governments address scenario builders. In Kenya, where he worked in the government incentives to borrow and not simply ways of limiting excessive service, he used the power of cost-benefi t analysis to evaluate and risky lending, then the chance of a future crisis will indeed be capital investment projects in the public realm that had signifi cant seriously reduced. spillover effects. At Shell he found unbridled intellectual curiosity Martin Weale and a radical approach to the multi-disciplinary analysis of major National Institute of Economic and Social Research energy and environmental issues that was not constrained by reductive economic models. A Graduate Training Experience But he attributes his success as an economic commentator in the maelstrom of political debate to a simple, if challenging, technique: I came to Cambridge by accident. Finishing an undergraduate start from fi rst principles and think clearly. It is a good axiom for degree in psychology, I was disturbed to learn that GDP failed to us all. account for natural capital depletion. A World Bank economist working on this told me that "The World Bank hires from fi ve Tony Cockerill universities: Cambridge, Oxford, Harvard, Stanford and Yale". However absurd in retrospect, it was a short list. Discovering that the US schools charged application fees shortened it further - again, Incentives to borrow are what absurd in light of the life cycle income considerations that I had yet to learn about. The fi nal fi lter, at least, was sound: Cambridge matter had a year long diploma and masters, more fl exible than Oxford's two year masters. On arrival, I was surprised by the reading lists: “Never again" is the popular response to the fi nancial crisis and a accustomed to merely a recommended textbook, Cambridge's seasoned observer might well be excused for thinking "never again extensive reading lists offered no such illusion of Truth: knowledge yet again". The government is proposing to prevent any recurrence was a living, human endeavour. Cambridge's physical presence by better regulation of fi nancial institutions. But better regulation, reinforced this sense: stone steps worn by centuries' use reminded to be successful needs to be combined with measures to reduce us that we stood in a long human project of inquiry. Even the incentives for people to borrow if the chance of a future crisis is to collegiate structure fostered this: I could take any question puzzling be signifi cantly reduced. Why, one might wonder, do mature and me to graduate drinks on Friday and fi nd someone – a biologist, profi table businesses borrow at all, instead of relying on retained historian or classicist - able to help answer it. But - my Cambridge profi ts to fund their activities? Presumably because they or their training forces me to ask - is this economically or statistically shareholders like borrowing. Business may like it because they get signifi cant? tax relief on debt but not on equity. Shareholders may like it because businesses borrow on terms more favourable than they have access Colin Rowat to themselves, perhaps because they cannot offset debt interest against their own share portfolios or because it is easier for limited companies than individuals to escape debts through bankruptcy. If tax relief for debt interest were removed, there would be less incentive to borrow and less corporate gearing. Ideally debt fi nance would be tax-penalized because it raises the risk of bankruptcy. The result would be a more stable banking system. Why do people borrow to buy houses but not normally to invest in their pension funds? Housing investment is tax favoured compared to other forms of investment. There is no gains tax and people can enjoy the benefi t of their investment without paying tax, simply by living in it. If housing were properly taxed, for example by an 2 My First Time at Cambridge Books I fi rst went to Cambridge through a conspiracy between my Ph.D. The Evolution of the Modern Workplace advisor Kenneth Arrow and his old friend Frank Hahn, who was visiting Harvard during my last year there as a graduate student. Edited by William Brown, Alex Bryson, John Forth, Keith Whitfi eld Together, Frank and Ken determined that I was “uneducated” and that the only remedy was for me to sit at Frank’s feet for a year or The last twenty-fi ve years have seen the so. So in the autumn of 1975 I was duly dispatched to Cambridge - world of work transformed in Britain. - fi rst as a visitor at Darwin, then as a junior research fellow at Jesus. Manufacturing and nationalized industries contracted and private services expanded. It was an exciting period for Cambridge economics. Angus Employment became more diverse. Deaton, Mervyn King, Gordon Hughes, Roger Witcomb, Oliver Trade union membership collapsed. Hart, and Douglas Gale were all Young Turks, enlivening both the Collective bargaining disappeared from Faculty seminar and the evening seminar that Frank had started at much of the private sector, as did strikes. Churchill. I could eavesdrop on legendary fi gures like Joan Robinson This was accompanied by the rise of and Richard Kahn in the tearoom.

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