Recommended Readings This Week- 24/6/2014

1. NeuroEconomics | Cortisol: An introduction to the Bear Market Chemical – Justin Goldberg

Cortisol is a chemical that is released in moments of stress. It functions as the ultimate response the body can produce in response to stress. When active in the system for prolonged periods, it produces symptoms such as loss of memory, fatigue and complete helplessness. In interpersonal relationships, cortisol get released in large quantities when the relationship breaks up. 

The point of the article is to state that cortisol plays a large role in causing “market psychosis” when events are going really bad. This is due to sense of helplessness and panic which cortisol can cause. 

The concept that matters though is that the level of cortisol in traders is directly proportional to market volatility. This is indicative that neurological phenomenon plays an essential role in understanding why markets are failing in stock market crashes. The pure use of economic theory will never yield a full explanation as to why a stock market crashes the way it did. To understand how the market operates, you need to understand the psychology of the participants in the market. Particularly when markets are failing.

2. The Guardian | How Labour is failing to grasp Ukip’s appeal to angry white voters – Matthew Goodwin and Caitlin Milazzo

Matthew Goodwin, from the University of Nottingham, alongside Caitlin Milazzo argue that Labour is failing to tackle the social and cultural reasons as to why the white working classes are abandoning the Labour party. Multiculturalism, European integration and immigration play a more substantial role in explaining why Labour voters are defecting to UKIP. 

What Labour should be really worried about is that the cost of living narrative seems insufficient attracting UKIP defectors back to Labour party. Even the NHS isn’t the main concern for those who decided to vote UKIP. Unless the cost of living narrative appeal to the centre ground voter, then the narrative seems destined to only be attractive to those who most likely would support Labour naturally anyway. 

White working class pensioners who have differing attitudes to Labour MPs and think-tanks stopped supporting Labour en masse in 2010. A measly 26% supported Labour, compared to 46% in 2005. Only 3% supported UKIP, that has risen to 28%. Thankfully for Labour, only 10% defected in recent elections. The long-term trend is worrying for Labour though. It may be in 2020 that Labour face a significant battle against UKIP, more so than in 2015. 

With that in mind, I see Blue Labour playing a far more significant role over the next six to 10 years. To fight UKIP, Labour will be forced to embrace left-wing conservatism or completely move away from its heritage. 

3. Project Syndicate | The Limits of Climate Negotiations – Jeffrey Sachs

Treating climate change as a zero sum game on the international level is doomed to ensure that we do not tackle climate change adequately enough. Instead, Sachs proposes that both the public and private sector unite in an effort to stimulate a technological revolution that will make low-carbon technologies much more accessible to the market. 

Investing in new technologies like that seen with the H-bomb, computers and the genome project can act as a model to develop the next stage of capitalism: the green economy. The state should be providing ambitious targets for scientists and engineers to innovate green technologies. Some of the technologies, such as nanotechnology already exist. Commercialising such technology is needed to ensure the technology is accessible to businesses and households. For example, nanotechnology could build more energy-efficient buildings. 

The US economy is worth trillions of dollars, it will take a very ambitious technological revolution to reform an economy of such size into an economically and ecologically sustainable economy. 

It’s not just the vision that is so attractive in this article. It’s insights such as these that make it a joy to read and contemplate:

But let’s stop pretending that this is a poker game, rather than a scientific and technological puzzle of the highest order.

4. Stumbling and Mumbling | Austerity in the Mainstream

Stumbling and Mumbling gives three reasons as to why the debate about austerity in Westminster may well be flawed.  

First, Westminister assumes that a portion of the deficit is structural. Because of this, growth will not reduce the deficit to sufficiently healthy levels. Yet this position fails to account for the uncertainty of the output gap between the actual GDP rate and the potential GDP rate. Meaning it is uncertain how large the structural deficit is. 

Second, would it not be better to tighten through monetary policy rather than fiscal policy? Keeping interest rates near zero increases the risk that an asset bubble mar arise in the stock markets.  

Third, what about the possibility that a recession will arise at some point during the parliament? The question of continuing austerity relies upon the assumption that growth will be continual through the parliament. 

I agrees wholeheartedly on the third reason. When making long-term plans, it is essential to have a back-up plan that can be implemented reasonably easily in case a recession were to occur. 

The first argument, though, is not really an argument in favour or against austerity. The uncertainty of the output gap remains true for those advocating either fiscal expansion or fiscal contraction. The point though is that a greater scepticism about the need for austerity. The need for austerity is not clear-cut.   

It is the second argument though in which a key insight about the working of economy is touched upon. I share the concern that a loose monetary policy will inflate an asset bubble. However, the reason interest rates are low to stop those in debt who will struggle to keep up with their payments. Many are struggling even with low interest rates. It is here that we can see how unhealthy the economy is. To stop an asset boom from occurring, we must take the risk that private debate becomes unsustainable for too much of the populace. Which could lead to a reasonable amount of defaults which could result in a recession.  

In the 1970s it was fiscal policy that was having severe difficulties tackling the issues at hand. Nowadays, it is monetary and fiscal policy. Is this one reason the economic difficulties are so prevalent six years after the financial crisis?

Gareth Mawer
I consider myself a left libertarian committed to promoting the philosophy of liberty, even though I do not always support proposals that are normally considered libertarian. Georgism and mutualism have had profound influences over my beliefs, though I'm not afraid to digress from them were necessary. My mains interests are politics, economics and philosophy.