AS I graduated from university, I faced a choice: pursue a comfy career as an economist, or a risky ride as an investment banker. Even though I chose the latter, economics has remained more than a passing passion, thanks to an amazing high school teacher, Peter Rolfe. Here are some final examples of how the subject pops up all over the place.
1. IS IT FAIR TO OFFER A HUNGRY BEGGAR YOUR LEFTOVERS?
A mate of mine, Andy, was strolling down a street when he passed a beggar. He was halfway through a hotdog and, feeling full, he decided to offer him the remainder. However the beggar refused the offer and seemed indignant. Was the offer true charity, or was it too patronising? For an economist, the position is clear: the beggar should accept. He would be better off, while Andy was no worse off. It would be a dream “Pareto Optimal” outcome.
2. WHAT’S YOUR ATTITUDE TO RISK? ARE YOU “RISK LOVING,” “RISK NEUTRAL,” OR “RISK AVERSE”?
Apparently, mild risk lovers tend to be the most successful, perhaps because they also tend to be the most positive. But the thing not to forget is that, when you do take risk, you should be rightly rewarded for it. A few years ago, I met an investor who was excited about receiving an extra 1 per cent by investing in Thai government bonds. That was until there was an attempted coup, and 1 per cent didn’t look very much at all. If you want to reduce risk, the simplest way is through diversification – putting your eggs in more than one basket. But that’s tough for, say, entrepreneurs. For them, it’s usually all or nothing, and the stress of flirting with failure.
3. SHOULD STREET MARCHERS BE CHARGED FOR THE RIGHT TO PROTEST?
Stuck in London traffic one weekend, my car crawled along because somewhere there was a protest march blocking a main road. I looked at other frustrated drivers and wondered: if the protesters had to fully compensate us for our time and inconvenience, would they have just stayed at home? Some things, however, are “externalities,” and lie outside the economic system. There is no mechanism for the sufferers to charge the infringers. It’s like when someone lights up a ciggie near us, and sadly we cannot charge them for the use of our clean air.
4. HOW DID GOVERNMENTS GET OFF SO LIGHTLY FOR THE ECONOMIC MESS WE’RE IN?
After a miserable decade in the 1970s, “big government” was seen as one of the culprits, and politics moved towards freer markets with less interference. This time around, the culprits are seen as the banks who are too greedy, big corporations who dodge tax or overcharge, and wealthy individuals who may or may not deserve their success. Fair enough, but shouldn’t governments have been running surpluses in the boom years, much as corporations pay dividends in good years? And wasn’t the Bank of England responsible for monitoring the health of the banks’ balance sheets?
5. FINALLY, WOULDN’T IT BE FANTASTIC IF HISTORIANS COULD TELL US MORE ABOUT THE FUTURE?
Historians often struggle to even agree on the causes of past events, and rarely use their skills to make predictions. Economists, on the other hand, are routinely expected to forecast the financial choices of millions of people! Usually, they don’t do a bad job. Even though many missed the recent credit crisis, economists were able to suggest some workable solutions. History would be much more interesting and useful with the economist’s level of logical rigour and theoretical modelling. Mind you, perhaps a persuasive high school history teacher could convince me otherwise.
Richard Farleigh has operated as a business angel for many years, backing more early-stage companies than anyone else in the UK.