Diane Coyle educates us on the History of GDP

On Thursday 6^th March, students of the Epsom College Economics and Enterprise Society travelled to the acclaimed Eton College, where we were educated on the measurement of economic and social progress by Diane Coyle OBE. Mrs Coyle is a freelance economist and author of the newly published GDP: A Brief but Affectionate History. Her talk consisted primarily about the shortcomings of GDP as a measurement of economic and social growth; she brought to our attention the extent of unrecorded economic activity including the informal and intangible economy. For example, the disregard of housework: if we included housework in GDP, our economy may be nearly double the size, however the government discount it on the grounds that it’s too difficult to record. The second half of her talk consisted of possible alternatives to GDP, which included Human Development Index, Happiness, or measuring what is important to the population. What fascinated me the most was the measurement of happiness. She noted that in Bhutan, instead of calculating GDP, the government measure Gross National Happiness (it’s even illegal to mention GDP). This evaluation of happiness is an attempt to unveil the quality of life using not only economic terms, but psychological terms, which seems only fitting – social welfare should be accounted for when assessing the extent to success of an economy. A booming economy with an unhappy population may not represent full potential or achievement. Ultimately, Diane’s conclusions that we should measure economic activity (GDP), social welfare, and sustainability were thoroughly convincing, and has certainly made me think more about the social and psychological sides of economics.

The Financial Crisis: Lessons Learnt

Mr Phizackerley’s talk focused mainly on the Global Financial Crisis of 2008, explaining in detail - yet in understandable terms – the causes and events of the Crisis and how it connected to the current European Crisis.  This was of particular interest as it was useful in making connections to current economic problems today, such as high unemployment rates in Spain. He also touched upon the system of banks, their different sectors and how they work- again offering understandable and useful knowledge to those who attended. For those of us who were perhaps slightly too young to understand fully the reasons and consequences of the financial crisis, it was helpful in establishing an understanding of how “greed and fear” can cause so much damage. It was astonishing to see through his graphs how quickly the situation deteriorated, particularly in the housing market. Mr Phizackerley’s talk was also useful in demonstrating the different sectors that economics is needed for in banking, and therefore offering potential job ideas that were perhaps unexplored before. When answering questions at the end, especially with regards to the term “banker bashers”, he helped by offering firsthand experience that, although banking did have its downsides, he still believed it to be one of the most exciting jobs out there today. Overall, Mr Phizackerley’s talk offered us a greater knowledge of a crisis that beforehand we were perhaps vaguely aware of, but now fully understood its causes and consequences that are still occurring today.  His personal experience could be used by students to see potential careers, and as a whole was thoroughly interesting.

Microsoft`s new CEO

On February 4^th, Microsoft introduced their third ever CEO Satya Nadella (46), who was born in India, Hyderabad and has degrees in electronics, computer science and business administration. Being internally recruited, having joined the company 22 years ago (he previously ran Microsoft`s Cloud and Enterprise group), he is certainly familiar with the business, which will enable him to put his ideas into practice very soon.

He replaces Steve Ballmer the prior chief executive of Microsoft (2000-2014), a decision which in my opinion was already overdue, as Microsoft struggled to progress with new innovations and failed to keep up with rivals such as Amazon, Apple and Google.

Compared to Ballmer, who was very extrovert and outgoing, Nadella is more introverted and has both a calmer and more considerate approach. In addition, he has the ability to connect people and to understand the dynamics between them through collaboration and is able to inspire and motivate with his authenticity in a seemingly effortless way.

Still, it might seem quite surprising that he was chosen to be the new chief executive, because there were hundreds of suitable competitors, like former Nokia CEO Stephen Elop, who undoubtedly has more entrepreneurial skill.

Moreover Nadella`s main weakness is, that he has never led a company before and does not have as much of an understanding of business compared to Ballmer. This increases the likelihood, that both Ballmer and Gates, the latter having resigned from being a chairman to move to a technological advisor role, would affect and maybe even restrict Nadella in his decision making process.

On the other hand Microsoft`s new CEO has a broadly developed skill set and can definitely rely on his proficient grasp of technical know-how. Furthermore Nadella understands how Microsoft must evolve in order to compete in the modern world; he also understands that the company has to continue to push many of its older, still profitable businesses forward.              

In conclusion, it will be interesting to see in which new directions and to what extent he will independently lead Microsoft in the future, and whether we will see a more similar company to Bill Gates` time and what revolutionary innovations we can expect from him.

Reflection on Open Skies Policy: Where are the benefits?

The Open Skies agreement that came into force in 1997 promised us (consumers) an increase in competition which would drive prices down and challenge the established carriers on routes. Foolishly, we expected a surge of new airlines that would operate on the US-UK routes. We were promised a better quality product at a substantially lower price. 15 years later, I must confess: I see little change. When the agreement came into the effect, we indeed had the emergence of new low-cost long haul carries such as EOS or SkyJet that offered an all premium service for not-so premium prices. The UKs international hubs such as Gatwick and Heathrow saw the arrival of new US and European carriers. Following simple economic theory, an increase in market supply was supposed to reduce prices for tickets. It did! However, the major carriers adopted aggressive techniques to retain their market share. It's not surprising that ZOOM airliners along with EOS and SkyJet went into bankruptcy soon after commencing their services. The orthodox carriers charged prices below that of the marginal cost as their significant scale allowed them to recoup their costs. They purchased take-off/landing slots to create a capacity barrier. A sudden surge in demand for these slots drove their prices up to levels that could only be afforded by large airlines.

Let me us an example to illustrate the result of such tactics. I was hoping to book a flight to New York this Christmas at an affordable price. Prior to making a booking, I searched what carriers operate the London-New York route. To my surprise, there were only 5 airlines. Looking up prices, I was shocked. The minimum price for a return Economy Class ticket was £1200. It appears to me that all benefits from an OpenSkies agreement had insofar been limited. We now have a market whereby unconventional competition has been removed and it resembles highly a structure that is costly to the consumer. I am in favour of OpenSkies agreement but I think the government must monitor the actions of major players in the industry with more vigilance and foster start-ups such as ZOOM UK. 

"The Armchair Economist" By Steven Landsburg

In ‘The Armchair Economist’ Steven Landsburg applies a variety of basic economic principles and reasoning to human behavior. 

A chapter that particularly intrigued me was chapter 16, as Landsburg investigates into why popcorn costs so much at the cinema.  With my basic knowledge of economics, I assumed that if cinemas charged less for popcorn demand would increase.  However, I thought that the reason cinemas do not decrease the price of popcorn is because once you have entered the cinema; the cinema owner has a monopoly.   

In comparison, Landsburg illustrates that the owners’ monopoly is not the reason why popcorn prices are so high.  He states “Once you enter the theatre, the owner has a monopoly on a lot of things. He is the only supplier of rest rooms, for example. Why doesn't he charge you a monopoly price to use the rest room?[…] The answer, of course, is that a rest room fee would make the theater less attractive to moviegoers. To maintain his clientele, the owner would be forced to sell tickets at a lower price. What he collected at the rest room door would be lost at the box office”. 

Instead, Landsburg explains that popcorn is a secondary product, whereas the ticket is a primary product.  ‘Popcorn lovers’ are likely to be relatively price insensitive as they associate popcorn as being a necessity when visiting the cinema.  They are therefore likely to purchase popcorn regardless of the price.  Charging high prices for popcorn enables the cinema owner to keep his ticket prices below customers’ “reservation price”.  Allowing price sensitive customers to go to the cinema.  Contrary to my original opinion I have now realized that it is unlikely that cinema owners will reduce popcorn prices.

Overall, I really enjoyed reading ‘The Armchair Economist’ and would recommend it to anyone else interested in behavioral economics or anyone intrigued by the way economists see the world, as Landsburg covers many other interesting topics such as ‘Why do seatbelts cause accidents’ and ‘Why do they charge $35 for rock concerts when they know it could sell out at $50’.