tag:theconversation.com,2011:/id/topics/microeconomics-3328/articlesMicroeconomics – The Conversation2024-03-04T20:04:37Ztag:theconversation.com,2011:article/2249112024-03-04T20:04:37Z2024-03-04T20:04:37Z10 reasons why Canadians are still dissatisfied with the economy, despite the upswing<figure><img src="https://images.theconversation.com/files/579277/original/file-20240301-24-yhh7th.jpg?ixlib=rb-1.1.0&rect=69%2C62%2C4531%2C3004&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Recent surveys suggest Canadians are dissatisfied with the direction of the economy. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>The COVID-19 pandemic <a href="https://www.cbc.ca/news/health/who-pandemic-not-emergency-1.6833321">is no longer a global emergency</a>, Canada’s GDP <a href="https://www.ctvnews.ca/business/economic-bounce-back-at-the-end-of-2023-could-push-back-rate-cuts-economists-say-1.6749435">outperformed expectations in 2023</a>, the economy seems to be heading for <a href="https://www.theglobeandmail.com/business/economy/article-statistics-canada-november-gdp-economy">soft landing after a period of stagnation</a>, inflation is <a href="https://www.cbc.ca/news/business/inflation-january-2024-1.7119796">winding down</a> and unemployment has decreased to <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/240209/cg-a002-eng.htm">5.7 per cent in January 2024</a> — close to pre-pandemic levels. </p>
<p>Despite these positive economic indicators, recent surveys suggest Canadians are <a href="https://policyoptions.irpp.org/magazines/december-2023/canadians-unhappy/">dissatisfied with the direction of the economy</a>. An overwhelming <a href="https://www.ipsos.com/en-ca/pessimism-mounts-about-future-economy-and-affordability">84 per cent of Canadians</a> believe the country is already in a recession, with 73 per cent anticipating one within the next year. <a href="https://www.cbc.ca/documentarychannel/features/generation-fear-how-bad-news-has-created-an-anxious-generation">Young people, in particular, are fearful of the future</a>.</p>
<p>This discrepancy prompts the question: Why are Canadians’ sentiments so <a href="https://www.theglobeandmail.com/business/article-canada-economy-mental-health/">at odds with economic indicators</a>? As economists, we have identified several reasons that explain why this gap exists.</p>
<h2>1. Growing socio-economic divide</h2>
<p><a href="https://www.thestar.com/business/gap-between-canada-s-rich-and-poor-increasing-at-record-speed-new-statcan-data-shows/article_c1477d8f-4961-5691-9179-a5b8cabaace9.html">Income and wealth inequality</a> are both growing at an alarming rate in Canada. <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/230704/dq230704a-eng.htm?HPA=1">The wealthiest 20 per cent now</a> account for more than two-thirds of net worth, compared to the 2.7 per cent held by the bottom 40 per cent.</p>
<p><a href="https://www150.statcan.gc.ca/n1/daily-quotidien/240122/t001a-eng.htm">The top 20 per cent accounted</a> for 40.3 per cent of net disposable income in 2023, while the bottom 20 per cent accounted for just 6.1 per cent. The <a href="https://globalnews.ca/news/10085442/canada-top-income-earners-post-covid/">top one per cent of earners</a>, meanwhile, have grown even richer. </p>
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<p>In contrast, the number of people in the <a href="https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110024101">low-income cutoff group</a> keeps increasing. Net saving for the lowest income households decreased by <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/240122/dq240122a-eng.htm">9.8 per cent</a> in the third quarter of 2023 compared to the previous year.</p>
<h2>2. Debt servicing burdens</h2>
<p>Since the onset of the pandemic, net savings have deteriorated for all except those with the highest incomes, as renters and lower-income families tend to spend more than they make on necessities.</p>
<p>Canada currently holds the <a href="https://www150.statcan.gc.ca/n1/en/pub/11-631-x/11-631-x2024002-eng.pdf?st=ytPi2j-5">highest amount of household debt as a percentage of disposable income</a> among all G7 countries. With the current high interest rates, the burden of interest payments for households as a percentage of disposable income recently reached its highest level in 12 years.</p>
<h2>3. Interest rates</h2>
<p>The average disposable income for the <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/240122/dq240122a-eng.htm">top 20 per cent of Canadians is increasing at the fastest rate</a> of any income group. This means those with financial assets benefit from rising interest rates, while those at the bottom suffer from the burden of greater debt service.</p>
<h2>4. Housing costs</h2>
<p>Skyrocketing housing prices have outpaced income and mortgage rates have gone up dramatically, resulting in the lowest <a href="https://globalnews.ca/news/10167093/housing-affordability-bank-canada-index/">home affordability index</a> in the last 40 years. The dream of home ownership seems more distant than ever for many.</p>
<h2>5. Impact of inflation</h2>
<p>Although <a href="https://www.reuters.com/world/americas/canadas-inflation-rate-drops-more-than-expected-29-january-2024-02-20/">Canada’s inflation rate shows signs of slowing</a>, it still remains fairly high. It reached <a href="https://www.cbc.ca/news/business/canada-inflation-rate-1.6526060">a 39-year high of 8.1 per cent in June 2022</a>, hitting <a href="https://globalnews.ca/news/9474837/low-income-canadians-inflation-statcan-report/">those in low-income groups</a> the hardest.</p>
<h2>6. Growing corporate concentration</h2>
<p>Canada’s most concentrated industries have become even <a href="https://www.bnnbloomberg.ca/competitive-decline-hurting-canadian-consumers-businesses-comp-bureau-1.1986903">less competitive</a>, and the number of highly concentrated industries is growing. <a href="https://www.cbc.ca/news/business/canada-competition-bureau-report-1.7001320">Profit margins</a> and markups of already profitable firms is increasing. </p>
<p>This trend negatively impacts consumers and broader society by reducing industry dynamism, resulting in fewer choices and higher costs. </p>
<p>We are seeing this currently play out in the grocery sector, where <a href="https://theconversation.com/increasing-monopoly-power-poses-a-threat-to-canadas-post-pandemic-economic-recovery-209308">a lack of competition has resulted in higher food prices</a>. This is the same reason why <a href="https://www.ionajournal.ca/exchange/2023/1/21/sky-high-prices-why-its-so-expensive-to-fly-in-canada-and-how-to-change-this">airplane tickets</a> and <a href="https://www.cbc.ca/news/business/marketplace-high-cell-phone-bills-1.6711205">cell phone bills</a> remain higher in Canada than in comparable countries.</p>
<h2>7. Mental health struggles</h2>
<p>The proportion of people reporting very good or excellent mental health <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/230913/dq230913b-eng.htm">decreased to 59 per cent in 2021 from 72.4 per cent in 2015</a>. </p>
<p>The prevalence of some chronic conditions, including high blood pressure, heart disease and obesity, increased from 2015 to 2021 as well. </p>
<p>Financial anxiety, pandemic-related stress and other issues are making <a href="https://www.thestar.com/life/are-canadians-getting-angrier-heres-what-experts-say-is-happening-and-how-we-can-tame/article_6457ee6a-56ce-5d84-a2ea-53b3bef15ed5.html">Canadians feel angrier in general</a>, which affects their outlook on life and the economy.</p>
<h2>8. Long COVID</h2>
<p>While the impacts of the pandemic are slowing down, long COVID is still a significant issue for many. <a href="https://www.cbc.ca/news/health/long-covid-symptoms-canadians-1.7053485">One in nine people</a> who contracted COVID-19 suffer from symptoms, including brain fog, <a href="https://doi.org/10.1056/NEJMoa2311330">cognitive impairment</a>, fatigue and shortness of breath, that affect their health and well-being. </p>
<p>It is shortsighted to assume we have all recovered equally from the pandemic when some people are still being affected by it.</p>
<h2>9. Higher education funding cuts</h2>
<p>College education has historically served as “<a href="https://www.britannica.com/topic/Education-The-Great-Equalizer-2119678">the great equalizer</a>” and an instrument of intergenerational social mobility, but in the face of <a href="https://universityaffairs.ca/news/news-article/the-rising-financial-precarity-of-universities/">declining government support for post-secondary education</a>, this may no longer be the case. </p>
<p>The financial situation of many colleges is <a href="https://www.thestar.com/politics/provincial/almost-half-of-ontario-universities-are-running-deficits-putting-student-services-at-risk-council-says/article_639ebedc-af31-11ee-bdce-47e37d4e1808.html">increasingly precarious</a>, meaning post-secondary institutions could end up raising tuition fees or rely more on international students to meet their budgets, both of which affect domestic students. </p>
<p>Students from the lowest economic stratum will increasingly find it difficult to trade the security of a job right out of high school for the high cost of a university or college degree. This, in turn, will reduce their chances to move up in the socio-ecnomic ladder.</p>
<h2>10. Youth struggles</h2>
<p><a href="https://www.nytimes.com/2024/01/29/upshot/teens-politics-mental-health.html">Youth across North America</a> are more anxious about their future, concerned about their mental health and educational prospects and more disillusioned by politicians than previous generations. </p>
<p>Despite being resilient and pragmatic, <a href="https://globalnews.ca/news/8360411/gen-z-canada-future-youth-leaders/">Gen Z are pessimistic about the world around them</a> and the future ahead. They worry about their financial security, with high costs of rent and groceries. </p>
<p><a href="https://www.theglobeandmail.com/canada/article-gen-z-is-a-climate-anxious-pessimistic-force-to-be-reckoned-with">A 2023 survey from the <em>Globe and Mail</em></a> found that nearly three-quarters of Gen Z disagreed that, as a generation, they would surpass their parents. Fifty-six per cent feel afraid, sad, anxious and <a href="https://doi.org/10.1016/j.joclim.2023.100204">powerless about climate changes</a>, while 78 per cent reported that climate anxiety is impacting their mental health. </p>
<h2>Navigating the disconnect</h2>
<p>While more than <a href="https://angusreid.org/2024-canada-optimism-pessimism-expectations/">40 per cent of Canadians</a> hope for positive outcomes in 2024 and the macroeconomic indicators show prosperity, there exist numerous factors causing dissatisfaction in large swathes of the population in Canada. </p>
<p>Managers, business leaders, policymakers, government officials and economists should all care deeply about this issue. Over-relying on aggregate indicators — like macroeconomic prosperity — while making strategic, investment, hiring and financing decisions could lead to unexpected outcomes and challenges.</p>
<p>For example, a real estate company might decide to invest in a large, low-end housing project based on economic numbers. While the initial logic may seem sound — if the economy is doing well, that there should be a huge demand for housing — issues might arise if the target population is financially strained and unable to afford the housing.</p>
<p>A comprehensive understanding of the mindset, risk preferences and motivating factors of key customers, stakeholders, investors, employees and voters is essential for making well-informed decisions that benefit all parties involved.</p><img src="https://counter.theconversation.com/content/224911/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anup Srivastava receives research funding from the Social Sciences and Humanities Research Council of Canada.</span></em></p><p class="fine-print"><em><span>Felipe Bastos Gurgel Silva, Luminita Enache, and Manuela Dantas do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are a number of reasons why there’s such a significant gap between aggregate economic numbers and the perceptions of everyday people.Anup Srivastava, Professor and Canada Research Chair, Haskayne School of Business, University of CalgaryFelipe Bastos Gurgel Silva, Assistant Professor, Trulaske College of Business, University of Missouri-ColumbiaLuminita Enache, Associate Professor of Accounting and Future Fund Fellow, Haskayne School of Business, University of CalgaryManuela Dantas, Assistant Professor, Department of Accounting, California State University, NorthridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1661292021-08-31T12:29:14Z2021-08-31T12:29:14ZMicroeconomics explains why people can never have enough of what they want and how that influences policies<figure><img src="https://images.theconversation.com/files/418067/original/file-20210826-21-1sf8j51.png?ixlib=rb-1.1.0&rect=0%2C8%2C997%2C788&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Microeconomists study how individuals and companies balance their desires and needs with costs and available resources.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/illustration/tiny-male-character-stand-with-magnifying-royalty-free-illustration/1247933978?adppopup=true">invincible_bulldog/iStock via Getty Images</a></span></figcaption></figure><p>Economics is broadly divided into <a href="https://www.britannica.com/topic/macroeconomics">macroeconomics</a> and <a href="https://doi.org/10.1057/978-1-349-95121-5_1212-1">microeconomics</a>. The big picture, macroeconomics, concentrates on the behavior of a national or a regional economy as a whole: the totals of goods and services, unemployment and <a href="https://www.britannica.com/topic/price-economics">prices</a>. </p>
<p>Then there’s a more detailed picture: the economic decisions that people and businesses make. Microeconomics analyzes behavior. It looks at how individuals and companies respond to incentives and <a href="https://www.econlib.org/library/Topics/College/scarcity.html">allocate scarce resources</a> efficiently.</p>
<p>People struggle to get as much as possible while spending as little as possible. The economist <a href="https://www.hoover.org/profiles/thomas-sowell">Thomas Sowell</a> has said there is never enough of anything to <a href="https://www.brainyquote.com/quotes/thomas_sowell_371242?src=t_scarcity">fully satisfy all those who want it</a>. This omnipresence of scarcity in our lives makes the study of human behavior compelling.</p>
<p>Microeconomics is divided into the <a href="https://www.sjsu.edu/faculty/watkins/constheo.htm">theory of the consumer</a>, which focuses on people’s behavior in market settings, and the <a href="https://www.cambridge.org/core/books/theory-of-the-firm/firm/74174CC30BA1E68B238F5A80CB75E14A">theory of the firm</a>, which concentrates on how businesses act, once again in market settings. </p>
<h2>Consumers pursue their self-interest</h2>
<p>In the 19th century, economists referred to consumers as “economic men” or <a href="https://www.investopedia.com/terms/e/economic-man.asp">homo economicus</a>. Today they might call consumers economic people. All of these terms refer to the idea that individuals make decisions based upon the rational pursuit of their self-interest. </p>
<p>The meaning of self-interest is pretty clear, but it’s important to comprehend what economists mean by pursuing it rationally. </p>
<p>To an economist, behavior is rational if it helps <a href="https://www.ecnmy.org/learn/you/choices-behavior/what-is-rationality/#:%7E:text=Rationality%2C%20for%20economists%2C%20simply%20means,the%20thing%20you%20like%20best.&text=Usually%20when%20we%20talk%20about,%2C%20you're%20acting%20rationally.">attain goals</a>. Economists <a href="http://read.hipporeads.com/what-an-economist-means-by-rationality/">do not pass moral judgment</a> on a person’s goals. Behavior that may seem irrational to a non-economist is not necessarily so to an economist. </p>
<p>To see this, say that a man named Raj wants to rob a bank. Given that goal, economists would say that if Raj conducts surveillance on the bank to look for security cameras, that’s rational behavior — for Raj.</p>
<p>Or if a woman named Asha hates credit cards, economists pass no judgment on her thinking and would say that for her, it is rational to burn credit cards. </p>
<h2>Consumers want the most they can afford</h2>
<p>To buy anything, a consumer must interact with a producer — a seller — whether that seller is a mom and pop store or Amazon. Consumer theory says they examine <a href="https://research.stlouisfed.org/publications/page1-econ/2013/04/01/prices-the-marketplaces-communication-system">prices</a> because they are interested in getting those goods and services that will make their satisfaction as large as possible at the lowest possible price. </p>
<p>Microeconomists study that interaction mathematically in two ways. First, they try to gauge a consumer’s satisfaction level by assigning a number based on how much this consumer values the goods and services she chooses to buy in a market. They call this number <a href="https://www.investopedia.com/terms/u/utility.asp">utility</a>.</p>
<p>Second, they interpret the act of seeking the most satisfaction as solving a <a href="https://www.sciencedirect.com/topics/computer-science/maximization-problem">maximization</a> problem. In a maximization problem, a consumer seeks the biggest bang for their buck. </p>
<p>Therefore, the central problem in consumer theory is the study of how consumers go about <a href="http://www2.harpercollege.edu/mhealy/eco211/lectures/utilmax/util.htm">maximizing their utility</a> in market settings — buying as much of what they like with the money they have available.</p>
<p>What fascinates microeconomists studying utility maximization is that it nicely illustrates a central tension in economics: how best to satisfy <a href="https://marketbusinessnews.com/financial-glossary/unlimited-wants/">unlimited wants</a> with limited means. The “unlimited wants” are captured by the notion of utility, and “limited means” refers to a consumer’s finite income or budget. Economists call this a <a href="https://math.libretexts.org/Bookshelves/Calculus/Book%3A_Vector_Calculus_(Corral)/02%3A_Functions_of_Several_Variables/2.07%3A_Constrained_Optimization_-_Lagrange_Multipliers">constrained maximization problem</a>.</p>
<p>As an example, consider Sheila, who has a budget of $1,000 a month (her constraint) for apartment rent. The monthly rents for apartments A, B and C are $900, $1,000 and $1,500. Sheila rules out apartment C – it’s too expensive. Apartment A will save her money, but apartment B, within her budget, may be nicer.</p>
<h2>Companies also pursue self-interest</h2>
<p>An integral part of microeconomics is the theory of the firm, the term economists use for companies. Economists believe that <a href="https://www.austincc.edu/sondg/handouts/micro/whyfirms.pdf">businesses exist</a> because team production is efficient and it <a href="https://www.cambridge.org/us/academic/subjects/economics/microeconomics/price-theory-and-applications-decisions-markets-and-information-7th-edition?format=PB&isbn=9780521523424">minimizes the costs of contracting</a>.</p>
<p>[<em>Over 110,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p>
<p>Economists study how businesses make as much <a href="https://www.investopedia.com/terms/p/profit.asp">profit</a> as they possibly can. Companies, like individual people, try to solve a <a href="https://www.sciencedirect.com/topics/computer-science/maximization-problem">maximization problem</a>: how to <a href="https://www.basic-concept.com/c/what-is-profit-maximization-and-how-to-achieve-it">maximize their profit</a>. Producer theory seeks to explain how businesses do that.</p>
<p>The study of profit maximization is fascinating to a microeconomicist like me because no company can produce whatever it wants and in unlimited quantities. Businesses are constrained by their technical capabilities and the cost of paying for inputs like capital and labor. Microeconomists describe these technical capabilities by means of the <a href="https://www.britannica.com/topic/production-function">production function</a>. This mathematical relationship describes how businesses use capital and labor to produce their goods or services.</p>
<p>Microeconomics looks at how consumers and companies behave so that they can understand why society needs economic policies to regulate and shape their behavior.</p><img src="https://counter.theconversation.com/content/166129/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amitrajeet A. Batabyal does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Microeconomics analyzes how individuals and businesses behave as they try to get the most they can for as little money as possible.Amitrajeet A. Batabyal, Arthur J. Gosnell Professor of Economics, Rochester Institute of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1275342019-11-21T20:58:03Z2019-11-21T20:58:03ZAlbanese promises a ‘productivity project’ in an economic vision statement harking back to Hawke and Keating<p>Anthony Albanese puts a “productivity project” at the centre of his economic agenda in the second of his “vision statements”, which seeks to further distance him from the Shorten era.</p>
<p>“Productivity is the key to economic growth, international competitiveness and, ultimately, rising living standards underpinned in large part by long-term, sustainable wage growth,” he says in an address to be delivered in Brisbane on Friday but released beforehand.</p>
<p>Albanese describes Australia as presently in a “productivity recession”.</p>
<p>“When Labor left office in 2013, annual productivity growth averaged 2.2%. Under the Coalition this rate has halved. In the last two quarters it has actually gone backwards.”</p>
<p>Albanese says he wants to pursue his “productivity project” in partnership with business, unions and civil society, but argues the focus should be much wider than just on industrial relations and work practices.</p>
<p>“I want to focus our productivity debate on managing the next wave of challenges.”</p>
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<p>These include increasing wages; population settlement and the management of cities and regions; climate change, energy and environmental sustainability; an ageing population, and entrenched intergenerational poverty.</p>
<p>“The priorities of our productivity renewal project will be to lift investment in infrastructure, lift business investment and invest in our people.”</p>
<p>He links the productivity agenda to Labor’s strong support for the superannuation guarantee’s legislated rise – which has become controversial - from its present 9.5% to 12%, saying an ALP government would partner with the private sector, including the superannuation industry, in investing in infrastructure.</p>
<p>The speech continues Albanese’s pitch to improve Labor’s relations with business. “I want to see business confidence restored and investment renewed,” he says.</p>
<p>One central theme of the speech highlights the importance of micro-economic reform. “I have long been a champion of micro-economic reform,” Albanese says.</p>
<p>“Labor’s productivity renewal project will restart the process of micro-economic reform and the forensic analysis of how economic activity is regulated and where changes have to be made”.</p>
<p>Lauding the Hawke-Keating record on micro-economic reform, Albanese says “through the sheer power of their actions, they reminded us all that there is a natural and central role for the state”.</p>
<p>“But we have now reached the limits of the Hawke-Keating reforms. And new challenges require new impetus.”</p>
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Read more:
<a href="https://theconversation.com/labor-looks-to-boost-protections-for-workers-in-insecure-jobs-albanese-126025">Labor looks to boost protections for workers in insecure jobs: Albanese</a>
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<p>In the speech Albanese essentially paints himself as a fiscal conservative well removed from Bill Shorten’s approach of big spending and higher taxation.</p>
<p>He stresses the reform agenda must be complemented by sound fiscal policy.</p>
<p>“I want our economic framework to have a soft heart and a hard head,” he says. The speech is laced with references to his personal experience growing up in straitened circumstances.</p>
<p>“As the child of a single mother on the invalid pension, I appreciate the value of a dollar and the importance of managing money.</p>
<p>"And having grown up in public housing, I also know all too well the value and the big difference government assistance can make to the lives of struggling families.</p>
<p>"Prudence and mutual obligation are values I learned growing up and they are values that I will take to fiscal policy,” he says.</p>
<p>“Our fiscal priorities will be integrated with our long-term objectives to increase our productivity and, in turn, our living standards and social mobility,” he says, putting social mobility “at the heart of Labor’s mission”.</p><img src="https://counter.theconversation.com/content/127534/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In his second “vision statement” Albanese says he wants to pursue his “productivity project”, and paints himself as a fiscal conservative well removed from Bill Shorten’s tax and spend approach.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1156562019-05-12T20:10:26Z2019-05-12T20:10:26ZDebate: How financial initiatives that tackle global warming can make a real impact<figure><img src="https://images.theconversation.com/files/272848/original/file-20190506-103071-eh0coz.jpg?ixlib=rb-1.1.0&rect=38%2C0%2C5137%2C2731&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The principles that drive financial markets emphasize short-term profits at the cost of long-term benefits. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/download/confirm/295761023?src=XMMBfk3LNoyXCcFbPGu9SQ-1-34&size=huge_jpg">Shutterstock</a></span></figcaption></figure><p>Awareness and concern over climate change and its impacts has risen sharply in recent years. According to a December 2018 survey by Yale University, <a href="https://climatecommunication.yale.edu/publications/climate-change-in-the-american-mind-december-2018/">73 percent of Americans</a> now say that global warming is real, up 10 percentage points in just three years. Investors have followed, with more than 525 with assets above US$96 trillion signing the <a href="https://www.unpri.org/">United Principles for Responsible Investment</a> (UN PRI). It now has nearly 2,000 signatories, with 74% of the asset owners and 62% of the investment managers considering climate change a long-term threat.</p>
<p>Those are encouraging signs that the financial markets are concerned about global warming, but one may raise the question: is it truly effective and is it creating real change? For financial markets to deploy their full capacities, a more profound transformation is required: the dominant principles that guide the markets need to be revised.</p>
<h2>When finance and climate change meet</h2>
<p>Financial markets have long ignored the ecological conditions of the planet. This despite the fact that financial flows play a fundamental role in almost every activity of the Anthropocene.</p>
<p>Recently, finance and climate change started to connect. It lead to the emergence of a number of initiatives such as the <a href="https://montrealpledge.org/">Montreal Pledge</a>, the <a href="https://unepfi.org/pdc/">Portfolio Decarbonisation Coalition</a> and <a href="http://www.climateaction100.org/">Climate Action 100+</a>. Political actors are also taking a stand, and one of the most noticeable efforts is probably the European Commission action plan on financing sustainable growth.</p>
<p>Although these changes are signs of a broad agreement that financial markets can play an essential role in solving one of the most pressing issues our planet is facing, the financial flows contributing to the reduction of emissions and to the adaptation to current and future climate variabilities still remains marginal.</p>
<p>Political and market actors are fully aware that the transformation to a low carbon economy requires significant investment in the coming years but also that financial markets are directly exposed to the consequences of climate change. Still, change does not seem to take place. Of course, new products and services are being developed. But is it the right response? We argue that a more deep and fundamental change is required: the dominant principles that are guiding the sector must be challenged.</p>
<h2>Locked in dominant and hindering logics</h2>
<p>Despite the 2008 financial crisis, the financial system seems to remain locked in its “old” principles rooted in individualism and economic self-interest. These are grounded in key components and tools such as the <a href="https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp">efficient market hypothesis</a>, the trade-off between risk and return, Markovitz’s <a href="https://www.investopedia.com/terms/m/modernportfoliotheory.asp">modern portfolio theory</a>, the <a href="https://www.investopedia.com/terms/m/modigliani-millertheorem.asp">Modigliani-Miller’s arbitrage principles</a>, or the <a href="https://www.investopedia.com/terms/b/blackscholes.asp">Black-Scholes-Merton model</a> of option pricing. Those tools have led financial actors to a “rational” approach to finance – that is to say, focused on self-interest. The alternative is a “reasonable” approach, one that takes into account the effect of one’s actions on others and the protection or enhancement of the common good.</p>
<p>Financial markets are short-term oriented. Even if short-termism is a widespread phenomenon in our societies, it seems to be even more accentuated in the financial world. Investors focus on the quarterly earnings or short-term portfolio returns. There is obviously a tension between the fast-paced nature of financial markets and the longer view of climate change. Even today, the financial implications of climate change are still regarded as “non-material” and therefore not considered.</p>
<p>Financial markets act according to the predictability of the future. The logic of predictability (based on past performance) guides most decisions on the financial markets. This is in full contradiction with the high level of uncertainty related to climate change. Financial markets believe in price efficiency under the premise of market efficiency. Price is regarded as the best estimate of value and the most rational basis for decision making. However, today’s prices do not take into consideration climate-related consequences.</p>
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<img alt="" src="https://images.theconversation.com/files/272849/original/file-20190506-103075-9qnxdf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/272849/original/file-20190506-103075-9qnxdf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/272849/original/file-20190506-103075-9qnxdf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/272849/original/file-20190506-103075-9qnxdf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/272849/original/file-20190506-103075-9qnxdf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/272849/original/file-20190506-103075-9qnxdf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/272849/original/file-20190506-103075-9qnxdf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Shipping by energy-intensive means such as trucks is possible only when negative externalities such as pollution and noise are pushed off on others.</span>
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<p>Financial markets live by risk-adjusted returns. The <a href="https://www.investopedia.com/university/concepts/concepts1.asp">risk-return logic</a> aims at mitigating risks and at the same time to maximize monetary returns. It focuses on what is measurable and therefore tends to neglect risks that stem from non-financial, future and not yet perfectly quantifiable conditions and developments. Within this framework, climate-related risks simply do not exist.</p>
<p>Based on <a href="https://www.investopedia.com/terms/n/neoclassical.asp">new classical theories</a>, these four interwoven and dominant frameworks are key organising and guiding principles in the financial markets. However, their very nature hinders the capacity of financial markets to contribute to climate change mitigation, as a result climate change tend to be simply ignored. Therefore, we are calling for alternative logics.</p>
<h2>Shifting the underlying principles</h2>
<p>Many practitioners – notably in the emerging field of impact investors – recognise the need for change in the financial system and are working to establish a <a href="https://www.theoryofchange.org/what-is-theory-of-change/">theory of change</a>. While the notion sounds highly appealing, developing such a comprehensive new theory is a huge task. Based on our argument that the dominant frameworks in finance are not well positioned to incorporate climate change and its financial consequences, we suggest four alternative frameworks that can serve as pillars for such a theory of change.</p>
<ul>
<li><p>Financial markets need to switch long-term thinking and practices. This is a requirement but at the same time is not easy given how deeply short termism is engrained in the financial markets. However, small changes such as better disclosure practices to allow for an analysis of the long-term consequences of climate change on individual asset basis could be implemented. The <a href="https://www.unpri.org/climate-change/french-energy-transition-law-global-investor-briefing-on-article-173/295.article">Article 173 of the Energy Transition Act</a> that passed in France in 2015, is a first step in this direction.</p></li>
<li><p>Markets need to adopt a system perspective. It becomes essential to understand and connect value that is created at company and portfolio level to the benefits this value creation entails at the system or society levels. In other words, it is about reconnecting society to capital markets rather than thinking of capital markets as isolated from society.</p></li>
<li><p>The transition toward a low-carbon economy through financial markets requires a new risk-pricing logic to incorporate carbon-price dynamics.</p></li>
<li><p>Addressing climate change requires active ownership practices through shareholder engagement. Instead of simply divesting, investors actively address and discuss issues with corporate management.</p></li>
</ul>
<p>Financial markets have the capacity capability to become a key driver for the necessary move toward a low-carbon and climate-resilient economy. This requires that low-carbon investments do not remain merely a buzzword and lose their essence, but become serious goals of the economy. </p>
<p>For this, the dominant finance principles need to be revisited and alternative ones proposed that can serve as a starting point for developing a broader theory of change. Beyond changing practices and redesigning tools, those alternatives require a real mind shift in the financial markets. They also necessitate the development of new skills and competences to deal with high level of uncertainties, complexity and paradoxical situations. Are financial markets and their actors ready for such a profound change?</p><img src="https://counter.theconversation.com/content/115656/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>Investors are increasingly concerned about climate change, but for the markets to deploy their full capacities, the dominant principles that guide them need to be revised.Céline Louche, Professor, Business & Society, AudenciaTimo Busch, Chair of Management and Sustainability, University of HamburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1100272019-01-17T19:12:51Z2019-01-17T19:12:51ZVital Signs: the power of not being too clear<figure><img src="https://images.theconversation.com/files/254308/original/file-20190117-32804-1ezlmtn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Specify what you want, and that might be all you'll get, whereas if you are vague...</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Incentives, in one form or other, are central to our lives.</p>
<p>The Soviet experiment ended in December 1991 because it turned out that when people got paid the same whether they worked hard or slacked off, most people slacked off. </p>
<p>People often work incredibly hard early in their careers to improve their promotion prospects. Parents will to go to extraordinary, sometimes life threatening, lengths to protect their children because of biological incentives. Doctors, nurses, emergency workers, and teachers often go above and beyond the call because of intrinsic motivation.</p>
<p>Without incentives of some kind nothing much happens. As former US treasury secretary Larry Summers once noted, “nobody in the history of the world ever washed a rental car.”</p>
<h2>We are bombarded by incentives…</h2>
<p>From bonuses for meeting “key performance indicators”, to stock options for executives, to no-claim bonuses on insurance policies, to the threat of the sack for to poor performance, we swim in a sea of incentives.</p>
<p>While carefully designed ones can improve our performance, perhaps dramatically, poorly thought out ones can do the opposite. And, unfortunately, they are all too common.</p>
<p>The problem is, people really do respond to incentives - often in the most literal and destructive ways. </p>
<h2>…with unintended consequences</h2>
<p>The list of incentive schemes that have gone awry is almost endless. The consequences range from corporate malfeasance, to teachers <a href="http://freakonomics.com/2011/10/19/those-cheating-teachers-full-transcript/">cheating on behalf of their students</a>, to plagues of rats and snakes.</p>
<p>We have witnessed staggering accounting scandals and bankruptcies like those of <a href="https://www.newyorker.com/magazine/2007/01/08/open-secrets-3">Enron</a> and <a href="https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2">WorldCom</a> where the high-powered incentives for senior executives to report good results became high-powered incentives to create what appeared to be good results.</p>
<p>Anyone who has read or watched “<a href="https://www.youtube.com/watch?v=vgqG3ITMv1Q">The Big Short</a>” knows the story of how high-powered incentives for mortgage brokers and traders of mortgage-backed securities triggered the global financial crisis.</p>
<p>Closer to home, the Hayne royal commission has shown how incentives in Australia’s financial services sector have led to questionable and sometimes illegal behaviour.</p>
<h2>Teachers can cheat, hunters can breed cane toads…</h2>
<p>Even where millions of dollars aren’t at stake, incentives can lead to perverse outcomes. Steve Levitt of Freakonomics fame was highly critical of the Obama administration’s <a href="http://freakonomics.com/2008/08/08/no-cash-for-clunkers/">“Cash for Clunkers” program</a> that was to buy back old cars at high prices and scrap them in order stimulate new car sales</p>
<p>He warned that as originally designed it would encourage people with younger cars to hold on to them for longer in order to qualify for the high price, holding sales back.</p>
<p>In a similar vein, <a href="https://theconversation.com/the-economics-of-cash-for-cane-toads-a-textbook-example-of-perverse-incentives-109574">Pauline Hanson’s proposal</a> to pay welfare recipients 10 cents for each live cane toad they turn over to the authorities would also likely exacerbate the cane toad problem by leading to breeding of toads for the bounty. The same thing happened with cobras in colonial India and with rats in colonial Vietnam. Yuck!</p>
<p>Told their careers depended on their students performing well in tests, some teachers in Pennsylvania famously <a href="https://www.thedp.com/article/2016/03/philadelphia-teachers-standardized-test-cheating">falsified tests</a> by erasing incorrect answers after the papers had been handed in and replacing them with correct ones in order to lift results.</p>
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Read more:
<a href="https://theconversation.com/the-economics-of-cash-for-cane-toads-a-textbook-example-of-perverse-incentives-109574">The economics of 'cash for cane toads' – a textbook example of perverse incentives</a>
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<p>Incentives work alright, but often in ways we wish they hadn’t.</p>
<p>Oddly, the way to escape perverse outcomes might be to make incentives harder to understand.</p>
<h2>…unless the incentives are opaque</h2>
<p>In a paper just published in the the RAND Journal of Economics, Florian Ederer of Yale, Margaret Meyer of Oxford and I suggest <a href="http://research.economics.unsw.edu.au/richardholden/assets/ederer_et_al-2018-the_rand_journal_of_economics.pdf">making incentives less obvious</a>.</p>
<p>Where there are two dimensions of a job that we want incentivised, it can make sense to pay out on only one, but not to say which one. </p>
<p>It’s an approach the British National Health Service stumbled on to after first attempting to incentivise low waiting times and then patient outcomes. </p>
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Read more:
<a href="https://theconversation.com/getting-an-initial-specialists-appointment-is-the-hidden-waitlist-99507">Getting an initial specialists' appointment is the hidden waitlist</a>
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<p>When it announced it was going to rewards hospital for lower waiting times, waiting times plunged as patients were reportedly left in ambulances and not “checked in” in order to cut reported waiting times, leading to <a href="https://www.hsj.co.uk/comment/its-time-to-stop-incentives-for-perverse-waiting-list-management/5074803.article">some appalling outcomes</a>. When they switched to rewarding measured outcomes instead, waiting times soared.</p>
<p>Being vague about what it actually paid on <a href="https://siteresources.worldbank.org/EASTASIAPACIFICEXT/Images/226299-1251872399239/bevanhoodpubadmin%5B1%5D.pdf">enabled it to get both</a>.</p>
<h2>There’s power in vagueness</h2>
<p>It’s why teachers don’t announce what material is going to be on a final exam ahead of the exam (because otherwise the students would study only that material). </p>
<p>It is why the Productivity Commission in its recommendation that an independent panel select ten “best in show” super funds to be on a list of default funds presented to people entering the workforce stopped short of setting out <a href="https://theconversation.com/superannuation-why-we-stick-with-the-duds-109660">exactly what the criteria would be</a>.</p>
<p>It’s why Google and Facebook <a href="https://www.accc.gov.au/focus-areas/inquiries/digital-platforms-inquiry/preliminary-report">don’t reveal the algorithms</a> they use to rank web sites and keep changing them, a practice about which News Corporation <a href="https://www.accc.gov.au/system/files/News%20Corp%20Australia%20%28April%202018%29.pdf">complains</a> in a submission the Australian Competition and Consumer Commission’s digital platforms inquiry.</p>
<p>If Google and Facebook did make clear exactly what they were rewarding throughout high placement in search results (length of time on site, links from other sites, number of hits) the publishers would aim for that at the expense of other things.</p>
<p>We could learn a bit from Google and Facebook. Sometimes it’s best for the people whose good behaviour you are trying to encourage not to know exactly which behaviour you’ll reward.</p>
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Read more:
<a href="https://theconversation.com/digital-platforms-why-the-acccs-proposals-for-google-and-facebook-matter-big-time-108501">Digital platforms. Why the ACCC's proposals for Google and Facebook matter big time</a>
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<img src="https://counter.theconversation.com/content/110027/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Counterintuitively, vague incentives are often stronger than clear ones.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1052942018-10-23T19:15:00Z2018-10-23T19:15:00ZThe internet has done a lot, but so far little for economic growth<figure><img src="https://images.theconversation.com/files/241780/original/file-20181023-169807-1dwppfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The internet is everywhere, except in the economic growth figures.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The internet is transforming every aspect of our lives. It has become indispensable. But, so far, according to <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/joes.12211">a new meta-analysis we have published in the Journal of Economic Surveys</a>, the internet has done next to nothing for economic growth. </p>
<p>Vast resources have been thrown at information and communication technologies. Yet despite exponential growth in ICT and its integration into almost all aspects of our lives, economic growth is not demonstrably faster (and at the moment is demonstrably slower) than it was beforehand. </p>
<p>As Nobel Prize-winning economist Robert Solow famously put it, “you can see the computer age everywhere but in the productivity statistics.” </p>
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Read more:
<a href="https://theconversation.com/what-is-5g-the-next-generation-of-wireless-explained-96165">What is 5G? The next generation of wireless, explained</a>
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<p>This productivity paradox has caused angst and raised questions about whether the trillions invested in ICT could have been better invested elsewhere.</p>
<h2>Our study of studies</h2>
<p>We reassessed ICT through a meta-analysis of 59 econometric studies incorporating 466 different observations in both developed and developing countries. We divided ICT into three categories: computing, mobile and landline telephone connections, and the internet. For developed countries, we found that computing had had a moderate impact on growth. Mobile and landline telephone technologies also had a small effect.</p>
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Read more:
<a href="https://theconversation.com/how-landline-phones-made-us-happy-and-connected-92662">How landline phones made us happy and connected</a>
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<p>But the internet has had no effect, at least not as far as can be ascertained from the research to date.</p>
<h2>The promise not yet delivered</h2>
<p>Ever since the Industrial Revolution, innovation and technological change have driven rising productivity and economic growth. </p>
<p>Information and communications technologies ought to follow in those footsteps. </p>
<p>Instead, productivity growth in US manufacturing has <a href="https://www.bls.gov/opub/mlr/2018/article/multifactor-productivity-slowdown-in-us-manufacturing.htm">slid</a> from 2% per year between 1992 to 2004 to minus 0.3% per year between 2005 and 2016.</p>
<p>Where ICT innovations <a href="https://www.jstor.org/stable/20777587?seq=1#page_scan_tab_contents">do lead to an increase in productivity</a>, it’s often a one-off boost rather than an <a href="https://press.princeton.edu/titles/10544.html">ongoing increase year after year</a>.</p>
<h2>Where the internet sends us backwards</h2>
<p>More disquieting, there is some evidence suggesting that rather than contributing to economic performance, some parts of ICT can harm it.</p>
<p>The internet can be an enabler of <a href="https://www.penguinrandomhouse.ca/books/202162/the-procrastination-equation-by-piers-steel/9780307357175">procrastination</a>. Cyberslacking can take up to <a href="https://www.sciencedirect.com/science/article/pii/S0747563211000604">three hours of work a day</a>. </p>
<p>It isn’t all bad. Many of us get a lot of joy from catching up on social media and watching dog and cat videos. But if everyone is distracted by it, little gets done.</p>
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Read more:
<a href="https://theconversation.com/ten-reasons-teachers-can-struggle-to-use-technology-in-the-classroom-101114">Ten reasons teachers can struggle to use technology in the classroom</a>
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<p>The internet has also enabled greater flexibility in work, another plus. But if it contributes little to economic growth, it is worth asking whether our economic managers should continue to fund its expansion.</p>
<h2>No saviour for developing nations</h2>
<p>For developing countries, generating economic growth is pressing because resources are scarce. ICT has been <a href="https://openknowledge.worldbank.org/handle/10986/2422">held out as a saviour</a>. </p>
<p>Yet, it has almost always been found that more obvious innovations, such as running water, <a href="https://press.princeton.edu/titles/10544.html">electricity</a>, and primary education for girls, have bigger payoffs. </p>
<p>Our own findings show that developing countries benefit from landline and mobile phone technologies but not at all from computing, at least not yet. ICT might need to reach a <a href="http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199548798.001.0001/oxfordhb-9780199548798-e-005">critical size</a> before its effects matter.</p>
<h2>But maybe later, down the track</h2>
<p>The time it takes for ICT investment to generate economic growth might be longer than expected, and it might need to reach an even bigger critical mass before that happens.</p>
<p>But it’s hard to avoid the conclusion that, for the immediate future, growth will continue to depend upon more traditional sources: trade between nations, education, new ideas, the rule of law, sound political institutions, and <a href="https://theconversation.com/dont-listen-to-the-rich-inequality-is-bad-for-everyone-81952">curtailing inequality</a>.</p>
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Read more:
<a href="https://theconversation.com/how-rising-inequality-is-stalling-economies-by-crippling-demand-99075">How rising inequality is stalling economies by crippling demand</a>
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<p>Unfortunately, these are under threat from growing nationalism and protectionism in the United States and elsewhere. The evidence to date suggests that we would be better off fighting those threats than investing still more in an information technology revolution that has yet to deliver.</p><img src="https://counter.theconversation.com/content/105294/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The internet has always been just about to deliver an enormous spurt of economic growth or productivity growth A new meta-analysis of 59 econometric studies finds it is yet to do so.Chris Doucouliagos, Professor of Economics, Department of Economics, Deakin Business School and Alfred Deakin Institute for Citizenship and Globalisation, Deakin UniversityTom Stanley, Professor of Meta-Analysis, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/835952017-09-10T21:24:55Z2017-09-10T21:24:55Z‘Weather-sensitive’ products: adjusting price and promotions to increase sales<figure><img src="https://images.theconversation.com/files/185105/original/file-20170907-9599-9d45t0.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A U.S. supermarket.</span> <span class="attribution"><span class="source">Pexels</span></span></figcaption></figure><p>It stands to reason that the weather can affect the sales of certain products – for example, more rainfall generally means that consumers purchase less sunscreen. But the phenomenon can go much further. In the UK market, warm summer weather led to a sales increase of <a href="http://www.dailymail.co.uk/money/markets/article-4645178/Ice-cream-saves-supermarkets-Heatwave-boosts-sales.html">23% for frozen sweets and 10% for chilled drinks</a>. In the US do-it-yourself market, stores reported falling sales of outdoor product categories due to <a href="https://www.forbes.com/sites/greatspeculations/2014/05/27/lowes-earnings-review-outdoor-category-sales-decline-due-to-rough-weather-but-boost-profitability/#3f92f16ed5b3">poor weather</a>. In the automobile industry, sales of convertibles increase by 5.4% when the <a href="https://www.adwordsrobot.com/en/blog/how-weather-influences-product-sales">temperature rises</a>. In the US and Canada, McDonald’s added technology that allowed them to <a href="http://www.businessinsider.fr/us/mcdonalds-menus-will-recommend-food-based-on-the-weather-2015-11/">recommend products</a> based on outside temperatures, but not adjust pricing.</p>
<h2>Optimising profits based on the weather</h2>
<p>Despite the clear influence of the weather on the sales of certain products, firms’ decisions on price, advertising or promotions can often be more a matter of habit than reason. Indeed, several marketing departments’ practices show that the links between the marketing decisions and the weather are still poorly understood. Understanding these links would give them a framework to better take the weather into account, and thus potentially increase sales and profits. </p>
<p>In a <a href="https://www.faculty-psbedu.paris/en/content/when-temperature-rises-and-consumer-cool-down-impact-pricing-and-advertising-strategies">recent study</a>, we help fill this gap by studying how price and advertising expenses can be adjusted to the outside temperature for “weather-sensitive” products.</p>
<p>The mapping of prices of such products on the French market shows discrepancies in the order of 20% within a same geographical region and between regions. Advertising expenditures can be concentrated on certain months of the year, sometimes reaching more than twice the annual average. Our study helps companies understand whether these practices of modulation in price and in advertising expenses are justified and how they can be optimised in relation to outdoor temperature.</p>
<p>Theoretical results of our study show that when the outside temperature increases, price and advertising expenditures should be increased when:</p>
<ul>
<li><p>Demand is relatively <a href="https://en.wikipedia.org/wiki/Price_elasticity_of_demand">insensitive to price changes</a>; </p></li>
<li><p>Demand more sensitive to price changes than to advertising changes – that is, an increase in price impacts demand more than an increase in advertising expenditures of the same intensity.</p></li>
</ul>
<h2>Yop yogurt as the case study</h2>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1385&fit=crop&dpr=1 600w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1385&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1385&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1740&fit=crop&dpr=1 754w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1740&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/185108/original/file-20170907-9570-1sxcnby.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1740&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>We empirically tested our theoretical results for a well-known product in the French <a href="https://en.wikipedia.org/wiki/Fast-moving_consumer_goods">FMCG market</a>, the drinkable yogurt Yop. The data used in our analysis included more than 1,300 sales and price observations over a period of three years at nine different regional levels as well as advertising expenses and outdoor temperature recordings from 1,100 weather stations all over the French metropolitan territory. We studied the relationship between temperature and price on the one hand, and between temperature and advertising expenditures on the other.</p>
<p>Estimates show that Yop’s demand is consistent with our theoretical model. It is not particularly price-sensitive (when price rises by 10%, demand falls only by 5%) and more sensitive to price than to advertising (when advertising expenditures rise 10%, demand increases by less than 1%). Most important, the price and the advertising expenses were shown to increase with the temperature.</p>
<p>In sum, our study can help firms better set prices and advertising expenditures according to temperature. For brand products (monopolistic markets), the warmer it gets, the greater firms’ ability to increase prices and advertising while increasing sales. In such markets, rising temperatures strengthens the market power of brands. For managers and their consulting firms, our study provides conceptual tools confirmed by an empirical analysis that can lead to better-informed price and advertising decisions and, ultimately, improve profits.</p><img src="https://counter.theconversation.com/content/83595/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>Weather has an impact on the sales of certain products, and new research shows that timely adjustments in price and advertising can make it possible for firms to increase profits.Xavier Rousset, Doctorant en Économie, Université Paris CitéOctavio Escobar, Associate Professor of Economics, PSB Paris School of BusinessRégis Chenavaz, Enseignant-chercheur en économie et marketing, Kedge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/521532015-12-31T21:23:57Z2015-12-31T21:23:57ZCabinet papers 1990-91: lessons from the recession we didn’t have to have<p>Australia’s last formal recession ended in the September quarter of 1991. Once it sunk in that this was a serious economic downturn, treasurer Paul Keating famously referred to it as “the recession Australia had to have”. This narrative of the recession seemed plausible at the time. A necessary correction for the twin problems of inflation and current account deficits. But it remains a point of contention among political and economic historians and the policy makers involved.</p>
<p>The selected key cabinet papers for 1990 and 1991 released today by the <a href="http://www.naa.gov.au/">National Archives of Australia</a> appear to support those who see the recession as <a href="http://www.uq.edu.au/rsmg/WP/Australian_Public_Policy/WPP07_3.pdf">likely caused and certainly exacerbated by monetary and fiscal policy.</a> Policy that was overly concerned with the current account deficit. The current account is a measure of trade balance and reflects Australia’s net financial position with the rest of the world. It was a measure of genuine importance to governments during the Bretton-Woods era of set exchange rates and the gold standard, but is considered of little importance today. The 1990-91 cabinet papers confirm the focus given to the current account in both budgetary and micro-economic reform considerations:</p>
<blockquote>
<p>“The Committee noted the need to take action to ensure that fiscal policy and the Budget surplus continue to be a key elements [sic] in demand management strategy, thereby helping reduce the current account deficit and dependence on overseas savings.” - First paragraph of the Expenditure Review Committee’s (ERC) 1990 cabinet submission titled Economic and Fiscal Policy Strategy (7055).</p>
</blockquote>
<p>Even in the midst of the economic downturn Keating was keen to defend the surplus as it contributed to national savings and kept downward pressure on inflation and exchange rates. The result was policy carefully aimed at increasing national output while holding down domestic demand, thus hopefully spurring exports and balancing the current account.</p>
<p>The Reserve Bank at the time also had a multi-targeted approach to monetary policy with concern not only for inflation but also current account and exchange rates. This meant monetary policy was tighter in the lead-up to the recession than it would have been if inflation was the principal target – as it is today. You can see from the graph below that monetary policy was most conspicuously out of step with inflation in 1989 right before the recession, with a big spike in interest rates despite only a very modest rise in inflation.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/106397/original/image-20151217-11308-1cc59cb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/106397/original/image-20151217-11308-1cc59cb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=321&fit=crop&dpr=1 600w, https://images.theconversation.com/files/106397/original/image-20151217-11308-1cc59cb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=321&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/106397/original/image-20151217-11308-1cc59cb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=321&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/106397/original/image-20151217-11308-1cc59cb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=403&fit=crop&dpr=1 754w, https://images.theconversation.com/files/106397/original/image-20151217-11308-1cc59cb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=403&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/106397/original/image-20151217-11308-1cc59cb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=403&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Interest rates and inflation 1970-2007.</span>
<span class="attribution"><a class="source" href="http://www.uq.edu.au/rsmg/WP/Australian_Public_Policy/WPP07_3.pdf">Bell & Quiggin 2007</a></span>
</figcaption>
</figure>
<p>Typical of those looking back at their actions during this period, former reserve bank governor Ian Macfarlane doesn’t mention the current account in <a href="http://www.theage.com.au/news/business/the-real-reasons-why-it-was-the-1990s-recession-we-had-to-have/2006/12/01/1164777791623.html?page=4">his defence of fiscal policy</a> at the time, even though Reserve Bank documents make it clear this was a major consideration.</p>
<p>The cabinet papers reveal a two pronged approach to dealing with both inflation and the current account deficit; maintaining tight fiscal policy and keeping a lid on wages.</p>
<p>When it came to fiscal policy, proposals from ministers for new money were sorted by the hard-line Expenditure Review Committee into “unavoidable”, “deferrable” or “dispensible” and only those categorised as unavoidable were considered for inclusion in the 1990-91 budget. Of the 219 policies under consideration, only 51 were determined to be unavoidable, the rest being either deferred (55) or binned altogether (113).</p>
<p>In spite of Bob Hawke’s claims that sustainability and environmental protection were key priorities of his government, basically every item of new expenditure for the environment was labelled dispensible or deferrable. There were ongoing internal divisions over continuing the so-far successful strategy of chasing the “green vote”. Of some contemporary interest is the fact that a request for funding for “Climate change policy – Multifaceted Program Initiatives” was dumped into the “dispensible” category. </p>
<p>This hard-nosed attitude to new spending flew in the face of long-standing orthodox supporting Keynesian fiscal stimulus during an economic downturn. The major justification given for this was the state of the current account. Inflation was part of that discussion but it was mentioned less often and given a back seat to the perceived current account problems.</p>
<p>In relation to the second policy focus, that of wage constraint, the cabinet submissions read like a Howard era Liberal party policy. The emphasis was on workforce flexibility, enterprise bargaining, productivity gains and the improvement of Australia’s competitive position; particularly in manufacturing and textiles. Wage constraint was seen as a critical component of restoring international competitiveness and our current account position. As a result, industrial relations reform tended to shift power towards employers while lauding the unions for taking a hit for the common good.</p>
<p>The collapse of Bretton-Woods and the abandonment of the gold standard in the 1970s meant a new paradigm for both fiscal and monetary policy. But such profound changes generally take a long time to be fully understood by bureaucrats, academics and policy makers alike.</p>
<p>The depth of the 1990-91 recession led to a rethink of monetary and fiscal policy. The Reserve Bank shifted focus to prioritising inflation as a target along with economic growth, abandoning consideration of the current account and the exchange rate.</p>
<p>The recession may not have been inevitable but the resulting plunge in inflation, combined with the new Reserve Bank focus, has created a low and relatively stable level of inflation in Australia ever since. This has certainly been a major contributor to our current record streak of uninterrupted economic growth.</p>
<p>Governments no longer take much interest in the current account figures. In fact, it’s hard to find somebody who admits that they (personally) ever did. If private individuals and institutions hold foreign debt it’s considered their own business. We’re yet to encounter a level of current account deficit that is unsustainable or that threatens the national economy (that’s not to say, of course, that such a level doesn’t exist).</p>
<p>While the evidence, with the benefit of hindsight, suggests the recession could have been avoided or ameliorated through looser monetary and fiscal policy, this would have required a level of policy insight that was not available at the time. It was reflection on the recession that created this policy insight. </p>
<p>To complete the lesson we now need policy makers and academics to understand what the collapse of Bretton-Woods <a href="https://theconversation.com/why-the-federal-budget-is-not-like-a-household-budget-35498">really meant for fiscal policy</a>. In 25 years’ time commentators and historians will almost certainly be looking back on current cabinet papers and similarly shaking their heads at the unnecessary obsession with fiscal deficits and surpluses.</p><img src="https://counter.theconversation.com/content/52153/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warwick Smith does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The 1990s obsession with the current account looks silly with hindsight, perhaps akin to our current one with fiscal deficits and surpluses.Warwick Smith, Research economist, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/493952015-12-15T09:47:18Z2015-12-15T09:47:18ZFive ways to fix the UK’s productivity puzzle from the inside out<p>We all know by now that Britain has <a href="https://theconversation.com/uk/topics/productivity">a productivity problem</a>. The average British worker simply doesn’t make as much stuff as those <a href="http://www.bbc.co.uk/news/business-33347300">from other major countries</a> and for all the agreement that something must be done, there is little consensus. Debates about solutions tend to focus on big ticket national infrastructure policy designed to grandly sweep away obstacles and enable improvement. But the risk is that we obscure practical steps needed at the very heart of the problem.</p>
<p>The UK’s economy rebounded following the global financial crisis, but by 2014 (the latest figures available) our workers were <a href="http://www.ons.gov.uk/ons/dcp171778_416704.pdf">around 30% less productive</a> than those in the US, Germany and France – and their productivity levels were improving faster over time than ours. The Office for Budget Responsibility has warned that low productivity <a href="http://cdn.budgetresponsibility.independent.gov.uk/EFO_November__2015.pdf">threatens the UK’s economic recovery</a>; whatever you think about the idea of a “global race”, it’s best not to be stuck in the slow lane.
One of the major problems is that these discussions are imbalanced, focusing almost exclusively on nationwide issues such as improving education and training, transport, high-speed broadband connectivity and banking and financial support. </p>
<h2>Step by step</h2>
<p>You see, productivity is a multi-level and systemic issue. Take the decision to devolve substantial budgets to <a href="https://theconversation.com/is-devo-manc-a-good-model-for-english-devolution-almost-41643">local government in Manchester</a> to improve provision of joined-up health and social care <a href="https://www.gov.uk/government/publications/summer-budget-2015/summer-budget-2015">in the north-west of England</a>. This has the potential for massive impacts on public sector productivity, as well as on the productivity of large numbers of private sector suppliers. </p>
<p>And so, crucially, we need to improve productivity from within both the public and private organisations. Without this we will continue to languish near the bottom of the G8 league tables. What follows are five proposals which can help.
</p>
<h2>1. Make managers more responsible</h2>
<p>Senior managers should be collectively responsible for improving productivity. This should be reflected in performance indicators and rewards. Productivity is not really about getting staff to work harder or longer, it is much more about designing working practices, processes and tools that help them work smarter and more effectively. </p>
<p>Improving productivity needs to be an explicit goal, measured and recorded using simple data which are made publicly available in annual reports for shareholders, the government and the general public.
</p>
<h2>2. Empower employees</h2>
<p>Employees should be empowered and teams developed to take responsibility for improving productivity. </p>
<p>Take the example of a manufacturing plant. Under the <a href="http://www.theguardian.com/business/2007/dec/16/2">“command and control”</a> way of thinking, machine operators are largely unskilled or semi-skilled but there are legions of supervisors, inspectors and maintenance engineers. Direct labour costs are low, but the indirect costs of staffing architecture are prohibitive.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/103888/original/image-20151201-21714-vq17q2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/103888/original/image-20151201-21714-vq17q2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/103888/original/image-20151201-21714-vq17q2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/103888/original/image-20151201-21714-vq17q2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/103888/original/image-20151201-21714-vq17q2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/103888/original/image-20151201-21714-vq17q2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/103888/original/image-20151201-21714-vq17q2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/103888/original/image-20151201-21714-vq17q2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Cheesed off? Workers should be given responsibility.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/nh567/2774100797/in/photolist-5e8Zw6-88jsRF-9NFu2f-9NvNDw-9b18Aq-94bZQR-6MPEUd-8SRXrE-8Mac4h-9obQEN-dAMBGh-7s32oZ-9ey3GE-8vQwLd-2F7Y4e-8vMvtH-73DPyf-7wcv88-2Fcd7u-aViSN8-eUZMuA-aRbmaF-2FcdJE-9NDy6B-9NsCbe-9NGstd-9NGHn1-7cQ7vk-9ocin7-apHaSb-9NJbtw-6KhGCa-9nbNH1-qtKzjY-E4R6a-9o8Mkx-ag5SVb-9ey3q5-ag68af-8CBxsD-bFeCSQ-73zPXB-66a1FS-82U2ui-9NC2JV-9NBP6p-ed4RYh-67rn5o-E4QRu-dk1uZo">NH567</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/1464-0597.00083/full">When staff are empowered</a>, the operators working in teams are able up to undertake most (if not all) of these roles. Overall costs are lower and the system operates with higher quality, lower waste, shorter lead times and higher throughput. </p>
<p>This is already happening in many organisations but the deal with staff needs to allow them to directly benefit from productivity improvements through reward and recognition.
</p>
<h2>3. Educate and train</h2>
<p>If you are going to give staff more responsibility, then they need to be well educated, trained and developed. This is a responsibility shared by the government, through national initiatives, and each organisation. Most <a href="http://onlinelibrary.wiley.com/doi/10.1111/1464-0597.00083/full">employees rise to the challenge</a>, especially when they realise their organisation and senior managers are serious and that it makes them more employable.
</p>
<h2>4. Value processes over technology</h2>
<p>Senior managers should focus on well-designed processes and working practices, rather than expecting new technology to solve human problems. It’s tempting to think a shiny new toy will make a factory work more efficiently or make trains leave a platform on time, but it’s the total system that must work effectively.</p>
<p>The idea is that you create a virtuous circle whereby empowered staff become more knowledgeable, motivated, competent and productive. Simply introducing new pieces of technology is not the answer. As <a href="http://www.profjimnorton.com/">Jim Norton</a>, board member of the Parliamentary Office of Science and Technology, <a href="https://books.google.co.uk/books?id=7vZf61ZAO48C&pg=PA514&lpg=PA514&dq=jim+norton+There+is+no+such+thing+as+a+technology+project&source=bl&ots=jHKRrj0ihO&sig=08CBi5uRRBQvM9sYPkl_-XiYinE&hl=en&sa=X&ved=0ahUKEwiCiKL8y7rJAhXB7w4KHc_SAa0Q6AEIJTAB#v=onepage&q=jim%20norton%20There%20is%20no%20such%20thing%20as%20a%20technology%20project&f=false">said in 2006</a>: “There is no such thing as an IT project.” </p>
<p>Instead, there should only be “improvement projects” to boost productivity which change systems of working and which are likely, of course, to include a technology component.</p>
<h2>5. Encourage innovation</h2>
<p>Companies should be structured to encourage interaction, creativity and innovation among staff and with customers. It doesn’t just sound nice; it makes a difference. Consider a company that sells aeroplane engines worldwide and is changing its business model to <a href="http://knowledge.wharton.upenn.edu/article/power-by-the-hour-can-paying-only-for-performance-redefine-how-products-are-sold-and-serviced/">“power-by-the-hour”</a>. The company used to sell the engine and then sell separate maintenance contracts. Now, from the outset of a project, it signs deals to supply power over a lengthy operational period and it must predict maintenance costs for the lifecycle of the engine.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/104858/original/image-20151208-32398-c5k7jm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/104858/original/image-20151208-32398-c5k7jm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/104858/original/image-20151208-32398-c5k7jm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/104858/original/image-20151208-32398-c5k7jm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/104858/original/image-20151208-32398-c5k7jm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/104858/original/image-20151208-32398-c5k7jm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=487&fit=crop&dpr=1 754w, https://images.theconversation.com/files/104858/original/image-20151208-32398-c5k7jm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=487&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/104858/original/image-20151208-32398-c5k7jm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=487&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Building better engines of growth.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/flissphil/4062342859/in/photolist-7bYz18-sKKgZm-6A7ozx-4Zc8D8-t11v15-i2Mx9-sKLwbA-9VDrTL-gwV4k-9T7fcD-t3nCLM-BgCwwa-qua9F-6iakbq-t11BDW-s6wrC8-7b46Ae-by11wK-kSnKrk-bMXBH8-8fqcx9-6hQMfa-9UTaki-5MDpaN-5Mzawx-9CjUom-sEf1z-9A9e3y">Phillip Capper</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The knowledge held by maintenance engineers and customers around the globe is essential to predict and reduce lifecycle costs. The designers need to develop and share social networks with maintenance staff, and with customers. That way, you get interaction, creativity, innovation and ultimately, increased productivity.</p>
<h2>Tuning up</h2>
<p>It boils down to ending the command and control culture and giving frontline staff the opportunity and motivation to deliver high quality products and services on timescales that delight customers. These proposals aren’t a quick fix, but there is <a href="https://www.researchgate.net/publication/211382721_The_impact_of_human_resource_and_operational_management_practices_on_company_productivity_A_longitudinal_study">hard evidence that they work</a>. These changes will also contribute to the apparent, current political consensus that we need to work towards a high-skill, high wage economy.</p>
<p>Above all, perhaps, the UK needs an understanding of the systemic problems of productivity. That will bring an acknowledgement that to boost productivity, we have to make multiple, coordinated interventions at multiple levels. No single policy, individual, group or profession will capture or understand all the elements and interactions in complex systems like this. And that means government and business having the patience and bravery to bring people from all levels into the project to make it work.</p><img src="https://counter.theconversation.com/content/49395/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Clegg has in the past received research funding from the public sector (e.g., Technology Strategy Board, research council grants) and from private sector organisations working in the high value manufacturing engineering sector. None of these organisations are expected to benefit from this article.</span></em></p>Efforts to fix the UK’s failure to make more stuff and be more profitable focus too far up the chain.Chris Clegg, Professor of Organizational Psychology, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/491912015-10-21T05:19:48Z2015-10-21T05:19:48ZFrom Chinese milk to Indian chocolate, behind the world’s fast-expanding markets<figure><img src="https://images.theconversation.com/files/99032/original/image-20151020-32258-b70hl3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Got milk? China joins the lactose lovers.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/gwendolyn_stansbury/17405540533/in/photolist-7ayepS-7hDWRe-dTf1tw-bTwp2k-mksTaH-rWuR9T-sw4WNr-4zugmn-o2iDUJ-ammeX7-9AkZ13-5AA2Yw-aarWBx-ietpvH-dZaiX4-hLB1BA-aSLHmg-dnKNjq-eCC1YY-i9nFR1-9kFZh4-apjV7y-gtpNHW-zWkVW6-iDvgsy-dxs9sa-6weqvG-bZowLy-vwgTaU-4oTK6W-3B8oi-9Zmrds-7tPYD6-iBtVZh-aJPxkD-5EbXEc-4mA8TW-b6iCaP-iAiHE5-5EgfEC-4Hx9hL-Hg8Wo-ztgcK-aMTW3v-fDSFLi-4dcmqU-wQV3N-6bnGLt-6L4jau-5NQrHY">Gwendolyn Stansbury</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>It’s time to think small when it comes to identifying growth areas in the global economy.</p>
<p>For the past 15 years, since the BRIC acronym was coined for Brazil, Russia, India and China, the world’s biggest emerging economies have been the focus for discussion on growth opportunities outside of western developed markets. But with <a href="http://www.bbc.co.uk/news/business-34550759">a slowdown in China</a> and a <a href="http://www.ft.com/cms/s/0/7f923140-6279-11e5-97e9-7f0bf5e7177b.html">credit downgrade for Brazil</a>, it is getting harder to view the BRICs story as a simple, grand narrative of gilded opportunity for investors and businesses alike. </p>
<p>Those concerns are not confined to China and Brazil. <a href="http://www.reuters.com/article/2015/10/03/russia-economy-gdp-idUSR4N11R01X20151003">Russia’s economy is contracting this year</a> due to low energy prices; India’s economic recovery too has been <a href="http://blogs.wsj.com/indiarealtime/2015/10/07/what-the-imf-said-about-indias-growth-outlook/">slower than expected</a>.</p>
<p>But these nations are not a busted flush; we just have to adjust our thinking. Real growth can be found in fast-expanding markets within those countries. It is a subject we have examined recently in a paper <a href="http://onlinelibrary.wiley.com/doi/10.1002/tie.21738/abstract">published in the Thunderbird International Business Review</a>, seeking to understand these markets which transcend sectors as well as nations, and sometimes even confound conventional wisdom.</p>
<h2>Milking it</h2>
<p>While BRICs was useful shorthand for showing that a few populous countries would reshape the global economy this century, this macroeconomic lure has in fact been a microeconomic disappointment for some big companies. Home Depot had an emblematic experience, entering China in 2006 and <a href="http://www.wsj.com/articles/SB10000872396390444433504577651072911154602">pulling out completely in 2012</a>. It didn’t anticipate that the do-it-yourself culture of the US wouldn’t translate into a country with abundant and relatively cheap labourers.</p>
<p>It is a story that illustrates the difficulty in using a top-down approach when operating in emerging markets. So rather than only taking a bird’s-eye view of such populous countries, it is useful to also take a ground-up look at where highly specific opportunities lie in BRIC countries and beyond.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/99001/original/image-20151020-32258-1dzcr51.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/99001/original/image-20151020-32258-1dzcr51.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/99001/original/image-20151020-32258-1dzcr51.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/99001/original/image-20151020-32258-1dzcr51.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/99001/original/image-20151020-32258-1dzcr51.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/99001/original/image-20151020-32258-1dzcr51.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/99001/original/image-20151020-32258-1dzcr51.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/99001/original/image-20151020-32258-1dzcr51.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The heat is on. Fast expanding markets take flight.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/billnwmsu/4865546739/in/photolist-8pXcwT-SA29P-a5a1pC-4VSHKB-8pXcBK-9RrVfh-am29z6-8CKHNF-fn1NMq-2fZnnf-2Tcfkx-frUPZ5-gVK9K-9MczU8-x8z3RA-82kgpj-x9A28q-2NvbVn-6XAb7z-dnhWPC-2KR2Z1-38tLXy-38tCF1-2TccP4-2Tce54-6icsEc-RhERj-igetHg-4GGUD8-oTgahW-nWEnM-7MX3Pt-e9DFvp-oouvmM-isXw3P-iDtYbZ-a2LNiG-8q1na7-8q1mXS-e9DFka-2fUYRB-faNCVb-p229Ki-2f6voB-8onDhn-6En2kb-8GSdyT-smiR8P-2uypG-8pXb5X">Will Murphy</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>In China, one of these fast-expanding markets is milk production and consumption. More people have been paying close attention to their health and to the role that milk can play in their basic diet. Other factors have included an upgrade to the supply chain, a relaxation of the country’s one-child policy and the continued westernisation of China as companies such as Starbucks grow popular.</p>
<p>From 2000 to 2006 alone, China’s raw milk consumption nearly quadrupled, and the country is now the world’s third-largest producer behind the US and India as agricultural infrastructure has improved.</p>
<h2>Choc-alert</h2>
<p>In India, fast-expanding markets include <a href="http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Cheese%20Demand%20Rising%20-%20New%20Market%20Opportunities_New%20Delhi_India_9-30-2015.pdf">Western-style cheese</a>, which saw sales growth of nearly 200% from 2008-2013; <a href="http://mnre.gov.in/schemes/decentralized-systems/solar-systems/solar-water-heatres-air-heating-systems/">solar water heaters</a>, with the area in square metres of instalments almost doubling between 2009 and 2011; and the <a href="http://www.ktvn.com/story/30151602/india-chocolate-market-projected-to-surpass-us-17-billion-in-2020-says-techsci-research">chocolate industry</a> may treble this year to more than $2 billion, as a rise in sugar prices has made traditional sweets more expensive.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/98892/original/image-20151019-23267-drgqf5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/98892/original/image-20151019-23267-drgqf5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/98892/original/image-20151019-23267-drgqf5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=371&fit=crop&dpr=1 600w, https://images.theconversation.com/files/98892/original/image-20151019-23267-drgqf5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=371&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/98892/original/image-20151019-23267-drgqf5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=371&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/98892/original/image-20151019-23267-drgqf5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=467&fit=crop&dpr=1 754w, https://images.theconversation.com/files/98892/original/image-20151019-23267-drgqf5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=467&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/98892/original/image-20151019-23267-drgqf5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=467&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Object of desire. In Liectenstein at least.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/124018523@N04/14848998042/in/photolist-oC9ZMC-H7C5e-5G5aw-s9aTjd-nUGg36-kTwbMP-5eS1k-4RDmgY-itZych-bF8MR-71UaqX-6VAhbC-7AS3iG-aiwvq5-5NQcCU-3Mctsz-6beqFb-6FDLVS-qvuopQ-8HP8fh-4mmNU3-73BEhh-dGoDb-6mMsx9-e8NbWJ-5W3Pp5-hgzA2X-cCwjVb-5p9G2-4xxhJ7-yD7Jua-iAvcY-6MsVK8-wpXxW-9pBiJX-jd9onD-JndG9-aNErz-ebNwN8-bdKh4-cmNTeb-arbeBi-A3AgU-w9f9Du-aCdTMv-778vmT-tcUefF-3exgsa-byTNZT-vgeeF8">Partha S. Sahana</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Beyond BRICs, fast-expanding markets include mobile money transfers in Kenya and video game production in Turkey, developing games which conform to Islamic values.</p>
<p>And we can even branch out beyond the developing world too. There are opportunities for entrepreneurs, investors and businesses in the Vitamin D testing <a href="http://m360.sim.edu.sg/article/Pages/Finding-Fast-Expanding-Markets-in-Zero-Growth-Countries.aspx">market in Italy</a>, benefitting from an increasing lack of direct sun exposure; in organic food production in Spain, linked to a downturn in the property market; in <a href="http://www.huffingtonpost.com/2012/10/26/food-trucks_n_2017376.html">food trucks in the US</a>, which have grown at a double-digit annual rate in recent years; and ceramic teeth in Liechtenstein, an industry which expanded in the past five years at a compound annual growth rate of 9.5%.</p>
<p>While overall growth is useful to know, an unquestioned loyalty to macroeconomic data misses much of the equation and loses most of the intelligence that can drive astute investment decisions. That’s partly because macroeconomic analysis often takes a linear look at the future, and this can often prove wrong. If you were to look at the <a href="https://www.census.gov/population/www/documentation/twps0029/tab04.html">US population statistics</a> in the early 1900s, one could reach the conclusion that the country would have been 80% Italian and Polish by 1930 if trends had followed a linear progression.</p>
<h2>Pocketing the wealth</h2>
<p>The central idea is that wealth can be found everywhere, even in countries that share gloomy macroeconomic data or prospects, like Bolivia, which is the country that has driven the quinoa revolution into the “ready to eat” industry in the US. With <a href="https://thinkers.in/fast-expanding-markets-a-new-needed-economic-lens-in-the-21st-century/">an annual growth rate of 26.5%</a>, Bolivia has exploded its production of quinoa, to the benefits of the new dietary aspirations of Americans, who have integrated the super grain into the daily use of soups, salads and energy bars. This is a great example of an agricultural fast-expanding market, which stems from what many consider as the poorest economy in Latin America.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/99002/original/image-20151020-32227-1ku833n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/99002/original/image-20151020-32227-1ku833n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/99002/original/image-20151020-32227-1ku833n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/99002/original/image-20151020-32227-1ku833n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/99002/original/image-20151020-32227-1ku833n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/99002/original/image-20151020-32227-1ku833n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/99002/original/image-20151020-32227-1ku833n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/99002/original/image-20151020-32227-1ku833n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Making the most of the boom. Bolivian quinoa farmers.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/bioversity/8414334430/in/photolist-dPxEty-6anLWD-muoNsR-f56NGm-6W8qU3-9o6E8P-6anLWr-6arXby-qQWmGv-qQWwmR-qQSth4-qQMfFG-66haf3-r8hmCS-r8fvRA-qQWk3P-qQWs78-r8drxP-ds6qo6-6anLWk-6WZVV6-bzwY4b-vuYKbo-fvGaoj-oHJQPj-4JcRqz-6W8oS9-qbwSLF-qQMqfS-4dGHqZ-baGVKn-qbzeoP-r8hrGQ-r8hsE1-r8eTE7-r8nvR4-6WZXu6-ds6tut-qQTGbi-6X4XDd-9RZBd1-qQU8vz-2bGjKv-9YdFSw-9X6iBV-9XphVg-9Ybos6-6anLWz-6bojKa-y7Uv3M">Bioversity International</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Sometimes, fast-emerging markets develop in unlikely settings. Italy has long had a reputation for high-quality food products and delicious wines, but in the midst of that, <a href="http://www.telegraph.co.uk/foodanddrink/beer/11676185/The-best-Italian-beers-to-try-this-summer.html">microbreweries are gaining a foothold</a>. This is partly because the lack of a traditional beer culture in Italy means microbreweries can more readily experiment with flavours and ingredients. Another surprising expanding market in Italy: American-style bakery products such as chocolate chip cookies, cupcakes and donuts.</p>
<p>Some may scoff that craft beer in Italy or quinoa in Bolivia are pretty insignificant compared to major global industries such as automobiles or machine tools. But such a reaction risks blinding us to fresh insights that can lead to new pockets of excellence that, taken together, make a real difference to the world economy.</p><img src="https://counter.theconversation.com/content/49191/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ignore the gloom around prospects for emerging markets. There are diamonds in the rough.Khaled Soufani, Senior Faculty in Management Practice (Finance), University of CambridgeMark Esposito, Professor of Business & Economics at Grenoble Ecole de Management and Harvard Extension School, Harvard UniversityTerence Tse, Associate Professor of Finance / Head of Competitiveness Studies at i7 Institute for Innovation and Competitiveness, ESCP Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/490142015-10-13T10:12:55Z2015-10-13T10:12:55ZHow data empowered the economic individual and gained a Nobel for Angus Deaton<p>On Monday in the staff common rooms of economics departments throughout the world, I doubt anyone was complaining about the award of this year’s <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2015/press.html">Nobel prize for economics to Angus Deaton</a>. </p>
<p>It is a choice perhaps with a view to addressing criticism that the discipline of economics can sometimes seem like ideology rather than science. It also appears to favour the micro over the macro; the experience of individuals rather than the grand plans of policy makers.</p>
<p>The first area of research mentioned in the Nobel Committee’s citation of Deaton’s work was his development of the <a href="https://www.aeaweb.org/aer/top20/70.3.312-326.pdf">Almost Ideal Demand (AID) System</a> with John Muellbauer of Oxford in the early 1980s. This system of equations allows policy makers to estimate not only how the price of a good affects its own demand but also how the price of other goods affect the demand for that good. So, if for example, VAT is increased on cigarettes, economists can estimate the likely effects on alcohol consumption. </p>
<p>The initial attempts to estimate these demand equations were unsatisfactory due to the way that the equations were written down rather than due to statistical or computational difficulties. It turned out that these equations were not flexible enough to allow certain key predictions of consumer theory to be tested. For example, will raising the price of diesel affect demand for petrol with the same magnitude as the affect of a change in the price of petrol on the demand for diesel? The contribution of Deaton and Muellbauer’s system of equations was that the key predictions of consumer theory could be tested rather than just assumed. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/98199/original/image-20151013-31138-1oe9cog.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/98199/original/image-20151013-31138-1oe9cog.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/98199/original/image-20151013-31138-1oe9cog.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/98199/original/image-20151013-31138-1oe9cog.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/98199/original/image-20151013-31138-1oe9cog.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/98199/original/image-20151013-31138-1oe9cog.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/98199/original/image-20151013-31138-1oe9cog.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/98199/original/image-20151013-31138-1oe9cog.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Price sensitivity.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/helldorado666/4748890417/in/photolist-8eDiEZ-shRzU-8VHRV2-bn1cd7-ooLjQ6-4Hb916-8Zo7wV-5RAdLh-67rRe3-8369Jd-9EmhxY-8Uwt9o-4JPDg1-dKTZng-dY99M6-8k78rR-5bzdV-dJxR1L-jWE3fn-dQ5AWj-9EmvfG-qKoZzC-4kCdRX-74p3sr-dTXrk-8RSRus-iNpH9k-4JKpjR-7w6cnb-83zxqq-ydHnV-k6wQnV-81JzLb-81EsMc-4JKphX-7rwdK9-81JAH3-6spzDG-w8TJV5-PXvDF-hyYNr-iL1YcL-jW5nt-avwPzr-aE8LKd-a4p9sG-acDKMn-qDmXiy-BJkyy-4MMso9">Hell Dorado</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Questioning theories</h2>
<p>Deaton then turned his focus to theories about income, savings and consumption. Macroeconomists up until the early 1990s felt that their <a href="http://www.ifs.org.uk/wps/wp0401.pdf">Permanent Income Hypothesis (PIH)</a> explained the real world pattern that aggregate consumption changes less than aggregate income. It was a case of theorists wanting to see their theory come true in the real world data. Deaton realised that when you fully think through the implications of PIH, then income should be smoother than consumption. This is because sometimes unexpected increases in income are, to some extent, permanent and not always completely random blips that disappear. </p>
<p>However, this wrinkle was not borne out by the Permanent Income Hypothesis and it was a finding that led to a whole reassessment of a key plank of macroeconomic theory. Deaton’s work resulted in the use of individual level longitudinal data to supplement the existing use of aggregate data. Again, his work was about inserting people and their experiences into economic theory. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/98201/original/image-20151013-31126-19uzy6q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/98201/original/image-20151013-31126-19uzy6q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/98201/original/image-20151013-31126-19uzy6q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/98201/original/image-20151013-31126-19uzy6q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/98201/original/image-20151013-31126-19uzy6q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/98201/original/image-20151013-31126-19uzy6q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/98201/original/image-20151013-31126-19uzy6q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/98201/original/image-20151013-31126-19uzy6q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The sharp end of the household survey industry.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/dany13/4642471820/in/photolist-85eT8A-c99mWN-dCFaqg-c99mFb-mS4dKB-mS63Zx-mSTr9Q-mS4VZx-nQStLM-8qc8fV-4Th5YG-qFF6Vm-irRE1v-ciDBwU-65PudD-9nhVg5-ugQkhA-7etbG4-7eiNET-nxb8WV-ttguYM-98GBgF-8yV35L-tGWSft-bvDgEL-nxaJJ5-8fxfEB-unMuAy-azKNR6-jwV15T-fL5qUt-ttgpbz-5zG6tg-9MwL8F-ffrEEZ-6oaj2i-nXrJfH-4ze6Jp-qJKHZQ-nXuatK-ogK5ci-oerzMX-qJLQMh-oeLUqm-q5xFfi-4NC7qN-4NxTnp-faBuqf-zU5ww-9MwLza">dany13</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Development of data for policy</h2>
<p>Then, in the 1990s, Deaton’s work focused on the study of poverty in developing countries. Up until that point, development economics had many theories but less than convincing empirical evidence to back up those theories. Deaton was instrumental in the design and collection of household survey data in many parts of the developing world, particularly India. </p>
<p>Survey design and data collection can sometimes be a less than exciting area of research. However good quality data are vital to testing theory and too many economists don’t take responsibility for the quality of the data that they use. Deaton’s work in this area led him and others to research important topics such as measuring poverty, calorie consumption and how assets are divided within a household in the developing world. </p>
<h2>Optimist</h2>
<p>To get an accessible version Deaton’s work, I would recommend his 2013 book: <a href="http://www.amazon.co.uk/The-Great-Escape-Origins-Inequality/dp/0691165629">The Great Escape: Health, Wealth and the Origins of Inequality</a> published by Princeton University Press. The book is pitched at a popular level but is based on extremely rigorous interrogation of data. Using a series of deceptively simple graphs, Deaton charts the very long-term trends in health and economic circumstances. It is a book that discuses history, medical science, industrial policy, development economics and political economy. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/98202/original/image-20151013-31129-nzkvbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/98202/original/image-20151013-31129-nzkvbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/98202/original/image-20151013-31129-nzkvbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/98202/original/image-20151013-31129-nzkvbx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/98202/original/image-20151013-31129-nzkvbx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/98202/original/image-20151013-31129-nzkvbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/98202/original/image-20151013-31129-nzkvbx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/98202/original/image-20151013-31129-nzkvbx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The challenge of old age.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/justcallmemo/8727658387/in/photolist-eiewLK-gzXJ45-rdVCTe-vjcei4-e8yymB-cBsaHG-b4Lgt6-7SvGMF-iGcHu1-62PcAj-dYmNhD-4q34S7-eaG5Zn-71cyhh-kR95g6-nc2FFR-86m1C6-66gLRM-sYjutV-68YS99-8uLewq-7nqhWo-9jFsWg-58vVdb-5C85kp-x7MWoe-9Q3n6L-niM3wp-nug5Fp-nQrALa-yqn6Wh-nCFC4-5UU8K9-2yLJjo-5ySYmm-3MqxzF-mKJPB-aCLzRL-68uPJ2-j62JSn-3ZhLT-AEFS-6WSEY-54Q2ek-ozpKTa-3KtyX-bESypn-8gnQ3H-5qs4dR-4YfoFh">Just Call Me Mo</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>He argues that improvements in our scientific understanding of disease and the role of public health measures, such as clean water supplies, had the major role in the improvements in our health. He shows how the Western world has largely escaped from the ravages of contagious diseases and that now the challenge is from the chronic diseases of old age. Reading the book, one is struck by his optimistic view of the world. He really has faith in science’s ability to improve the well-being of mankind. And yes, that does include economics.</p>
<p>However, he also keenly aware of our continuing problems. He discusses how perverse incentives in the pharmaceutical industry have needlessly allowed communicable diseases to continue to claim lives in parts of the developing world. Later in the book, he convincingly argues, that long-term aid to countries does more a lot more harm than good because despotic regimes, with an external source of income, have less of a need to collect taxes and so become even less accountable to their own people.</p>
<h2>Debate on the future of economics</h2>
<p>The later point, hints that Deaton is not afraid to say controversial things. A few years ago Deaton asked some big questions about the <a href="https://www.aeaweb.org/articles.php?doi=10.1257/jel.48.2.424">future of empirical economics</a>. The recent trend in applied microeconomics, especially in development economics has been a move away from traditional theory towards the use of experiments. For example, randomising participation in education programmes to reduce sexually transmitted diseases in developing countries, and then evaluating the effect of the programme. Deaton argued that this approach to economics has limited external validity – that an HIV prevention program aimed at teenage girls in Kenya may not have the same effect as a chlamydia prevention program aimed at working women in South Africa. </p>
<p>Deaton called for the applied microeconomists not to abandon economic theory in favour of experiments but instead to think more deeply about the consequences of economic theories and how they can be tested using real-world data. This is the approach he has followed throughout his career and what has led to him win a Nobel Prize.</p><img src="https://counter.theconversation.com/content/49014/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vincent O'Sullivan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The annual economics award recognises the value of micro analysis and good, old-fashioned legwork.Vincent O'Sullivan, Lecturer in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/124372013-03-03T19:27:58Z2013-03-03T19:27:58ZWhen it comes to economic forecasting, it’s wise to admit to uncertainty<figure><img src="https://images.theconversation.com/files/20692/original/bhvxsg8j-1361928563.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">If there's one thing we can say with certainty, it's that economic forecasting is far from an exact science.</span> <span class="attribution"><span class="source">Image from www.shutterstock.com</span></span></figcaption></figure><p>One certainty about economic forecasts is that, almost certainly, they will prove to be incorrect. The best forecasters can hope for is not to make systematic errors – to get it right on average – and to ensure that forecasting errors are relatively small.</p>
<p>It is political folly to hope for more. This is a message that current and aspiring Treasurers should take from last week’s release of the Commonwealth Treasury’s Forecasting Review. A second message, but not a recommendation made by the Review, is that pain could be avoided if politicians were more open about the uncertainty involved in forecasts of budget outcomes and the uncertain consequences of new policies more generally.</p>
<p>As presently structured, annual budget statements are coy about forecast uncertainty. Take the 2012-13 statements for example. In Mr Swan’s <a href="http://www.budget.gov.au/2012-13/content/speech/html/speech.htm">budget speech</a>, he rehearsed the ways in which past forecasting errors resulted in lower-than-expected tax revenues, but then went on to list the “responsible decisions which return the Budget to a $1.5 billion surplus in 2012‑13”.</p>
<p>Clearly, the Treasurer’s remarks revealed a disconnect between past mistakes and future certainty.</p>
<p>To be fair, the budget documents do make explicit references to forecast errors and uncertainty. But they are buried away in <a href="http://www.budget.gov.au/2012-13/content/bp1/download/bp1_bst5.pdf">Statement No. 5</a> and an appendix to <a href="http://www.budget.gov.au/2012-13/content/bp1/download/bp1_bst3.pdf">Statement No.3</a>.</p>
<p>The appendix discussion, for instance, is cast in terms of scenarios whose impact on the fiscal outlook is “purely illustrative”.</p>
<p>For example, one scenario looks at the effect of a fall in non-rural commodity export prices sufficient to cut the terms of trade by 4% which, in turn, leads to a fall of 1% in nominal GDP. Under a number of assumptions, this results in deterioration in the budget of $3.4 billion in the first year, and $7.1b in the second year.</p>
<p>Not many readers would get this far, but most of those who do would know that the terms of trade are volatile and difficult to forecast. So, at first glance, this seems to be helpful.</p>
<p>However, the variable of interest is not the terms of trade but a component of it: non-rural commodity export prices. In plain English, this refers to minerals, oil, and gas, which make up about three quarters of exports of goods and services. So the relevant fall in prices is a bit over 5%.</p>
<p>So far, so good. But to make the scenario useful in assessing risk to budget outcomes, the reader needs to know the likelihood of a fall (or rise) of this magnitude. In other words, Treasury would need to provide its assessment of risks for forecasts of prices of minerals, oil, and gas.</p>
<p>Which brings us back to the Forecasting Review. The Review gives the Treasury a pass mark in the sense that its forecasting performance is as good as (or better than) performances by comparable agencies. It also makes a number of recommendations as to how its performance might be improved, especially in relation to forecasting components of tax revenue.</p>
<p>But forecast errors can never be eliminated, so it is important to clearly communicate forecast risks to policymakers and the public. In this respect, the Review falls short. Its recommendation is limited to including, in the annual budget documents, an explanation of the sources of last year’s forecasting error for real and nominal GDP. This is a useful supplement to accountability, but does little to inform readers of Treasury’s estimates of likely forecast errors over the coming year, let alone four-year horizon included in many budget tables.</p>
<p>The Reserve Bank has recently taken the lead in this regard. In its <a href="http://www.rba.gov.au/publications/smp/2013/feb/pdf/0213.pdf">February Statement on Monetary Policy</a>, it provided an analysis of likely forecasting errors, assuming that these errors are similar to those made in the past. The relevant chart is reproduced below. Assuming the pattern of forecast errors remains the same, the top panel shows that there is a 70% chance that underlying inflation for the calendar year 2014 will fall between 1.6% and 3.2%.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/20688/original/fsn48fnc-1361926899.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/20688/original/fsn48fnc-1361926899.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/20688/original/fsn48fnc-1361926899.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=819&fit=crop&dpr=1 600w, https://images.theconversation.com/files/20688/original/fsn48fnc-1361926899.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=819&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/20688/original/fsn48fnc-1361926899.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=819&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/20688/original/fsn48fnc-1361926899.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1029&fit=crop&dpr=1 754w, https://images.theconversation.com/files/20688/original/fsn48fnc-1361926899.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1029&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/20688/original/fsn48fnc-1361926899.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1029&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">ABS, RBA</span></span>
</figcaption>
</figure>
<p>The Bank of England goes further. Its starting point is the same as for the Reserve Bank – an analysis of past forecast errors. But it then applies its judgement to generate an assessment of current forecast uncertainty. Their most recent ‘fan chart’ for forecast GDP growth is shown below. The darker is the green shading, the more likely the forecast outcome.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/20690/original/28xk52xg-1361927373.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/20690/original/28xk52xg-1361927373.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=498&fit=crop&dpr=1 600w, https://images.theconversation.com/files/20690/original/28xk52xg-1361927373.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=498&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/20690/original/28xk52xg-1361927373.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=498&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/20690/original/28xk52xg-1361927373.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=626&fit=crop&dpr=1 754w, https://images.theconversation.com/files/20690/original/28xk52xg-1361927373.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=626&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/20690/original/28xk52xg-1361927373.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=626&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Bank of England Inflation Report, February 2013</span></span>
</figcaption>
</figure>
<p>The fan chart usefully highlights a second, sometimes ignored issue in forecasting. Even the present situation is not known with certainty because statistical agencies often make substantial revisions to data series as sample data are supplemented by more complete information. In the fan chart, the distribution of estimates of past growth reflects the likelihood of data revisions.</p>
<p>The public could be better informed — and could be spared many of the cheap shots that characterise current political debate — if Treasury went beyond the recommendations of the Review and offered a more informative discussion on forecast uncertainty. They should follow the lead offered by central banks.</p><img src="https://counter.theconversation.com/content/12437/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graeme Wells does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>One certainty about economic forecasts is that, almost certainly, they will prove to be incorrect. The best forecasters can hope for is not to make systematic errors – to get it right on average – and…Graeme Wells, University Associate, School of Economics and Finance, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/79922012-07-13T04:18:47Z2012-07-13T04:18:47ZWhy do governments fund sports? (VIDEO)<figure><img src="https://images.theconversation.com/files/12527/original/7vjzdj6k-1341209063.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Liam Lenten explains why the government spends your money on sport.</span> </figcaption></figure><p><em><strong>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten.</strong></em></p>
<p><em><strong>In the sixth and final part of this series, Liam looks at some of the reasons why governments choose to invest money in sports</strong>.</em></p>
<hr>
<p><em><strong>You can watch Liam explain the video</strong>.</em> </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/jRF_g7HqogI?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Part six of Liam Lenten’s Some Sports Economics.</span></figcaption>
</figure>
<p><em><strong>Or read through the transcript below</strong>.</em></p>
<hr>
<p>In assessing the use of taxpayer’s funds in, let’s say, bidding for a major event (and financing it if successful), or building a new stadium, or even trying to secure a new license for a sports team, it helps to start with the basics. Public sector subsidies (in any sector, not just sport) involve both pros and cons. This is where the tool of cost-benefit analysis becomes handy. Remember, you may be a sports fan, but you’re also a taxpayer!</p>
<p>As for the benefits of having a team, event or facilities (let’s say the latter), without public facilities for professional sport, privately built facilities will develop if (and only if) team owners expect profits – that is, if net expenditure by fans on tickets and (if you recall clip 3) complementarities exceeds the cost of building and maintenance (and the pressure to maximise profit helps keep expenditures in check). However, this is not usually the case, and this apparent ‘market failure’ is often used by sports industry advocates as a justification for public sector involvement in building the stadium, and so if the local government decides to build it anyway (maybe they see it as a public good), team owners certainly won’t argue with that – they’ll simply agree to be a tenant.</p>
<p>Is a stadium a worthwhile investment for a city? The City’s revenue is sourced mostly from the rent paid by tenants (that is, the teams) – that could be a percentage of gross or flat fee plus maybe a share of revenue from complementarities. Though, evidence from professional sports in North America is that teams invariably receive highly favourable lease agreements – in many cases, no rent or token rent (say, $1) is paid, but it’s often linked to attendance, usually it’s less than 10% of ticket sales. On the costs side: we have construction, depreciation and (if you borrow) interest. Also, think of opportunity cost – what else could have been done with those funds to improve other public facilities that (even if not as popular electorally) might have produced better social outcomes, such as roads, schools, hospitals?</p>
<p>If profit is not possible, that doesn’t necessarily mean that government shouldn’t use your taxes to build it, but why then do governments subsidise sports teams and events? The answer is found in our concept here: the city considers both direct and indirect costs and benefits, whereas the private sector ignores the latter.</p>
<p>Let’s break this down. Direct benefits? Most are obvious, but question marks could be appended to most (or just about all) of them. So you can talk about new spending by fans, or in a regional context – for example, the Gold Coast AFL team: net exports (you increase exports of games to non-local fans; and reducing imports of games in Brisbane). But is expenditure really new or just a substitute for other local entertainment? Consider how Hollywood had a bumper last quarter of 1994, coinciding with the MLB players’ strike. Or talk about the expenditure of the coach and players – after all, they live locally. Another wet blanket here is that fundamentally, sports teams and events are relatively small businesses.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12528/original/6yvfvnfr-1341210454.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12528/original/6yvfvnfr-1341210454.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=513&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12528/original/6yvfvnfr-1341210454.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=513&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12528/original/6yvfvnfr-1341210454.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=513&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12528/original/6yvfvnfr-1341210454.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=644&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12528/original/6yvfvnfr-1341210454.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=644&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12528/original/6yvfvnfr-1341210454.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=644&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">In 2011, the Gold Coast Suns joined the Brisbane Lions as the second AFL team from Queensland.</span>
</figcaption>
</figure>
<p>Now, indirect – what the city also considers, costs and benefits on third parties (alternatively negative and positive externalities). Negative: things like congestion, noise and crime, but even then, it might be socially optimal to merely reduce the number of games, not eliminate them. Positive: this is the so-called ‘social impact’ of the event or team, giving a sense of identity as locals, also attracting people from all over the world (which can be used for future tourism marketing), but partially offset by locals leaving? Boosters also talk about ‘multiplier’ effects. Moreover, there’s the argument that it attracts other business, but there’s little (if any) evidence of this!</p>
<p>Politicians believe (or at least try to convince the public) that positive externalities easily outweigh the negative, invoking the wonderful (if over-used) quote from the motion picture Field of Dreams: “Build it, and they will come”! Nevertheless, on balance, the general consensus of Sports Economists is that governments tend to over-spend on sports, but to properly discuss the political considerations would require a whole other series of videos.</p>
<p>Anyway, the final whistle has been blown on this video series, so we’ll leave our coverage there. I hope you have enjoyed this take on some of the sport industry’s greatest mysteries, and that you’ve learnt a bit of Economics along the way, too! In the meanwhile, think economically –it may just help you win. I’m Liam Lenten, farewell for now.</p>
<p><strong>Watch previous videos from Some Sports Economics:</strong></p>
<p><a href="https://theconversation.com/when-scoring-an-own-goal-is-the-only-way-to-win-video-7982">When scoring an own-goal is the only way to win (VIDEO)</a></p>
<p><a href="https://theconversation.com/full-versus-half-full-stadiums-in-maximising-profits-video-7984">Full versus half-full stadiums in maximising profits (VIDEO)</a></p>
<p><a href="https://theconversation.com/the-economics-behind-inelastic-ticket-pricing-video-7987">The economics behind inelastic ticket pricing (VIDEO)</a></p>
<p><a href="https://theconversation.com/the-economics-of-comparative-advantage-and-usain-bolt-video-7988">The economics of comparative advantage and Usain Bolt (VIDEO)</a></p>
<p><a href="https://theconversation.com/drafts/7989/edit">Media broadcast rights and the Prisoner’s Dilemma (VIDEO)</a></p><img src="https://counter.theconversation.com/content/7992/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Liam Lenten does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten. In the sixth and final part of this series, Liam…Liam Lenten, Senior Lecturer, School of Economics , La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/79892012-07-11T20:37:15Z2012-07-11T20:37:15ZMedia broadcast rights and the Prisoner’s Dilemma (VIDEO)<figure><img src="https://images.theconversation.com/files/12523/original/yn56tyvw-1341206725.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Liam Lenten presents Part 5 of Some Sports Economics. </span> </figcaption></figure><p><em><strong>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten.</strong></em></p>
<p><em><strong>In the fifth part of this series, Liam looks at media broadcast rights in the sports industry and why it faces what is called the “Prisoner’s Dilemma”.</strong></em></p>
<hr>
<p><em><strong>You can watch Liam explain the video</strong>.</em> </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/6loOUrx9RI0?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Part 5 of Liam Lenten’s Some Sports Economics.</span></figcaption>
</figure>
<p><em><strong>Or read through the transcript below</strong>.</em></p>
<hr>
<p>One of the most amazing phenomena in the sports industry over the last generation has been the seemingly unabated ‘rise and rise’ of the value of broadcast rights. Indeed, in 1999 top Sports Economists Rod Fort and James Quirk wrote: ‘It’s a no-brainer…Over the past 20 years, from 1980 on, the most important single factor responsible for the wild explosion in franchise prices and in player and coaching salaries is the huge increase in pro sports’ television income’. And in the last decade or so, we’ve seen more of the same. With reference to the AFL, from 1988, the rights deals increased in successive waves from $30 m to around $80 m to $150 m to $500 m, then to $780 m over the period 2007-11. And just when you think they’ve plateaued, they manage to pull yet another rabbit out of the hat – the most recent rights sold for a staggering $1.253 b, and the experience is similar in the NRL, not to mention many other analogous stories across European football and the North American Major Leagues.</p>
<p>So what causes media networks to bid ever-increasing amounts to secure the rights? Well, they believe these sports will help boost ratings and provide other benefits, but proceed down the chain by a level, and the funds come from advertisers who want to get you to consume their product. In that desire, these advertisers have been willing to throw more and more funds into advertising.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12526/original/fmzd3dj3-1341208624.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12526/original/fmzd3dj3-1341208624.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12526/original/fmzd3dj3-1341208624.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12526/original/fmzd3dj3-1341208624.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12526/original/fmzd3dj3-1341208624.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12526/original/fmzd3dj3-1341208624.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12526/original/fmzd3dj3-1341208624.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">How much are media networks prepared to pay to secure broadcasting rights?</span>
</figcaption>
</figure>
<p>Let’s try to drill down into this aspect, by modelling firms and advertising choice. The ‘worth’ of advertising is related to its marginal revenue product. But what if advertising’s impact falls directly on brand switching (not really on overall consumption increases)? Then, the net result depends not only on how much advertising we do (firm X), but also on how much our rivals do (firm Y). We can write this formally as:</p>
<blockquote>
<p>MRPX(AX,AY,Z) = MPX(AX,AY) × MRX(Z)</p>
<p>where: AX,AY = amount of advertising by firms; Z = level of sales of product advertised</p>
</blockquote>
<p>Marginal revenue product equals marginal product, which is a function of the amount of advertising by both firms, multiplied by marginal revenue (a function of level of sales of the advertised product), meaning that marginal revenue product is a function of all three variables.</p>
<p>We can use Game Theory – a field of economics somewhat popularised by the portrayal of joint 1994 Nobel Laureate John Nash in the Oscar-winning film, A Beautiful Mind. OK, let’s take a duopoly for a product ‘thingamyjigs’, assume both producers, X and Y, start with $50m each. Consider the following (one-shot) game – both face a simultaneous choice; and $10 m cost of advertising, but if they advertise and the other does not, they succeed in switching $15m worth of consumption from their rival. The full set of payoffs are summarised in the grid, and the initial status quo is the bottom-right cell.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12403/original/tysh9v72-1340936531.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12403/original/tysh9v72-1340936531.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=193&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12403/original/tysh9v72-1340936531.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=193&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12403/original/tysh9v72-1340936531.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=193&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12403/original/tysh9v72-1340936531.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=242&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12403/original/tysh9v72-1340936531.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=242&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12403/original/tysh9v72-1340936531.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=242&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Consider what the best strategy is for Firm X (Lentex): If Firm Y were to increase, we get $40m if we had increased, $35m if we did not. If Firm Y were not to increase, we get $55m if we had increased, but only $50m otherwise. Therefore, the conclusion is Firm X should increase irrespective of Firm Y’s action (it’s called the ‘dominant strategy’). However, using the same reasoning, Firm Y’s dominant strategy is likewise to increase. The upshot – both end up with $40m. Note of course that both would prefer $50m.</p>
<p>This outcome is a concept known as Prisoner’s Dilemma, or perhaps here an advertising dilemma, it’s applicable not only to many scenarios in sport, but also many other phenomena, even an international arms race. </p>
<p>All this spending does neither firm any good, so how to “escape” the ‘dilemma’? Well, you can’t collude with the other firm (that’s illegal in most developed industrialised nations), so without outside intervention, your only hope is to come to some kind of tacit understanding not to advertise, at least at the same time – that is, if it’s a repeated game, (let’s say advertising for the AFL Grand Final, which is every year), each firm might just be able to work out over time what the other is going to do. </p>
<p>With outside intervention, however, it’s easy – if we take the government-imposed ban on tobacco advertising on television in the 1970s, firms no longer had to worry about preserving sales in the face of rival advertising, and subsequently profits skyrocketed (albeit temporarily). </p>
<p>In summary: one thing for certain is that media rights are here to stay, and probably to rise even further still.</p>
<p><strong>Watch previous videos from Some Sports Economics:</strong></p>
<p><a href="https://theconversation.com/when-scoring-an-own-goal-is-the-only-way-to-win-video-7982">When scoring an own-goal is the only way to win (VIDEO)</a></p>
<p><a href="https://theconversation.com/full-versus-half-full-stadiums-in-maximising-profits-video-7984">Full versus half-full stadiums in maximising profits (VIDEO)</a></p>
<p><a href="https://theconversation.com/the-economics-behind-inelastic-ticket-pricing-video-7987">The economics behind inelastic ticket pricing (VIDEO)</a></p>
<p><a href="https://theconversation.com/the-economics-of-comparative-advantage-and-usain-bolt-video-7988">The economics of comparative advantage and Usain Bolt (VIDEO)</a></p><img src="https://counter.theconversation.com/content/7989/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Liam Lenten does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten. In the fifth part of this series, Liam looks at…Liam Lenten, Senior Lecturer, School of Economics , La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/79882012-07-11T04:48:39Z2012-07-11T04:48:39ZThe economics of comparative advantage and Usain Bolt (VIDEO)<figure><img src="https://images.theconversation.com/files/12497/original/bmgzndzb-1341203287.jpg?ixlib=rb-1.1.0&rect=0%2C15%2C638%2C425&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Welcome to Part four of Liam Lenten's Some Sports Economics.</span> </figcaption></figure><p><em><strong>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten.</strong></em></p>
<p><em><strong>In the fourth part of this series, Liam explains the economic concepts of absolute and comparative advantage - and how Jamaica’s decision not to run the world’s fastest man (Usain Bolt) in the final leg of the Beijing Olympics 4x100m relay final helped them win the race.</strong></em></p>
<hr>
<p><em><strong>You can watch Liam explain the video</strong>.</em> </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/OU6U1cp8pt4?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Part four of Liam Lenten’s Some Sports Economics.</span></figcaption>
</figure>
<p><em><strong>Or read through the transcript below</strong>.</em></p>
<hr>
<p>As fans, we often get frustrated when our team loses – it’s natural to blame someone…often the coach?</p>
<p>We ask questions, such as: ‘why the hell does the coach play player X there’? The following is an elegant case study for an Olympic year. We need think back no further than the last Olympics in Beijing, 2008, for an illustration.</p>
<p>The example? In relays, the traditional sequence of runners in a team is picked from slowest to fastest. Selectors of the Jamaican Men’s 4×100 metre relay team confronted this very conundrum. Jamaica faced some hot opposition (fortunately for them, Great Britain was disqualified in their semi, while USA dropped the baton in theirs) leaving Caribbean rivals Trinidad and Tobago qualifying first for the final by five one-hundredths of a second, but Jamaica were still hot favourites for gold, because they had ace up their sleeve, with Usain Bolt (missing in the semi) to come back into the line-up for the final, but where… in what position?</p>
<p>He was selected in the third leg, begging the question why, since he was clearly faster than Asafa Powell (who was picked as Anchor – the final leg)? The boring answer is that analysts will talk about how Bolt was a 200 metre specialist earlier in his career, giving him more experience at running the bends.</p>
<p>The more interesting (that is, economic) answer, applicable to all sorts of similar problems in many industries, is based on the distinction between absolute and comparative advantage. In its purest form, it’s used as a means of explaining why countries engage in trade of goods and services, leaving everybody better off.</p>
<p>Let us imagine that the grid below outlines times selectors expect both to run their splits. From this, it is clear that Bolt has the absolute advantage over Powell in either position, but since there is only one Usain (not four), you can only run him in one position – so which? In short, comparative advantage tells us in which position Bolt should run.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12399/original/y8nvc2mt-1340935032.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12399/original/y8nvc2mt-1340935032.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=196&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12399/original/y8nvc2mt-1340935032.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=196&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12399/original/y8nvc2mt-1340935032.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=196&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12399/original/y8nvc2mt-1340935032.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=247&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12399/original/y8nvc2mt-1340935032.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=247&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12399/original/y8nvc2mt-1340935032.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=247&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Note also from the grid that both run the straight quicker than either runs the bend, which my experience in athletics some time back tells me is completely logical.</p>
<p>Anyway, how to work this out? That old economic chestnut – opportunity cost (defined simply as: best opportunity forgone).</p>
<blockquote>
<p>Opportunity Cost:</p>
<p>OC (Bolt at Third-leg) = 9.74 - 9.65 = 0.09</p>
<p>OC (Powell at Third-leg) = 9.85 - 9.73 = 0.12</p>
</blockquote>
<p>Now, if we run Bolt in third, we obtain a time from him of 9.74, but in doing so, we forgo running him as Anchor, hence subtract 9.65 from this, leaving us with nine one-hundredths of a second. Using the same logic, the opportunity cost of running Powell in third is twelve hundredths of a second.</p>
<p>The objective is to: minimise opportunity cost (ultimately, it is a cost) – so, select the runner with the lower opportunity cost in that position. Conclusion: Run Bolt in the third-leg.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12502/original/64km244x-1341203492.jpg?ixlib=rb-1.1.0&rect=8%2C96%2C556%2C424&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12502/original/64km244x-1341203492.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=677&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12502/original/64km244x-1341203492.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=677&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12502/original/64km244x-1341203492.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=677&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12502/original/64km244x-1341203492.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=851&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12502/original/64km244x-1341203492.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=851&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12502/original/64km244x-1341203492.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=851&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Usain Bolt returns for the relay final, but in what position?</span>
</figcaption>
</figure>
<p>But that’s not quite the end of the story; we need to know that the true also works in reverse.</p>
<blockquote>
<p>Opportunity Cost:</p>
<p>OC (Bolt at Anchor-leg) = 9.65 - 9.74 = -0.09</p>
<p>OC (Powell at Anchor-leg) = 9.73 - 9.85 = -0.12</p>
</blockquote>
<p>Contrapositively to before, running Bolt at Anchor produces 9.65 but imposes forgoing 9.74, leaving an opportunity cost of negative 0.09 seconds, and via equivalent reasoning, .12 seconds is the opportunity cost of Powell as Anchor.</p>
<p>Conclusion: Run Powell in the anchor-leg. This story has a happy ending! Jamaica won the final, astonishingly by almost a full second, smashing the 15-year old World Record in the process – a Tour de Force of rational economic decision-making in sprint team selections.</p>
<p><strong>Watch previous videos from Some Sports Economics:</strong></p>
<p><a href="https://theconversation.com/when-scoring-an-own-goal-is-the-only-way-to-win-video-7982">When scoring an own-goal is the only way to win (VIDEO)</a></p>
<p><a href="https://theconversation.com/full-versus-half-full-stadiums-in-maximising-profits-video-7984">Full versus half-full stadiums in maximising profits (VIDEO)</a></p>
<p><a href="https://theconversation.com/the-economics-behind-inelastic-ticket-pricing-video-7987">The economics behind inelastic ticket pricing (VIDEO)</a></p><img src="https://counter.theconversation.com/content/7988/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Liam Lenten does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten. In the fourth part of this series, Liam explains…Liam Lenten, Senior Lecturer, School of Economics , La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/79872012-07-10T20:16:28Z2012-07-10T20:16:28ZThe economics behind inelastic ticket pricing (VIDEO)<figure><img src="https://images.theconversation.com/files/12471/original/c4c6y6w8-1341197411.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p><em><strong>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten.</strong></em></p>
<p><em><strong>Ever wondered why the AFL doesn’t charge more to see games live - but stadium food costs a fortune? It’s called inelastic pricing and in the third part of this series, Liam looks at this strategy as well as the concept of complementarities.</strong>.</em></p>
<hr>
<p><em><strong>You can watch Liam explain the video</strong>.</em> </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/-mv9-TqHnKc?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Part 3 of Liam Lenten’s Some Sports Economics.</span></figcaption>
</figure>
<p><em><strong>Or read through the transcript below</strong>.</em> </p>
<hr>
<p>Sports fans out there might be aware of the <a href="https://theconversation.com/afl-boss-andrew-demetriou-we-are-trying-to-control-as-much-as-we-can-control-2812">casual observation</a> that ticket prices tend to be lower than might otherwise be expected (the AFL is a really good example). This brings to light the strategy of pricing in the inelastic region of the demand curve. Price elasticity, our tool here, is defined as:</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12397/original/py8bym2j-1340934814.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12397/original/py8bym2j-1340934814.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=303&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12397/original/py8bym2j-1340934814.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=303&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12397/original/py8bym2j-1340934814.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=303&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12397/original/py8bym2j-1340934814.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=381&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12397/original/py8bym2j-1340934814.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=381&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12397/original/py8bym2j-1340934814.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=381&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The percentage change in quantity demanded owing to a change in price, divided by the percentage change in price that gave rise to that change in demand.</p>
<p>Basic microeconomic principles tell us that a monopolist maximises profits when prices are where marginal revenue equals marginal cost (<a href="https://theconversation.com/full-versus-half-full-stadiums-in-maximising-profits-video-7984">See this explained in the previous video</a>). A lot of research suggests that teams and leagues set prices in the inelastic part of the demand curve, and that these leagues would be better off by setting match ticket prices above current levels (that is. that ticket prices are lower than the profit-maximising level).</p>
<p>This is a puzzle (I mean, don’t these guys care about optimisation?). The question arises: why is this so?</p>
<p>Well, if marginal cost was zero (as assumed in the previous video), then the profit-maximising solution is at unit elasticity (as depicted in the top panel). If we relax this assumption (arguably more realistic – after all, we need more venue staff as the crowd grows in number) to allow marginal cost to be non-zero (albeit small), then the profit-maximising solution is at a slightly lower quantity, and subsequently in the elastic part of the curve. The new equilibrium price is actually higher, not lower! This reinforces the puzzle, so the explanation has to be something else.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12395/original/gsbzp4n6-1340934441.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12395/original/gsbzp4n6-1340934441.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1019&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12395/original/gsbzp4n6-1340934441.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1019&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12395/original/gsbzp4n6-1340934441.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1019&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12395/original/gsbzp4n6-1340934441.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1281&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12395/original/gsbzp4n6-1340934441.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1281&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12395/original/gsbzp4n6-1340934441.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1281&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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<p>So, what is it then? One possibility (a likely candidate) is revenues from sources other than the gate (as shown in the bottom panel) – car parking, food, merchandise etc. We’ve left it late this time, but the underlying concept here is that of complementarities – there are analogies in many other industries, like how concerts in the music industry have become relatively more expensive over time because of the diminished ability of artists to extract complementary revenue from recorded music.</p><img src="https://counter.theconversation.com/content/7987/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Liam Lenten does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten. Ever wondered why the AFL doesn’t charge more…Liam Lenten, Senior Lecturer, School of Economics , La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/79842012-07-09T20:35:58Z2012-07-09T20:35:58ZFull versus half-full stadiums in maximising profits (VIDEO)<figure><img src="https://images.theconversation.com/files/12467/original/xzfytgwm-1341195961.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p><em><strong>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten.</strong></em></p>
<p><em><strong>In the second part of this series, Liam gives insight into the demand equals supply truism by using ticket sales</strong>.</em></p>
<hr>
<p><em><strong>You can watch Liam explain the video</strong>.</em> </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/CeovrxJKxOo?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Part 2 of Liam Lenten’s Some Sports Economics.</span></figcaption>
</figure>
<p><em><strong>Or read through the transcript below</strong>.</em></p>
<hr>
<p>Now, many people know the demand equals supply truism without having studied economics, but we need a little further insight from Economic Theory to solve more perplexing phenomena. To this end, we can look at the market for tickets to a game (as in the figure), using our helpful friend, the traditional Keynesian-style diagram. Assume the home team is a monopoly (in its local market) at least in its own sport. Here, the profit-maximising quantity of tickets is where marginal revenue equals marginal cost.</p>
<p>The marginal revenue curve could be drawn as below. Those of you with some micro theory under your belt will know it is twice as steep as the demand curve (and if you don’t, you’ll just have to take me on blind faith). To complete the picture, assume that marginal cost equals zero (that is to say, there is a negligible additional cost of one extra person coming in at the gate). But at capacity, marginal cost becomes vertical (here, to fit just one more person in, you literally have to bulldoze the stadium and build a bigger one).</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12393/original/n93y22mx-1340933918.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12393/original/n93y22mx-1340933918.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=489&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12393/original/n93y22mx-1340933918.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=489&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12393/original/n93y22mx-1340933918.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=489&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12393/original/n93y22mx-1340933918.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=614&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12393/original/n93y22mx-1340933918.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=614&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12393/original/n93y22mx-1340933918.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=614&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Related to this, let’s explain the comparison between sell-outs versus half-full matches. For this, we’ll contrast two Melbourne-based teams in different sports (both are local monopolies, at least at the time of filming).</p>
<ul>
<li><p>Melbourne Storm (in the NRL) – they play at Rectangular Stadium, with a capacity of 29,000; and</p></li>
<li><p>the NBL’s Melbourne Tigers, who play at the State Netball Hockey Centre (capacity 4,000).</p></li>
</ul>
<p>Assume demand and hence MR is identical for both sports (Basketball and Rugby League, which could be imagined to be plausible).</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/12391/original/gsbf677n-1340933821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/12391/original/gsbf677n-1340933821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=316&fit=crop&dpr=1 600w, https://images.theconversation.com/files/12391/original/gsbf677n-1340933821.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=316&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/12391/original/gsbf677n-1340933821.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=316&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/12391/original/gsbf677n-1340933821.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=397&fit=crop&dpr=1 754w, https://images.theconversation.com/files/12391/original/gsbf677n-1340933821.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=397&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/12391/original/gsbf677n-1340933821.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=397&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>The critical point of contrast between these two capacities is where on the marginal cost curve the marginal revenue curve intersects – the horizontal section in the Storm case, and the vertical section in the Tigers case, producing very different price-quantity equilibria.</p>
<p>The conclusion here? The Tigers games sell-out every single time and in the absence of being able to shift the demand curve outwards are happy with the status quo, whereas the Storm are likewise perfectly content to have only 10,000 turn up to their games.</p>
<p>Related to this was the rather odd case in the A-League: where for some home games in 2009, Gold Coast United capped attendance at 5,000 (in a stadium that holds 27,000) – the answer to such apparently bizarre behaviour by chairman Clive Palmer lies in an extended version of this very model.</p><img src="https://counter.theconversation.com/content/7984/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Liam Lenten does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten. In the second part of this series, Liam gives…Liam Lenten, Senior Lecturer, School of Economics , La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/79822012-07-09T04:23:58Z2012-07-09T04:23:58ZWhen scoring an own-goal is the only way to win (VIDEO)<figure><img src="https://images.theconversation.com/files/12419/original/4jzz2b8z-1340954331.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Liam Lenten presents Some Sports Economics, a six-part video which uses sporting analogies to explain common economic concepts.</span> <span class="attribution"><span class="source">YouTube</span></span></figcaption></figure><p><strong>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten.</strong></p>
<p><em>Liam says: “I am motivated to better explain basic microeconomic concepts – in such a way to appeal more to the sensibilities of my third-year undergraduate students. That is, using a frame of reference that they can easily relate to, in a more naturalist approach. This video series is the culmination of these initial efforts.</em> </p>
<p><em>"I hope that by making them available on The Conversation, members of the general public can also benefit by gaining a new appreciation of the dismal science. I trust that these videos can play a small role in convincing you, too, that economics is about so much more than just interest rates and current account deficits.”</em></p>
<p><em><strong>In this first video, Liam explains the link between the concept of perverse incentives and the 1994 Caribbean Cup match between Barbados and Grenada</strong>.</em></p>
<hr>
<p><em><strong>You can watch Liam explain the video:</strong></em> </p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/1lpymvuZn2c?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Welcome to Liam Lenten’s Some Sports Economics.</span></figcaption>
</figure>
<p><em><strong>Or read through the transcript below.</strong></em></p>
<hr>
<p>Hi, I’m Liam Lenten…your host! Sport is full of apparent anomalies. We’ll raise a handful of them in this video series. But usually there’s an economic reason why we observe what we observe. Each of these six videos will introduce an economic concept (which you may or may not know) and will also introduce a tool by which the concept will be applied – all in an effort to explain these anomalies.</p>
<p>And what better way to commence the series than by way of the concept of incentives (in this case, perverse) and strategies in economics, and also the policies used as the tools to optimise outcomes.</p>
<p>Now, you would think a basic winning tactic in the round-ball version of football would be to kick the ball between the posts. Your opponent’s posts, that is. </p>
<p>However, the 1994 Caribbean Cup involved a first-round match between Barbados and Grenada, in which Barbados needed to win the match by two clear goals to advance to the knockout-stage. Even winning the match by merely one goal would see Grenada advance instead.</p>
<p>Simple enough so far, but the governing body of the tournament stipulated a very quirky rule (supposed to reward teams for winning close matches, but laden with potential for perverse incentives) that drawn games would proceed to extra-time, in which goals would count double. And, by virtue of addition of sudden-death, there could be only one. This supposedly simple rule created a horribly weird match.</p>
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<figcaption><span class="caption">1994 Caribbean Cup between Barbados and Grenada.</span></figcaption>
</figure>
<p>With less than ten minutes remaining in regulation time, Barbados led 2-0 (exactly the lead they required) and began to play very defensively, as one might expect. However, in the 83rd minute, Grenada pulled one back, making the score 2-1 (enough to send them through instead). Barbados once again proceeded to attack, but was thwarted at every turn. With only three minutes left, the Barbados players contemplated their options. </p>
<p>To advance, they still needed to score an extra goal allowing them to win by two, but they had another less obvious option afforded to them by virtue of the idiosyncratic rule mentioned earlier, which (you might have guessed by now) they chose instead – they scored a deliberate own-goal, levelling the game at 2-2 intended to send the game to extra-time, where they would have an additional 30 minutes to score, and because of that rule yet again, one goal (counting as two) would be enough to kill the contest immediately in their favour.</p>
<p>This is not even yet the most peculiar phase of the match. Now, Grenada (initial shock abating) realised that what they needed to do next was score a goal—at either end—to, on one hand win the game, or on the other lose by one but at least avoid extra-time – both of these means would be equally sufficient to achieve the ends, and so the Grenada players turned around from the re-start and headed for their own net. From here, the comedy really intensified as the Barbadians had anticipated this move and half their players rushed forward to defend the Grenada goal—while the other half stayed back to defend their own (successfully, might I add) until the end of injury time.</p>
<p>Ultimately, Barbadian ingenuity was rewarded, as one of their strikers scored the winning goal four minutes into extra-time, sending Barbados through to the following phase. It’s worth noting that no penalties were handed down by FIFA to the Barbados Federation on the grounds that they were genuinely trying to achieve the best outcome in the overall context of the tournament. As expected, the Grenadians were not amused – manager James Clarkson was furious. “I feel cheated; the person who came up with these rules must be a candidate for the madhouse”.</p>
<figure>
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<figcaption><span class="caption">Tacitly collusive football between Austria and (then) West Germany.</span></figcaption>
</figure>
<p>For those with an interest in the World Game, your “assignment” is to go on-line and find out as much as you can about an infamous 1982 FIFA World Cup match between Austria and the then West Germany, which produced more than an hour of tacitly collusive goalless football (not to mention utterly boring) and see if you can understand the perverse incentives at play in that case. Needless to say, policies were altered thereafter to ensure that the final pair of first round matches in the same group, would be played simultaneously to help circumvent such incidents in future.</p>
<p>Anyway, all this sounds the warning of the Law of unintended consequences. Governments have to be mindful of these possible perverse incentives in formulating all sorts of policy, from taxation to health to education. Yes, this stuff is undeniably important to the bigger-picture of governance and society.</p><img src="https://counter.theconversation.com/content/7982/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Liam Lenten does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten. Liam says: “I am motivated to better explain basic…Liam Lenten, Senior Lecturer, School of Economics , La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.