Capitalism and democracy: friends or foes? | Free exchange | Economist.com

How Capitalism Is Killing Democracy - Foreign Policy (abstract only)

“Why is FREEDOM so important in a market economy? If people in society are not free, can a market economy truly succeed?”.

Friday’s class discussion focused on the different answers to the basic economic questions offered by centrally planned versus market economies. 

The question I left them to ponder over the weekend had to do with an apparent paradox visible in China today: that of a free market economy seemingly thriving in a society where political and social freedoms are severely limited by the communist dictatorship. It has long been claimed that free markets will be followed closely by political freedom, and vis versa. The two are thought to go hand in hand. According to the Economist.com’s blog, Free Exchange:

The late Milton Friedman emphasized that economic freedom promotes political freedom and is also necessary for the sustainability of political freedom over time. His underlying logic is that competitive capitalism separates economic power from political power. One could point to Chile, Taiwan and South Korea as examples where Friedman’s logic seems to hold.

So if, as Friedman said, free markets lend themselves to free societies, then how has China’s thriving market economy not resulted in a freer society, even after 30 years of economic liberalization? Robert Reich, writing in the Foreign Policy Journal examines the issue in some depth:

Conventional wisdom holds that where either capitalism or democracy flourishes, the other must soon follow. Yet today, their fortunes are beginning to diverge. Capitalism, long sold as the yin to democracy’s yang, is thriving, while democracy is struggling to keep up. China, poised to become the world’s third largest capitalist nation this year after the United States and Japan, has embraced market freedom, but not political freedom. Many economically successful nations ”from Russia to Mexico” are democracies in name only. They are encumbered by the same problems that have hobbled American democracy in recent years, allowing corporations and elites buoyed by runaway economic success to undermine the government’s capacity to respond to citizens’ concerns.

Of course, democracy means much more than the process of free and fair elections. It is a system for accomplishing what can only be achieved by citizens joining together to further the common good. But though free markets have brought unprecedented prosperity to many, they have been accompanied by widening inequalities of income and wealth, heightened job insecurity, and environmental hazards such as global-warming.

What can explain the recent divergence of capitalism and democracy in countries like China, Russia and Mexico? The Free Exchange blog explains:

The cause of this divergence, Mr Reich contends, is that companies seeking an advantage over global competitors have invested increasing amounts of money in government lobbying, public relations and bribery. This process of corporations’ writing their own rules has weakened the ability of average citizens to have their voices heard through the democratic process.

So it appears that as capitalism and free markets have flourished, freedom of the individual has been trumped by freedom of the corporation to lobby and thus influence government into creating favorable environments for investment and growth, often times at the expense of society’s health and the best interests of the public as a whole. We will learn a term for this kind of activity in AP and IB Economics: rent-seeking behavior.

As firms grown larger and industrial and commercial power becomes concentrated in powerful multi-national corporations, the priorities of governments seem to be shifting away from individual freedoms and civil rights and towards the interests of the corporate world, whose money and influence run deep through the veins of the world’s governments.

So perhaps I was wrong. Maybe Milton Friedman was wrong too. Perhaps the 21st Century has bred a new relationship where free market capitalism is wed not to democracy, but to a new kind of corporatocracy, a term used by Noam Chomsky, in which governments bow not to the will of the people they govern, rather to the pressures from corporate entities. Freedom and justice for all (firms, that is). Gives you something to think about, huh

Discussion Questions:

1. Do free markets lead to free societies?
2. Is political freedom a prerequisite for a successful market economy?
3. Has “corporatocracy” surpassed democracy as the dominant influence in the rich, developed countries of the world?
4. In what ways could economic strength come at the expense of individual freedom?

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• BBC NEWS | UK | Education | Economics ‘dying out’ in schools

  “There are three times as many pupils taking psychology A-level as economics and almost twice as many taking A-level media studies. Sport and physical exercise and the expressive arts are now bigger subjects at A-level than economics.”

  What’s happening to my favorite subject area in the UK? It appears that economics education and the number of teachers going into economics is on the decline.

  Why? It’s not exactly clear, but the simple answer seems to be, “It’s difficult, so students are chosing not to study it”. That’s unfortunate, especially in an age when economics lies at the root of so many of our world’s social political and environmental issues.

  tags: economics, education

Some Britons Too Unruly for Resorts in Europe - NYTimes.com

According to the article above, Great Britain exports more trouble to the rest of Europe than any other nation.

A recent report published by the British Foreign Office, “British Behavior Abroad,” noted that in a 12-month period in 2006 and 2007, 602 Britons were hospitalized and 28 raped in Greece, and that 1,591 died in Spain and 2,032 were arrested there.The report did not distinguish between medical cases and arrests associated with drunkenness and those that had nothing to do with it. But it did say that “many arrests are due to behavior caused by excessive drinking.”

The unruly behavior of Britons does not always end when the vacation is over, either:

Earlier this summer, flying home to Manchester from the Greek island of Kos, a pair of drunken women yelling “I need some fresh air” attacked the flight attendants with a vodka bottle and tried to wrestle the airplane’s emergency door open at 30,000 feet. The plane diverted hastily to Frankfurt, and the women were arrested.

How is this story related to economics, you may be wondering? Well, it’s really about a market failure. The over-consumption of alcohol by British tourists is creating spillover costs for the societies (and police forces) of the nations in which the tourists get themselves into trouble.

As governments often do when market failures exists, some British consulates have begun taking action to reduce the negative externatlities associated with their nationals’ drunkenness.

Worried about the increase in crimes and accidents afflicting drunken tourists, the British consulate in Athens has begun several campaigns, using posters, beach balls and coasters with snappy slogans, to encourage young visitors to drink responsibly.

“When things do go wrong, they go wrong in quite a big way,” said Alison Beckett, the director of consular services. “What we’re trying to do here is reduce some of these avoidable accidents where they have so much to drink that they fall off balconies and are either killed or need huge operations.”

Because British tourists only consider their own enjoyment (benefits) while on vacation, they consume alcohol at a level that fails to take into account the social costs of their behavior. In economic terms, the marginal private benefit of alcohol consumption exceeds the marginal social benefit, representing an overallocation of resources towards alcohol in tourist towns. Government action by British consulates is aimed at reducing demand (marginal private benefit) among tourists, shifting the MPB curve back towards the MSB curve, in the hope  that alcohol consumption will decline to the socially optimal level, where marginal social benefit equals marginal social cost.

There seems to be a fine line between too much drinking and not enough in the tourist spots of Europe. As far as the impact that British drunkenness has on business, some in the tourist trade believe the very prospect of wild parties and cheap booze is what keep the local economies afloat. Crack down too much on the wild Britons, and business could collapse as customers attracted to the anarchy stop arriving.

Discussion questions:

1. Is overconsumption of alcohol a market failure? If so, what type could it be classified as?
2. If the tourist nations were serious about cracking down on drunk tourists, what economic actions could they take in the resort communities where most of the trouble occurs?
3. How are proprietors of bars and clubs in resort communities benefiting at the expense taxpayers from other parts of the tourist nations? Does the private cost of running a bar in a place like Malia, Greece reflect the social cost? Explain.

Now is that time of year when thousands of students across the world, from Zurich to Zimbabwe, will be taking their first economics course. Perhaps it will be a basic, high school introductory course or perhaps an even more challenging AP or IB course. Perhaps you are taking an introductory college course.

It seems like all economic text book authors seem make the point, usually in their chapter 1, that a primary benefit of studying economics is that it transforms us into more effective citizens by enabling us to better understand and conclude on the economic positions and promises of those running for public office.

I couldn’t agree any stronger!

In my classroom, I like to informally call the study of economics “the 180 degree science” because as the student studies this science for the very first time they often develop opinions and conclusions that are precisely the opposite of what they had originally believed before taking the course.

For example, here are 3 of my favorite “180 degree moments”, which are applicable to the United States’ economy but are generally applicable to all global economies, that you will probably learn in your first year economics’ course:

Ø Pre-Econ Course Citizen Quote: “We don’t make anything anymore in America. America’s manufacturing prowess is in a state of constant decline.”

Ø AP Student’s Response: “I disagree. The dollar value of manufactured goods in the United States, restated for price level changes so the comparison is accurate, is up over 50% in the last 12 years! Yes, it is true that the U.S. has lost several million jobs in manufacturing over that same time period, but that is primarily due to rising productivity (think machines & technology), where the U.S. can now produce more valuable manufactured products than ever before with many less people freeing those workers to be employed in more lucrative service-related businesses. Moreover, the US has maintained its share of global manufacturing product over that same aforementioned time period, whereas other manufacturing countries, such as Japan and Germany, have actually decreased their percentage share of global manufactured product. But, I think I understand where you may have gotten that mistaken notion that manufacturing in the U.S. is in decline; from the U.S.’s shrinking automobile industry, the lower employment in manufacturing due to higher productivity, and from the negativity inherent in the media and press which focuses mostly on the lost jobs.

Ø Pre-Econ Course Citizen Quote: “The U.S. government’s national debt of $9.6T is out of control. Imagine our country having to borrow $9.6T to pay its debts because it has no fiscal control!”

Ø AP Student’s Response: “The United States’ current level of national debt is both affordable and consistent with most nations. National accounting statistics show that the U.S.’s 67% national debt/national income percentage is average compared with other modern economies. Moreover, the level of U.S. national debt as a percentage of national income (67%) is at the same ratio as it was back in 1997 and 1992, and is much less than it was in 1950! The ‘”trick” is that debt must be benchmarked to income. It interesting that if someone knows that Bill Gates owes someone $10M they quickly can figure out that he’s probably fine, but if the guy at Starbucks finds out that the U.S. owes $9.6T they think the country is fiscally out of control!”

Ø Pre-Econ Course Citizen Quote: “International trade is hurting our economy as we have lost millions of jobs to lower wage countries. NAFTA (North American Free Trade Agreement between U.S., Mexico, and Canada) has really hurt us by having million of American jobs being lost to Mexico.”

Ø AP Student’s Response: “I challenge you to find me a reputable economist who will tell you that NAFTA, or any other free trade agreement for that matter, has not been beneficial for the United States, Mexico, and Canada. Over the past 15 years, independent and numerous studies show that free trade agreements increase employment, incomes, and standards of living in ALL countries and NAFTA is no exception to this rule. Sure, free trade does cause certain industries to lose out to better competitors but, overall, international trade increases competition with the nation’s citizens benefitting through increased product quality, lower product prices, and increased incomes and standards of living.

I really hope you work hard in your economic course so that, you too, will see your nation’s economy, and our global economy, in a whole new light. As an AP Economics’ teacher in the U.S., I see it as an especially “sweet year” for a first time economics’ student due to a presidential election.

Let the YouTube video-analysis clips of Barack Obama and John McCain begin! Our “economic analysis” hats are on… and we are ready to apply what we have learned and conclude on their economic positions.

Is international trade really as good for a nation’s standard of living as economists say? And, what the heck is comparative advantage anyway? And what about the foreign currency market and those confusing supply & demand curves? Yes, the quest to understand the economic benefits of international trade is enough to make any citizen or first-year economic student vomit, tremble, get a headache, or at least curse.

Having been an AP Economics’ teacher for 8 years now, I must candidly admit that it took me a few years of study and research to try to reduce international trade to pure simplicity and understanding. Let me give it a shot below. I love simplicity.

The average “Joe Citizen” in almost any country in the world is suspicious of trade, and rightfully so, since he reads or observes factories being closed, jobs lost, and the feeling that somehow his country is going down the toilet as his own home fills up with foreign-made products. Unfortunately, what Joe Citizen does not understand is that the money his own nation is spending for those foreign products (imports) is spent right back into the pockets of his own country, increasing employment and income.

Let’s take a single, real-world, international trade example being careful to accurately explain the whole economic story:

Let’s say that the United States (we’ll say Wal-Mart) decides to buy several shirts costing $400 from a Chinese shirt manufacturer, in lieu of buying those same shirts from a shirt manufacturer in Elon, North Carolina (USA). As a US AP Economics’ teacher I am one of about only 47 Americans in Fairfax County Virginia, which not coincidentally ties to the number of AP Students I taught this year, that quickly understand that the decision to purchase the shirts from China, in lieu of the US manufacturer in North Carolina, is actually BETTER for America and will make my home country better off in the long run! What? Mr. Latter, are you Benedict Arnold, the American traitor, reincarnated?

Let me explain how the US benefits (and China too!) in simple terms ignoring foreign currency transactions, which will just confuse the discussion and cause the student to lose sight of what is really happening:

The first key point is that when Wal-Mart buys the shirts from China for $400 it can only pay China with US dollars. Why? Because Wal-Mart has only US dollars! It has no Chinese currency (Yuan). It literally drains its bank account of US dollars that are transferred/paid to China!

The second key point is that when China receives that same $400 US dollars for the shirts, China cannot, unfortunately, spend any of the $400 in its own economy since only the Yuan is accepted as a medium of exchange in China! China is now forced to either throw the currency away (not advised!), or immediately spend the money back to the USA (advised!).

In summary, China has actually traded a product (shirts!) for paper (US dollars!), and those US dollars cannot be spent in China. For China to receive any value at all for the shirts it sent to America, China must now spend the $400 back into the US economy for, say, a global positioning system (GPS) from FleetMatics out of Waverly, Massachusetts (USA). Cutting through to simplicity, in essence, it’s almost as if Wal-Mart (USA) just paid FleetMatics (USA) $400 directly for the shirts!

Yes, the “punch line” is that all home-currency spending by the domestic nation on foreign products (imports), in turn, are spent right back to the domestic nation increasing the domestic nation’s employment, income, and standard of living. (Note; this is shown in a nation’s balance of payments schedule which always nets to zero, but, yuk, who cares about that right now with summer coming!)

And, yes, let’s not forget that Elon, North Carolina shirt maker that did not get the original $400 from Wal-Mart in our above example! Our nation loves competition (ready for the Olympics?) and I am excited to see if that North Carolina shirt manufacturer can “raise their game” (increase productivity), and hopefully get the next shirt contract from Wal-Mart or some other firm! If not, well, that North Carolina firm may just have to close down.

If you are still reading this post at this point, you may be thinking the following if you have a little economics’ background: “But the US has a growing trade deficit with China, so China may not immediately buy that GPS system from FleetMatics for $400”. And, you are correct, but that is also not a problem for either the United States or China. What China is really doing right now is deciding to temporarily save or invest a minority percentage of their US dollars received back into America in lieu of buying US products. Said another way, China is not buying as many GPS’ as the US is buying shirts and, of course, we call that phenomenon the US trade deficit which immediately seems to speak “problem”. But it is really no problem at all! China is still spending their “saved” US dollars back into the US economy, but in different ways. China is saving and investing some of those US dollars directly into the United States economy by building plants in America, buying US stock to fund American companies’ expansions, and temporarily saving some of their dollars, for future US purchases, by buying US bonds to help the US government pay for the war in Iraq, the war against terrorism, and several other US government initiatives necessitating borrowing. Eventually, China will sell these US bonds and buy that GPS system or build more plants to employ more Americans!

Now one last thing. Promise! Let’s get back to why trade is really so economically advantageous to any nation that pursues it. And by advantageous, I mean how it increases our incomes and standards of living. In one word, the answer is “productivity”. If we go back to the original example of the US buying shirts from China and China taking the US dollars to buy the GPS, we remember that the shirt manufacturer from North Carolina was “left out in the cold” because Wal-Mart did not buy the shirts from them. We can logically conclude that perhaps some Chinese manufacturer of GPS systems was “left out in the cold” because some Chinese business elected to buy from FleetMatics in the USA, and not the Chinese GPS manufacturer. Wow, I love global competition! What a great way to incent businesses in both the USA and China to compete against each other and increase their productivity and conserve our nations’ scarce resources, increase our choice, and lower our costs!

Discussion Questions:

1. Which basic economic principles underly the emergence of international trade as a global economic force.
2. Who are the winners and losers of trade between the US and China as explained above?
3. Why do you think free trade is such a controversial topic among certain groups of Americans an other Western nations’ people?

Today marked the first day of the 2008-2009 school year here at Zurich International School. It was a crazy day, where students rushed from class to class for quick introductions and syllabus distribution, barely having time to learn each teacher’s name before rushing to the next one. But if things were crazy for the students, they were just as crazy for us teachers.

Here’s a summary of the year ahead for me personally at ZIS:

• I have five sections of Economics this year, with a total of 77 students.
• One AP Microeconomics - 17 students
• One Year 1 IB Standard level - 6 students
• One Year 1 IB Higher level - 19 students
• Two Year 2 IB HL/SL classes - 35 students
• My 77 students come from around 30 different countries
• In one IB class I have 16 students from 15 different countries, including: Bulgaria, Greece, Switzerland, Scotland, Italy, South Africa, Germany,
  Guatemala, Finland, Romania, Australia, US, Mexico, England, and India.
• I am joined by two other Econ teachers at ZIS: Joe Hauet and Sarah Goudy, both who have vowed to join this blog as occasional contributors this year.
• I have abandoned paper texts this year, and we will instead use e-book versions of McConnell and Brue’s 17th edition “Economics”. Students all have their own Lenovo tablet PCs, which will allow them to read and take notes digitally.
• This blog will continue to be used as a resource for expanding the learning that goes on in the AP and IB Econ classroom. In addition to the over 140 Econ students here at ZIS, around 70 students will be reading and commenting on the blog from Shanghai American School, where my colleague Michelle Close plans to continue her occasional posts on this blog as well.

With that I will wrap it up for today. It has been a truly long and exciting day here in Zurich. Tomorrow I’ll start with the year 2’s and begin picking up where their last teacher left off, with International Economics, and begin the long trek towards external examinations in May of 2009.

Goodnight, and I’ll see you all in class very soon!

This post is about how Switzerland has successfully employed an innovative system of incentives to encourage its citizens to reduce the amount of garbage they create. Just three weeks in this amazing country and I can already see why it earned the highest score in last year’s Environmental Performance Index.

In the AP and IB Economics units on market failure, we study the concept of negative externalities, which exist when the behavior of one individual or firm creates spillover costs to be faced by other individuals or society as a whole. A simple example is a factory that dumps waste in a river. Clearly, disposing of its waste in such a manner poses little or no cost on the factory owners, but significant costs on downstream users of the river’s water. A community that wishes to use the river for drinking water must now install expensive filtration and purifying systems just to make the water usable. The factory has kept its own costs down by externalizing the cost of filtration by passing it on to downstream users.

Spillover costs exist on micro levels as well. While it is easy to see how a large factory creates negative externalities, it is often harder to imagine how we as individuals create spillover costs for our neighbors and society in our everyday actions. The stark truth, however, is that an individual’s behavior, multiplied by millions upon millions of individuals making up a citizenry, can have as great if not greater negative impacts on the environment and society as the negligent behavior of one firm.

Here in Switzerland, the behavior of each individual citizen is subject to unusually strict scrutiny. No, Big Brother is not watching, as you may be thinking, (however, I have heard stories of snoopy neighbors alerting the police upon witnessing the most minor of infractions by a fellow citizen), rather, one finds it in his best economic interest to strictly monitor his own behavior down to the finest detail. Allow me to explain what I mean.

Let’s take garbage for example. The definition of garbage in Switzerland is very different from that in the United States. Where I’m from, garbage is anything that you can’t use anymore. You throw it “away”, put it on the curb and it disappears.

A garbage bag in the US is usually a 40 gallon (160 litre) plastic bag that could fit an entire family inside, and the typical American family probably produces two to three bags worth of “garbage” each week, which conveniently disappears in the wee hours of the morning to be taken “somewhere”, which most Americans don’t know or care to know where that is. How much does it cost an American household to dispose of this voluminous quantity of garbage? Well, the bags cost around 18 cents each, and monthly removal services vary depending on the community, but are typically a flat rate for almost any amount of garbage.

In the United States, it is very easy for individuals to pass the true cost of their garbage disposal onto society as a whole. It doesn’t matter all that much whether you put one tiny plastic bag on the curb or a half dozen 40 gallon bags on the curb, you are going to generally pay the same amount for collection regardless. The result of such a system is that the typical household has no incentive to reduce the amount of garbage that it produces. Logically, Americans are inclined to over-consume and produce copious amounts of garbage in the absence of any significant system of incentives in place to encourage waste reduction.

So, what’s different about Switzerland? It’s all about incentives. Let me explain. Here, you don’t pay a flat rate for garbage removal. In fact, you don’t HAVE to pay anything for garbage removal! Oh wow, you say, it’s FREE? In fact, quite the opposite is true. You don’t have to pay anything for garbage removal as long as you don’t create any garbage. In other words, you only pay for what you throw away.

Unlike in the US, here a typical garbage bag here is a 35 litre plastic sack, only slightly larger than a plastic grocery bag. Each village requires its citizens to buy official garbage bags for that community, and each individual bag costs anywhere from $1.50 - $2.50. A role of ten 35 litre bags can cost around $25.

When we consider that anything a household wishes to throw away must be put in an official village garbage bag which itself must be purchased for $2.25, and we know that a typical 40 gallon (160 litre) garbage bag in the US costs just $0.18, we can easily calculate and compare the costs of garbage disposal to both US and Swiss households.

• In Switzerland: 100 litres of garbage costs $6.40 to dispose of
• In the US: 100 litres of garbage costs a little over $0.11 to dispose of
• In other words, garbage removal costs Swiss households around 57 times as much per litre as it does Americans, when we consider the price of garbage bags alone.

Clearly, Swiss households are given a significant incentive NOT to create garbage. So what DO the Swiss do with all their waste? Recycle it, of course! See, here in Switzerland all recycling is free. The villages even offer free curb side pick-ups for all recyclable materials.

A simple system of incentives (and dis-incentives) is the secret to Switzerland’s environmental success. Other systems are in place to encourage citizens to use public transport, tread lightly while hiking in the outdoors, conserve energy and water at home, and behave in other environmentally friendly ways, but I’ll save my discussion of those items for another time, once I figure out how to reduce, re-use and recycle all my own “garbage” here in Zurich!

This blog has been quiet for some time. Summer will do that to a blogger; gets your mind off work, Economics, teaching, content, learning, all those activities that make up the daily life of a teacher for 10 months out of the year are blissfully absent from our daily routines during the summer months.

Alas, all good things come to an end, as does summer every year come mid-August. With the end of this summer, however, a new adventure begins as I find myself settling into a new school in a new city and country. So far, I have had an amazing two weeks in and around Zurich Switzerland with my wife, who is here for a while before heading back to Shanghai for one more school year.

In my short time in this amazing country, I have already had several ideas for future blog posts analyzing the unmatched economic efficiency I have observed in the daily routines of the Swiss people, buearacracy, transport and waste disposal systems, etc… Switzerland is the country with the highest Environmental Performance Index (EPI) rating, indicating that it best manages its natural and environmental resources, which as I have observed is the result of a well implemented system of economic incentives on multiple levels of Swiss society. From petrol tariffs to recycling schemes to half fair rail passes, all in a country with some of the lowest income taxes in Western Europe, Switzerland has somehow figured out the secret formula that so many developed and developing countries have yet to grasp: how to achieve a strong economy AND a healthy environment.

Throughout the coming school year, during which I will be teaching four sections of International Baccalaureate Economics and one section of Advanced Placement Economics, I will attempt to focus my posts to this blog on some of the issues faced by Switzerland and its European neighbors in the modern global economy. Additionally, I will attempt to unravel some of the Economic secrets that have helped make this city of 300,000 the world’s most livable city for three consecutive years.

I will be joined this school year by some new faces here at Welker’s Wikinomics. Steve Latter of Fairfax, Virginia, will continue to post articles, as will my former colleague Michelle Close from Shanghai American School. I am also hoping to recruit my new teaching partner here in Zurich, who may also be keen on using the blog as a means of extending the learning of his AP and IB Econ students.

For now, I will enjoy my last 10 days before classes begin full speed ahead here in beautiful Zurich, Switzerland. I will resume regular posts sometime later this month, so please stay tuned!