The emancipation of the mind

Some of you may be wondering why we choose to study the evolution of economic thought. Is it just out of sheer interest? Or are there deeper reasons? John Maynard Keynes, one of the most highly-regarded economists of our time, said it best.

“A study of the history of opinion is a necessary preliminary to the emancipation of the mind.”

That is to say, without knowledge of the history of economics, we cannot even begin to understand contemporary economics or its relation to modern-day policy. It is for that reason that we are inviting a number of distinguished guests to speak about this very topic at the Marshall Society Annual Conference.


The award-winning labour economist

One of our most renowned speakers is Sir Chris Pissarides. Now a professor at the LSE, his most impressive accolade was being awarded the 2010 Nobel Prize in Economics along with two other labour economists, for their work on search theory in the labour market.

His vital contribution was developing a concept called the matching function whereby the number of vacancies in the labour market was modelled as a function of the number of unemployed, incorporating factors such as the degree of incomplete information, government policies, and external shocks to the market. In fact, it proved crucial when it came to understanding the movements of the labour market in the aftermath of the Great Recession;  as the economy came out of recession, although unemployment fell in tandem with a rise in job vacancies, the economy did not recover as quickly as expected as the Beveridge curve looped out to the right, as shown below. 

However, his work did not just improve the policymakers’ understanding of the labour market, his work actively helped to shape policy. The DMP model, named after the three Nobel Prize winners, explains that policies designed to protect workers from unemployment may have the effect of reinforcing unemployment. By making it harder to dismiss workers so as to reduce job destruction, it also depresses job creation and makes for a less dynamic labour market with a higher average duration of unemployment.

With the Nobel Prize being awarded in a year when American and European unemployment were at their zenith following the Great Recession, the award to Pissarides and his colleagues was well-deserved.


The ObamaCare architect

Not to be outdone however, is Jonathan Gruber. Named as one of the Top 25 Most Innovative and Practical Thinkers of Our Time” by Slate Magazine in 2011, the MIT professor has been played a big part in helping to write the Affordable Care Act, something that he himself called “the single most important piece of government legislation perhaps since World War II”.

Having spent decades modelling the intricacies of the health-care ecosystem and building up his reputation in health economics, he worked as a technical consultant to the Obama Administration in 2009-10 and worked with both the administration and U.S. Congress to help craft the Patient Protection and Affordable Care Act. Despite being highly controversial, the ObamaCare act has survived several repeal attempts and has been noted for its effect in reducing the uninsured rate in the US.

The guardian of the financial system

Knighted for his services to central banking, Sir Paul Tucker has spent most of his life staving off financial crises and ensuring financial stability. With 33 years of experience at the Bank of England, he has always had his finger on the British economy’s pulse.

In particular, he received great praise for his role as Executive Director for Markets during the financial crisis of 2007-8 when he led the charge in urging the central bank to provide emergency lending to help shore up liquidity shortages in the banking system. This resulted in the creation of the Special Liquidity Scheme under which the Bank of England lent £185bn of Treasury bills to 32 UK banks and building societies, and was subsequently dubbed as ‘the single most successful crisis response deployed in the U.K’ by the Wall Street Journal.

Having left his role as Deputy Governor of the Bank of England for Financial Stability in 2013, just under a month ago, he took on a new job as chair of the Systemic Risk Council. An independent organisation that monitors and encourages regulatory reform to help mitigate systemic risk across global capital markets, it further demonstrates his commitment to safeguarding the stability of the global financial system.

The happiness expert

Also an expert in the field of labour economics is Professor Richard Layard. As a Programme Director at the LSE’s Centre for Economic Performance, he has been responsible for exploring the causes of happiness.

On top of regularly co-editing the Annual Happiness Reports, he and his colleagues on the Wellbeing research programme released a highly controversial paper in 2014, looking into what leads people to be satisfied with their life. Despite the traditional wisdom being that academic achievement as a child or income are critical to achieving happiness later in life, the paper stressed the importance of one’s “emotional health”. In fact, the paper completely dismisses the importance of income as it “only explains about 1% of the variation in life satisfaction among people in the UK”. It is for this reason that Layard proposes that countries should be focused not on GDP but on GWB, general well-being.

With the conference set to take on the 30th Jan, our distinguished guests will have a great deal to discuss so make sure not to miss out! For more information, visit this link.

Goodhart’s Law: 40 years on

Few economists earn the privilege of having an economic law being named after them. Charles Goodhart, distinguished in the field of monetary policy and financial markets, is one such individual.

It was back in 1975 at the London School of Economics that he made a decisive realisation, that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”. Put simply, “when a measure becomes a target, it ceases to become a good measure”.

The most famous example of this was during Margaret Thatcher’s government, when her chancellor Geoffrey Howe observed a relationship between the official interest rate and the money supply, and the money supply and nominal incomes. This led him to mistakenly attempt to target the growth rate of the money supply (M3) by using the official interest rate, only to overshoot the target by 100% in the first two-and-a-half years whilst failing to raise nominal incomes by nearly as much. In this case, the fundamental relationship between the variables changed and Goodhart’s law prevailed.

Fast forward 40 years to today and Goodhart’s law is still very much well and alive. Here’s a more recent and vibrant example; consider President Obama’s Race to the Top programme for education reform. Teachers were judged on the test score performance of their pupil, as the rationale is that better test scores are correlated with better school
quality. However, the very act of targeting test scores changes the fundamental relationship between the variables as it gives the incentive for dishonest teachers to cheat and it forces honest teachers to devote time away from teaching the material towards passing the test. Consequently, the relationship between school quality and test scores deteriorates, proving that Goodhart’s law is both timeless and ubiquitous.

Charles Goodhart, of Goodhart’s law, is coming to Cambridge on the 24th November to speak about ‘Alternative Theories of the Determination of the Money Supply‘ in King’s College Cambridge! Don’t miss out on what promises to be enthralling lecture from such a distinguished individual in the field of economics.

Andrei Kirilenko: From Crisis to Crisis

This Friday, the Marshall Society is inviting Andrei Kirilenko, one of the most prominent figures in financial economics, to give a talk at the Keynes Lecture Hall in King’s College Cambridge. But who is he, and what has he done?

The Frontier of Finance

Former chief economist of the U.S. Commodity Futures Trading Commission Andrei Kirilenko

In the wake of the global financial crisis where a lack of transparency was blamed for exacerbating the issues at the heart of the crisis, Kirilenko joined the US Commodities Futures and Trading Commission (CFTC) in 2008 where he built a reputation for being an expert in the field of algorithmic and high frequency trading which is fast becoming a dominant feature of the financial markets.

It was here as the Chief Economist of the CFTC that he played a key role in determining the causes of the 2010 Flash Crash, when the Dow Jones Index lost almost 1000 points (roughly 9% of the index’s value at the time) in the space of just a few minutes, implying a disappearance of $1 trillion of market value, only to recover significantly shortly afterwards. It was the Dow Jones’ biggest intraday point drop, to the extent that the CTFC described it as one of the most turbulent periods in the history of financial markets.

Suspicions abound, fingers were pointed at a trader called Navinder Singh Sarao who had used spoofing algorithms to rapidly place orders for futures in vast quantities, only to cancel them immediately afterwards.  Here, Kirilenko played a key part in deducing that although high-frequency traders did significantly contribute to the Flash Crash, they were not ultimately the cause of it.

Following this, he continued to make crucial strides in the field of financial economics by publishing a paper called “The Trading Profits of High Frequency Traders”  in 2012 in which he controversially made the claim that markets were effectively a “zero sum game”. He argued that by using the high-speed nature of computerised trading to take advantage of traditional investors in the sale and purchase of futures contracts, high-frequency traders were making profits at the expense of ordinary investors, sometimes as much as $5.05 per contract.

By shining a light onto the practice of aggressive HFT trading, the study has been praised for helping advance the implementation of regulations by “establishing their cost-benefit considerations”.

Ukraine in chaos

Andrei Kirilenko, Professor of the Practice of Finance. MIT Sloan School of Management

However, working on financial crises has always been Kirilenko’s main concern. Before joining the CFTC, Kirilenko had spent 12 years at the International Monetary Fund where he “went from crisis to crisis”  by working with countries on the fringe of the global financial system.

Ultimately, it is plain to see that his interest in financial crises stems from the Ukrainian crisis. Having grown up in Ukraine and having worked there during his time at the IMF, he is now a US citizen but returned there last summer to volunteer his skills and knowledge to the cause of helping Ukraine recover from its upheaval in recent times and even went so far as to make a call for others to join him in his effort to regenerate the country.

Even now, Ukraine is still struggling and sees constant strife. It was the 2014 revolution which ousted President Yanukovych and his pro-Russian government that ignited the fire as soon, Russia responded by annexing Crimea and war ensued in Eastern Ukraine between pro-Russian and pro-government forces. Despite the Minsk 2 ceasefire agreement bringing almost a year’s worth of fighting to an end earlier this year as well as the approval of a $17.5 billion loan program from the IMF, Ukraine’s economy is still in dire shape. The IMF expects the country to contract by a drastic 11% this year and the economy is subject to the world’s second fastest inflation rate, peaking at over 60% in April, which has pushed the Ukrainian central bank to hold the benchmark interest rate at 22%.

Remarkably, this is where his current line of work lies as the co-director of the MIT Sloan centre for finance and policy, which focuses on the analysis of the systemic risk associated with big government and how to deal with future financial crises.

So if you are interested in finding out what the future lies in store for Ukraine or for more information about his role as one of the key regulators in the field of high frequency trading, come along to the event this Friday!