ECONOMICS IN DEBATING TRAINING SESSION

TODAY Opportunity Costs Comparative advantage Markets For/against Free Trade ‘The Dutch Disease’

JUST SOME THINGS TO KEEP IN MIND (1) Economics is most often very common sense-it’s just the language that is a bit complicated There is no overarching economic theory that is accepted by everyone Economic policy is value-based  who should be getting what, who should be taxed more, is it the role of the state to impose those taxes, is it moral that the markets act in a certain way Using jargon in debates without explaining it will not work (average informed citizen) Be careful not to characterise groups of people as homogenous when describing how they respond to economic policy

JUST SOME THINGS TO KEEP IN MIND (2) Economic policy is also extremely political –Lobbying –Public perception –Biases towards certain types of policies (Central Bank Independence) –Public reactions (more prone to react to things they understand) So proving something is theoretically possible from an econ point of view might not win you the debate if you don’t show it’s feasible in the given political context So motions are never ONLY about Economics

COMPARATIVE ADVANTAGE PRINCIPLE It is mutually beneficial for two actors to specialise in the industries they have comparative advantage Is this based on any assumptions? Which ones? –Fair trade –Fair regulations –Lack of monopolies –Economies of same sizes and equal relative power

OPPORTUNITY COST David Beckham is a great lawn mower He can mow his lawn in two hours

OPPORTUNITY COST Instead of mowing his lawn, David could spend the two hours filming a commercial and make £10,000  David‘s opportunity cost of mowing his lawn is £10,000

OPPORTUNITY COST Neighbour Scotty can mow David's lawn in 4 hours. He could also work at McDonald's for 4 hours and make £8 per hour.  Scotty's opportunity cost of mowing David's lawn is £32

OPPORTUNITY COST Who is better at mowing the lawn?

OPPORTUNITY COST Who is better at mowing the lawn? –David Beckham. He can do it in 2 hours rather than 4. He has an absolute advantage in mowing the lawn.

OPPORTUNITY COST Who is better at mowing the lawn? –David Beckham. He can do it in 2 hours rather than 4. He has an absolute advantage in mowing the lawn. Who has a comparative advantage in mowing the lawn?

OPPORTUNITY COST Who is better at mowing the lawn? –David Beckham. He can do it in 2 hours rather than 4. He has an absolute advantage in mowing the lawn. Who has a comparative advantage in mowing the lawn? –Scotty. He can do it at a lower opportunity cost (£32 versus £10,000).

OPPORTUNITY COST Gains from specialization and trade: –If David pays Scotty about £50 (more than his McDonald’s salary) to mow his lawn, he can film his commercial. –Both are better off than in a situation where the best lawn mower in the world, David Beckham, mowed his lawn.

Trade Liberalisation (useful in general)-make sure you take into account the stage the economy is in when you impact these arguments Good stuff: Enables specialisation(comparative advantage) Lower prices for consumers(resources imported cheaper  lower costs  lower prices) Increased competition between firms  efficiency Enables economies of scale

Trade Liberalisation Bad stuff: Structural unemployment short run(shift between industries). Hard for people to specialise in new industries. Environmental harm(if legislation if poor) Uncompetitive economies are at a disadvantage(protectionism required) Dependability of international markets  increased risk

MARKETS Markets are mechanisms through which scarce resources are allocated. Many types of markets (goods, financial etc.) Free markets create equilibrium (that is beneficial to all) Why is equilibrium good?

PROBLEMS WITH MARKETS.

1. EXTERNALITIES An externality is when I make a trade with you, but it has some accidental effect on other people who weren't involved in the trade. (e.g. Environmental Damage) Happens especially with monopolies Is there a way to solve externalities without Government Intervention? –Possibly, but it is likely to be difficult Hard to boycott or have entire community action Often these problems are more wide spread than just immediate area

2. COORDINATION PROBLEMS/COLLECTIVE ACTION PROBLEM Coordination problems are cases in which everyone agrees that a certain action would be best, but the free market cannot coordinate them into taking that action. A self-interested person has some incentive to sign a pact to make everyone do something beneficial, but in many cases has a stronger incentive to wait for everyone else to sign such a pact but opt out himself. This can lead to an undesirable equilibrium in which no one will sign such a pact. Relative Bargaining Power

3. IRRATIONAL CHOICES Old-school economics assumed choice to be "revealed preference": an individual's choices will invariably correspond to their preferences, and imposing any other set of choices on them will result in fewer preferences being satisfied. There is growing evidence from behavioural economics that seemingly trivial alterations in the way decisions are presented can substantially affect choices. Should Governments protect people from irrational choices? Should I be able to decide what I consume even if it hurts me? To what extent?

4. LACK OF INFORMATION In order for consumers to be able to make the right decisions, they need to have perfect information about everything However, this clearly doesn’t happen in the real world. So, Governments intervene to protect individuals by ensuring that products are of a certain standard, and label how they work or what went in to them. However, sometimes there are insurmountable cases of information asymmetry (where one party has information, and the other party doesn’t, and that information is very important to the transaction). The two most interesting cases are moral hazard and adverse selection, and something like health insurance gives a good example of both.

MORAL HAZARD Moral hazard occurs when, by protecting an individual against some bad outcome, it leads to behaviour that actually may increase the likelihood of that bad outcome occurring. If you have top notch health insurance, and know you will be covered no matter what happens, then you are likely to be less careful with your health, meaning you may in fact be more likely to get sick Not caring about locking your bike Banks being reckless in their lending

5. MONOPOLIES/OLIGOPOLIES Monopolies are inefficient Can charge what they want when they have control over the market Generally we don’t have debates about monopolies or oligopolies, but the principles are useful to consider – issues about market power and relative competitiveness do come up in other debates, particularly when considering labour debates such as minimum wage, labour union or right to strike debates.

SO, GOVERNMENT INTERVENTION? Different opinions on this Different types of measures Today, debate more focused on the types of measures that the state should impose rather than on whether the state should impose measures at all.

THE DUTCH DISEASE

HOW TO PREPARE FOR ECONOMICS DEBATES Know the basics(you can build it up from there) Read up articles from (The Economist has a great section entitled ‘The Economist Explains’) Bank of England has a bunch of videos that are nice Ask people when you don’t understand The Undercover Economist, Freakonomics

THW privatise the NHS THW heavily subsidise declining industries THW introduce a national minimum wage THW impose a tax on unhealthy foods THBT the state should not fund art