Oil, tax and theft: the dubious economics behind ISIS

Islamic State as an economy

Already labelled “the best funded terrorist organisation of all time”, ISIS has prospered so much financially that it can almost be thought of as an economy in its own right. Since its creation in 1999, the enrolment of 20,000 jihadists from Asia, Africa and Europe has been paramount in keeping the organisation alive, along with stockpiles of oil in Iraq, and various other dubious activities which have bolstered its financial success. Yet will ISIS be able to maintain this level of income in years to come?

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The Next Financial Crisis

In late 2007 the US housing bubble burst, reducing confidence in the financial system, and then in the real economy. Four key stages are identifiable; an asset price bubble, a shock strong enough to burst the bubble, pessimism among investors, and then a recession. Escaping one of these stages, requires brave and active policy making – or extraordinary circumstances.

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Economic Concepts Applied to Football

Simple supply and demand

For most sides in the Premier League there is excess demand, but perfectly inelastic supply. Whilst this is hardly ideal for these clubs, inequalities between supply and demand can be fatal for smaller clubs. Darlington Football Club are the classic example of this – only their demise came about due to excess supply. Up until 2003, the club played at Feethams, with a capacity of 8,500. The average crowd they pulled in this season was 3,312 – whilst significantly lower than capacity this is the norm for clubs of that level. However, it was an ill-fated move to the Reynolds Arena in the 2003-04 season that sparked the beginning of the end for the club. Bizarrely, the chairman had chosen to build a 25,000 all seater stadium despite the low crowds Darlington attracted. This was an economic disaster and the money spent on the stadium was simply never recouped from entrance fees. Add this to the fact that money was raised for construction from high interest loans and the club was always going to be in trouble. The maintenance and running costs for such a large stadium were huge, and it wasn’t long before the club was driven into administration – just 6 months after they moved in. Whilst money was raised to keep the club going in the short term it was simply not sustainable and the club went bust in 2011

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The De Beers Diamond Deceit

‘Diamonds are forever’, well at least that’s what the De Beers Diamond Corporation would like to make you believe. Whilst the diamond industry is often seen as one of the most profitable markets ($72 billion-a-year retail business worldwide) in our current world, when actually put under scrutiny there is insufficient reasoning behind it to merit the excessive demand that it carries. The explanation behind what appears to be a societal crave for diamonds can be tracked back to arguably one of the most effective advertising campaigns in the history of the world by the De Beers diamond cartel. Attaining their goal of creating a monopoly in the diamond industry, De Beers launched an extensive project that intended to (and successfully) indoctrinate the public in believing that the true way for a man to propose was with a big shiny rock on a ring, the target audience overtime became much more broad and went through the relationships of marriage, long-standing partner or even a short-term girlfriend.

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Moyes’ Sacking – Football or Financial?

February 2014, David Moyes, at the helm of Manchester United F.C. for almost 7 months now, had been finding it increasingly difficult to replicate the high standards set by his predecessor, the legendary Sir Alex Ferguson. High profile losses to Chelsea and Stoke followed by an agonising draw to Fulham (at home) had left the reputation of the most successful English football team in tatters. Many reasons were put forward but it was ultimately a combination of factors that had contributed to the unexpected decline of a team that had won the league just a year ago – and convincingly by 13 points. Fast-forward two months to April 22nd and David Moyes had been removed from the most prestigious job in club football before he even got to learn all the names of the staff roster. It was 10 months! 10 months (of a 6-year contract), that’s all it took for the board to realise that this had been a costly mistake and it was time to cut losses. Evidently, the results on the pitch were a major factor in making this decision but, obliquely, it was the detrimental effects off it that led to this brutal decision.

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Why Globalisation Isn’t Perfect

Globalisation is the extent to which economic activity is able to transcend geography. In ancient times trade was limited to a neighbouring villages, then, with the invention of the wheel and the state, trade was able to happen across continents. However this was not yet globalisation in the truest sense; cross border economic activity was limited to a few traders in specific goods, capital, individuals, ideas and firms remained largely constrained to their geographical origin. Perhaps the age of seafaring was the beginning of globalisation; ships were able to transport goods anywhere in the world, the goods one was able to purchase was solely limited by their financial, rather than geographical, position. This criteria, to me, is of less significance, international economic links were very different to local economic links at the time. In the post feudal age, individuals were, on the whole, free to choose their occupation or start a business – but only locally. The ability to migrate for work was limited, industries – though able to sell goods abroad – would struggle to exist in any international form (excluding those focused solely on international trade, such as the British or Dutch East Indian Trading Companies).

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Should we be worried about China’s economy slowing down?

China’s economy has slowed down to 6.9%, the lowest it has ever been since the 2008 financial crisis. Hit by the volatility in the stock market as well as weak economic data, the rate of 6.9% was slightly better than what economists expected initially. The Communist government has repeatedly cut interest rates since November which have helped to ease investor fears that there could be a downturn in the economy, leading to an eventual global crisis.

Despite this however, China is still growing at an incredible rate which other countries would dream of. The release of this data coincides with the Chinese President Xi Jinping visiting the UK for a week. There is no doubt that talks of a new trade deal will be in discussion. With China growing at this rate, it would mean global economic growth of 1%, making China the biggest contributor to the world economy. So it is easy to see why Britain wants to increase trade with China and increase Chinese investment.

However, it is an inescapable fact that some countries, including the UK, have been affected by the slowdown. The country’s slowdown has led to an undermining of industries such as energy and metals, which ultimately led to many of the UK’s steel-making factories such as the SSI plant in Redcar cutting jobs and even shutting down completely. The blame was put on cheaper Chinese steel sales and falling steel prices, leaving many industrial centres in developed countries to further deteriorate and unable to compete with foreign competition.

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A History of Poverty in the UK

The way in which poverty is looked at, and dealt with, is a great factor in determining the shape and nature of the rest of society. It does not exist to the same extent as it has in the past, but it persists. It is no longer regarded with the same level of hostility as it has been in the past, but hostility persists.

The absolute poverty we see in developing countries, that is, individuals living off less than $2 per day, does not exist in the UK. Relative poverty however, does exist. It is currently defined as 60% of the median income, or around £260 pounds per week. This definition leaves us with a staggering 13 million people, half of which are in work. Perhaps more alarmingly one in six children, 2.3 million, live in poverty (definitions become more complex at this point due to equitizing family sizes and recent government revisions). Figures are similar among pensioners; one in six, or about 1.6 million, live in poverty.

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Why Automation Will Make Many of Us Poorer

You have surely noticed the self service checkouts in supermarkets, where there used to be five humans serving us we now have to make do with ten machines. While this might be the most apparent recent development with regards to automation, it is not the only. Google’s self-driving cars have driven over 1.7million miles in California with eleven minor accidents, none of which were the fault of the cars. Clearly they are here to stay. Why employ a lorry driver when you can have one that does not sleep, crash, quit or belong to a trade union? What about white collar workers? Surely lawyers are safe from automation? It is not common knowledge that the majority of a lawyers time is spent trying to find discrepancies in mounds of paperwork; a task that a computer could perform to a far higher standard. What about doctors? A bot called “Watson” already has a better diagnosis record than regular doctors; being able to stay up to date with thousands of patients around the world and instantly read the latest medical papers. It may not be as trusted as a human but it is no less accurate. In the medium-long term very few jobs are safe.

It is worth noting that automation will have a negligible impact on the developing world in the short term, the greater cost of capital relative to workers acts as a disincentive for companies to invest in new technology. This bias towards labour intensive industry is shown by the dominance that the developed world still retains over sectors such as pharmaceuticals and automobiles.

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Seeking Refuge: Why Britain?

Recent weeks have seen the ongoing migrant crisis in Calais accelerate with seemingly each night seeing more and more economic migrants attempt to storm the Channel Tunnel in hope of reaching the UK. Some merely try to hop onto the back of lorries boarding ships or trains, whereas others risk their lives attempting to jump onto the trains. These attempts have seen more than 30 migrants die since the start of 2014 with the number only likely to grow should the situation remain as it is. But why do these men and women so desperately want to reach the UK?

Many of those camped in the migrant camp known as “The Jungle” are asylum seekers who have fled their own countries to escape violence.  In a number of cases, men will pay to be smuggled out of the country and then risk their lives in the Mediterranean crossing that has been the subject of much press as of late. Following the crossing, a large amount converge on Calais, moving through Europe seemingly unnoticed. Many take such risks in the hope that the UK will offer them a better quality of life and the chance to bring their family with them once they have established themselves in society. Surely their bravery and willingness to search for a better life does not deserve the labels that have been thrown at them such as “cockroaches” by Katie Hopkins and “a swarm” by David Cameron? Such adjectives have highly negative connotations and imply that the motives of those seeking asylum in the UK are primarily negative twisting British public opinion of migrants on a broader scale. In order to fully understand the nature of the situation we must ask ourselves “Why Britain?” and consider the situation as a whole rather than the action of the migrants in Calais and the disruption caused to cross-Channel transport services.

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A Case for the Abolition of Cash

While the abolition of cash is not likely to happen in the foreseeable future, at least in the UK, the idea has been given some attention lately. Andy Haldane, the Chief Economist at the Bank of England, and Ken Rogoff, Professor of Public Policy at Harvard, have both come out in favour. They cite two main reasons; reducing the ease with which the shadow economy can function and ending the ‘zero lower bound’ for the base rate.

Before examining it is worth looking at the current state of ‘cash’ in the UK and abroad. There are two primary uses for cash; a medium for exchange and a store of value, and it is used in three locations, domestically, abroad, and in the shadow economy. There is currently around 40% of UK GDP (£62bn) in printed notes, up from a low of 30% in the early 90s. But where is this cash?

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Capital in the Twenty-First Century and Its Critique.

A nation’s income comes from two sources; capital – that is, rent, interest and dividends – and wages from labour. Through the 20th century it was believed that the split between these was constant, at around 70% going to labour. This split is determined by multiplying the stock of capital (relative to total income) by the average rate of return on capital. Therefore, the nature of the correlation between these two measures will determine how much income goes to each capital and labour.

The correlation is certainly negative – as capital accumulates its marginal productivity falls. The first acre of land will increase a farmers output greatly, however by the 100th acre he will struggle to cover all the land – any extra acres will provide less yield. This idea is transferable to most forms of capital, provided the quantity of labour is fixed.

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The Death Of Facebook

Facebook faces impending doom according to a recent study by Princeton researchers, John Cannarella and Joshua Spechler, who have proclaimed that “Facebook will undergo a rapid decline in the coming years, losing 80 per cent of its peak user base between 2015 and 2017”. As Facebook reaches its tenth birthday this month, will it last much longer?
Facebook currently has over 1 billion users worldwide, and a market capitalisation of around $130 billion. It might seem implausible to many that this giant company might collapse so rapidly. But this is exactly what happened to MySpace, the most visited website in the world from 2005 to early 2008. By 2011, it had all but disappeared. Even giant firms fail. This is the lesson of economic history, ever since companies operating on a truly global scale began to appear in the late 19th century. Of the world’s top 100 non-financial companies a century ago, in 1914, all with market capitalisations of many billions in today’s prices, most have either gone bankrupt or are mere shadows of their former selves. Some of them disappeared very quickly. But while other companies have failed, as a Facebook user it seems ridiculous that Facebook will face the same fate in just a few years. It seems so ridiculous that it’s hard to believe Princeton University are even associated with it. Admittedly Facebook has become increasingly frustrating as it becomes the new ‘YouTube’, as your newsfeed becomes flooded with vines and other videos, but the number of active users on Facebook is ever increasing.
So how can Facebook die? Economists may refer to the observable attributes of the alternatives, such as price and quality. As Facebook is fantastically popular, it must be because the product not only provides features which many people want, but because it does so much more effectively than its rivals. A dominant market leader can only be displaced, on this view of the world, if either a superior rival emerges, or if there is some unforeseen and sudden shift in consumer tastes. This was the cause of MySpace’s death, which was killed by facebook and twitter which were substitute goods. But what’s killing Facebook? Not snapchat. Not Google+. Therefore we can rule competition out as a suspect for the cause of Facebook’s proclaimed death, as it remains dominant.
However surprisingly, these were not the arguments which John Cannarella and Joshua Spechler outlined in their report. They did not take into account Facebook’s features; rather they look at user behaviour based on network contacts. The researches stated, “… every user that joins the network expects to stay indefinitely, but ultimately loses interest as their peers begin to lose interest. Thus, a user that joins early on is expected to stay on the network longer than a user that joins later. Eventually, users begin to leave and recovery spreads infectiously as users begin to lose interest in the social network. The notion of infectious abandonment is supported by work analyzing user churn in mobile networks, which show that users are more likely to leave the network if their contacts have left.” However the mathematical and economical modelling used to come to this conclusion is totally flawed. That’s because they used a tool called Google Trends to see how often people searched for “Facebook” on Google over the years. They saw Google searches for “Facebook” decline, noted that when MySpace and Bebo waned, so did Google searches for those terms, and came to their dire conclusions.
So why is this a big deal? Because when a big news outlet like NBC News run;s a story, people believe it. They don’t stop to read the original paper and if they did, the academic jargon would make it incomprehensible to most. But it has an effect. Facebook is a publicly traded company. A story like this could affect the stock price and change the valuation by millions. It could also be the sort of thing that creates the end it predicts by convincing people that Facebook is dying and they should go somewhere else. Therefore the natural reaction of an economist is to make the prediction that John Cannarella and Joshua Spechler were motivated by the possibility of buying cheap shares. The incentive of making a fortune outweighed their loss of reputation or credibility after producing such a flawed conclusion.
Facebook’s response to the Princeton study was quite amusing, mocking the outrageous modelling they used to come to their conclusion. They used Princeton’s Facebook “likes” and “peer reviewed articles” and evaluated them over time. They noted an alarming downward trend of Princeton’s Facebook “likes” and made a conclusion based on the similarities between student enrolment and Google Trends index. From this, Facebook concluded that Princeton would also suffer a decline in enrolment of 50% by 2018.

According to CNN, “Princeton received 24,498 applicants for its current freshman class and accepted only 7.4% of them, ensuring its status as one of the nation’s elite universities. And as of September 2013 Facebook had 1.2 billion monthly active users.” Neither institution is really in any danger of disappearing any time soon.

By Sam Timmins

The Economic Consequences of Mr Salmond

2014 is building up to be one of Great Britain’s most important years in recent memory. On the 18th of September 2014, Scotland will be asked whether they want to become an independent sovereign state. It is not often that a 300-year-old union is broken, so the vote will have ramifications far beyond a land of 5 million people.  Alex Salmond is rebuilding Hadrian’s Wall as we speak! Scottish independence could lead to a break-up of the United Kingdom and its key industries such as North Sea Oil and naval ship building yards.

Even with the political and cultural arguments ringing around the referendum, the most important argument is that of the economics of independence – almost fitting for the birthplace of Adam Smith! One poll found that only 21% of Scots would favor independence if it would leave them £500 a year worse off, and only 24% would vote to stay in the union even if they would be less well off sticking with Britain. Almost everyone else would vote for independence if it brought in roughly enough money to buy a new iPad, and against it if not.

Opinions on the economics of independence are starkly divided. Nationalists argue that, mostly thanks to North Sea oil and gas, Scotland would be better off alone to reap the benefits of its natural resources.  However this view has a sell by date. The richest reserves have already been exploited, leaving inaccessible oil that becomes uneconomic when prices fall. North Sea production has been falling by about 6% a year for the past decade leaving an eventuality that the oil will run out. Many fields will stop producing in the 2020s; by the 2040s oil is likely to be dribbling rather than gushing forth. Tax revenues from oil and gas are highly volatile; prices are high now but due to its unreliable nature, Scotland would depend on oil for some 18% of its GDP, making it subject to shifts in global commodity prices and the heavy reliance on natural resources could lead to dire economic conditions in time to come.

What will remain Scotland’s biggest problem as an independent state is its currency. Due to the UK being the largest trade partner for Scotland, it would be beneficial for them to keep the pound as their currency to allow easier cross border trading and therefore more economically integrated with the UK. Given that 60% of all Scottish exports are to the rest of the UK, a separation could hit it hard. However, in keeping the pound, gives away any right to its governing. Interest rates would be kept under the Bank of England’s control, leaving many to argue whether a nation with no control over their currency, can truly be called independent. Furthermore there is no guarantee that England and Wales would accept a currency union which would lead to Scotland being forced to join the euro and then be inevitably sucked into the struggling eurozone. In an era when most of the discussion is about leaving the euro rather than anyone new joining up. With problems in eurozone countries reverberating through the entire single currency area, Scots would be wary to vote yes when this is a strikingly clear possibility.

The Scottish vote would also have knock on effects for the rest of the UK. It is hard to compute exactly how much the Scots cost the English. But according to figures published today by the Institute of Fiscal Studies, total public spending was around 11 per cent higher per person in Scotland than in the UK as a whole in 2011-12. Scotland’s welfare bill alone is huge and utterly unsustainable without some form of external funding. Its pension’s bill is £13.3?billion a year, health care costs £11?billion and social security £8?billion. To many Englishmen, an independent Scotland may be in their best interest. As English tax payers are propping up many a Scotsman, the reduction in public spending in Scotland would encourage the increase in spending in the rest of the UK which would introduce more government subsidies and fund the rejuvenation of UK businesses; thus raising GDP and raising employment.

On the other hand in the eventuality that Scotland remains in an economic union with the rest of the UK would avoid disruption to UK firms selling north of the border, there may be a cost to exporters in the remaining UK since Scottish oil exports probably cause the pound to trade at a higher level than otherwise. However, due to independence from the rest of the UK,   Wales and England would not benefit from a share of the tax revenues from exports such as gas and manufacturing. This would leave a considerable hole within the British economy that would be difficult to replace as Scotland is both rich in natural resources and production capabilities.

For many, it appears that the independence of Scotland represents a large and daunting risk to the Scottish economy. The Scottish sentiment surrounding the vote will inevitably sway many Scots to the independent vote, but the overwhelming risk associated with the “Yes” vote will be difficult for Alex Salmond to ignore much longer. The aim of SNP is for Scotland to gain independence and carve a place for Scotland within the European and Global market place. For the degree of economic independence a small European country can enjoy in a global marketplace is inescapably limited. It is unlikely that Scotland from now up until the vote will have resolved the flaws of their over reliance on finite resources for revenue or their uncertain stance on currency. It is likely that the vote will end in failure for Mr. Salmond as in a global climate already full of economic uncertainty it would be doubtful that the people of Scotland would want to take a risk that for many, seems senseless.

 

Contributed By Jack Albert Editor-in-Chief