Why is a bank run bad?

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Remember our post about the 1907 financial crisis? Here is a cool video explaining the concept of bank runs, which had a vital role during the spread of the crisis and were the main reasons of the actual crisis. Do expect a longer post during the weekend with description of the 1929 crisis, and possibly a post later this evening. 

A Game of Rates

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In our earlier posts about monetary policy, we've written about monetary regimes and their distribution around the world – but we are yet to show how the different mentalities consider different statistical data and have different targets set for them. So we invite the readers to a Game of Rates – by comparing the Hungarian and American central banker simulator, created by the respective central banks, we will show what differences are there between these two countries' monetary mentalities.

Economist of the Week - Adam Smith

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It's Wednesday – and if it's Wednesday, then it is Economist of the Week. Schoolonomic launches a new, weekly series dedicated to sharing knowledge about well-known and less-known thinkers in the field of the economic sciences, from historical to (hopefully) contemporary. Besides their contributions to the field, we aim to concentrate on the personal side of their story as well – why did they choose to become economists? What economic environment did they live in?

Our choice of first choice is only natural – we present to you Adam Smith, writer of An Inquiry into the Nature and Causes of the Wealth of Nations.

A World Map of Monetary Policy

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Reflecting on our earlier post about advanced monetary policy and the types of (if) existing targeting methods, we now publish the world map of monetary policy - depicting the worldwide uses of inflation targeting and fixed exchange rates.

Schoolonomist, 2012. All rights reserved.

3 Films To Watch About Business

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Do you have programmes for this evening? Considering the record-hot summer and the fact that many have to work tomorrow, you'd probably want to stay at home. However, all is not lost considering entertainment - and if you are reading Schoolonomic at this hour, then consider watching one of the films below, collected by us, about the inner workings of unique companies.

Your Humble Guide to Public Finance IV. - Advanced monetary policy

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In our final post of our series on public finance, we will first discuss the methods and the effects of controlling money supply, and the types and targets of monetary policy.

How did tubercolosis change the world of economics

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When you think about factors which attribute to the development of finance, you usually think along the lines of education, security derivatives, advances in risk management and similar stuff. However, that is just one, the impersonal side of the story – while discussing about financial history, everybody forgets about TB, which lead to the creation of Cowles Foundation, which in turn mentored at least 10 Nobel Prize participants. Care to read more?

It all began in 1926...

Image from Wikipedia

Let's do the price time warp!

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If you read our article on monetary policy carefully, you should fully understand the effects of inflation - but have you ever wondered about what does that mean regarding everyday commodity prices? Well, thanks to this infographic from Visual.ly, you can get an idea about how much prices actually rise over extended periods.

Created by mattrawlings46

7 Biggest Crashes of All Time, I.

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Probably everybody has heard about the 2008 market crash and the fall of Lehman Brothers among others – but other economic crises are generally unknown to readers. Do you how a single financier saved the US economy from total collapse in 1907? Have you heard about Black Monday and Black Friday? If not, then join us in our series to learn about 7 of the biggest stock market crashes of all time from the beginning of the 20^th century until now.

Polls

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Ladies and gentlemen, in order to make the future posts of Schoolonomic more interesting and encourage blogger-reader interaction, I am submitting three questions about the blog. Please, spare a few seconds and vote - it makes Schoolonomic a better blog for both the writers and you.

Update: due to technical problems with the first polls submitted, now I am re-submitting the polls with the same questions.

The first question inquires about how did you find the blog, with the aim of increasing blog marketing.

How did you find the blog?
	Facebook
	Twitter
	Google Search
	StumbleUpon
	Other (if so, please comment below)
pollcode.com free polls

Our second question adresses countries of origin.

Where are you reading the blog from?
	Hungary
	From abroad
pollcode.com free polls

Our final question is primarily aimed at our Hungarian readers.

Would you like to see post translations?
	Yes, to Hungarian
	Yes, to another language
	No, English is fine
pollcode.com free polls

We appreciate all votes, and don't forget - carry on reading us.

Your Humble Guide to Public Finance III. - Monetary Policy, Basics

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In the third post of our series on public finance, we will provide a brief introduction into monetary policy. Given the fact that monetary policy is more complex than it's fiscal counterpart, this section will be divided into two posts – and this post will explain the main goal of monetary policy, and why do we need it at all. Read more about the supply of money, inflation and the role of central banks, below.

What is monetary policy?

So what is monetary policy? Following a quick Google search and clicking on the first result of Wikipedia, the article's first lines read that monetary policy 'is the process by which the monetary authority of a country controls the supply of money, often targeting... '

Okay, okay, stop. Two questions rightfully come to mind. What the heck is the supply of money, and what is a monetary authority?

Money supply

Firstly, the money supply, a.k.a. The supply of money – this is, simply put, the total amount of money in the economy. Now why is controlling money supply important? Consider the following equation:

MV = PQ

or

Money supply * Velocity of money = Average price of goods * Quality of goods

Money supply: as mentioned above – the total amount of money in the economy.

Velocity of money: the number of times each unit of currency (say, dollars) is spent per year

Average price of goods: the average price of goods and services sold per year

Quality of goods: the average quality of goods and services sold per year

Don't forget that money doesn't have value on it's own – it's an universal medium of exchange of wealth in the economy, hence every f.e. dollar has to be backed up by the appropriate amount of goods or services. Now imagine what happens if the amount of the money supply goes up, because somebody starts to create money out of nowhere – to finance their expenses – according to the equation above, the prices would rise, because the other variables wouldn't change, but suddenly more money would be present for each unit of goods or services. This is inflation – and if it's too high, money will loose it's value. Remember the Germany of the 1920s from history lessons? One of the main goals of monetary policy is to curb excessive inflation.

Central authority

The second question is – what is a central monetary authority? And why do we need such a thing?

The answer lies with the above example – in order to prevent money from loosing it's value, authorities have always tried to stop people from issuing money besides their own. While currencies were made of gold and silver, the mere scarcity of these resources was a stopping power – but the introduction of paper money changed things. From that point on, everybody could theoretically print paper money – to stop this, individual countries did two things – firstly, sanction citizens who forged banknotes (and coins), and secondly, give the power of printing money to an individual, state institution which is independent from the government (in order to stop the government from printing money to cover their expenses). These are central banks, and they are the worldwide conductors of monetary policy to this day.

Conclusion

The main goal of central banks is to control inflation, the phenomenon of decreased money value due to a growth in the money supply. We will write further about how central banks influence money supply, and what effects does it have on the economy in our next post – and until then, don't stop reading us.

Announcement

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I'd like to apologise for the inconvenience, but Schoolonomic will be offline until Monday - I'll be on a weekend family trip without internet access, preventing me from publishing additional posts. Until then, carry on - and as a goodbye present, I'd recommend the following video about macroeconomical arguements - which will be throughly explained in the coming days. Prepare, and have a nice holiday!

Yuck! - The wonderful world of school catering

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The years spent in primary and secondary school are some of the most memorable ones for many people, for both better and worse – and one of most common negative experiences for many in Hungary is the abysmal quality of school catering. Meanwhile, in Britain, students are able to enjoy a wide variety of dishes, supplemented by the results of Jamie Oliver's Feed Me Better campaign – and as a group of Essex University researchers confirmed, better school meals lead to better results. So how did the Hungarians fail where the British didn't? Read the underlying economic explanations, below.

So what is the problem?

Most Hungarian primary and secondary school cantines are supplied by private companies specialising in student catering and mass food production for summer camps, dormitories, schools and the like. The schools are usually owned by local city councils, or – more recently, due to a new law – by the Department of Education. (In the UK, 7% of pupils are attending 'independent schools', funded by private sources – the corresponding statistics for Hungary is a mere 3.7%.) These local municipalities in turn try to reduce costs as much as possible – giving less to the individual schools to spend from, which in turn causes those schools to choose the cheapest catering offer available. But you may ask, what is the problem with cheap? Fast food in the UK before Jamie Oliver wasn't that bad.

The problem with cheap

The main problem is, that in Hungary, cheap means way, way cheaper than in the UK. Even considering that according to the recent Big Mac index, you can buy 1.2 times as many food in Hungary than in the UK from the same amount of food, the differences are still enormous. But why?

Meal price differences

Firstly, consider the price differences between the average cost of school lunches – the UK average of the two extremes of 1.25₤ and 2.50₤ is 1.875₤, while the average Hungarian cost equivalent is 1.13₤. It is way lower, and even with the price level multiplier, the resulting 1.3 pounds are simply not enough to provide quality food for Hungarian schoolchildren – in fact, 1.3 pounds are not even enough to buy a Happy Meal at McDonald's, so even low-quality fast food isn't a viable option.

Wage differences

So why not simply raise costs for Hungarian schoolchildren, instead of compromising on quality? The answer lies with the cost of food – compared to the wages which pay for children catering.

The median wage in Hungary is 213,000 HUF a month – the equivalent of 604 pound sterlings, which means 725 'weighted' pounds, the amount of money adjusted for UK prices using the multiplier above. Meanwhile, the same median wage in the UK is 501₤ a week, meaning an 2004₤ median wage – and we come to the astonishing conclusion that even with price level adjustment, the Hungarian median wage is a mere 36% of the UK one.

Disproportionate contribution

That means that while the monthly cost of catering for a single children is a mere 2% of median wages in the UK, it is 5% for Hungarian parents – and for many under the median line, the cost is even more. So the only option remaining would be government subsidies – and with a 1.2% decrease of GDP in this financial quarter, the Hungarian government has bigger troubles than providing free school lunches.

So until then, it seems the Hungarian children are left to fend for themselves in supplementing the school meals – the more lucky spending many times of the original school meal prices to buy food for themselves, and the less lucky suffering from lack of appetite and even malnutrition due to the quality issues. Dig in!

Your Humble Guide to Public Finance II. – Fiscal policy

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In the second post of our series on public finance, we will now cover fiscal policy, which – as briefly mentioned in the first post – controls government spending and revenues with the aim of maintaining macroeconomical stability. Read more about aggregate demand, fiscal stimulus and the like, below.

What is it for?

Fiscal policy aims to control the aggregate demand(AD) of a country's economy by government spending – the total demand for final goods in the economy. That sounds nice – but what makes up aggregate demand? As simple as it may sound, only four factors – and one of them is directly government spending. Beware, a mathematical formula is coming up. To make things easier, let's use the example of your imaginary family farm and your local city council.

AD = C + I + G + NX

or in other words:

Aggregate Demand = Consumption + Investment + Government spending + Net exports

Consumption: the demand by unattached individuals and households. (Imagine yourself going down to the shop to buy a candy.)

Investment: the total spending of the private sector, aimed at producing something consumable in the future (Your dad, a farmer, buys a bull besides the family cow, in order to sell the calf's meat later.) 

 

Government spending: the combined amount of government investment and consumption (The city council hires an economic adviser (consumption), who in turn recommends the council to buy your family a bull (investment – in this case, a.k.a. government stimulus) to increase your farm's productivity.)

Net exports: the sum of total imports and exports of an economy. (Your dad buys the bull from China. However, he exports the cow's milk to Canada. If the sold milk costs more than the bought bull, that makes the family a net exporter.)

How is it done?

There are two ways of influencing aggregate demand by the government – taxation, and expenditure. Taxation (you giving milk to the city council) – besides giving money to the government to spend, see above – decreases aggregate demand (less money, less consumption and investment). Expenditure, on the other hand, increases aggregate demand by increasing government spending (buying more bulls), which in turn leads to increased private spendings (Don't forget that your state-bought bull's offspring will produce milk as well).

Types of fiscal policy

There are three main types of fiscal policy, neutral, expansionary, and contractionary. Neutral fiscal policy means that government spending is completely funded by taxes (you get back the exact cost of the given milk in say, bulls). Expansionary fiscal policy means that the government spends more than it earns, increasing it's debts, which is usually done in a recession (Your family cow died. You can't produce goods, so the council has to bail you out by buying a cow as well, meaning they'll have uncovered spending, given that you can't pay them back with milk). Contractionary fiscal policy means that the government earns more than it spends. (The city council has debts, so when you ask them to buy a second cow for you, they turn you down.)

Alternative government funding

Finally, as it was mentioned above, tax revenues do not always cover the government's costs. What can be done then in order to avoid government bankruptcy? The main methods are borrowing, consumption of reserves, sale of fixed assets and government enterprises.

Borrowing: the government sells bonds at a fixed price, promising to pay back the loan gained by purchasing the bond in installments, with an additional interest rate. (You buy a Ten-Year Cow Bond with an interest rate of 10% from your government at the price of 100$, with the hope of receiving 11$ each year for 10 years.)

Consumption of reserves: consumption of the government's own financial and other reserves to pay back debts. (The city council starts to drink the 'tax-milk' instead of selling it.)

Sale of fixed assets: The selling of government property to fund debts. (The city council sells a pitch of land to you, where you can grow forage for your cows.)

Government enterprises: Using the profits of government companies to fund other governmental expenses, instead of re-investing the money in the companies. (The government creates it's own cow farm, and they give the milk to their creditors.)

Conclusion

The goal of fiscal policy is to influence aggregate demand, and setting it to an acceptable level. The government can to this by taxation (decreasing), or spending (increasing). The government may also choose to spend more than it earns (producing a net increase in aggregate demand, but also an increase of debts), but then it has to pay back it's debts by additional borrowing, consumption of reserves, sale of assets (a.k.a. privatisation) or using the income of government enterprises.

Our next post will cover the role of monetary policy regarding macroeconomical stabilisation, concluding our series. Follow us on RSS to find out about the concluding piece.

How to pick successful stocks

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By the time you've stumbled upon this blog, you must have read at least a dozen pages of commentary about the inner secrets of stock trading, suggesting various techniques to make your investments as profitable as possible. So here, we share the secret, the answer to the question of all time – how can I pick successful stocks? And the answer is:

You can't pick successful stocks.

And if you read further, we'll explain why, and what can be done instead. 

What? 

To the lucky few, this shouldn't come as a surprise. I expect however that the majority of our readers are flabbergasted by this statement – but in fact, there are hundreds of pages of research supporting it, by very influential thinkers. Among these people are Benjamin Graham – author of the book The Intelligent Investor, a legendary fund manager and a mentor of Warren Buffett –, and the other is Daniel Kahneman – along with his lifetime associate Amos Tversky –, who won the Nobel Prize of Economics in 2002 – as a psychologist(!). So how does a psychologist and a businessman can explain the futility of stock-picking efforts? See below.

But how? 

 The basic concept of investment, advertised by multiple 'insider' books is that a stock's price includes all the available knowledge about the value of the company in question, and the available predictions about the future prices of that stock. Hence theoretically everyone has the ability to make profits – or suffer losses if they fail to recognise the 'signs'. We know however that this is not the case. There are many investors who are actually losing consistently, an achievement not even a dart-throwing chimpanzee (a popular analogy of picking stocks at random) could match. The statistics of this unsuccess were first published by a Berkley finance professor, named Terry Odean. Odean studied the records of around 10,000 individual brokerage accounts from 1991 to 1996, and he analysed 163,000 individual trades. This allowed him to study every situation where a broker sold one stock, and he immediately bought another. The justification for this stock change is, naturally, the expectation that the new stocks will do better than the old ones. So did they? Simply put: no. Odean found, that the sold stocks on average did 3.2 percent better than the newly bought ones – meaning, that every stock replacement actually decreased profitability instead of increasing it. The more you trade, the more you loose. 

Why?

The answer is illusion of skill. The process of selecting stocks for investment at hedge funds and investing firms is a very complex one – it involves reading economic forecasts, examining income statements, reading balance sheets, management evaluations and many more high-level intellectual processes. Unfortunately, evaluating business prospects and trading in their stocks is not the same thing – and despite claims to the contrary, stock analysts, quite simply lack the skills in order to assess whether a particular information is or isn't already incorporated in a stock's price. However, involving such an incredible intellectual effort in anything – however ineffective it actually may be – will inevitably lead to the conclusion that the effort was effective. Daniel Kahneman, the renowned psychologist – and as mentioned, Nobel Prize winner – calls this a 'System 1' reaction – the section of the mind which includes our instinctive, automatised reactions to the world around us. (For further enquiry, read more here about dual process theory or read Kahneman's bestseller, Thinking, Fast and Slow)

But what about the real experts? 

You might still wonder that there must be at least a few experts who have the know-how of stock-picking – not merely guessing, but bringing in decisive results year after year. The sad truth is, that there are no such persons – according to Kahneman's research, analysing the investment incomes of 25 top-notch wealth advisers, the correlation between any two consecutive financial years' year-and bonus (a general indicative of business performance in investment circles) was 0.01. In other words, zero. Even the best wealth advisers were guessing – and you can't hope to do much better.

What now?

 You can rightfully ask – can stocks serve as a viable investment option at all, considering their individual unpredictability? The answer is, yes – the key word is individual. You can't hope to pick out the most successful stocks, but if you buy diverse enough stocks to disperse your losses (in fact, buy index funds), you could achieve the market average – and don't forget that even the returns of the market average generally outshine those of alternative investment options, for example bank deposits or some government bonds. If you'd like to read more – and there is a lot to be read -, I recommend Benjamin Graham's book on value-based investment, and most importantly – Daniel Kahneman's aforementioned book on the basic emotional and logical fallacies the human mind so easily falls for.

How much did the London Olympics cost?

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Reflecting on one of our comments earlier by G (and by the way, the first comment on the blog, congratulations!), Here is some additional information published by external sources about the London Olympic costs, and how the spending on the London Games can be put into perspective compared to both previous games and other high-cost projects.

Readers notice: from time to time, Schoolonomic will also share thought-provoking articles, infographics and videos from external sources, discussing previously mentioned blog topics. This post is the first of these. 

This video is a 25-minute long Al Jazeera podcast about the costs and organizational materials involved in making the London Olympic Games possible. For further inquiry, you may also check this infographic at paydayloan.co.uk.

We'd humbly you to comment on the blog's posts as much as possible - your feedback is more than appreciated, as it both makes for a better written blog and special feedback opportunities - such as this post.

Your Humble Guide to Public Finance I. - Introduction

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If you've ever stumbled upon a blog writing about economics, you must have noticed words like 'fiscal','monetary', 'aggregate demand' and 'government stimulus', and reading more, fierce debates about 'the effectiveness of fiscal stimulus' or 'expansionary monetary policy'. Feeling confused?

There is no need. This series of posts wishes to explain what all the fierce debate is about – in short, public finance.

Readers notice: Starting this Monday, Schoolonomic launches a weekly series of connected posts, each of the series detailed to basic economic concepts and theories, explained in a - hopefully - fun and non-conventional way. Your Humble Guide to Public Finance is the first of these. Subscribe to the blog here to receive a flow of updates.

In a dream economy, there would be no need for public finance. Based on the model of free markets, private economic actors (men and groups with money) would provide all the goods and services you'd ever need, efficiently and equally – like security, health service, pensions, a protected environment and more.

Market failure

That is not the case, however. Due to various reasons – information asymmetry (imagine rival police stations which do not share criminal records), externalities (a coal plant's combustion products harming nearby corps), etc. –, not all services can be provided by private markets. This is called a market failure.

Consequently, there is a need for a non-profit, neutral entity to provide these public services for the individuals – and that is the government, which does this through the means of public finance.

Goals of public finance

The state's main goal is to correct these inconsistencies and maintain the efficiency of the free markets, namely by fighting resource allocation inefficiency (For example, in the 1880s Italy, 20% of landowners held 80% of land), income allocation inefficiency (In contemporary US, the top 1% of the population holds 18% of income) and keeping macroeconomic stability (Keeping the goals of full employment, constant economic growth, price stability, and balance of state budget).

Methods of public finance

The state can do this two ways – either by regulation (telling market actors what they can and can not do, the collection of these regulations is the law), or macroeconomic stabilisation policies. Regulation is done by jurists and economists, while macroeconomic policies are set by politicians and economists. The latter is what all the debate is about – so let's explore it further.  

Macroeconomic stabilisation policies

The economy constantly needs stabilising – and that is what these policies do. There are two types of them, fiscal policy (controlling the spending of the state) and monetary policy (controlling the spending of the markets, a.k.a the money supply). These two are the ones that most of the debate is about, with economists generally favouring one or the other, and they will be covered in separate follow-up posts as part of this series.

Government failure

Finally, we must also mention – and us, Central Europeans know this from bitter experience – that the state is not perfect, either. When the state makes inefficiency even worse than it was without intervention, a government failure occurs. These are consequently worse than market failures, and finding the careful balance between government and market failures is another big question of macroeconomics.

Follow up on this post to learn about monetary and fiscal policy – and meanwhile, feel free to leave a comment.

How music festivals make you rich

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Besides the Olympics, one of the biggest public events in Europe this weekend is the Sziget Festival, with a live Youtube broadcast and 385,000 visitors last year, generating a whopping 10,000,000 € income for the organisers – but does it make the organisers rich? Discover the inner workings of festival organising, and get answers to your questions.

Picture from pitchfork.com

 According to Wikipedia, there are about 650 yearly music festivals worldwide, organised in more than 60 countries. However, that leaves many questions unanswered – how do organisers gain income? What costs do they have to endure? And finally – can you actually get rich while organising a music festival?

Income

Despite the huge range of activities which can be found on a music festival – besides the gigs, there are vendors, performances, sponsor booths – the sources of income can be divided into three basic categories: Ticket sales, vendor profit shares, and sponsor contributions. Using the case study of Sziget, Hungary's biggest and the world's 9^th biggest music festival, take a look at how festival income is made up.

Tickets, 75%

Three quarters of the income of an established festival come from ticket and season ticket sales, essentially determining the profitability of a festival. However, huge income can only be expected if the festival is already known – Sziget run losses in five consecutive years before turning a profit.

Sponsor contributions, 15%

Music festivals are an excellent way for both domestic and multinational companies to advertise their services, usually gaining profit themselves in the process. Sponsors of Sziget in recent years included Pepsi, McDonald's, AXE, OTP Bank, and the most-read Hungarian newspapers besides many more.

Profit shares, 10%

Every year, there is are a huge number of local entrepreneurs serving the thirsty and hungry, and the organisers gain their share from every transaction. Despite decreasing sponsor contributions, the rate of these shares are actually increasing, suggesting an in turn increased profitability of the local salesmen.

Expenses

The causes of expenses are much more varied, and due to the fact that newspapers like to talk more about gains than losses, they are not as easily traceable. Here is the list, consisting of five principal elements: artist's fees, taxes, landscaping, marketing and else.

Artist's fees, 33%

The price of seeing the Hollywood music industry's rich and famous live on stage is not negligible – one of the main reasons while Sziget failed to run profit in 2011 was the huge cost of the first-day Prince gig, failing to attain a large enough audience.

Taxes, around 27%

The Hungarian VAT is 27% - compared to the median European VAT rate of 20%. This greatly reduces the profitability of the festival, not to mention the land use fee payed to the Budapest city council.

Landscaping costs, 18%

Building stages, providing water, sanitation, electric current and fencing off tent areas in the middle of the capital, then demolishing it all, cleaning up and restoring the original landscape is no easy, and certainly not a cheap task. The fact that one fifth of costs is involved demonstrates this.

Marketing, 8%

To gain visitors, people need to know about the festival and it's performers first – hence the need for marketing, which involves a 42% share of domestic and 58% share of foreign advertisement.

Miscellaneous, 14%

There are many other expenditures involved in organising a festival – discounts for various museums and events around the city, petrol costs for both the organisers' own vehicles and tourist transport buses, and many more.

The road to riches

So considering all this, is it worth organising a music festival in terms of profit? The answer is, yes – but like many investments, it involves great risks and a relatively low return. This year's Sziget festival is scheduled to make around a 350,000 € profit – which, when divided by the total involved amount of money, 10,000,000 €, makes for a bare 3% return. You'd perhaps be better off buying government bonds – but then again, the main point of music festivals is the entertainment.

So grab your dancing shoes, and head off for the local music festival – or ask us in comments about the correlation between festival length and profits, and else.

_______________________

Sources: SG.hu, Sziget.hu, Index.hu, HVG.hu

MMORPG Economics

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When familiarising myself with the difference between stock exchanges and commodity exchanges back in my 11th year, I always wanted to find an easy platform where one could get the hang of trading on exchanges while not involving any actual money in the process. Luckily, I quickly found one. Care to guess? 

It was RuneScape, a free online multiplayer roleplaying game. Read more to find out how an MMORPG brings the full experience of exchange trading to 18 million users, below.

Image edited from http://runescape-mysteries.com/

Yep, the game RuneScape, an MMORPG (massively multiplayer online roleplaying game, involving thousands of gamers playing in a common virtual world) actually includes a free, (almost) non-limited simulation of exchanges, complete with the unique atmosphere provided by you fanatically clicking with your mouse in order to reach the 'brokers' in the middle to make a buy/sell offer. There are graphs for every tradeable item in game - thousands of them -, market watches furiously arguing over the reasons of price changes, complete with a Common Trade Index, calculated with the same method as the DJIA, the Dow Jones Industrial Average (I know, it's not a difficult method).

And before you start to think that the game must be an isolated meeting point for a few unsocial madmen, The game has 15 million free and 3 million paying accounts, which makes for a RuneScape population bigger than 75% of the world's states. Not so borderline, huh?

History

 

RuneScape was founded like your average startup company in 1999, three brothers together under the ambitious name of „Java Gaming Experts” - only this time they were British, all three are graduates of the University of Cambridge. They created RuneScape in 2001, and their game was already enormously popular when they decided to implement one of the biggest updates ever released for the game in 2007 – the Grand Exchange, a location in the game's virtual reality where buyers and sellers of items could gather together to trade via a common platform, without having to wait to find an actual buyer/seller in person. 

Features

 

Of course, the game's economy was already up and running before that, with two of the big in-game cities serving as the most important trading hubs – but due to the fact that when you wanted to acquire say, a sword (which comes quite handy in a game mostly dedicated to players battling each other), you had to go through a long process of finding the appropriate vendor, wasting precious time searching, travelling and suffering from huge price differences, not to mention the possibility of fraud.

The introduction of the exchange has changed all that. If one wishes to buy or sell, they simply submit their buy/sale offer along the appropriate amount of coins/items, and then continue playing, receiving an instant ingame notification when the transaction is complete. To get the bought items, you need not even go back to the exchange – just visit one of the game's various banks.

The virtual economy

 

The game's virtual exchange perfectly simulates the inner workings of a real one. There is a large and growing number of 'merchanters', people solely living off trading on the exchange, there are the aforementioned market watches, speculators generating and in turn believing rumours, accurate statistics and history of prices and more.

It is not a perfect model, however. The number of simultaneous trades is limited – 2 for free, 6 for paying players –, and for long, you could only offer buy/sell prices for an item in a 10% range of the particular day's average trading price, hence limiting gains and losses. Also, the number of goods in the economy is theoretically unlimited: every registering user may mine as many ores, catch as many fish, kill as many cows, etc. as they wish, and goods which ARE actually limited in number have ridiculously huge prices compared to their ingame usefulness.

The virtual economy is not outright crazy, though – the number of active players practically limits the amount of goods in circulation, and the limited items (such as the Santa Hats widely distributed during 2005 Christmas Eve, but never since) are usually merely the conduits through which money circulates and fashion items. In the end of the day, both conventional gamers and amateur economists like myself find what they were looking for – an immensely enjoyable experience.

If you want to know more, try out Runescape yourself, or find us in comments or via email, at schoolonomic@gmail.com.

The dark side of the Olympics

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Did you know, that 37% of countries has never, ever won an Olympic medal?
Ever wondered why India, despite a population that matches that of China, 'fails to shine' on the Olympic Games? And that there were participants in the Olympics who were actually preparing in refugee camps before the event?

Continue reading, and discover what the underlying economic explanations are.

With the Olympic Games ending on this Sunday, and an approximately one-billion-large crowd watching it's opening ceremony, we are truly experiencing an Olympic craze. Every nation fanatically - and rightfully -  supports their athletes, cheers along with their winners, counts their gold, silver, and bronze medals, and so on...

Nobody talks about the losers, though. The countries which do not win medals and the countries which don't win enough medals compared to their size. This post's goal is to tell their story, and tell about the reasons of their nonperformance.

The non- and under-medalists

The list of countries that - often despite a long history of Olympic presence - whose athletes failed to gain or gain enough medals is long. These are, to mention a few: Malta, Monaco, Myanmar, Bolivia from the first, India, Indonesia from the second category and so on. While the list of these countries is huge, the factors contributing to their underperformance are the same - either size, wealth, or stability.

1.Size

Most of the countries which fail to get a medal in the Games are, simply put, too small. Monaco, San Marino and Malta, for example, all have economies which could more than support the preparation of world-class athletes, but their population is too small for real talents to emerge - their combined populace barely exceeds half million souls. Hence, winning a gold medal for them would be a truly extraordinary event - if you weigh population against total medal number, like The Guardian did, you can see that Grenada, a country of 110,000 souls leads this year's alternative score list with only a single gold medal.

2.Wealth

Most of the countries which fail to shine are also very poor. And not just the Oceanian island nations, small and poor, mostly living off Australian and New Zealandian subsidies like Nauru, Kiribati, etc. - also countries which are heavyweights in terms of population, including India, Indonesia, and the Democratic Republic of Congo - these three alone housing 1.5 billion (!) citizens.

The answer in their case is GDP(PPP) per capita. This is a fancy way of saying the value of all goods and services produced within a country in a given year(this is GDP), divided by the population for the same year(which is capita). PPP means purchasing power parity, which compensates for the differences between price levels of certain countries.  (More simply put, a training shoe costs less in Nigeria than in Switzerland, hence you can buy more stuff in Nigeria with the same amount of money. If you'd like to read more, check out the Big Mac index here and here.)

Now what does a bad score on the GDP per capita list mean? It means, that the country's economy can only provide a very limited amount of goods and resources to each of it's citizens. India is 129th, Indonesia is 122th and the Democratic Republic of Congo is 183th, according to IMF.

That means no fancy training shoes and swimming pools for sportsmen either - many Olympians from these countries prepare without equipment and even in refugee camps, like Aguida Amaral of East Timor. Their poor results are, hence understandable - and even their participation is something worthy of the world's awe.

3. Stability

Finally, many of the countries have simply lacked the internal stability to either participate, or be successful during the Olympics. Somalia, Ethiopia, Eritrea and many other African countries have been tide locked in civil wars and a series of coups throughout the century, essentially preventing them for establishing a functioning Olympic committee in the first place. Perhaps their story is the most tragical - in countries where oftentimes merely survival is an achievement, participation in the Olympics is a far-fetched dream.

To quote Baron Pierre de Coubertin, the father of the modern Olympic Games:

“Sport must be the heritage of all men and of all social classes.”

It is disillusioning that after 116 years, his words are yet to come to fruition.

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Arguenomists

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When I first started learning about economics, my first impression was that given any economic problem, there is no agreement between any two economists regarding it's solution - in fact, that economics can hardly claim to be a solid science at all.

With time and further reading, I overcame my misconception.


The impression that economists can't agree on anything is not new – there are possibly more jokes about economists than any other scientific profession (for a short collection, see here), and even world-famous economists are aware of this fact. The legendary Paul Samuelson – recipient of the 1970 Nobel Prize, whose textbook Economics has been both legendary and dreaded among freshmen for the better part of the 20^th century – wrote that economists in recent years have gained the reputation of being a quarrelsome society, who are unable of agreeing on anything.

For the record – he wrote that in 1982, thirty years ago.

Is it a science then?

 

Yes, economics, despite – or rather, due to – all it's academic controversies, is a science. The main reason why the opposite is often believed has been well explained by Samuelson himself, and further elaborated on by countless others, but it still can be explained in one simple word:

Media.

If you ever thought that the 24/7 'insider' coverages of BBC, CNN, Fox, etc. about international economic and political events are the final and unquestionable source of an universal wisdom, then either stop reading, or check out Charlie Brooker's brilliant show Newswipe as soon as possible. Given the public's insatiable appetite for conflict, journalists and broadcasters consequently concentrate on economic issues which are either political (no agreement there), or bring up problems which easily appeal to emotions, f.e. unemployment, trade unions and the appropriate size for governments. In fact, economist's basically agree regarding 95% of the questions ever addressed in an economic discussion.

Disagreements

 

In order to highlight the source of disagreements in contemporary academic discussion, we must mention the difference between positive economics and normative economics – in short, what is and what should be.

Positive economics includes many famous economic concepts, including the classical theory of supply and demand, consumer choice, etc. Ever since the time of Adam Smith and his Wealth of Nations, economists sustained the credibility of these ideas. Positive economics is descriptive, therefore it generates minimal controversy compared to its counterpart.

Normative economics however is explanatory, allowing for multiple implementations of various economic events. Even here, there is a wide sense of agreement regarding a lot of things – nobody longs for mercantilism anymore, for example –, but then comes macroeconomics to make things more difficult.

Macroeconomics

 

Macroeconomics – which addresses the behaviour of multiple economic actors as opposed to the single-actor focus of microeconomics – is the tool that can provide the solution for today's crisis. However, due to political,historical and academical reasons, contemporary economists seemingly fail to provide us with a unified plan.

All is not lost, however – all economists agree that they long for a supportable, dynamic, capitalist economy, and while they brand themselves as Fiscal Conservatives, Neo-Keynesians, Monetarists and the like, they have a well-established and deep understanding of economical theories, and they all adhere the scientific method. Thus, they differ from both fringe scientists and pseudoscientists.

Conclusion

 

Just as Newtonian physics influenced a wide range of the concept of physics, ultimately culminating through relativity theory in string theory and the ToE (competing concepts of particle physics), so are modern micro-and macroeconomics both derived from the principles of classical economics and Adam Smith's The Wealth of Nations.

To paraphrase the well known phrase about punk music:

Economics's not dead.