COMPUTER APPLICATION IN
ECONOMICS
(Econ-337)
Rift Valley University College Center for
Distance Education
Adama 2010
SECTION ONE
EARLY ECONOMIC THOUGHT
1. Ancient Economic Thought
1.1 Introduction
Main articles: Ancient economic thought, Chanakya, Qin Shihuang, Wang Anshi,
Muqaddimah, and Arthashastra
The earliest discussions of economics date back to ancient times (e.g. Chanakya's
Arthashastra or Xenophon's Oeconomicus). Back then, and until the industrial revolution,
economics was not a separate discipline but part of philosophy. In Ancient Athens, a
slave based society but also one developing an embryonic model of democracy,[4] Plato's
book The Republic contained references to specialisation of labour and production. But it
was his pupil Aristotle that made some of the most familiar arguments, still in economic
discourse today.
1.2 Thought History of Economic
The history of economic thought deals with different thinkers and theories in the subject
that became political economy and economics from the ancient world to the present day.
It encompasses many disparate schools of economic thought. Greek writers such as the
philosopher Aristotle examined ideas about the "art" of wealth acquisition and questioned
whether property is best left in private or public hands. In medieval times, scholars such
as Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a
just price.
British philosopher Adam Smith is often cited as the father of modern economics for his
treatise The Wealth of Nations (1776). His ideas built upon a considerable body of work
from predecessors in the eighteenth century particularly the Physiocrats. His book
appeared on the eve of the Industrial Revolution with associated major changes in the
economy.[3] Smith's successors included such classical economists as the Rev. Thomas
Malthus, Jean-Baptiste Say, David Ricardo, and John Stuart Mill. They examined ways
the landed, capitalist and labouring classes produced and distributed national output and
modeled the effects of population and international trade. In London, Karl Marx
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castigated the capitalist system, which he described as exploitative and alienating. From
about 1870, neoclassical economics attempted to erect a positive, mathematical and
scientifically grounded field above normative politics.
After the wars of the early twentieth century, John Maynard Keynes led a reaction against
what has been described as governmental abstention from economic affairs, advocating
interventionist fiscal policy to stimulate economic demand and growth. With a world
divided between the capitalist first world, the communist second world, and the poor of
the third world, the post-war consensus broke down. Others like Milton Friedman and
Friedrich von Hayek warned of The Road to Serfdom and socialism, focusing their
theories on what could be achieved through better monetary policy and deregulation. As
Keynesian policies seemed to falter in the 1970s there emerged the so called New
Classical school, with prominent theorists such as Robert Lucas and Edward Prescott.
Governmental economic policies from the 1980s were challenged, and development
economists like Amartya Sen and information economists like Joseph Stiglitz introduced
new ideas to economic thought in the twenty first century.
1.3 Aristotle
Main articles: Aristotle, Politics (Aristotle), and Nicomachean Ethics
Plato
and his pupil, Aristotle, have had an enduring effect
on
Western
philosophy.Aristotle's Politics (c.a. 350 BC) was mainly concerned to analyse different
forms of a state (monarchy, aristocracy, constitutional government, tyranny, oligarchy,
democracy) as a critique of Plato's advocacy of a ruling class of "philosopher-kings". In
particular for economists, Plato had drawn a blueprint of society on the basis of common
ownership of resources. Aristotle viewed this model as an oligarchical anathema.
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In Politics Book I, Aristotle discusses the general nature of households and market
exchanges. For him there is a certain "art of acquisition" or "wealth-getting". Money itself
has the sole purpose of being a medium of exchange, which means on its own "it is
worthless... not useful as a means to any of the necessities of life".[5] Nevertheless, points
out Aristotle, because the "instrument" of money is the same many people are obsessed
with the simple accumulation of money. "Wealth-getting" for one's household is
"necessary and honourable", while exchange on the retail trade for simple accumulation is
"justly censured, for it is dishonourable".[6] Aristotle disapproved highly of usury and also
cast scorn on making money through monopoly.[7]
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SECTION TWO
CLASSICAL POLITICAL ECONOMY
2. Classical Economics
Main article: Classical economics
See also: Thomas Edward Cliffe Leslie, Walter Bagehot, and Thorold Rogers
The classical economists were referred to as a group for the first time by Karl Marx.[26]
One unifying part of their theories was the labour theory of value, contrasting to value
deriving from a general equilibrium of supply and demand. These economists had seen
the first economic and social transformation brought by the Industrial Revolution: rural
depopulation, precariousness, poverty, apparition of a working class. They wondered
about the population growth, because the demographic transition had begun in Great
Britain at that time. They also asked many fundamental questions, about the source of
value, the causes of economic growth and the role of money in the economy. They
supported a free-market economy, arguing it was a natural system based upon freedom
and property. However, these economists were divided and did not make up a unified
current of thought.
2.1 Jeremy Bentham
Main article: Jeremy Bentham
Jeremy Bentham believed in "the greatest good for the greatest number".
Jeremy Bentham (1748-1832) was perhaps the most radical thinker of his time,
and developed the concept of utilitarianism. Bentham was an atheist, a prison
reformer, animal rights activist, believer in universal suffrage, free speech, free
trade and health insurance at a time when few dared to argue for any. He was
schooled rigorously from an early age, finishing university and being called to the
bar at 18. His first book, Fragment of Government (1776) published anonymously
was a trenchant critique of William Blackstone's Commentaries of the laws of
England. This gained wide success until it was found that the young Bentham, and
not a revered Professor had penned it. In The Principles of Morals and Legislation
(1791) Bentham set out his theory of utility.
The aim of legal policy must be to decrease misery and suffering so far as possible while
producing the greatest happiness for the greatest number.[28] Bentham even designed a
comprehensive methodology for the calculation of aggregate happiness in society that a
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particular law produced a felicific calculus.[29] Society, argued Bentham, is nothing more
than the total of individuals,[30] so that if one aims to produce net social good then one
need only to ensure that more pleasure is experienced across the board than pain,
regardless of numbers. For example, a law is proposed to make every bus in the city
wheel chair accessible, but slower moving as a result than its predecessors because of the
new design. Millions of bus users will therefore experience a small amount of displeasure
(or "pain") in increased traffic and journey times, but a minority of people using wheel
chairs will experience a huge amount of pleasure at being able to catch public transport,
which outweighs the aggregate displeasure of other users. Interpersonal comparisons of
utility were allowed by Bentham, the idea that one person's vast pleasure can count more
than many others' pain. Much criticism later showed how this could be twisted, finstance,
would the felicific calculus allow a vastly happy dictator to outweigh the dredging misery
of his exploited populus? Despite Bentham's methodology there were severe obstacles in
measuring people's happiness.
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2.2 Jean-Baptiste Say
Main article: Jean-Baptiste Say
Say's law, that supply always equals demand, was unchallenged
until the 20th century.
Jean-Baptiste Say (1767-1832) was a Frenchman, born in Lyon
who helped to popularise Adam Smith's work in France.[31] His
book, A Treatise on Political Economy (1803) contained a brief
passage, which later became orthodoxy in political economics until
the Great Depression and known as Say's Law of markets. Say
argued that there could never be a general deficiency of demand
or a general glut of commodities in the whole economy. People
produce things, said Say, to fulfill their own wants, rather than
those of others. Production is therefore not a question of supply,
but an indication of producers demanding goods. Say agreed that
a part of the income is saved by the households, but in the long
term, savings are invested. Investment and consumption are the
two elements of demand, so that production is demand, so it is
impossible for production to outrun demand, or for there to be a
"general glut" of supply. Say also argued that money was neutral,
because its sole role is to facilitate exchanges: therefore, people
demand money only to buy commodities. Say said that "money is
a veil". To sum up these two ideas, Say said "products are
exchanged for products". At most, there will be different economic
sectors whose demands are not fulfilled. But over time supplies
will shift, businesses will retool for different production and the
market will correct itself. An example of a "general glut" could be
unemployment, in other words, too great a supply of workers, and
too few jobs. Say's Law advocates would suggest that this
necessarily means there is an excess demand for other products
that will correct itself. This remained a foundation of economic
theory until the 1930s. Say's Law was first put forward by James
Mill (1773-1836) in English, and was advocated by David Ricardo,
Henry Thornton[32] and John Stuart Mill. However two political
economists, Thomas Malthus and Sismondi, were unconvinced.
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2.3 Thomas Malthus
Malthus cautioned law makers on the effects of poverty reduction policies.
Main article: Thomas Malthus
Thomas Malthus (1766-1834) was a Tory minister in the United Kingdom
Parliament who, contrasting to Bentham, believed in strict government
abstention from social ills.[33] Malthus devoted the last chapter of his book
Principles of Political Economy (1820) to rebutting Say's law, and argued that the
economy could stagnate with a lack of "effectual demand".[34] In other words,
wages if less than the total costs of production cannot purchase the total output
of industry and that this would cause prices to fall. Price falls decrease incentives
to invest, and the spiral could continue indefinitely. Malthus is more notorious
however for his earlier work, An Essay on the Principle of Population. This
argued that intervention was impossible because of two factors. "Food is
necessary to the existence of man," wrote Malthus. "The passion between the
sexes is necessary and will remain nearly in its present state," he added,
meaning that the "power of the population is infinitely greater than the power in
the Earth to produce subsistence for man."[35] Nevertheless growth in population
is checked by "misery and vice". Any increase in wages for the masses would
cause only a temporary growth in population, which given the constraints in the
supply of the Earth's produce would lead to misery, vice and a corresponding
readjustment to the original population.[36] However more labour could mean
more economic growth, either one of which was able to be produced by an
accumulation of capital.
2.4 David Ricardo
Main
article:
David Ricardo
Ricardo
is renowned
for his law of comparative advantage.
David Ricardo (1772-1823) was born in London. By the age of 26, he had
become a wealthy stock market trader and bought himself a constituency seat in
Ireland to gain a platform in the British parliament's House of Commons.[37]
Ricardo's best known work is his Principles of Political Economy and Taxation,
which contains his critique of barriers to international trade and a description of
the manner the income is distributed in the population. Ricardo made a
distinction between the workers, who received a wage fixed to a level at which
they can survive, the landowners, who earn a rent, and capitalists, who own
capital and receive a profit, a residual part of the income. [38] If population grows,
it becomes necessary to cultivate additional land, whose fertility is lower than
that of already cultivated fields, because of the law of decreasing productivity.
Therefore, the cost of the production of the wheat increases, as well as the price
of the wheat: The rents increase also, the wages, indexed to inflation (because
they must allow workers to survive) too. Profits decrease, until the capitalists can
no longer invest. The economy, Ricardo concluded, is bound to tend towards a
steady state.
To postpone the steady state, Ricardo advocates promoting international trade to import
wheat at a low price to fight landowners. The Corn Laws of the UK had been passed in
1815, setting a fluctuating system of tariffs to stabilise the price of wheat in the domestic
market. Ricardo argued that raising tariffs, despite being intended to benefit the incomes
of farmers, would merely produce a rise in the prices of rents that went into the pockets of
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landowners.[39] Furthermore, extra labour would be employed leading to an increase in the
cost of wages across the board, and therefore reducing exports and profits coming from
overseas business. Economics for Ricardo was all about the relationship between the
three "factors of production": land, labour and capital. Ricardo demonstrated
mathematically that the gains from trade could outweigh the perceived advantages of
protectionist policy. The idea of comparative advantage suggests that even if one country
is inferior at producing all of its goods than another, it may still benefit from opening its
borders since the inflow of goods produced more cheaply than at home, produces a gain
for domestic consumers.[40] According then to Ricardo, this concept would lead to a shift
in prices, so that eventually England would be producing goods in which its comparative
advantages were the highest.
2.5 John Stuart Mill
Remy Bentham, wrote the most authoritative economics text of his time.
Mill, weaned on the philosophy of Je
Main articles: Principles of Political Economy and John Stuart Mill
John Stuart Mill (1806-1873) was the dominant figure of political economic
thought of his time, as well as being a Member of Parliament for the seat of
Westminster, and a leading political philosopher. Mill was a child prodigy,
reading Ancient Greek from the age of 3, and being vigorously schooled by
his father James Mill.[41] Jeremy Bentham was a close mentor and family
friend, and Mill was heavily influenced by David Ricardo. Mill's textbook, first
published in 1848 and titled Principles of Political Economy was essentially a
summary of the economic wisdom of the mid nineteenth century.[42] It was
used as the standard texts by most universities well into the beginning of the
twentieth century. On the question of economic growth Mill tried to find a
middle ground between Adam Smith's view of ever expanding opportunities
for trade and technological innovation and Thomas Malthus' view of the
inherent limits of population. In his fourth book Mill set out a number of
possible future outcomes, rather than predicting one in particular. The first
followed the Malthusian line that population grew quicker than supplies,
leading to falling wages and rising profits.[43] The second, per Smith, said if
capital accumulated faster than population grew then real wages would rise.
Third, echoing David Ricardo, should capital accumulate and population
increase at the same rate, yet technology stay stable, there would be no
change in real wages because supply and demand for labour would be the
same. However growing populations would require more land use, increasing
food production costs and therefore decreasing profits. The fourth alternative
was that technology advanced faster than population and capital stock
increased.[44] The result would be a prospering economy. Mill felt the third
scenario most likely, and he assumed technology advanced would have to
end at some point.[45] But on the prospect of continuing economic growth, Mill
was more ambivalent.
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"I confess I am not charmed with the ideal of life held out by those who think that the
normal state of human beings is that of struggling to get on; that the trampling, crushing,
elbowing, and treading on each other's heels, which form the existing type of social life,
are the most desirable lot of human kind, or anything but the disagreeable symptoms of
one of the phases of industrial progress. Mill is also credited with being the first person to
speak of supply and demand as a relationship rather than mere quantities of goods on
markets,[47] the concept of opportunity cost and the rejection of the wage fund doctrine.
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SECTION THREE
MARXIST ECONOMICS
3. Marxian Economics
Main article: Marxian Economics
Karl Marx provided a fundamental critique of classical economics, based on the
labour theory of value. Just as the term "mercantilism" had been coined and
popularised by its critics, like Adam Smith, so was the term "capitalism" or
Kapitalismus used by its dissidents, primarily Karl Marx. Karl Marx (1818-1883)
was, and in many ways still remains the pre-eminent socialist economist. His
combination of political theory represented in the Communist Manifesto and the
dialectic theory of history inspired by Friedrich Hegel provided a revolutionary
critique of capitalism as he saw it in the nineteenth century. The socialist
movement that he joined had emerged in response to the conditions of people
in the new industrial era and the classical economics which accompanied it. He
wrote his magnum opus Das Kapital at the British Museum's library.
3.1 Context
Main articles: Robert Owen, Pierre Proudhon, and Friedrich Engels
With Marx, Friedrich Engels coauthored the Communist Manifesto, and the second
volume of Das Kapital.
Robert Owen (1771-1858) was one industrialist who determined to improve the
conditions of his workers. He bought textile mills in New Lanark, Scotland where he
forbade children under ten to work, set the workday from 6 a.m. to 7 p.m. and
provided evening schools for children when they finished. Such meagre measures
were still substantial improvements and his business remained solvent through
higher productivity, though his pay rates were lower than the national average. [49] He
published his vision in The New View of Society (1816) during the passage of the
Factory Acts, but his attempt from 1824 to begin a new utopian community in New
Harmony, Indiana ended in failure. One of Marx's own influences was the French
philosopher Pierre Proudhon. While deeply critical of capitalism, he also objected to
those contemporary socialists who idolized association. In his book The Philosophy
of Poverty Proudhon made a political economic attack on the classical subsistence
theory of wages.(1846)[50] In his book What is Property? (1840) he argue that
property is theft, a different view than the classical Mill, who had written that "partial
taxation is a mild form of robbery".[51] However, towards the end of his life, Proudhon
modified some of his earlier views. In the posthumously published Theory of
Property, he argued that "property is the only power that can act as a counterweight
to the State."[52] Friedrich Engels, a published radical author, released a book titled
The Condition of the Working Class in England in 1844[53] describing people's
positions as "the most unconcealed pinnacle of social misery in our day." After Marx
died, it was Engels that completed the second volume of Das Kapital from Marx's
notes.
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3.2 After Marx
Beatrice Webb helped establish the London School of Economics.
Main articles: Karl Kautsky, Rosa Luxembourg, Beatrice Webb, John
A. Hobson, R. H. Tawney, and Paul Sweezy
The first volume of Das Kapital was the only one Marx alone published.
The second and third volumes were done with the help of Friedrich
Engels and Karl Kautsky, who had become a friend of Engels, saw
through the publication of volume four.
Marx had begun a tradition of economists who concentrated equally on
political affairs. Also in Germany, Rosa Luxembourg was a member of
the SPD, who later turned towards the Communist Party because of
their stance against the First World War. Beatrice Webb in England
was a socialist, who helped found both the London School of
Economics (LSE) and the Fabian Society.
3.3 Neoclassical Thought
Main articles: Neoclassical Economics, Marginalism, and Mathematical Economics
See also: Leon Walras, Alexander del Mar, John Bates Clark, Irving Fisher, William
Ashley (economic historian), Enrico Barone, and Maffeo Pantaleoni.
In the 1860s, a revolution took place in economics. The new ideas were that of the
Marginalist school. Writing simultaneously and independently, a Frenchman (Leon
Walras), an Austrian (Carl Menger) and an Englishman (Stanley Jevons) were developing
the theory, which had some antecedents. Instead of the price of a good or service
reflecting the labor that has produced it, it reflects the marginal usefulness (utility) of the
last purchase. This meant that in equilibrium, people's preferences determined prices,
including, indirectly the price of labor.
This current of thought was not united, and there were three main schools working
independently. The Lausanne school, whose two main representants were Walras and
Vilfredo Pareto, developed the theories of general equilibrium and optimality. The main
written work of this school was Walras' Elements of Pure Economics. The Cambridge
school appeared with Jevons' Theory of Political Economy in 1871. This English school
has developed the theories of the partial equilibrium and has insisted on markets' failures.
The main representatives were Alfred Marshall, Stanley Jevons and Arthur Pigou. The
Vienna school was made up of Austrian economists Menger, Eugen von Böhm-Bawerk
and Friedrich von Wieser. They developed the theory of capital and has tried to explain
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the presence of economic crises. It appeared in 1871 with Menger's Principles of
Economics.
3.3 Marginal Utility
Main articles: Marginal utility theory, Carl Menger, Stanley Jevons, and Leon Walras
Early attempts to explain away the periodical crises of which Marx had
spoken were not initially as successful. After finding a statistical correlation
of sunspots and business fluctuations and following the common belief at
the time that sunspots had a direct effect on weather and hence agricultural
output, Stanley Jevons wrote,
"when we know that there is a cause, the variation of the solar activity,
which is just of the nature to affect the produce of agriculture, and which
does vary in the same period, it becomes almost certain that the two series
of phenomena— credit cycles and solar variations—are connected as effect
and cause.[55]
3.4 Mathematical Analysis
Main articles: Vilfredo Pareto, Alfred Marshall, Francis Edgeworth, and Johann Heinrich
von Thünen
Alfred Marshall wrote the main alternative textbook to John Stuart Mill of the day,
Principles of Economics (1882)
Vilfredo Pareto (1848-1923) was an Italian economist, best known for developing
the concept of the circumstance under which nobody need be made worse off,
and nobody better off through wealth redistribution. When this situation exists,
the economy is said to be "Pareto efficient". Pareto devised mathematical
representations for this optimal resource allocation, which when represented on
a graph would yield a curve. Different points along the curve represent different
allocations, but each would be optimally efficient. Rather than using the
persuasive language of classical economists like Mill, the Pareto efficient curve
could be represented with a precise mathematical formula.
Alfred Marshall is also credited with an attempt to put economics on a more mathematical
footing. He was the first Professor of Economics at the University of Cambridge and his
work, Principles of Economics[56] coincided with the transition of the subject from
"political economy" to his favoured term, "economics". He viewed maths as a way to
simplify economic reasoning, though had reservations, revealed in a letter to his student
Arthur Cecil Pigou.
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(1) Use mathematics as shorthand language, rather than as an engine of inquiry.
(2) Keep to them till you have done.
(3) Translate into English.
(4) Then illustrate by examples that are important in real life.
(5) Burn the mathematics.
(6) If you can’t succeed in 4, burn 3.
This I do often. Coming after the marginal revolution, Marshall concentrated on
reconciling the classical labour theory of value, which had concentrated on the supply
side of the market, with the new marginalist theory that concentrated on the consumer
demand side. Marshall's graphical representation is the famous supply and demand graph,
the "Marshallian cross". He insisted it is the intersection of both supply and demand that
produce equilibrium of price in a competitive market. Over the long run, argued Marshall,
the costs of production and the price of goods and services tend towards the lowest point
consistent with continued production. Arthur Cecil Pigou in Wealth and Welfare (1920)
insisted on the existence of market failures. Markets are inefficient in case of economic
externalities, and the State must interfere. However, Pigou retained free-market beliefs,
and in 1933, in the face of the economic crisis, he explained in The Theory of
Unemployment that the excessive intervention of the state in the labor market was the real
cause of massive unemployment, because the governments had established a minimal
wage, which prevented the wages from adjusting automatically. This was to be the focus
of attack from Keynes.
3.5 Contemporary Economic Thought
From the 1970s onwards Friedman's monetarist critique of Keynesian macroeconomics
formed the starting point for a number of trends in macroeconomic theory opposed to the
idea that government intervention can or should stabilise the economy.[80] Robert Lucas
criticized Keynesian thought for its inconsistency with microeconomic theory. Lucas's
critique set the stage for a neoclassical school of macroeconomics; New Classical
economics based the foundation of classical economics. Lucas also popularized the idea
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of rational expectations,[81] which was used as the basis for several new classical theories
including the Policy Ineffectiveness Proposition.[82]
The standard model for new classical economics is the real business cycle theory, which
sought to explain observed fluctuations in output and employment in terms of real
variables such as changes in technology and tastes. Assuming competitive markets, real
business cycle theory implied that cyclical fluctuations are optimal responses to
variability in technology and tastes, and that macroeconomic stabilisation policies must
reduce welfare.[83]
Keynesian economic made a comeback among mainstream economists with the advent of
New Keynesian macroeconomics. The central theme of new Keynesianism was the
provision of a microeconomic foundation for Keynesian macroeconomics, obtained by
identifying minimal deviations from the standard microeconomic assumptions which
yield Keynesian macroeconomic conclusions, such as the possibility of significant
welfare benefits from macroeconomic stabilization.[84] Akerlof’s ‘menu costs’ arguments,
showing that, under imperfect competition, small deviations from rationality generate
significant (in welfare terms) price stickiness, are good example of this kind of work.[85]
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SECTION FOUR
ECONOMICS IS THE STUDY OF HOW PEOPLE CHOOSE
TO USE RESOURCES
4.1 Concepts of Economics
Resources include the time and talent people have available, the land, buildings,
equipment, and other tools on hand, and the knowledge of how to combine them to create
useful products and services.
Important choices involve how much time to devote to work, to school, and to leisure,
how many dollars to spend and how many to save, how to combine resources to produce
goods and services, and how to vote and shape the level of taxes and the role of
government.
Often, people appear to use their resources to improve their well-being. Well-being
includes the satisfaction people gain from the products and services they choose to
consume, from their time spent in leisure and with family and community as well as in
jobs, and the security and services provided by effective governments. Sometimes,
however, people appear to use their resources in ways that don't improve their well-being.
In short, economics includes the study of labor, land, and investments, of money, income,
and production, and of taxes and government expenditures. Economists seek to measure
well-being, to learn how well-being may increase overtime, and to evaluate the wellbeing of the rich and the poor. The most famous book in economics is the Inquiry into the
Nature and Causes of the Wealth of Nations written by Adam Smith, and published in
1776 in Scotland.
Although the behavior of individuals is important, economics also addresses the
collective behavior of businesses and industries, governments and countries, and the
globe as a whole. Microeconomics starts by thinking about how individuals make
decisions. Macroeconomics considers aggregate outcomes. The two points of view are
essential in understanding most economic phenomena. The list of fields in economics
illustrates the scope of economic thought.
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4.2 About the American Economic Association
The Association has about 18,000 members from all over the world, most of whom are
working economists in academia, business, government, international and not-for-profit
agencies. It was founded in 1885 to promote the study of economics from all points of
view. "The Association as such will take no partisan attitude, nor will it commit its
members to any position on practical economic questions." The Association publishes
seven journals. About 4,000 libraries subscribe to the journals and individual members
receive journals with membership. The Association also produces ECONlit, a database to
identify and locate books and articles in economics. The annual meeting of the
Association, usually in early January, attracts about eight thousand economists who
present their work and discuss current economic issues. The Association recognizes with
awards the achievement of a small number of economists who have made outstanding
achievements in the advance of economic thought. The Association promotes the market
for economists by helping employers find applicants and vice versa. The Association is
headquartered in Nashville, Tennessee.
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SECTION FIVE
WHAT ARE THE FIELDS IN ECONOMICS?
Economists organize their discipline in fields from agricultural economics to urban
economics. Many economists specialize in a field by publishing original essays on topics
and teaching courses in a specific field.
The fields are in two sets: those that develop core skills and those that emphasize
application of the skills in specific settings. The core itself involves two modes of
analysis. The Skills page gives simple examples. First, mathematical description of
economic phenomena allows derivation of relationships. This mode of thought is called
economic theory. Mathematics allows arguing by deductive reasoning from stated
premises to a conclusion. It offers the internal consistency of mathematical proofs but
requires no evidence of applicability.
The second core method looks for evidence based on observing economic phenomena. It
draws inference from persistent patterns. A consistent pattern that is distinct from the
complexity and randomness in nature is likely to have meaning. This mode of thought is
called inductive reasoning. It is the mode of analysis of economic historians, statisticians,
and experimenters. The study of formal methods for drawing inferences from statistical
evidence in economics is called econometrics.
Many advances in economic understanding come from the interaction between deduction
and induction. When mathematical analysis yields new insights, the historians,
statisticians, and experimenters look for ways to judge whether available evidence is
consistent with the theory. When observation shows phenomena that are inconsistent with
available theories, economic theorists look for new theories. The core fields are in item C
on the list of fields shown below.
Most economists concentrate their work and teaching in an applied field, that is, in the
other categories shown below. They study the history of the phenomena and adapt the
core theoretical ideas of economics to offer explanations. They develop a variety of
methods to observe and measure events and apply econometric methods to test
hypotheses. For example, international economists study the history of trade, balance of
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payments, and exchange rates. They will understand both the economic theories and the
econometric findings that explain international economic phenomena.
The fields of economics, however, have fuzzy boundaries because economic events are
interconnected. Every transaction has a buyer and a seller; each economic event has
extended consequences. A change in a wage rate will affect the cost of the goods the
workers produce as well as change the income and consumption patterns of the workers’
households. An economist working in one field will be aware of connections to the rest of
the economy.
The fields of economics, then, are more signposts than fences. They include the core
areas of mathematical and statistical methods as well as the many areas in which the core
methods are applied. Most undergraduate programs include study in the core fields and in
a selection of applied fields. The standard classification of economic fields given below
appears in the Journal of Economic Literature. These field labels provide enduring
markers on the terrain of economic thought.
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SECTION SIX
JOURNAL OF ECONOMIC LITERATURE
6. Classification of Fields
6.1 General Economics and Teaching
The principles course in the economics curriculum develops core ideas. The course also
provides the big picture of how individual economic events fit together to shape
aggregate outcomes. Mastering basic ideas and getting a sense of how the parts fit into the
whole is an essential entry point to the study of other fields and more advanced ideas in
economics. The A category also includes discussion of the teaching of economics.
6.2 Schools of Economic Thought and Methodology
Economists who study the history of economic thought investigate how the core ideas in
economics have developed.
6.3 Mathematical and Quantitative Methods
Econometricians develop methods to measure economic phenomena. They apply the
scientific method by formulating hypotheses, gathering evidence, and judging whether the
evidence is consistent with the hypotheses. Mathematical economists develop tools for
finding optimal solutions to economic problems and advance ideas in game theory. Game
theory is the method for analyzing how one player chooses strategies in light of
knowledge of the possible strategies a rival might choose. Game theory is used to analyze
many economic phenomena including the interaction between firms. In recent decades,
experimental economists have tested economic theories in laboratories and in the field.
6.4 Microeconomics
Studying how markets function and the role of prices is of central concern in
understanding economics. Investigation of the behavior of individual households, firms,
and prices and quantities of specific products like automobiles is called microeconomics.
Behavioral economists study the cognitive and emotional dimensions of economic
decisions.
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6.5 Macroeconomics and Monetary Economics
The actions of individuals sum to the total activity in a whole economy. In the aggregate,
the total amount of products consumed by households and firms must equal the total
amount produced. The total amount firms pay to workers and investors must equal the
amount households receive in income. Study of the aggregate relationships in an
economy is called macroeconomics. Economic growth, the role of money and interest
rates, and changes in the overall level of prices and the aggregate level of unemployment
are central concerns of macroeconomics.
6.6 International Economics
International economists study trade among nations and the flow of finance across
international borders. Globalization and the deficit in the U.S. balance of payments with
other countries are current concerns.
6.7 Financial Economics
Financial economists study the process of saving and investing with a specific concern
for how individuals and firms deal with risk.
6.8 Public Economics
Public finance economists consider the role of government in the economy. Some focus
on evaluating government programs and others focus on the design of tax systems.
Public finance economists are also interested in how the political process makes
decisions. Issues of national security and defense appear here as well the study of state
and local governments.
6.9 Health, Education, and Welfare
Some economists focus on the markets and government policies that directly shape
access to health care. Others focus on schools and educational policies. Still others
consider the economic circumstances of the poor and evaluate alternative government
programs to improve the well-being of the poor.
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6.10 Labor and Demographic Economics
Labor economists study employers’ decisions to hire workers and employees’ decisions
to work. They study how wages are set, the nature of incentives workers face, and the
role of minimum wage laws, unions, pensions plans, and training programs. They are also
interested in the formation of families, determinants of birth rates, migration, population
change, and aging.
6.11 Law and Economics
Some economists use the tools of economics to study the incentives for human behavior
that are defined by the legal system. Property rights, for example, are essential for
markets to work well but they can be defined in a variety of ways that have different
effects on the well-being of people.
6.12 Industrial Organization
Industrial Organization is the study of individual markets, the nature of competition, and
the role of prices. Some economists study issues in anti-trust policy. Others study the role
of advertising, pricing policies, and how costs vary with the scale of operations. Some IO
economists investigate particular industries such as appliances, software, and electricity.
In the last decade a number of economists have studied economic issues in sports,
recreation, and tourism.
6.13 Business Administration, Business Economics, Marketing and Accounting
Business economists study decisions made by firms. How do firms maximize profit?
What prices should they set and how much should they produce? What is the role of
incentives within the firm, of entrepreneurship, and leadership?
6.14 Economic History
Economic historians explore changes in economic well-being and how economic
institutions have developed. The emergence of markets, the forces shaping the industrial
revolution, the sources of improvements in agricultural productivity, the influence of
railroads and other new technologies provide perspective on current economic issues.
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6.15 Economic Development, Technical Change, and Growth
Economists who are interested in the development of economies often focus on third
world countries. Why have some countries developed while others have not? How might
the industrialized countries improve the prospects for development around the world?
Who gains and who loses with industrialization?
6.16 Economic Systems
Analysts compare the capital market system to the various forms of socialism and the
transition from centrally planned to more market-based economic systems. Economists
sometimes address issues in specific countries like China, Cuba, and Poland.
6.17 Agricultural and Natural Resource Economics, Environmental and Ecological
Economics
Economists study farming, fishery, and forests with a focus on prices, markets, and
changing technologies. Natural resource economists study markets for energy (oil, coal,
and electricity) and mineral resources. Economists have played an important role in the
evolution of policies to promote clean air, water, and land.
6.18 Urban, Rural, and Regional Economics
Economists analyze the location decisions of households and firms and the associated
issues in housing, transportation, and local government.
6.19 Miscellaneous Categories
Data, dissertations, and book reviews are classified here.
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6.20 Other Special Topics
Other special topics include the economics of the arts, religion, and culture.
Each major field defined in the JEL has several subfields. Search for the field and
subfield terms in Wikipedia and Google for more information about each.
Economists add to our collective knowledge by publishing new work in each of the fields
above as explained in the finding facts & ideas page. Some of the latest work addresses
issues of significant current interest.
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SECTION SEVEN
CURRENT ISSUES IN ECONOMICS
Economists study changes occurring in specific countries or individual sectors of an
economy; some ask fundamental questions about the nature of economic decisions; some
address proposals to change government policies.
Leading economists develop issues in two lectures sponsored by the American Economic
Association at its annual meeting. The address of the President of the Association and an
invited lecture called the Ely Lecture, named for a founder of the Association, discuss
issues of the speakers' choice. More economists define their own issues in symposia
where they present their work. The symposia sometimes address more focused topics than
the newspaper headlines and also develop deeper understanding of economic phenomena.
Economists from all over the world present their latest research at the Annual Meetings of
the American Economic Association and economic agencies publish annual reports that
discuss significant issues for the nation and the world.
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SECTION EIGHT
LOGICAL ANALYSIS
The Open Market Committee of the Federal Reserve looks at evidence about the rate of
inflation, that is, the rate of increase in the general price level, and the expected rate of
inflation, and decides to act to reduce inflation. Will it buy bonds from investors in the
open market, using money from its accounts, or will it sell bonds from its reserves in
exchange for investors’ money?
A bond is a contract. The seller of the bond receives the face amount of the bond at the
time of the sale and agrees to pay the holder of the bond a certain amount each quarter
until the bond matures (expires) at which time the bondholder receives the return of the
face amount of the bond. Once a bond is issued, its current price varies in the marketplace
for bonds as investors’ respond to changing interest rates. When interest rates on similar
assets rise, the holders of a given bond will want their bond to pay the same interest rate
as other similar assets. A fall in the current price of the bond means that the fixed bond
payment provides a higher rate of interest relative to the current price. The bond’s interest
payment is fixed; the bond’s market price varies as market interest rates vary.
Here is the analysis. When the Federal Reserve sells bonds, the market price of bonds will
go down and thereby increase the current rate of interest of the bonds. (The fixed interest
payment relative the lower market price of the bond means the current rate of interest
earned by the bond is higher.) With higher interest rates, investors will economize on the
use of funds, businesses will begin fewer capital projects, the pace of economy activity
will slacken, and inflation will, in time, come down.
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SECTION NINE
COMPUTERS IN ECONOMICS, POLITICS, AND SOCIAL
STRUCTURES
9.1 Computer Economics
9.1.1 Stock Market
Today's financial markets experience larger swings partly because of program trading,
where large stockholders use computers to decide when to buy or sell stock in large
quantities. When the specified conditions are met and the programs trigger, the large
transactions can cause other programs to trigger, leading to a spiral of selling and buying
that produces the large swings in the market.
On the other hand, computer trading has also allowed more people to participate in the
stock market through low-cost Internet stock trading sites.
9.1.2 E-commerce
There has been a meteoric rise in online business, a phenomenon that
is termed e-commerce. Many consumers now pay their bills entirely
online. Online shopping at sites like Amazon.com has become routine
for many consumers. It did not take many years for online auctions at
sites such as eBay to become enormously popular.
9.1.3 Electronic commerce
Electronic commerce, commonly known as (electronic marketing) e-commerce or
eCommerce, consists of the buying and selling of products or services over electronic
systems such as the Internet and other computer networks. The amount of trade conducted
electronically has grown extraordinarily with widespread Internet usage. The use of
commerce is conducted in this way, spurring and drawing on innovations in electronic
funds transfer, supply chain management, Internet marketing, online transaction
processing, electronic data interchange (EDI), inventory management systems, and
automated data collection systems. Modern electronic commerce typically uses the World
Wide Web at least at some point in the transaction's lifecycle, although it can encompass
a wider range of technologies such as e-mail as well.
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A large percentage of electronic commerce is conducted entirely electronically for virtual
items such as access to premium content on a website, but most electronic commerce
involves the transportation of physical items in some way. Online retailers are sometimes
known as e-tailers and online retail is sometimes known as e-tail. Almost all big retailers
have electronic commerce presence on the World Wide Web.
Electronic commerce that is conducted between businesses is referred to as business-tobusiness or B2B. B2B can be open to all interested parties (e.g. commodity exchange) or
limited to specific, pre-qualified participants (private electronic market). Electronic
commerce that is conducted between businesses and consumers, on the other hand, is
referred to as business-to-consumer or B2C. This is the type of electronic commerce
conducted by companies such as Amazon.com.
Electronic commerce is generally considered to be the sales aspect of e-business. It also
consists of the exchange of data to facilitate the financing and payment aspects of the
business transactions.
9.2 History: Early Development
The meaning of electronic commerce has changed over the last 30 years. Originally,
electronic commerce meant the facilitation of commercial transactions electronically,
using technology such as Electronic Data Interchange (EDI) and Electronic Funds
Transfer (EFT). These were both introduced in the late 1970s, allowing businesses to
send commercial documents like purchase orders or invoices electronically. The growth
and acceptance of credit cards, automated teller machines (ATM) and telephone banking
in the 1980s were also forms of electronic commerce. Another form of e-commerce was
the airline reservation system typified by Sabre in the USA and Travicom in the UK.
Online shopping, an important component of electronic commerce was invented by
Michael Aldrich in the UK in 1979. The world's first recorded B2B was Thomson
Holidays in 1981. The first recorded B2C was Gateshead SIS/Tesco in 1984 The world's
first recorded online shopper was Mrs Jane Snowball of Gateshead, England During the
1980s, online shopping was also used extensively in the UK by auto manufacturers such
as Ford, Peugeot-Talbot, General Motors and Nissan. All these organizations and others
used the Aldrich systems. The systems used the switched public telephone network in
dial-up and leased line modes. There was no broadband capability.
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From the 1990s onwards, electronic commerce would additionally include enterprise
resource planning systems (ERP), data mining and data warehousing.
An early example of many-to-many electronic commerce in physical goods was the
Boston Computer Exchange, a marketplace for used computers launched in 1982. An
early online information marketplace, including online consulting, was the American
Information Exchange, another pre Internet online system introduced in 1991.
In 1990 Tim Berners-Lee invented the World Wide Web and transformed an academic
telecommunication network into a worldwide everyman everyday communication system
called internet/www. Commercial enterprise on the Internet was strictly prohibited until
1991. Although the Internet became popular worldwide around 1994 when the first
internet online shopping started, it took about five years to introduce security protocols
and DSL allowing continual connection to the Internet. By the end of 2000, many
European and American business companies offered their services through the World
Wide Web. Since then people began to associate a word "ecommerce" with the ability of
purchasing various goods through the Internet using secure protocols and electronic
payment services.
9.3 Business Applications
Some common applications related to electronic commerce are the following:



Email
Enterprise content management
Instant messaging

Newsgroups

Online shopping and order tracking

Online banking

Online office suites

Domestic and international payment systems

Shopping cart software

Teleconferencing

Electronic tickets
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9.4 Government Regulations
In the United States, some electronic commerce activities are regulated by the Federal
Trade Commission (FTC). These activities include the use of commercial e-mails, online
advertising and consumer privacy. The CAN-SPAM Act of 2003 establishes national
standards for direct marketing over e-mail. The Federal Trade Commission Act regulates
all forms of advertising, including online advertising, and states that advertising must be
truthful and non-deceptive. Using its authority under Section 5 of the FTC Act, which
prohibits unfair or deceptive practices, the FTC has brought a number of cases to enforce
the promises in corporate privacy statements, including promises about the security of
consumers’ personal information. As result, any corporate privacy policy related to ecommerce activity may be subject to enforcement by the FTC.
The Ryan Haight Online Pharmacy Consumer Protection Act of 2008, which came into
law in 2008, amends the Controlled Substances Act to address online pharmacies.[11]
9.5 Forms
Contemporary electronic commerce involves everything from ordering "digital" content
for immediate online consumption, to ordering conventional goods and services, to
"meta" services to facilitate other types of electronic commerce.
On the consumer level, electronic commerce is mostly conducted on the World Wide
Web. An individual can go online to purchase anything from books or groceries, to
expensive items like real estate. Another example would be online banking, i.e. online bill
payments, buying stocks, transferring funds from one account to another, and initiating
wire payment to another country. All of these activities can be done with a few strokes of
the keyboard.
On the institutional level, big corporations and financial institutions use the internet to
exchange financial data to facilitate domestic and international business. Data integrity
and security are very hot and pressing issues for electronic commerce today.
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SECTION TEN
COMPUTER ECONOMICS
10.1 IT Job and Budget Cuts Expected
Computer Economics has been doing an in-depth survey of a couple hundred North
American IT shops for 20 years now, and even with that skinny amount of data compared
to the millions of companies in the region, the trend data across those decades is
interesting. In the most recent survey, 202 IT execs were polled and asked a load of
questions pertaining to their IT budgets and staffing expectations for 2009 and 2010. The
survey was performed in March, and the report came out in late June, and I just found out
about it last week, so there is a pretty big lag. Since the survey questions were asked, the
American economy seems to have stabilized some, and now economists are projecting
that we could even exit the recession that started in December 2007 by the end of
September. (We won't know if this has happened until early next year thanks to all this
lagging.)
Computer Economics says that in a typical recession, fewer than half of IT executives
polled say they will be increasing their IT operational budgets, and indeed, in the spring
when the survey was done, 38 percent of those polled said they were cutting budgets and
only 45 percent said they were increasing IT spending; 17 percent said they would spend
about the same amount this year as they did in 2008. The report says that this is not as bad
as the situation was in 2002, in the wake of the dot-com and ERP busts and the 9/11
terrorist attacks, which sent the world into a recession. Back then, only 36 percent of IT
shops polled by Computer Economics said they would increase IT budgets. In many
cases, companies were already drunk with excess capacity thanks to IT binge spending,
and it took many years to burn off that capacity. (That's my analysis. Computer
Economics had some fuzzy logic about the downturn being led by technology in 20022003 and the 2007-2009 recessions being led by real estate and financial collapses. Who
bought all of those servers back in 2000 and 2001? Every company in every industry on
earth was worried that the Internet was going to leave them behind.
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When average across all companies surveyed by Computer Economics, IT budgets are
expected to be flat as a pancake in 2009, just like they were in 2004. The company
reckons that, based on what survey respondents said the average IT operational budget in
North America grew 2.5 percent in 2005, rose by 4.1 percent in 2006, peaked at 5 percent
growth in 2007, and declined to only 4 percent growth in 2008. As you can see, IT
managers and their bosses in the boardrooms of North America are keeping IT budgets on
a shorter leash than in the late 1990s, when budgets were growing at double-digit rates.
If there is a worrying metric, it is that some 49 percent of IT execs said they would
actually spend less dough than they had allocated to them for the budget in 2009, which
means more pressure to cut costs than they are already under. Only 9 percent of the execs
surveyed said they would spend more than they were budgeted.
IT budgets are also on the decline versus company revenue, according to Computer
Economics. In 2004, the IT budgets of the companies surveyed averaged 1.9 percent of
revenue, which shrank to 1.7 percent in 2005 and rose to 2 percent of revenue in 2006. In
2007, that ratio between the IT budget and company sales slipped to 1.8 percent, and fell
further to 1.5 percent in 2008. It is anticipated to be 1.5 percent in 2009. The amount of
IT budget money spent per user is also on the wane. Last year, companies spent $6,924
per user for IT operations, down from $7,583 in 2006 and $8,010 in 2006. (Those are
inflation-adjusted figures.) For 2009, Computer Economics was told that the average IT
spending per user would rise to $7,284, but it remains to be seen if companies hit those
targets--particularly with so many IT managers expected to make deeper cuts than their
then-current budgets back in March had already done.
As you might expect, manufacturing and retail companies have been hit the hardest in
terms of IT budgets, while energy, healthcare, services, and banking and financing firms
have held up. (Banks didn't really take the hit--remember, we bailed their sorry assets
out.) Discrete manufacturers report a 5.5 percent decline in IT budgets, and process
manufacturers are taking a 2.5 percent hit. As a group, retailers are expecting to take a 1
percent budget hit in 2009. Energy companies report a 1 percent increase in IT budgets,
services companies expect to spend 4 percent more, healthcare companies are looking at a
4.7 percent increase, and those banks are expecting to spend 4.9 percent more. If I didn't
call your name there, your IT operational budgets across your industry are flat. Sorry.
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So that was the operational budget. The capital budgets have already been frozen. In
2006, IT capital budgets across the companies polled by Computer Economics rose by 5
percent, and increased by 4 percent in 2007. In 2008, capital budgets were flat, and they
are anticipated to be flat this year, too. Server spending is down, but could recover in the
second half of the year. (We'll see. I remain skeptical.) Some 48 percent of the IT execs
polled said they would be able to spend all of the hardware and software budgets they
have been allocated, but 43 percent said back in March they probably wouldn't be able to.
Only 9 percent say they will be able to spend more. I wanna know who these companies
are.
As for staffing, Computer Economics says that nearly half of those companies polled (46
percent) are cutting staff this year, and a quarter are making cuts of 10 percent or deeper
in 2009. Some 27 percent of those polled say they are keeping their IT employee ranks
the same, and another 27 percent report that they are hiring. It is not clear how the
numbers will wash out
10.2 Application of Computer
Typically, undergraduate economics electives focus on content rather than methods, in
spite of the fact that empirical work is fundamental to the practice of economics.This
article describes an alternative approach to teaching content by using computer
applications that emphasise the empirical testing or applications of the theory. Students
enjoy economics courses more when they are taught in this way and lab assignments
provide opportunities to teach a broad skill set that is important to many undergraduate
economics majors.
In spite of persuasive arguments in favour of moving away from lecture/exam formats for
undergraduate economics classes, the vast majority of economics classes are still taught
in the ‘chalk-and-talk’ format.1 Some classes, most commonly statistics or econometrics,
have an add-on laboratory component in which students do engage in active learning of
statistical techniques, while a few economics programmes contain separate, stand-alone
laboratory courses. In contrast, electives in an economics curriculum typically focus on
content, rather than empirical methods. The important feature of all these approaches is
that the manner in which content is usually taught in an economics elective is divorced
from what students learn in their methods classes.This article describes an alternative
approach that uses computer applications that integrate content and empirical
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methods.This approach attempts to help students develop an understanding of content in a
way that more closely resembles the understanding of an empirical research economist.
The economics education literature supports the use of alternative teaching methods. For
example, Becker (1997) bemoans the fact that most undergraduate
10.3 International Review of Economics Education
Economics courses are taught with lecture methods and urges academic economists to
adopt more active, hand-on teaching techniques. Salemi (2002) makes a strong case for
active involvement of students in the classroom, citing work of educational psychologists
and instructional specialists, while Simkins (1999) argues similarly that ‘meaningful
learning’ requires the student to actively participate in the experience. While these and
many other articles provide evidence for the need for active earning generally, several
other articles discuss specifically the use of computer applications or labs in the
economics curriculum. King and LaRoe (1991) describe the economics curriculum at
Denison University that requires students to take a number of lab courses as part of the
economics major and presents some informal evidence about the effectiveness of this
departure from the traditional curriculum. The method described in this paper shares
many similarities with the approach described in King and LaRoe.However, the exercises
described here are slightly more sophisticated and occur within the class, not in a separate
lab period. In the same vein, Santos and Lavin (2004) describe a research curriculum that
teaches students how to find and chart macroeconomic data, access journal articles and
write papers on economic issues. They present some evidence that this technique helps
students achieve ‘deep learning’. One final example of the effectiveness of computer
applications is found in Kendrick,Mercado and Amman (2006).They provide a series of
examples using computational economics that allow students to be creative and become
more deeply involved in their own education.With this literature in mind, this paper
describes one technique, integrating computer applications, that also encourages active
learning economics electives courses.The second section of this paper describes the
overall structure of a lab based course.The third section discusses features of a good lab
assignment for an elective class.The fourth section provides benefits and drawbacks of
this approach.The fifth section discusses some details of this method applied to a course
in economic growth.The sixth section provides some preliminary evaluation of this
technique, and the seventh section offers a concluding thought. Example assignments are
included in the appendices. Structure of a lab-based elective although labs play a central
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role in a lab-based course, they do not need to dominate the class. In my course in
economic growth (described in more detail later), students complete four labs during the
course of the semester with a partner and then complete one lab by themselves in lieu of a
final exam. In total, all five labs count for 25% of the course grade. In addition, students
are assigned a 15 to 20.
10.4 Integrating Computer Applications into Economics Electives
Page final paper (25% of the course grade) in which they are required to use regression
analysis as evidence for at least one of the points made in the paper. In this upper-level
elective, students are also given a take-home midterm,which takes the form of a five-page
essay (20% of the grade), assigned to give an oral presentation of a journal article (10%),
take two quizzes early in the semester (5%) and are given a participation grade (15%).
Most of the students in the class are accustomed to the lecture/exam format in their
economics classes and the quizzes serve the purpose early in the semester to transition
them to a format that relies more heavily on papers, presentations and participation
(i.e.poor performance on the quizzes signals the need for increased effort).This structure
is facilitated by the fact that the class is relatively small, with approximately 20
students.This particular course is taught at a highly selective liberal arts college and the
prerequisites include intermediate macroeconomics and microeconomics as well as
economic statistics. Instructors with less able or prepared students may wish to substitute
additional quizzes, in-class exams or problem sets that rely on the more straightforward
textbook material for some of the paper and presentation assignments.
Furthermore, lab assignments can be tailored to the sophistication of the students;
assignments can focus more on descriptive statistics and graphing for students who are
not familiar with multiple regression anlaysis.
Only five class periods are designated as labs, with the purpose of the lab periods being
simply to get the students started on the assignment.The topic of regression analysis does
spill over into other class periods in a variety of ways and some modification to
traditional lecture notes is required to integrate the lab experience into the course content.
First, students often ask questions about the lab in subsequent class periods, especially
when the topic of the class is related to their labs. In addition, in order to integrate the labs
into the course content, current and previous labs are often referenced in relation to the
theory being discussed.The nature of the lecture is also geared towards students who will
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do empirical work as some time is spent discussing the empirical implications of the
theory discussed. Furthermore, the articles that students present are carefully selected to
include relatively simple but clever empirical strategies that the students explain to their
classmates. Finally, econometric issues are discussed in class on an as-needed basis.
Students in the class use the menu-driven STATA, which they learned in their economic
statistics class.The class requires access to a computer lab at least five times during the
semester. Students work in pairs during the lab period so only one computer for every two
students is required.

International Review of Economics Education
Features of a good lab assignment intended to teach theory. The lab assignments in such a
course consist of a small number of open-ended questions that students are required to
answer using regression analysis.The nature of economics implies that much of what is
taught in economics classes has empirical implications and the key to creating a good
assignment is to have students consider the evidence for these implications.The growing
availability of free or inexpensive economic data on the Internet makes empirical work
possible in almost any economics elective. In designing the assignments, a key principle
to keep in mind is that the purpose of the assignments is not to teach econometric
methods, nor is it for students to produce irrefutable, publishable results, but to teach the
students the content of the elective course.The overarching principle of this method is that
it is the process of empirical investigation that generates the learning
opportunities.Therefore, the assignments should emphasise the implications of theory
discussed in class, rather than the application of a ‘technique of the week’ as can happen
too often when the focus is on learning statistics. Depending on the ability levels of the
students, the assignments might ask the students to replicate, with explanation, a result in
their textbook or in a course reading.This same assignment can be made slightly more
difficult by asking the question in a different way than students have seen in course
material before. For more sophisticated students, the question could require them to
extend material beyond that which was discussed in class.Assignments can also be made
more challenging by giving less direction on the data and variables that should be used. In
particular, assignments for which students are supposed to use all the data in a data set
supplied by the instructor without transformations should be avoided because these kinds
of assignments can be completed by students without an understanding of the material.
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For example, in a macroeconomics, money and banking, or monetary policy class,
students might be given a reading on inflation/output tradeoffs in which estimation of the
Phillips curve is discussed. For example, Lansing (2002) provides a discussion accessible
to many undergraduates that demonstrates how the slope of the Phillips curve may be
different depending on the time period examined.A relatively straightforward assignment
would ask the students to reproduce this work with data from different time periods than
that used by the author, or different measures of inflation, to confirm that the conclusions
are robust. A slightly more difficult assignment might ask the students to read the same
article but ask a less directed question, i.e. estimate the cost of a one percentage point
decrease in the inflation rate. Of course, to answer this question, the students need to
estimate a Phillips curve, but they first need to realise that they do and also to wrestle
with the issue of changing slopes.Alternatively, one might be interested in having
Integrating Computer Applications into Economics Electives students examine these
relationships for a subgroup of the population (e.g. using unemployment rates for
teenagers, females, Hispanic males, etc.) and discuss the policy implications of their
results.
Finally, an even more challenging assignment might ask students a similar question, but
would not provide a reading and would require the students to either reason through an
empirical specification based on class discussions or find a relevant article themselves.
For students who are inexperienced in using empirical evidence for their ideas, these
kinds of assignments are very challenging because the way economics is currently taught
does not often require students to conside how to form empirical specifications consistent
with their theories.Much of the value in teaching content via labs comes from this very
exercise – developing and justifying an empirical specification requires students to think
very precisely about their ideas.A good source for timely and interesting lab questions
for a variety of classes can be found in publications intended for a policy-oriented
audience (e.g. Fed publications,World Bank publications,many papers written at public
policy think tanks). Many of these kinds of articles present empirical analysis that is very
accessible to students who have had one statistics class.Two example assignments
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10.5 On Writing in Economics
10.5.1 Economic Writing Guide
Selecting a topic is the first and perhaps most important step in writing a research paper.
One of the better ways to choose a topic is to review material you have already studied to
discover what unanswered questions you are interested in pursuing. Your professor can
help you develop sound topics, ones that are sufficiently narrow so they can be tackled
and sufficiently broad so that they are interesting. A list of past economics theses is
available from your advisor. You may get ideas of what constitutes a successful thesis by
looking at some of them. They can be borrowed by asking your advisor.
10.5.2 Writing Research Papers in Economics
The Internet can be a useful place to do economic research. However, its usefulness
should not be overestimated by students, nor should it be incorrectly used. The Internet is
not a replacement for books. If you want to find out about the role of trade unions during
the Truman administration, you should search for "Truman" and "trade unions" in the
Colby catalog, not Yahoo! Additionally, because the Internet is unregulated, information
received there should be regarded with a great deal of skepticism if the source is
unknown. When used properly, as a fast and easy way of accessing credible publications,
and as a supplement to library research, the Internet can be a valuable research source.
However, when used improperly, or as the first and only site to research, it is woefully
inadequate, and can be intellectually deceiving.
10.5.3 Writing Economic Research Papers
Pitzer describes the characteristics of the good economics essay. It emphasizes choosing a
topic, exploring the existing literature, developing and using an outline, and drawing a
well-founded conclusion. Here are its comments on plagiarism and citing references.
Plagiarism, the dishonest use of another's intellectual labor, is a serious offense and will
be treated as such. While the Student Handbook fully describes the policies of the College
in cases of plagiarism and cheating, an additional handout on how to avoid plagiarism by
proper acknowledgment of sources is available from the Economics Department. If you
are in doubt about what plagiarism is and what isn't, pick one up.
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You are urged (but not required) to simplify your life and ours by using the author-date
method of acknowledging sources. In this method, each written source is identified in the
text (rather than in a footnote) by the author's last name and the year of publication.
Footnotes are then needed only for material not considered important enough to be
included in the text.
The rules given below for using this method are similar to those in A Manual of Style,
12th edition, published by the University of Chicago Press
1. Both author and date of publication are typically enclosed in parentheses: My
conclusions differ from those of an important earlier study (Friedman and
Schwartz 1963).
2. The citation should stand just before a punctuation mark. If this is impractical, it
should be inserted at a logical break in the sentence: Since the Arab oil embargo at
the end of 1973, numerous papers (Bergstein 1974; Krasner 1974; Varon and
Takeuchi 1974) have assessed the probability of successful cartelization of other
primary commodities.
3. If the author's name has just been mentioned, it need not be repeated in the
citation: According to Armington (1969), products distinguished by place of
production are not perfect substitutes.
4. Refer to a particular page, section, or equation as follows: (Keynes 1936, p. 156)
(Tobin 1963, sec. 3) (Kemp 1969, eq. 6.12)
5. For works with more than one author, use the full form of citation for two or three
authors, but an abbreviated form of four or more. A work by three authors would
be cited: (Little, Scitovsky, and Scott 1970)
6. But instead of: (Sneezy, Dopey, Happy, Grumpy, Sleepy, Bashful, and Doc 1988)
use: (Sneezy, et al. 1988)
7. If you refer to two or more works by the same author published in the same year,
distinguish the work as follows: (Armington 1969a) (Armington 1969b) etc. The
Journal of Political Economy uses the author-date method. Check it for further
examples.
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Your bibliography should list all references cited in the text plus other sources you
consulted but did not cite.
Brian Gilbert, Writing across the Curriculum, Northern Illinois University (1997) lists a
number of sources that address the rhetoric of economics.
10.6 Finding Facts and Ideas

How do you find facts and ideas that address economic issues?
Students can search databases to identify essays, books, government documents,
newspaper and magazine stories that address economic issues. Economists have
published essays and books to make their ideas available for use by others and works are
often available online and through library subscriptions.
A student who wants to study a particular topic, say, the "price of gasoline," might search
for this phrase in several of the databases to identify essays, books, and other materials
that bear on the topic. Using related terms like "energy prices," "petroleum products," and
"price of crude oil" will yield related materials. The references published in academic
works often lead to further reading. Building a good bibliography—a reading list—on a
topic and reading key materials to understand what others have written about a topic is an
essential first step in an investigation.
Essays published in formal academic journals have typically been carefully reviewed by
two or more other scholars who are expert in the subject matter as well by the editor of
the journal who is also usually a successful scholar. The process of evaluation is called
peer review. Essays that have passed through peer review are likely to be of high quality.
Formal essays are careful to include references to other published works used in
developing ideas. Each essay makes an original contribution to an on-going stream of
essays, creating a cumulative body of work from many scholars that, taken together,
represent what is known about economic phenomena.
By going to the references listed at the end of an essay, a reader can see what's needed to
read backward to see where ideas first appeared and how they have developed. Some
electronic indices noted below identify subsequent publications that include a reference to
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an article a reader has identified. The forward-looking citations allow a reader to read
forward to see where an idea has gone.
Peer-reviewed essays normally document carefully the logical chain of deduction, the
steps used in a mathematical derivation, and the data and methods used in a statistical
investigation so that other scholars can replicate the evidence provided. Sometimes the
details are in appendices.
The Journal of Economic Literature (JEL) publishes review essays, that is, essays that
summarize, integrate, and critique dozens and sometimes well over a hundred essays on a
given broad topic. Reading a review essay is a convenient way to get acquainted with
what is known on a topic and where controversies arise. JEL also publishes reviews of
recent books in economics, an annotated list of new books, and a list of current
dissertations from North American universities.
Although some economic journals publish only highly specialized essays, which is essays
that require a significant amount of prior knowledge in order to be understood, some
journals and books are accessible to a wider audience. One such publication is Challenge:
The Magazine of Economic Affairs.
10.7 Computer Economics and Application
Computer Economics has been doing an in-depth survey of a couple hundred North
American IT shops for 20 years now, and even with that skinny amount of data compared
to the millions of companies in the region, the trend data across those decades is
interesting. In the most recent survey, 202 IT execs were polled and asked a load of
questions pertaining to their IT budgets and staffing expectations for 2009 and 2010. The
survey was performed in March, and the report came out in late June, and I just found out
about it last week, so there is a pretty big lag. Since the survey questions were asked, the
American economy seems to have stabilized some, and now economists are projecting
that we could even exit the recession that started in December 2007 by the end of
September. (We won't know if this has happened until early next year thanks to all this
lagging.)
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Computer Economics says that in a typical recession, fewer than half of IT executives
polled say they will be increasing their IT operational budgets, and indeed, in the spring
when the survey was done, 38 percent of those polled said they were cutting budgets and
only 45 percent said they were increasing IT spending; 17 percent said they would spend
about the same amount this year as they did in 2008. The report says that this is not as bad
as the situation was in 2002, in the wake of the dot-com and ERP busts and the 9/11
terrorist attacks, which sent the world into a recession. Back then, only 36 percent of IT
shops polled by Computer Economics said they would increase IT budgets. In many
cases, companies were already drunk with excess capacity thanks to IT binge spending,
and it took many years to burn off that capacity. (That's my analysis. Computer
Economics had some fuzzy logic about the downturn being led by technology in 20022003 and the 2007-2009 recession being led by real estate and financial collapses. Who
bought all of those servers back in 2000 and 2001? Every company in every industry on
earth that was worried that the Internet was going to leave them behind.)
When averaged across all companies surveyed by Computer Economics, IT budgets are
expected to be flat as a pancake in 2009, just like they were in 2004. The company
reckons that, based on what survey respondents said, the average IT operational budget in
North America grew 2.5 percent in 2005, rose by 4.1 percent in 2006, peaked at 5 percent
growth in 2007, and declined to only 4 percent growth in 2008. As you can see, IT
managers and their bosses in the boardrooms of North America are keeping IT budgets on
a shorter leash than in the late 1990s, when budgets were growing at double-digit rates.
If there is a worrying metric, it is that some 49 percent of IT execs said they would
actually spend less dough than they had allocated to them for the budget in 2009, which
means more pressure to cut costs than they are already under. Only 9 percent of the execs
surveyed said they would spend more than they were budgeted.
IT budgets are also on the decline versus company revenue, according to Computer
Economics. In 2004, the IT budgets of the companies surveyed averaged 1.9 percent of
revenue, which shrank to 1.7 percent in 2005 and rose to 2 percent of revenue in 2006. In
2007, that ratio between the IT budget and company sales slipped to 1.8 percent, and fell
further to 1.5 percent in 2008. It is anticipated to be 1.5 percent in 2009. The amount of
IT budget money spent per user is also on the wane. Last year, companies spent $6,924
per user for IT operations, down from $7,583 in 2006 and $8,010 in 2006. (Those are
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inflation-adjusted figures.) For 2009, Computer Economics was told that the average IT
spending per user would rise to $7,284, but it remains to be seen if companies hit those
targets-particularly with so many IT managers expected to make deeper cuts than their
then-current budgets back in March had already done.
As you might expect, manufacturing and retail companies have been hit the hardest in
terms of IT budgets, while energy, healthcare, services, and banking and financing firms
have held up. (Banks didn't really take the hit-remember, we bailed their sorry assets out.)
Discrete manufacturers report a 5.5 percent decline in IT budgets, and process
manufacturers are taking a 2.5 percent hit. As a group, retailers are expecting to take a 1
percent budget hit in 2009. Energy companies report a 1 percent increase in IT budgets,
services companies expect to spend 4 percent more, healthcare companies are looking at a
4.7 percent increase, and those banks are expecting to spend 4.9 percent more. If I didn't
call your name there, your IT operational budgets across your industry are flat. Sorry.
So that was the operational budget. The capital budgets have already been frozen. In
2006, IT capital budgets across the companies polled by Computer Economics rose by 5
percent, and increased by 4 percent in 2007. In 2008, capital budgets were flat, and they
are anticipated to be flat this year, too. Server spending is down, but could recover in the
second half of the year. (We'll see. I remain skeptical.) Some 48 percent of the IT execs
polled said they would be able to spend all of the hardware and software budgets they
have been allocated, but 43 percent said back in March they probably wouldn't be able to.
Only 9 percent say they will be able to spend more. I wanna know who these companies
are.
As for staffing, Computer Economics says that nearly half of those companies polled (46
percent) are cutting staff this year, and a quarter are making cuts of 10 percent or deeper
in 2009. Some 27 percent of those polled say they are keeping their IT employee ranks
the same, and another 27 percent report that they are hiring. It is not clear how the
numbers will wash out.
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10.8 Technology Hiring Expected
The economic system in a democracy requires legitimacy. But the activities within
economic policy, which in general aim at improving living conditions, are frequently seen
with a strong scepticism, particularly by the citizens of the European Union. So
researches on attitudes towards economic institutions and policy measures are of
substantial interest to politicians. Since functional conditions of market economy are
relatively complex and do not resemble the structure of individual private households,
formal economic education is assumed to be a prerequisite for understanding them. Thus,
we assume a positive correlation between the level of lay subjects’ understanding and
their level of agreement with fundamental aspects of market economy. This correlation is
the focus of our paper and of our future empirical research1. We want to elicit the
strength of this relationship because we think it affects main objectives of economic
didactics.
Economic education aims to empower pupils with competence to evaluate and to decide
on economic situations as well as on economic policy. Therefore, in the first part we will
focus on the didactic aspects of our approach and particularly report on empirical studies
about the status of economic literacy. In the second section, the concept of economic
competence will be discussed. On the one hand, we will give an overview about research
results concerning the cognitive development of economic competence and factor
influencing this development. On the other hand, we present the (non-normative)
competence model underlying.
Stressed out technology workers who have been drowning in work because of staff
reductions in 2009 will see some relief in the coming year, predicted researchers at
Computer Economics in a study titled "Outlook for IT Staffing and Spending in 2010,"
released Dec. 15. In 2010, 39 percent of 139 companies surveyed plan to increase hiring,
Computer Economics said, while 52 percent of those companies will increase operational
technology budgets in 2010.
For the remainder of 2009, however, a third of surveyed companies are still prioritizing
IT cost-cutting, according to the report, and 16 percent will continue to ride the costreduction train in 2010.
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"Based on our 20 years of tracking IT budgets, all signs point to a recovery year," Frank
Scavo, president of Computer Economics, said in a news release. "IT executives are
prepared to make midyear adjustments, up or down, based on the strength of the recovery,
but right now it appears we see a year of stabilization in IT spending and staffing."
Recent findings from a Gartner poll of 190 executives were in line with the Computer
Economics study. Overall, Computer Economics forecasts 2 percent median annual
growth in IT operational spending next year, which is slightly lower than Gartner's
forecast that IT spending will increase 3.3 percent in 2010. Likewise, Gartner found 52
percent of companies surveyed plan to increase IT budgets in the coming year.
To put things in some historical perspective, Computer Economics reported that in
2005—the year "when IT finally rebounded from the deep tech-led recession"—budgets
for IT were in the 2.5 percent growth range and grew mightily from there to 4.1 percent in
2006, 5 percent in 2007 and 4 percent in 2008.
About 7 percent of companies in the Computer Economics study are planning staff
reductions in 2010—compared with earlier years, a further sign that the recession's
impact is waning.
"It now appears clear that IT spending and layoffs hit bottom sometime in 2009 and that
we are seeing the beginning of a small renewal in spending on new equipment and
personnel," Computer Economics said in its news release. "If the economic recovery
proves sustainable, this forecast could be conservative; as many IT executives are
planning for second-half adjustments once the picture clears."
By comparison, 35 percent of companies were slashing budgets at the end of 2008 and
only 11 percent were increasing spending.
"At that point, however, business leaders were worrying about the possibility of a global
financial meltdown," Computer Economics said. "This year, IT organizations are
continuing to restrain spending as they approach year-end, despite [the fact] that many of
those same organizations anticipate a green light to raise spending in the year ahead."
How many jobs are being created by these increases was not addressed in the Computer
Economics and Gartner reports
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10.9 Privatization and Restructuring of State-owned Enterprises
The government has announced plans to privatize and restructure state-owned enterprises
including Eskom (the electrical electricity supplier), Transnet (transportation of freight
and people), Telkom (communications) and Denel (aviation, guided weapons and
ordnance). Privatization would include converting the enterprises to companies owned by
shareholders. Restructuring includes commercializing (undertaking operations for a
profit) and corporatizing (registration of the company under the Companies Act).
Key elements of what was to become the first democratically elected government of
South Africa assumed leadership of the country’s trade policy even before it was installed
in office. The principal impetus for this was the preparation of South Africa’s offer to the
Uruguay Round of GATT.South Africa’s GATT offer was effectively the outcome of
negotiations in the National Economic Forum (NEF). In brief, NEF’s origins go back to
an attempt in 1990 by the previous government to introduce a tax on consumption and to
reform labour relations legislation. This generated massive opposition from the unions in
what was already a volatile political and industrial relations climate. The upshot was an
agreement by the previous government to submit changes in industrial relations and
economic policies to negotiating bodies on which labour and business were represented.
The National Manpower Commission, a hitherto powerless and largely ignored advisory
body, was accordingly upgraded and empowered to negotiate the content of labour
market and industrial relations policy. The National Economic Forum was constituted and
mandated to achieve consensus over economic policies. Although consideration of
macroeconomic policy was within NEF’s competence, the unions focused attention on
trade and industrial policy from the outset.
10.10 The Incentive Structure: Conclusions
South Africa’s industrial policy-makers have staked much on their trade and competition
policies. This has been done despite skepticism, at times overt hostility, from both
business and labour to the trade reforms. Nevertheless, government has, despite the
marked lack of enthusiasm for their approaches in these fields, held together the
coalitions supporting its industrial policy. This has been achieved partly because of the
consensus-building, participatory process followed by government. In part, it has
sustained its coalitions because it has successfully managed to portray a principled
approach to its reforms — there is little sense, in contrast with the structural adjustment
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programmes in many other developing countries, that “restructuring” has been foist upon
South Africa. On the contrary, it has been presented as a positive approach to the reality
of globalization, as an aggressive attempt to win space for South Africa in the global
market. This has, by no means, immunized South Africa’s policy-makers from criticism
but it has prevented the intense polarization between government and powerful interest
groups that has characterized other trade reform of this genus.
10.10.1 Industrial Performance and Policy: The Past
An understanding of South Africa’s industrial development proceeds from a number of
stylised facts. In summary, the country is a well-endowed mining economy. Gold is at the
centre of this mineral bounty although other resources — diamonds, coal, platinum and
others — are also of major significance. However, the share of the mining sector,
measured by output and unemployment, has declined over time. On the other hand,
manufacturing sectors share of total GNP grew steadily, declining slowly in recent
decades as the services sector share grew. This shift in the relative weight of mining and
manufacturing underpins the conventional wisdom that represents South Africa as an
economy that has successfully made the transition from its root in resource extraction to
one resting on secondary industry — manufacturing.
But this success, it is widely recognized, has been severely attenuated. In particular,
mining is still disproportionately represented in South Africa’s exports. And — generally
thought to be closely tied to the manufacturing sector’s difficulties in penetrating
international markets — employment in manufacturing began to stagnate and, in some
years, actually decline from the late 1970s.
The explanation for this stunted transition from a mining to a manufacturing economy
(often dubbed “jobless growth” as the growth in manufacturing output and exports
particularly after 1994 did not translate into greater employment in the manufacturing
sector) is generally sought in the policies widely believed to have underpinned the growth
of the manufacturing sector, namely a typical attempt at import substituting
industrialization (ISI) largely through the instrumentality of tariff protection and capital
subsidies. While it is widely held that ISI secured the development of a large and
relatively diversified consumer goods producing sector, a range of other policy-induced
as well as structural shortcomings conspired to ensure import substitution remained
extremely shallow.
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That is, while ISI underpinned highly diversified consumer goods production, it never
generated a capital goods producing sector of any significance and this accounts for the
persistent negative trade balance in manufacturing (and for many of the emerging
inefficiencies in the consumer goods sectors). Moreover, tariff protection — in
combination with other subsidies and forms of support — underpinned a powerful antiexport bias, and the consequent lack of engagement with world markets intensified South
Africa’s perennial balance of payments difficulties and also accounted for the emergence
of dynamic inefficiencies in the manufacturing sector.
These shortcomings were, the story goes, belatedly recognized by the previous regime. It
began to tinker around with tariff liberalization and with export promotion and it
introduced measures designed to incentives innovation and technology development, but
it possessed neither the imagination nor the political will or legitimacy to reform its
industrial policy. The democratic government hence inherited a manufacturing sector
foundering on the rocks of an ISI policy regime and a global environment far less tolerant
of this policy orientation and less forgiving of the inefficiencies that it engendered.
This is not an entirely unfamiliar tale although the extreme shallowness and lack of
dynamism associated with South Africa’s experiment with ISI has to be accounted for.
The particularities of apartheid enter here: extreme income inequalities distorted and
limited the domestic market; labor market and education policies massively restricted
productivity growth and contributed to high levels of industrial unrest; a range of other
apartheid-type restrictions fatally inhibited the development of dynamic SMEs; and
finally, international isolation, itself a direct consequence of apartheid, not only buried
any prospects for export growth but also accounted for government support for “strategic”
sectors and enterprises that severely distorted investment decisions that supported
increasing capital intensity, and that shackled South African industry with highly priced
but poor quality intermediate inputs.
Arguably, however, the conventional wisdom and the industrial policy response that it
suggests represent a partial, incomplete picture of South Africa’s industrial history. It
represents a viewpoint that has been questioned in recent research casts strong doubt on
the widely held notion that import substitution has constituted the central dynamic
underpinning the growth — and malaise — of South African manufacturing.
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This attempted revision of South Africa’s industrial history proceeds from the strength
and centrality of “. . . what is termed a Minerals-Energy Complex (MEC). This includes
the mining and energy sectors and a number of associated sub-sectors of manufacturing,
which have constituted and continue to constitute the core site of accumulation in the
South African economy. ... Contrary to the popular view that there has been a declining
role for mining, the economy’s dependence on this MEC core has in fact increased” (Fine
and Rustomjee, p.71)
For the authors of this view, the expanded role accorded to the MEC vis-à-vis
manufacturing represents more than an empirical revision with shares of output,
employment and other indicators, more accurately distributed between the minerals sector
and other intimately related sectors, on the one hand, and manufacturing, on the other.
Rather, it is argued, the MEC, and measures directed at strengthening it represents the
South African “system of accumulation” and, as such, “ . . .addresses the process by
which the core set of industries . . .have developed historically and have influenced how
other sectors have developed” (Fine and Rustomjee, p.91).
While the “MEC core” is constructed through the very strong material linkages between
mining, electricity generation, minerals processing, iron and steel basic industries and
large swathes of the chemical sector, the key relationships that establish MEC as a
“system of accumulation” are to be found, argue Fine and Rustomjee, firstly, in the
extensive conglomeration that characterizes the corporate sector including the place of the
financial sector in these corporate arrangements and, secondly, in the relationship
between private capital and the state, both qua policy formulator as well as investor in
key sectors of industry — iron and steel, electricity generation and chemicals, to name the
most important.
This revision impacts on interpretations of South African industrial policy as it unfolded
in the inter-war years. As already intimated, this interpretation is dominated by notions of
“imperial” or “international” or, more colloquially, “English-speaking” mining capital
counter posed by “national” or “Afrikaner” manufacturing capital. Where the former
possessed considerable economic power this, the argument runs, was countervailed be the
rising political power of the latter. In the inter-War period, this balance of political power
was manifest in the development of an industrial policy which — acting principally
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through trade policy, public investment in basic industry and taxation of gold mining —
effectively underpinned the rise of the manufacturing sector.
For Fine and Rustomjee, however, the division between the two “fractions” of capital is
less clear-cut and the disjuncture between economic and political power, far from
generating an industrial policy that unequivocally favored the national manufacturing
fraction over its imperial counterpart in mining, produced a messier, more compromised,
more piecemeal approach. They argue that in key aspects — for example important
instances of public investment in key sectors — measures adopted during the inter-War
period ultimately reinforced the dominance and reach of the mining sector though
consolidating its links with the state. In short, the crucial inter-War period is, in this view,
noteworthy not for the introduction of a comprehensive set of ISI policies but rather for
its failure to produce a coherent industrial policy.
The tension between support for manufacturing and the economic power of MEC, the
argument continues, resolved itself in the post-War period essentially through the
interpenetration of English and Afrikaans capital, an interpenetration powerfully
facilitated by the key state-owned enterprises central to MEC (for example, ISCOR in
steel, ESCOM in electricity, SASOL in chemicals and petroleum and, in finance, the
Industrial Development Corporation). This interpenetration effectively consolidated the
dominance of MEC and further marginalized the tariff — which was deployed
increasingly reactively and incoherently — as a strategic instrument of industrial policy.
Writing in 1994, Fine and Rustomjee’s complete their account of post-War industrial
policy with the following observation: “. . . the IDC administers the only significant
proactive industrial policy in the 1990s: the promotion of an industrial trajectory around
the MEC, supporting large-scale mega-projects including SASOL’s expansions,
aluminium smelting, stainless steel and potash. The only difference is that the process is
driven by private sector interests, especially following the privatization programme.”
These two realities — a powerful minerals base with its associated cluster of industries
and a large secondary industrial capacity that grew up largely behind tariff walls — are
powerfully prevalent features of South Africa’s industrial structure and policy. They
continue to inform robust policy debate, with, crudely speaking, one school focused on
transforming the interaction between the MEC core and the rest of the economy, the other
on enhancing the competitiveness of secondary industry.
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10.10.2 Post-Apartheid Industrial Performance and Policy
There are four powerful sets of factors that structure the environment confronting South
Africa’s new policy-makers. These are themes that constantly recur and influence the
direction and outcomes of current policies and programmes and that will, consequently,
run through our case studies. These are, firstly, the historical legacies of South African
industrialization and industrial policy; secondly, the new and fluid international
environment for trade and industrial policy-making; thirdly, the newly empowered
constituencies (and the continued weight of old interest groups) whose potentially
contradictory requirements claim the attention of the new government. Finally, the
current direction of industrial policy is, of course, also powerfully influenced by the
performance of the economy and, more particularly, of the manufacturing sector and this
will briefly overviewed here.
10.10.3 The Past in the Present
We have attempted to outline the historical evolution of South Africa’s manufacturing
and the industrial policy underpinning it. The story that emerges defies easy
characterization and is perceived by current policy-makers to drive South Africa’s
industrial policy in one of two directions.
For those who understand the development of South Africa’s manufacturing as a pale and
largely unintended sideshow to the longstanding centrality of the “mineral-energy
complex,” the industrial policy problem is manifest in the persistent inability to translate
the raw material rent that accrues to MEC into downstream manufacturing capacity. For
those wedded to the more traditional view of South Africa’s industrial history, those who
hold that import substituting industrial policies (including tariff protection and capital
subsidies) successfully spawned significant capacity in secondary industry, the industrial
policy problem translates into the inability of this segment of industry to compete on
international markets, how, in other words, to counter the productivity-sapping
consequences of ISI typically run a ground.
While we have already cautioned against polarizing these divergent views of South
Africa’s industrial history too sharply, they are associated with distinct policy emphases
and programmes. Hence, the former view is pre-occupied with the apparent inability to
successfully utilize our mineral output in downstream value-added production. Concern
with “import-parity pricing” looms large. The Spatial Development Initiative programme,
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which is reviewed below and which was designed to catalyse downstream manufacturing
activity processes through public-private partnerships in large upstream infrastructure or
mineral processing projects, derives directly from efforts to strengthen the interaction
between the MEC core and the rest of the economy.
The policy prescriptions associated with the alternative view tend to focus more directly
on factors thought to limit productivity growth in secondary industry, on programmes
directed at enabling South Africa’s established manufacturing base to move into higher
value added, export-oriented segments of industry. This view is associated with a range of
programmes — inter alia, market access agreements, programmes designed to spur
innovation and technological capacities, the development of small business, improving
inter-actions between firms, at workplace relations and practices, and at human resource
development.
These divergent views also translate into a particular view of the role of the state in
industrial development. Hence, the MEC view tends to a more dirigiste approach to
industrial policy, one inclined to a close interaction between the state and those relatively
few firms that dominate the MEC core, interactions designed to strengthen their material
linkages with the rest of the economy. The alternative view, one whose policy objectives
must, perforce, be realized through the activities of a large number of relatively small
firms, is principally concerned to ensure that the state establishes an environment that will
encourage productivity enhancement on the part of the myriad of firms whose positive
responses this approach relies upon. It is concerned to ensure investment in the basic
underlying capabilities generically required for successful industrial development.
It is difficult to identify which of these approaches has dominated industrial policy in the
post-apartheid period. There is certainly a powerful view at the Department of Trade and
Industry that holds that the state’s principal industrial strategy must derive from our
natural resource bounty and that our policies must be designed to utilize this base as a
springboard for attracting further manufacturing investment. But, equally, significant
policy resources have been devoted to programmes associated with the alternative
approach — with securing trade access agreements and other export support programmes,
with supporting SME development, with facilitating information flows to firms, with
constructing a new regulatory environment. As will be further elaborated, it is our view
that this latter approach will prevail.
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10.11 South Africa in the World
The development of South Africa’s current industrial policy coincides with a dramatic
change in the interface between this country and the rest of the world. This has had a
major impact on industrial policy with influence exercised at two inter-connected levels
— the first and most direct is through the opening up of greater opportunities for trade;
and the second through intensified interaction between South African policy-makers,
advisors and academics, on the one hand, and their counterparts in the rest of the world
and, most particularly, in Washington DC.
It is surprisingly difficult to identify a global orthodoxy around industrial policy in the
early 1990s, South Africa’s crucial and formative transitional period. The “line”
emanating from the multilateral development institutions, the international consultancies
and the centres of academic influence was beginning to blur, largely in consequence of
the positive Asian experience of industrial policy. Certainly, as the South African
transition accelerated from the early 1990s the positive contribution made by industrial
policy to the “Asia miracle” was widely acknowledged. But, there was, for example, little
consensus around the particular policies that secured rapid industrial growth. It often
appeared possible to make the Asia miracle accord exactly with the prejudices of the
observer, although it was well nigh impossible to deny the association between the
sterling performance of the Asian Tigers and their export performance. An ability to
successfully penetrate international markets became a hallmark of a successful industrial
policy even if the precise mechanisms for achieving this remained at the centre of robust
debate.
South Africa’s relationship with the World Bank, a major representative of global policy
orthodoxy, was almost entirely comprised of policy advice. Indeed, South Africa has, in
fact, not solicited loans from the World Bank. In the realm of trade and industrial policy,
World Bank advice to South Africa’s policy-makers is identified with three overall,
mutually reinforcing, approaches. These are firstly tariff liberalization, secondly, the
elimination of subsidies supporting capital intensive mineral processing, and thirdly, more
surprisingly, a focus on micro industrial policy programmes directed at informing and
building capacity in manufacturing firms. This latter orientation — unquestionably
fostered by Brian Levy, a World Bank staffer active in South Africa who had cut his teeth
on small business development programmes in Korea and Indonesia — was actually
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supported by a grant from the Japanese Government via the World Bank. This grant —
the Japanese Grant Fund — enabled government, union and business representatives to
develop collaborative investigations that ultimately underpinned key industrial support
programmes later introduced by government.
The global orthodoxy in trade policy was easier to identify. Indeed, there is little doubt
that the developing consensus around trade policy sets the framework for industrial
policy, that is, certain new insights notwithstanding, global perceptions of industrial
policy were more determined by new agreements and institutional arrangements
governing trade, than by the existence of a powerful global orthodoxy surrounding
industrial policy itself. In particular, as liberalization proceeded (in the context of both
multi- and bi-lateral arrangements) so did those industrial policy measures perceived to
provide an “unfair” advantage in trade come under the spotlight.
South Africa’s experience strongly reflects this argument. The first major economic
policy reform in which the new policy-makers engaged (they were then not even in
government yet) was South Africa’s offer to the Uruguay Round of the GATT. This was
immediately followed by scrutiny of some key industrial policy instruments that were reexamined for their GATT compatibility and were found wanting — the General Export
Incentive Scheme (GEIS), major cash grant to exporters, quickly fell by the wayside. The
GATT negotiations are discussed below. Suffice for the moment to note that any notion
that South Africa’s rulers mindlessly embraced a new global orthodoxy at significant
variance with the policy positions associated with the ANC and its union allies is way too
simplistic. As will be elaborated below, for a complex mix of reasons, powerful domestic
constituencies supported trade liberalization. However, it remains true that, beginning
with GATT and extending through a number of bilateral trade agreements and then the
attempts to reach agreement with SADC and the EU, South Africa’s trade policy quickly
became the instrument that conditioned its industrial policy.
10.11.1 New Voices and New Government
The demise of apartheid has brought previously unrepresented interests to centre-stage.
Moreover, the insertion of these newly empowered interests into the policy-making realm
also underpins significant changes in the mode of governance, in the mode of policy
formulation and implementation.
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These factors — the newly empowered constituencies and the transformation of the mode
of governance — have naturally impacted powerfully on the substance of industrial
policy.
In the sphere of trade and industrial policy, the principal interests whose voice
democratization has brought to the fore are unionized workers. The powerful South
African union movement has devoted considerable attention to industrial policy. At the
early stages of the transition the unions initiated an independent wide-ranging study —
the Industrial Strategy Project (ISP) — which, through a strongly interactive research
process, produced a series of sectoral reports as well as reports on trade policy,
technology policy, competition policy and human resource development. The study
produced a synthesis report elaborating an overall industrial strategy for South Africa. An
extraordinary proportion of the twenty-plus researchers engaged in this project have
moved into senior civil servant and policy advisory positions in the Department of Trade
and Industry and other related government departments and programmes. The union
official responsible for interfacing with the ISP was Alec Erwin, initially Deputy Minister
of Finance in the first post-apartheid cabinet and, for the past four years, Minister of
Trade and Industry. The unions have also participated extensively in a number of
important sectoral initiatives that drew government, business and labour into discussions
around competitiveness issues.
Union participation in industrial policy formulation has — despite initial resistance —
placed productivity-related questions high on their agenda. Productivity enhancement has
come to be accepted by the unions as part of industrial strategy that eschews wage
repression as the basis for developing competitive advantage and that de-emphasises
popular cost cutting industrial strategies such as the development of export processing
zones. A key issue central to questions of policy formulation is the extent to which union
influence over industrial policy has contributed to the poor association between industrial
growth, on the one hand, and employment creation, on the other.
Union experience of job loss associated with productivity enhancement has predictably
softened their commitment to this industrial strategy but it has also — again despite
particularly strong initial resistance — helped persuade the unions of the importance of
increasing the size of the market for their output and, hence, of penetrating international
markets. While not wanting to overstate the extent of union acceptance of this approach,
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where
“productivity
enhancement”
and
“international
competitiveness”
were
unmentionable in union circles at the beginning of the decade, they are now an
established element of their discourse, key objectives of an industrial strategy that
identifies training and participatory forms of work organisation as core elements.
In addition to their substantive impact on the character of industrial policy, the unions
have powerfully influenced the process of policy formation. In particular, they are largely
responsible for initiating a participative mode of governance unusual in its scope and
depth. The National Economic Development and Labour Council (NEDLAC), a statutory
body on which government and organized labour, business and community interests are
represented, is a key site for the formulation of trade and industrial policy. An important
aspect of NEDLAC’s3 activities is the extent to which it has institutionalized and
rendered transparent the lobbying process so powerfully associated with industrial policy.
Democratization has also brought other interest groups to the industrial policy table,
although none as well organized, or with views as well developed, as the unions.
Promotion of Black ownership and entrepreneurship is, for obvious reasons, a particularly
important policy objective of the new government. It is represented in various instruments
and institutions of industrial policy, although its strongest manifestation in this arena is in
the priority accorded to SME development. However, in the arena of trade and industrial
policy, the influence of Black owned business interests, while significant in the context of
selected programmes, is overshadowed by that of the unions. Certainly, at the level of
NEDLAC, business representation remains overwhelmingly dominated by relatively
unreconstructed white dominated business interests.
The sectoral business associations remain powerful. Their background is strongly in the
arena of lobbying for protection and subsidization rather than in the provision of real
services to their members. The latter orientation is a potentially important, even
necessary, dimension of a successful supply-side driven industrial strategy and they are
clearly experiencing some difficulty in discarding their historical baggage. Certainly the
requirement for a participative, transparent approach to policy-making has changed the
nature of decision-making and limited the possibilities of successful lobbying.
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10.11.2 Economic Performance Post-1994
Attempts to evaluate the post-1994 performance of the manufacturing sector against the
new government’s industrial policy must be heavily qualified. But, however tendentious
the association, it impacts significantly upon public perception and, from there, on the
actual content of the policies and the degree of support for programmes, many of which
rely for their success upon high levels of “buy-in.”
Manufacturing has significantly out-performed the overall economy in the post-1994
period. Although volatile, output has grown consistently over this period. Of particular
interest is the significant growth in manufactured exports. Moreover, research-in-progress
indicates that the period has posted a small, but marked, increase in “non-traditional”
exports, essentially a relatively rapid growth in exports from the non-MEC segment4.
Decomposition of our sources of growth — growth which only resumed in 1993 after a
long period of stagnation and decline — would certainly reveal that the manufacturing
sector has been the major source of growth and that export growth has underpinned
overall manufacturing sector growth. In summary:
The secondary sector responded positively to the lifting of sanctions in the 1993–94
period. Manufacturing production grew strongly in 1994 and 1995 as both domestic and
export demand was strong. In addition as the Reconstruction and Development
Programme (RDP) gathered momentum, the electricity and water supply sectors also
grew strongly. However, the manufacturing sector’s growth rate slowed considerably in
1996 partly due to tariff liberalization as well as weak domestic demand factors. The
tariff liberalization led to increased competition on the domestic market and
manufacturers were forced to restructure their production processes in order to increase
their competitiveness. Moreover, with the domestic market increasingly contested by
international producers, local manufacturers were forced to target export markets in order
to maintain sales/turnover. Many South African producers have done so successfully and
manufactured exports have increased significantly since 19955.
On the face of it then, this does represent a considerable vindication of the new
government’s industrial policy and, predictably, DTI has gone to considerable lengths to
correlate post-1994 performance with its policies and programmes.
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However, there are grounds for concern. While export performance has clearly improved
over the recent past (notwithstanding a strengthening, until very recently, of the exchange
rate), with imports increasing more slowly during this period, the manufacturing trade
balance is still heavily in deficit, with key sub-sectors still net users of foreign exchange.
Moreover evidence suggesting that the up-take of the supply side programmes has been
limited, casts some doubt on the claim that export success is policy-driven. In the context
of a stagnant domestic market, this suggests that South Africa’s export successes may
simply be reproducing an established pattern of “distress” exporting that will fade away
as soon as the domestic market picks up again. Of course, if more rapid growth then sucks
in more manufactured imports, the combined impact on imports and exports will see a
familiar balance of payments constraint coming into play and choking off further growth.
This fear is borne out by the persistently low levels of new investment in manufacturing.
Although considerably more robust than the 1980s, current investment levels still do not
reflect the injection of considerable new capacity. Moreover, much of the export success
and new market penetration is in Sub-Saharan Africa whose markets are less demanding
and considerably more limited than those of South Africa’s traditional trading partners
where exports have not grown significantly.
However, it is at the perceived inability of the manufacturing sector to generate
employment that much of the criticism is directed. And just as the spectacle of mass,
unemployment has called into question core aspects of South Africa’s macroeconomic
and labour market policies, so too has it undermined support for key elements of the trade
and industrial policies. Indeed, as the strength of the unions and the strength of orthodoxy
(and, of course, of the interests that support it) serve to hold the line on, respectively,
labour market and macroeconomic policies, the burden for employment creation is, by
default, passing to industrial policy. Growing criticism has focused on the wisdom of
continued commitment to tariff liberalisation, on perceived support for highly capitalintensive mega-projects, and on an apparent reluctance to target labour intensive sectors
for support.
DTI has robustly — and persuasively — defended its record on employment. While it
readily acknowledges that tariff liberalization (exacerbated by massive illegal imports)
has resulted in some employment loss, it also suggests that certain job gains consequent
upon rapid restructuring are not being recorded: “ . . . employment statistics in South
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Africa are notoriously unreliable and the Department is of the opinion that underreporting of informal sector activities, increased sub-contracting and the creation of
unrecorded new jobs results in employment statistics under-reporting the true
employment level in the manufacturing sector.”6
Where tariff liberalization is concerned, DTI argues that a realistic assessment, would
give them higher marks: “The restructuring of tariff protection, which started in 1995, has
not had the disastrous consequences many commentators were predicting earlier. The deindustrialization which has accompanied tariff liberalization in a number of developing
countries has been avoided mainly because of the careful segmentation and sequencing of
the tariff reform.”7
In summary then, the new policies are correlated with satisfactory performance on output
and exports, although there are powerful reasons for doubting the implied causality. On
the other hand, the new industrial policies correlate poorly with employment
performance. Again, the grounds for attributing causality to industrial policy are weak but
the perception is nevertheless widespread. The upshot is that South Africa’s industrial
policy-makers are going to be under increasing pressure to pull labour absorbing
industrial policies out of their hats.
10.11.3 Trade and Industrial Policies and Programmes: A Selective
Overview
To elaborate on the process and substance of industrial policy-making and
implementation, we will examine a number of key industrial policies, programmes and
institutions.
Below, we examine policy-induced changes to the general incentive structure reflected in
reformed trade and competition policies and the programmes aimed at strengthening the
capacity of South African firms to respond to the new incentives emanating from the
international and domestic markets.
10.11.4 The Incentive Structure
Two broad policy instruments shape the strength and character of market-based
incentives and are increasingly inter-related. These are, firstly, trade policy, encapsulating
that range of measures that mediate the interplay between the international market and the
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domestic economy; and, secondly, competition policy, the policy intervention that
establishes the core rules governing participation within the boundaries of the national
economy.
The interplay between these two policy fields — international trade liberalisation and
competition policy — is increasingly evident. Industrialised nations are increasingly
demanding the inclusion of competition policy commitments in bilateral trading
agreements, the primary objective being to ensure exporters and foreign investors a level
playing field in the economies of their trading partners. These demands have begun to
surface in South African trade agreements, notably the South Africa-EU agreement.
Conversely, the link between international trade and competition law has also been
underlined by the willingness of powerful international trading nations to permit, even
encourage, their national firms to adopt practices in the conduct of international trade
flagrantly at odds with the competition rules applicable in their domestic markets. The
US’s willingness to sanction international cartels, its support for certain mechanisms
designed to protect intellectual property, and, in particular, its cynical resort to antidumping actions to protect domestic producers (though penalising domestic consumers,
of course) against international competition, are better known examples of competitionreducing measures freely utilised in international trade.
There is a certain common irony in the ANC’s support for trade reform and competition
policy. Both derive strongly from the ANC’s anti-capitalist roots, or, at least, from its
distance from domestic business interests. The relatively easy passage through the ANC
and, particularly, its union allies, of trade reform has much to do with the exclusion of the
ANC from the ranks of national capital, combined with the strongly held view that tariff
protection amounted to little more than a feeding trough for White owned business.
Competition policy has, for its part, consistently been viewed as an instrument for
disciplining business although it has not always been appreciated that the mechanism of
competition policy is one that subjects capital, as well as public policies aimed at
privileging selected elements of capital, to the discipline of market forces rather than the
discipline of the state. The point is that in the early 1990s the ANC was only beginning to
engage with business on a significant scale and there was no business lobby capable of
restraining the ANC’s desire to discipline White capital. At the end of the 20th Century,
the only permissible discipline was that of the market.
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10.11.5 Trade Policy
Key elements of what was to become the first democratically elected government of
South Africa assumed leadership of the country’s trade policy even before it was installed
in office. The principal impetus for this was the preparation of South Africa’s offer to the
Uruguay Round of GATT.
South Africa’s GATT offer was effectively the outcome of negotiations in the National
Economic Forum (NEF). In brief, NEF’s origins go back to an attempt in 1990 by the
previous government to introduce a tax on consumption and to reform labour relations
legislation. This generated massive opposition from the unions in what was already a
volatile political and industrial relations climate. The upshot was an agreement by the
previous government to submit changes in industrial relations and economic policies to
negotiating bodies on which labour and business were represented. The National
Manpower Commission, a hitherto powerless and largely ignored advisory body, was
accordingly upgraded and empowered to negotiate the content of labour market and
industrial relations policy. The National Economic Forum was constituted and mandated
to achieve consensus over economic policies. Although consideration of macroeconomic
policy was within NEF’s competence, the unions focused attention on trade and industrial
policy from the outset.
In 1994, in one of the first legislative Acts following the democratic election, the National
Manpower Commission and the National Economic Forum were effectively amalgamated
to form the National Economic Development and Labour Council (NEDLAC).
The three industrial policy measures upon which the NEF focused were, firstly, the
preparation of the GATT offer. Secondly, the General Export Incentive Scheme, a large
cash grant tied to export performance, was reviewed by the NEF committee responsible
for industrial policy. Thirdly, as complement to the work of the ISP, an international
consultancy was commissioned to prepare a series of reports examining the
competitiveness of selected manufacturing sectors.
The bundling of these three issues is not entirely at random. The most obvious connection
is GATT adherence — trade liberalisation and the dismantling of export schemes of the
GEIS variety were clear GATT requirements leaving supply side programmes as the key
GATT-legal mechanisms to support export growth. The Japanese Grant Fund studies
were conducted under the direction of union, employer and IDC representatives. They
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were designed to identify and initiate supply side programmes. Adherence to the GATT
requirements themselves were underpinned by powerful domestic forces — strange to
tell, although they were viewed with considerable trepidation and reluctance by a
business community long used to tariff support, they were enthusiastically grasped by the
unions and ANC representatives. As already suggested, the unions — who powerfully
influenced, indeed determined ANC policy in these matters — viewed the tariffs and
GEIS as little more than state largesse directed at a small strata of business, the usual
suspects producing lightly processed mineral or agricultural products. This viewpoint
accounted in significant part for the willingness of the unions to forego programmes that
defended, at least in the short term, the jobs of their members. Moreover, the unions were
confident, naively as it turned out, in the state’s ability to compensate for tariff protection
with productivity enhancing supply side measures.
In a familiar sequencing, the preparation of the GATT offer took centre stage, with the
union representatives assuming effective leadership of the tri-partite committee. Business’
role was largely reactive, while the lame-duck DTI assumed an administrative function.
The research department of the Industrial Development Corporation (IDC) took
responsibility for much of the influential background technical input into the process.
Remarkably, given their divergent starting points – IDC was the most vocal proponent of
trade liberalization in the final decade of the old order — the unions and IDC dominated
the preparation of the GATT offer. Members of the ANC’s Department of Economic
Policy were drawn into the later stages of the negotiations.
South Africa’s involvement in the Uruguay Round of the trade negotiations achieved an
unexpected degree of internal consensus. On one reading this was achieved because, as a
result of some clever technical manipulations, the degree of liberalization was actually
quite slight. Moreover, the offers in respect of two of the most highly protected and
sensitive sectors — auto assembly and clothing — were effectively prepared in sectoral
tri-partite arrangements which developed a position around tariffs in the context of overall
sectoral industrial strategies. For these sectors the phase-down of the tariff was
considerably slower than that applicable to the rest of manufacturing — indeed Nelson
Mandela, though not yet in government, was obliged to draw on his standing with the US
President to seal acceptance of South Africa’s clothing offer. Considerable progress was
made in rationalizing an extremely complex, lobby-driven system of trade barriers (itself
symptomatic of the lack of a coherent, systematic ISI strategy) and this, rather than a
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major reduction in actual trade barriers, may be the most significant substantive aspect of
this round of trade reform.
However, even while recognizing that the highly unusual environmental features that
dominated this period of trade reform were bound to produce some surprises, few would
have anticipated the prospect of the unions, in close collaboration with IDC, leading a
trade reform process acceptable to GATT. Moreover, such powerful symbolism resonated
in other areas. It certainly shifted the relationship between the unions and IDC, and, less
easy to demonstrate concretely, it established a capacity, the self-confidence, necessary to
engage with the international economic institutions, a lesson that served to remove some
of the heat from the interactions between the unions and ANC, on the one hand, and the
World Bank, on the other.
There is undoubtedly a certain degree of validity in the argument that attributes the
internal consensus surrounding the GATT negotiations to the limited actual degree of
liberalization conceded by South Africa. But, this argument notwithstanding, the internal
negotiations underpinning the submission of South Africa’s offer remains a remarkable
exemplar of the dynamic character of policy-making, of how particular environmental
factors influence the calculations of the participants, enabling them to adopt “formative”
rather than narrowly defensive policy stances.
However, by the same token, changes in the environment over the succeeding four years
have placed severe strain on the consensus surrounding trade reform.
Despite their putative commitment to “free markets” the business community has always
been sceptical of the trade reforms. Prominent industrialists have complained loudly
about what they deem to be an overzealous approach to trade liberalization, pointing to
occasions where government has reduced tariffs below the level required by their GATT
(now WTO) obligations — “holier than GATT” is how a leading industrialist
characterized government’s approach. Business has been particularly offended by the
simultaneous elimination of GEIS, the key export incentive.
The unions are also increasingly wary of further trade reforms. There are two reasons for
this: firstly, their faith in the power of compensating supply-side measures has been
eroded by the difficulties of synchronizing their introduction with the tariff reduction;
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secondly, the bi-lateral and regional trade negotiations have thrown into relatively sharp
relief the prospect of significant short-term employment losses.
For a variety of reasons, the new government moved quickly to eliminate a key demandside support for manufacturers, namely GEIS. The introduction of supply-side
programmes was intended to compensate for the elimination of GEIS and for the tariff
reductions. The results have not lived up to expectations and account for a considerable
decline in support for further tariff reduction.
However, the major doubts surrounding tariff reform have emerged through the
experience of the regional and bi-lateral trade negotiations. Largely because of their
promise of market access, these agreements have featured prominently on the new
government’s trade agenda. But market access is proving costly, invariably requiring
reciprocal commitments with accompanying tariff reductions. The difficulties
experienced by South Africa’s trade negotiators have brought many of South Africa’s
peculiar features into sharp focus.
Hence, in negotiations with developing countries, South African unions have attempted to
secure the inclusion of a “social clause” in the trade agreements but the negotiating
partners have rebuffed this. In short, in these agreements the potential “losers” have
emerged more clearly and along lines more predictable than in the Uruguay Round. And
these losers are employed low-skill workers in the labour intensive end of the
manufacturing sector. They are also usually union members. In the context of widespread
concern regarding unemployment and job loss and a still powerful union movement, this
may successfully limit the trade reform programme.
Nor has the experience of negotiating trade agreements with the industrialized world been
particularly encouraging. The tortuous negotiation with the European Union is the most
notorious of these. In a nutshell, South Africa’s willingness to open its manufacturing
markets was not matched by a reciprocal willingness to open up European agricultural
markets. The US, for its part, has utilized anti-dumping and a variety of other new
protectionist measures as the foundation stones of its new strategic trade policy. This new
protectionism has developed in the context of widespread popular opposition to further
trade liberalization, opposition that brings together a range of developed country
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constituencies cutting across unionists, industrialists, farmers, environmentalists as well
as human rights activists.
However, through these difficulties, the South African government has managed to hold
the line on, to retain the acquiescence, if not enthusiastic support, of domestic
constituencies for trade liberalization. This it has done through a combination of
approaches.
Firstly, the government has assiduously involved both unions and business in the
preparation of its various trade negotiations at both a bi-lateral and multi-lateral level.
Indeed it appears that the South African government has been unique in the space that it
has given to civil society, notably business and labour, in the preparation and conduct of
trade negotiations. This effective extension of tri-partism to the international arena has
undoubtedly contributed to the consistency of South Africa’s trade policy and is a ringing
endorsement of the benefits of participatory governance of trade policy formulation.
Secondly, South Africa has aggressively sought to protect its interests within the rules of
the international game. Hence, on the domestic front it has moved to shore up the
institutions responsible for policing international trade. This includes a palpable
improvement — albeit from a very low base — in the performance of customs and excise.
High profile smugglers — including some highly respectable retailers — have been
aggressively pursued, and smuggled goods have been publicly burnt as ministers and
senior officials look on. South Africa has also thrown considerable resources into antidumping regulation.
This rules-based approach is also evident on the international front. The highly publicized
spat between South Africa and the EU over the latter’s assertion of ownership of certain
“national ascriptions” — Port and Sherry for example — is the clearest, but by no means
only example of South Africa’s insistence on using international rules to confront the rise
of developed country protectionism. Indeed in the notorious EU Port and Sherry
confrontation, Erwin was occasionally criticized from within his own ranks for refusing
to concede a point that was of little relevance to South Africa in substantive trade terms.
However, another take on Erwin’s position is that he was prepared, by holding up the
conclusion of a very important trade agreement, to sacrifice a short term interest in favour
of enforcing the agreed rules of international trade, in favour of global governance of
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trade. This must be read in combination with South Africa’s vigorous chairmanship —
again in the shape of Erwin — of UNCTAD and with the high profile assumed by South
Africa during the abortive Seattle WTO meeting.
South Africa is by no means the only developing nation aggressively confronting
developed country protectionism. Certainly Brazil and its MERCOSUR partners have
encountered similar obstacles in their efforts to penetrate European agricultural markets
and have responded in like fashion. This approach appears to represent the beginnings of
a globalist assertion by developing countries in trade, of an assertion that by developing
countries that “free” international trade must be complemented by global governance
systems in which developing countries have a voice and whose rules are honoured.
Few, if any, of those who participated in the initial discussions around South Africa’s
GATT offer, could have foreseen the way in which the new government’s approach to
trade has unfolded. In summary, the new South African government, despite its strong
union base and national developmental objectives, quickly accepted trade liberalization as
one of the pillars of its industrial strategy. While this approach has suffered some reverses
— largely manifest in growing union hostility — it has formed the basis for an
increasingly internationalist perspective on the part of South Africa’s economic policymakers. This is reflected in variety of ways — in its approach to trade agreements, in its
support for multilateral institutions and rules, in its efforts to develop a southern voice in
global economic affairs. The industrialized countries, the initial protagonists of trade
liberalization, have achieved their narrow objectives through a partial reform. Developing
countries, on the other hand, often with South Africa in a leading role, appear to be saying
that, having initially been reluctant participants in the business of trade liberalization, they
now recognize that their interests are best served by a full blown internationalism in the
conduct of economic affairs. South Africa’s contribution to this development may well
turn out to be its government’s most enduring contribution to trade and industrial policy.
10.11.6 Competition Policy
Vigorous anti-trust has long occupied a central place in the rhetoric associated with
opposition to apartheid. Highly centralised and overwhelmingly white-dominated
corporate ownership and control structures, highly concentrated product markets, and
poorly developed small and medium scale enterprises, particularly in the manufacturing
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sector, are generally considered key economic analogues to the racially based
discrimination and exploitation that defined apartheid.
Until the late 1980s, nationalisation was the favoured solution to the problem of
ownership and market concentration. As this option receded, it was replaced by support
for vigorous application of anti-trust policy. As suggested above, the common
denominator was the perceived need to discipline capital although there was precious
little appreciation that nationalisation and anti-trust represented widely divergent policy
approaches, indeed policy approaches at opposite ends of the “state vs market” spectrum.
At the risk of stating the obvious, whereas state ownership represents the strongest form
of state direction of the economy, anti-trust represents a policy choice to support market
processes against abuse or potential abuse by powerful actors, private and public.
However, despite the high profile accorded anti-trust prior to the 1994 elections, it was
placed on the backburner by the new government. Although the two leading members of
ANC’s Department of Economic Policy, Trevor Manuel, the Minister of Finance, and
Tito Mboweni, the first Labour Minister in the new government and later Reserve Bank
governor, were vocal and provocative proponents of robust anti-trust, they had to contend
with extremely resolute opposition from their counterparts in business. Several
memorable public clashes between Mboweni and Manuel and the public affairs director
of the Anglo American Corporation bear testament to this. There is no question that the
intensity of business opposition slowed up the process of reforming competition law. This
was precisely the period when the ANC was building links to the business community,
whose views understandably resonated more loudly with the ANC in government than
they had with the ANC in opposition. Interest group pressure aside, the new government
was increasingly sensitive to economic performance and to the need to penetrate
international markets, concerns that, on the face of it, appeared to dictate an increased
reliance on established big business and support for the few “national champions” in
evidence.
It should also be borne in mind that a competition statute and an enforcement agency had
been in place since 1980. Although the inadequacies of the statute and the institution were
widely appreciated, both were, in effect, significantly strengthened by the more
sympathetic context provided by a government with a stated commitment to anti-trust. A
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number of decisions of the Competition Board in this period bear this out. This too
reduced some of the urgency previously associated with the reform of competition law.
But the major reasons for delay were more prosaic. Other priorities ranging from the need
to reconstruct the Department of Trade and Industry to dire need to reform international
trading relations took precedence over competition law reform. And then the unexpected
complexity in reforming competition policy and its legal instruments gave government
further pause for thought. The complexities were, in a period where competition policies
were coming under the spotlight internationally, partly technical — both the law and the
economics of anti-trust are unusually technically demanding.
But, in addition, reform was also politically complex. We have noted business opposition.
But this was not entirely surprising. The less predictable difficulties were, firstly, dealing
with the dawning recognition that many of the diverse expectations associated with antitrust enforcement were not going to be met, indeed that the conventional wisdom in antitrust enforcement argues against the pursuit through anti-trust of multiple social and
economic objectives. And then secondly it began to dawn on some in government and on
the left — the traditional supporters in South Africa of anti-trust — that competition law
would constrain not only private actors but that public policies and public enterprises
would, in key respects, also be constrained by the operation of effective competition law.
The public sector was given some taste of this in the last days of the previous competition
regime. The proposed merger between SASOL and AECI, South Africa’s two largest
chemical companies was, on familiar “national champion” grounds, explicitly supported
by the Department of Trade and Industry but nevertheless prohibited by the Competition
Board. And the SABC, the state-owned broadcaster, was prevented from engaging in
blatantly anti-competitive practices when it attempted to use its statutory broadcasting
monopoly to achieve dominance in the market for TV film production.
However, these difficulties notwithstanding, there was sufficient impetus behind
competition law reform to bring a new Bill to parliament in 1998 and to have the
authority up and functioning in September 1999. The obstacles in the way of competition
policy reform were partly overcome by impetus from new and unexpected sources.
Firstly, competition policy issues were gradually being put on the international trade
agenda, both in multilateral arrangements like the WTO and in bilateral trade
engagements. Second, as South Africa proceeded to restructure state owned enterprises, it
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became clear that a framework capable of regulating increasing competition between the
public and private sectors as well as constraining the power of newly privatised
monopolies had to be created.
In short “free trade” had triumphed globally and “deregulation” and “privatisation”
were de rigeur in domestic markets. However, whether under the guise of anti-dumping,
or new international treaties governing intellectual property, or mergers and acquisitions
or, in thoroughly lawless markets like Russia, simply by creation of new, absolutely
unconstrained, monopolies, powerful interests everywhere were busy devising new
barriers to trade, domestic and international. New rules of the game were required and
competition law shot to the top of the policy agenda in both industrialised and developing
countries and in the multilateral forums in which they met.
South Africa has had anti-monopoly legislation in place these past two decades. This
legislation — the Maintenance and Promotion of Competition Act — created the
Competition Board, the institution responsible for administration of the Act. The
limitations of the legislation were widely recognised. The enforcement mechanisms were
particularly weak. For the most part the Competition Board functioned in an advisory role
to its responsible minister. Hence, the decision to prohibit or impose conditions upon a
merger had to be taken by the minister. Where, after investigation, the Competition Board
found that an anti-competitive practice has been perpetrated its only remedy was to report
the transgressor to the police. Needless to add that in the twenty year lifespan of the
Competition Board there was no instance of a successful prosecution of an anticompetitive restrictive practice.
In short, the Competition Board occupied a Cinderella status in the industrial policy of the
previous regime. This is not entirely surprising. It was a government wedded to
protectionism and for whom interaction with the business community took the shape of
close, mutually beneficial, ties with a privileged group of firms and entrepreneurs. These
were characteristics antithetical to the vigorous pursuit of competition policy. The lowly
status of competition policy was also partly a product of the absence of significant
consumer support. The Black majority exercised their consumer power through the
utilisation of boycotts of offending products or services. Their problems could not, to put
it mildly, be resolved through the enforcement of competition law. The white consumer
institutions were a polite grouping of “housewives leagues.” The competition authority
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was, in summary, isolated from both nodes of political power — the white establishment
and the black majority. It is little wonder that their activities and their recommendations
were largely ignored by successive apartheid governments.
The review process took the form of a discussion in NEDLAC where business, labour and
government reached agreement on the broad principles governing competition policy.
The outcome of these discussions informed the drafting of the new Competition Act
(1998). We will not attempt to summarize the provisions of the new Competition Act.
Suffice it to note the following features of the new competition regime:
First, the Act specifies multiple objectives. These include the predictable consumer
related objectives (“competitive prices and product choices”) and efficiency objectives
(“the efficiency, adaptability and development of the economy”). However, the list of
objectives include several less traditional objectives, including employment promotion,
penetration of world markets, the promotion of SMEs, and to increase “the ownership
stakes of historically disadvantaged persons.” Certain of these — notably international
competitiveness, employment, SMEs and the extension of ownership stakes are explicitly
restated as public interest criteria to be incorporated into merger evaluation.
This feature of the Act is a manifestation of the historical basis of the ANC’s support for
anti-trust, of the pressing social and economic problems that confront South Africa, and
of the powerful influence of interest groups in policy formation. Arguably, few of these
objectives belong in a competition statute. Indeed, the only objectives that would pass
muster with a competition purist are the efficiency objectives while many, considerably
less pure, would be prepared to incorporate the consumer related objectives. Certainly,
the ownership diversity, employment creation and even export growth are rarely found in
the list of objectives that a competition authority is required to promote. Moreover, the
competition authorities adjudicate these strong “public interest” objectives, which are the
competition authorities decide how to balance competition objectives with the other
objectives of the Act. The Act is silent on the balance sought.
While this represents a tremendous challenge for the competition authorities it is, a
challenge that emerges directly from the context within which it is located. In the current
environment, it is all but unthinkable for a major piece of South African social and
economic legislation to foreswear, even by mere omission let alone active commission, a
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commitment through its implementation to employment creation and Black economic
empowerment. In other words, their inclusion in this statute does not simply represent the
political power of the unions and the Black business class — it rather represents a major
national goal. Clearly, however, there are narrow specific interests that cluster around
these broader goals and they must be prevented from shifting the balance of policy
implementation in a direction that promotes narrow interest group goals over the broader
national goal. In order to limit the ability of powerful political interests to impose narrow
objectives on public sector decisions, the public authority and legislature should, as in this
instance, preemptively include broad social objectives that leave the decision-making or
implementing authority considerable room for interpretation.
The nettle has now to be grasped by the competition authorities. If they want the
traditional competition objectives — efficiency and consumer welfare — to come to the
fore they will have to demonstrate the connection between these objectives and the
promotion of broader social objectives also enshrined in the Act. This will inevitably
entail explaining why, for example, in a particular merger; employment considerations
have given way in the face of efficiency gains. But to stand aloof from the core values,
objectives and concerns of the society is to jeopardize the entire project.
This goes directly to our second point, namely the vexed question of institutional
independence. The new Act accords the competition authorities an unusual degree of
independence. The Act creates three autonomous institutions. These are the Competition
Commission, which is the investigative and prosecutorial agency, and the two
adjudicative agencies, the Competition Tribunal and the Competition Appeal Court. The
adjudicative bodies — the Tribunal and the Appeal Court — are particularly interesting
indicators of the extent of independence accorded the competition authorities. The
Tribunal, effectively the court of first instance, is composed of 10 lay persons (that is
non-judges — lawyers, economists, accountants) appointed by the President for a fiveyear, renewable term. As with judges of the High Court, the members of the Tribunal can
only be dismissed under the most exceptional of circumstances. The Tribunal adjudicates
all matters — mergers and restrictive practices — regulated by the Competition Act. It
has the power to issue compliance orders or interdicts, to prohibit mergers, to levy large
fines and order divestiture. Its decisions can only be appealed to the Competition Appeal
Court, a specialist division of the High Court staffed by judges with a special interest in
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competition law. In other words, the investigation and adjudication of all matters under
the Competition Act is the province of independent, specialist agencies. No decisions of
the Commission, the Tribunal or the Appeal Court are subject to ministerial veto. Not
even the Supreme Court of Appeals, the highest court in the land, has jurisdiction over
competition matters. This model has, with variation, been extended to a number of other
agencies — the telecommunications and broadcasting regulator, for example, is similarly
independent.
This model is open to criticism. A non-elected group of technocrats, has, by any measure,
been extended considerable autonomy, including responsibility for interpreting and
protecting the public interest. However, there are considerable checks built into the
system. The executive and legislature naturally hold sway over the legislation that
governs the competition authority, over, in other words, the mandate of the independent
authority. The executive is, through its policy statements, capable of refining this mandate
and offering its own interpretations. The legislature receives an annual report from the
agencies and its committees are entitled to demand that the Competition Commission
account to it. Moreover, the competition authorities’ budget is a line item within the
Department of Trade and Industry’s budget and the head of the Commission and the
members of the Tribunal are appointed by the executive.
This arrangement does attempt to steer a path between accountability and autonomy: the
legislation, a detailed statute and set of rules, provides the framework and is in the hands
of the executive and legislature; decision-making within that framework is the protected
terrain of the competition authorities. As delicate as the balance inevitably is, it appears
appropriate in the case of a body that is taking decisions on both competition and public
interest grounds.
This brings us to our third point, namely the absence of clear popular or interest group
support for competition enforcement, and, on the other hand, potentially powerful
opposition. For all that, South Africa has inherited a relatively well-organized civil
society from the anti-apartheid struggle and consumer power was frequently deployed in
the struggle but there is limited current experience of active independent consumer
organization. Even within government, consumer interests are barely catered for. This
represents a major and possibly fatal lacuna in the competition enforcement framework.
Despite its commitment to defending a specific public interest, the competition authorities
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are, if they perform their task with integrity, bound to make powerful enemies. And these
opponents will not only come from organized business and labour; they are more likely to
come from the public sector. In particular, they will come from the powerful state-owned
enterprises or from the recently privatized state corporations, and they will come from
policy-makers whose proclivity to use government policy and resources to favour, for
whatever reason, a particular enterprise or interest group will be circumscribed by the
competition authorities.
This fear is, to a certain extent, already borne out. The first nine months of the life of the
Competition Act have been marked by a struggle, yet unresolved, over the jurisdiction of
the Act. In particular, the state owned corporations, backed, for the most part, by the
sector regulators, have attempted to assert immunity from the Competition Act. Their
public rallying call centres around universal service, the argument being that regulation
by a body focused on promoting competition will compromise the universal provision of
services like telecommunications and electricity. In truth, if the competition authorities
are unable to demonstrate the compatibility between competition enforcement and the
extension of service then they will lose the battle.
It should be underlined that, as with the steadfast commitment to liberalization of
international trade, the government has been unwavering in its support for independent
and robust competition enforcement. In the last period of the life of the Competition
Board, at a time when government had already stated its commitment to independence on
the part of the competition authorities, it allowed the Board’s prohibition of a major
merger in the chemical sector to stand despite the Department of Trade and Industry’s
strong support for the merger and despite the right, in the previous regime, to use a
ministerial veto. In a major merger in the pharmaceutical sector, despite a strong lobby
from a well-connected Black empowerment grouping that stood to profit from the merger,
government was persuaded by the consumer-related concerns of the Competition Board
and supported prohibition of the merger. In a jurisdictional dispute with the state-owned
enterprises, the government proposed that parliament amends the Competition Act in
order to ensure that these enterprises are subject to competition regulation.
But this commitment cannot be taken for granted. It will inevitably waver if it is not seen
to be supported by a strong social interest. Consumers are the only secure source of
support. But this poses the classic dilemma faced by trade reform — the losers are
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powerful and well-organised; the potential winners, though numerous, are notoriously
poorly organized. In part, the competition authorities are going to have to create their
support base. It will be difficult to achieve this in the context of its role in merger
evaluation where an attempt to gain public support invariably presupposes compromising
competition considerations. The opportunity lies rather in the careful selection of
winnable, significant restrictive practices cases that serve to demonstrate the link between
competition enforcement and consumer and small business interest.
Finally, there is little doubt that in the first months of its life, the competition authorities
are confronted by a threat far more intractable than those mentioned above. Regulation is
a skills-intensive activity and, on current evidence, there are simply insufficient skills to
staff the agency. The shortage is exacerbated by the gap between public and private sector
salaries. The only way that this skills deficit will be overcome will be by approaches to
staffing rare in the constrained public sector employment environment. Targeted bursary
programmes, sponsored university courses, secondments from the private sector, staff
exchanges with more experienced anti-trust agencies are some possible approaches. They
involve a change in the mindset governing public sector employment — in particular
approaching staff not as prospective lifelong employees, but rather focusing on making
the agency sufficiently career-enhancing to attract the best graduates and young
professionals in law and economics.
The labour market may prove to be the greatest obstacle to developing an industrial
policy rooted in a “small smart” state rather than the large, interventionist states of
previous eras. The trade and competition policies pursued by the South African
government presuppose the former type of state, the “small, smart” state. Resources,
principally human resources have to be generated and have to be conserved, if this
approach is to bear fruit. As will be outlined below, this has implications for the range
and character of supply-side programmes, also skills intensive, which are selected.
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10.11.7 The Incentive Structure: Conclusions
South Africa’s industrial policy-makers have staked much on their trade and competition
policies. This has been done despite skepticism, at times overt hostility, from both
business and labour to the trade reforms. Nevertheless, government has, despite the
marked lack of enthusiasm for their approaches in these fields, held together the
coalitions supporting its industrial policy. This has been achieved partly because of the
consensus-building, participatory process followed by government. In part, it has
sustained its coalitions because it has successfully managed to portray a principled
approach to its reforms — there is little sense, in contrast with the structural adjustment
programmes in many other developing countries, that “restructuring” has been foist upon
South Africa. On the contrary, it has been presented as a positive approach to the reality
of globalization, as an aggressive attempt to win space for South Africa in the global
market. This has, by no means, immunized South Africa’s policy-makers from criticism
but it has prevented the intense polarization between government and powerful interest
groups that has characterized other trade reform of this genus.
Competition policy has not yet had the opportunity to generate either the hostility or the
grudging respect accorded trade policy. However, if successfully implemented, it will
undoubtedly encounter the same reaction.
Trade liberalization and competition policy are designed to promote market access. With
respect to the domestic market, trade liberalization is a powerful complement to
competition policy. By the same token, with respect to the international market
competition policy, it may become a powerful complement to trade liberalization or
globalization. This is clearly appreciated, hence the attempts, generally at the behest of
the industrialized nations, to include commitments to national competition policy
enforcement in bilateral trade agreements. The avowed intention of these commitments is
to ensure that liberalization of international trade is not effectively thwarted by domestic
markets rendered inaccessible in consequence of anti-competitive practices, that is, to
ensure that foreign investors and exporters are not denied access to domestic markets
unconstrained by acceptable competition rules. In other words, in this conception
competition law remains, despite its inclusion in international trade agreements, a
mechanism for regulating national or domestic trade.
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However, if competition policy is to serve the developing nations in meeting their
international trade objectives then it must be applied to trade between nations. Deployed
in this way, it would complement the efforts of South Africa and other developing nations
to challenge new protectionist measures also usually pioneered by industrialized
countries. Domestic laws that permit the operation of international cartels, anti-dumping,
and the constraints on parallel importing and compulsory licensing are all measures that
would fall foul of the domestic competition laws of most nations. They should equally be
proscribed in international trade by rules developed and enforced multilaterally. South
African industrial policy should pursue the internationalization of competition law with as
much energy as it has pursued multilateralism in other areas of international trade. As
noted earlier, this may come to constitute the most enduring, the most visionary, and
element of South Africa’s new industrial policy.
10.12 Building Underlying Capabilities

The South African Experience of Supply-Side Industrial Policy
Programmes
It has been argued that although anti-dumping measures are fundamentally anticompetitive and often cynically abused, their acceptance in international trade law is a
precondition for achieving and maintaining consensus on a significant reduction in trade
barriers. In the total scheme of things, the scale of the tariff reduction far outweighs the
impact of anti-dumping and so, although everyone recognizes that anti-dumping measures
represent little more than the re-instatement of a degree of protection, the net effect
remains a significant reduction in international trade barriers.
With hindsight, a similar argument may be applied to the role of supply-side programmes
in South African industrial policy. In order to win support for trade liberalization it was
necessary for key constituencies to believe that its negative effects would be ameliorated
by the introduction of supply-side measures which would enable South African firms to
respond positively to the intensification of international competition. It also gave the new
government comfort insofar as it re-affirmed a central and positive role for government in
supporting industrialization even as it was agreeing to limit its ability to use a major
defensive weapon, the tariff.
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However, although this view may accurately capture the impetus behind the deployment
of anti-dumping, it would be an unduly cynical view of government’s efforts to
strengthen the supply-side. Certainly, programmes to strengthen generic capabilities —
for example, the provision of general industrial skills and technological capabilities — are
generally well-founded. Our concern is, however, with the rather narrower set of supplyside programmes arising out of industrial policy, with the gamut of programmes aimed at
providing South African firms with access to the finance, best-practice technology and
knowledge that is necessary to support one or other agreed national policy objective in the
field of industrial policy, for example to promote manufactured exports or small business.
Our general conclusion is that these programmes are costly; in particular they require
significant inputs of skilled personnel. They also diffuse poorly, that is, the returns that
accrue to this expenditure of scarce resources are low. We hasten to add, however, that
this is not to say that there are no examples of successful industrial policy programmes of
this type. South Africa has experience of successful technology support programmes.
Moreover, major projects and other investments have been financed or otherwise
supported in active partnerships between IDC and the private sector. If there is an
identifiable pattern in these exceptions, it appears that supply side programmes work best
when their implementation is taken up by a highly committed, focused institution with a
considerable direct stake in a successful outcome. This may be a dedicated technology
laboratory, an industrial development bank, or a local government. High levels of
dedicated expertise, proximity to the issue and to the various stakeholders and the
capacity to focus the broad mandate handed down by government appear to be the key
ingredients of success. Interestingly, although the structures outlined above apply less
forcefully to the industrial support traditionally provided by the state, namely the
provision of basic infrastructure, we will see how, even in this area, a positive impact is
dependent upon the institutional framework within which it is introduced.
Our conclusion then is that central government’s primary task is in setting the stage for
industrial development. In particular, the state department responsible for industrial
development — DTI — must establish the framework of rules within which international
trade (trade policy) and domestic trade (competition policy) occur. This, effectively the
establishment of the incentive structure, is overwhelmingly central government’s baseline
task, one that cannot be assumed by any other authority. Independent institutions may be
required (we believe that they are) to give day-to-day content to the framework — that is
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to regulate mergers or enforce international trade rules, etc — but the establishment of the
framework and the periodic review that this requires is par excellence the province of
central government. It may elect to do this in consultation or in negotiation with key
interest groups — this may well be the prudent approach to adopt — but it remains
responsible for ensuring that the framework is in place.
Where the provision of targeted capabilities is concerned, government too has an
important role in setting the rules of the game. In the case of the Industrial Development
Corporation, the rules take the form of a governing statute and a mandate from the
shareholder, the state. It extends to the state appointing the board of IDC, and to regular
contact between senior executives of the corporation and DTI. However, the board is
responsible for translating the statute and the shareholders’ mandate into the policy of the
corporation and the executive management is responsible for carrying out the decisions of
the board, for implementing the policy. There are several variant forms of the
relationships described here — however the broad approach implicit in this structure
encapsulates the appropriate relationship between the government and those charged with
the responsibility for delivering the support in question.
Further research is needed to interrogate this conclusion more carefully. However, a
division of labour that essentially has the state establishing the broad rules of the game for
autonomous delivery mechanisms appears to characterize successful supply-side
programmes. The reasons for this are many and varied. For present purposes, one key
factor is the range of interests that the state is obliged to serve and the consequent
accumulation of a range of conflicting objectives in so many programmes. As outlined in
the analysis of the Competition Act, the fact that the state establishes independent
agencies does not and should not prevent it from passing on its socially complex agenda
to these institutions through the mandating or legislative process. However, these
institutions are better placed than the state to distinguish between core objectives and
subsidiary objectives, in the process retaining the focus necessary for effective delivery,
and the sensitivity to the broader environment that is required of an effective social actor.
Supply-Side Measures: Some Preliminary Lessons.
DTI has identified six key areas of policy intervention directed at accelerating
manufacturing development and in which the range of supply-side programmes are
located.
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It categorizes its areas of policy intervention as:

investment support;

export promotion or “trade facilitation”;

technology promotion and innovation support;

small business promotion;

strategic and informational leadership; and

support for human resource development.
This is a significant, although not unusual, range of support. There are numerous
programmes within each category. We will briefly review two programmes, namely the
Spatial Development Initiative (SDI) and the Workplace Challenge (WC). These
programmes are chosen because, although vastly different in scale and objective, their
shortcomings evidence the difficulty in implementing micro-industrial support
programmes from the centre. Conversely, they bear out the importance of focused
institutional support in realizing the objectives of supply-side industrial policy. They
address, in other words, a key aspect of this project namely “questions of legal and
institutional designs required for a more conducive policy environment.”
The Spatial Development Initiatives or SDIs offer particularly important lessons in these
areas. The SDI programme was, arguably, the flagship programme of post-apartheid
industrial policy. It attained this stature for a number of reasons: first, it constituted an
attempt to find the longstanding national holy grail, namely the instrument to catalyze
widespread development from large projects, infrastructural as well as minerals related
projects; secondly, responsibility for implementation of the SDI programme was held
firmly within central government, the better, or so it was thought, to ensure, its
effectiveness; and, thirdly, the SDI programme represents a wide-ranging amalgam of
redistributive and growth goals. It embodies, in other words, government’s requirement to
address the multitude of social and economic objectives in each major programme.
The SDI programme was intended to promote private sector investment in particular areas
of South and southern Africa. The public-private interface was a crucial feature of the
SDI programme — it was essentially a programme for “crowding-in” private investment,
with public investment as the key instrument. The SDI areas were chosen because of a
particular disadvantage each had inherited from the apartheid past (for example, areas
adjacent to the Bantustans, the nominally independent territories within South Africa that
were at the heart of apartheid). The proponents of the SDIs argued that they were to be
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distinguished from typical regional industrialization programmes, frequently attempted
and usually unsuccessful, because the regions were selected, not simply by reference to
redistributive criteria, but because they each evidenced “development potential.” The
programme envisaged that investment would be catalyzed in these areas through the
insertion of infrastructure, usually transport infrastructure, funded through public and
private partnerships, and through “anchor projects.” The latter were usually large mineral
processing plants that would be attracted by the port or other transport facilities that
comprised the infrastructure component of SDI. SDI best represents that leg of industrial
policy that is rooted in the notion that the regeneration of South African manufacturing
resided in the possibility of building productive links between the MEC core, on the one
hand, and supplier and downstream producers, on the other.
A small team of Pretoria-based DTI officials and consultants were assigned to each SDI.
Their task was essentially to market their SDI area to prospective investors. Their efforts
would culminate in a high profile investors’ conference in SDI at which high level
government officials and actual or prospective investors would showcase their various
projects and other offerings.
By way of example, the first, and most successful SDI, is the Maputo Development
Corridor. Both Mozambique and the adjacent South African province of Mpumulanga
were acutely “disadvantaged” by apartheid South Africa’s systematic military and
economic destabilization of Mozambique. Furthermore, strong development potential was
identified for both the Mozambique economy and Mpumulanga producers in
strengthening the physical links between South Africa’s industrial heartland and the
Maputo Harbour. Accordingly, the development of road linkages and the restoration of
the Maputo Harbour constituted the infrastructure end of SDI. A large aluminium smelter
— owned by a large South African mining company with significant IDC participation —
was the anchor project identified. SDI was managed by a small project team based in
Pretoria and Maputo whose work culminated in the convening of a high profile investors’
conference.
The impact of the SDI programme has, by most measures, been disappointing. Significant
new investment has not materialized as a result of the programme. Certainly, there is little
evidence that the relationship between the anchor projects and their economic
environment has been materially transformed — they remain proverbial “cathedrals in the
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desert,” little inserted, either by way of upstream or downstream linkages, into the local
economies in which they are physically located.
A detailed critique of the SDI programme has identified one principal factor underlying
SDI’s disappointing impact. In essence, the SDI programme confirms that the linkages
that the anchor projects were expected to catalyze did not materialize because insufficient
attention was devoted to developing institutional capacity in the local economies in
question. In other words, in order to realize Hirschman’s celebrated backward and
forward linkages, the growth process had to be “endogenised” in the location in which the
investment project was located. Endogenisation occurred when the project implanted
more than physical assets in the area in question. It had to implant an institutional
capacity in local government or civil society to attract and retain further investment. Not
only had this local institutional development not occurred, it had been explicitly
underplayed in favour of an approach that located institutional capacity in central
government. This approach was well intended. In fact, the SDI programme specifically
sought to inure itself from the effects of poor local and provincial government capacity
and conflicting local interest groups, by locating responsibility for implementation in
central government. This may have been precisely the converse of what was required for
a successful SDI programme. A review of the SDI programme concluded:
If the SDI process is essentially one that involves changing the “rules of the game” that
govern interaction between the public sector and private sector — a shift that appears to
have occurred at national level — then it is vital that this be reflected at the provincial and
local levels. In the absence of a developmental provincial or local state, central
government initiatives must prioritise engaging and strengthening local, relatively wellorganised and long-standing, non-governmental interests.
This then was the principal drawback of the SDI approach — far from engaging with
local capacity, it attempted, ironically in the name of effective implementation, to
substitute central government capacity for the complex, but essential, task of catalyzing
the development of focused local capacity.
On the other hand, the precise modality of the Workplace Challenge (WC) — and a
recognized precondition for its successful implementation — was local participation and
buy-in. The Workplace Challenge was designed at NEDLAC, the quadripartite statutory
institution comprising representatives of government, business, labour and other
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organizations of civil society representing “community” interests. The avowed purpose of
the programme was to facilitate interaction between workers and managers. This
interaction was aimed at enhancing firm level productivity through improved industrial
relations and workplace organization. The mere fact that this programme was initiated at
all represented something of a triumph for post-apartheid’s conciliatory, corporatist
approach to governance. It represented an acknowledgement by organized business and
labour that increased workplace productivity was the key to achieving international
competitiveness and that this in turn was rooted in participatory work organization. It was
a far cry from an approach that viewed productivity as a synonym for wage repression.
The WCP’s implementation relies upon a three tier collaborative process between labour,
management and government. The first tier of collaboration is located at NEDLAC.
NEDLAC’s Workplace Challenge Committee is co-chaired by both DTI and NEDLAC
representatives. Labour and business interests are represented by their respective
associations. The second tier of collaboration is located at the sector level. Every
Workplace Challenge project forms a sector level committee that has representation from
industry associations, management and labour (DTI representation is also encouraged).
The third tier of the collaborative process is located in the firm itself. At this level, a
Workplace Challenge committee representing key stakeholders in the firm is established.
The participating firms receive assistance from private consultants who facilitate the
analysis of those impediments to productivity improvement that are rooted in poor
industrial relations and workplace organisation. The government subsidises 75 percent of
the cost incurred by the firms that participate in this process. As a result, R24 million has
been allocated to the WCP. However, between 1997 (when the implementation phase
began) and 2000, only five initiatives had been funded at the sectoral level with an
average cost of about one million Rand. The upshot is that the benefits arising from the
programme have accrued to a small number of firms with minimum diffusion through the
economy or even the economic sectors directly concerned. This is, in large part, a direct
consequence of low levels of capacity and institutional readiness on the part of each of
the parties responsible for the implementation of the project.
Take DTI, the Department is the primary source of industrial policy formulation. In this
instance, DTI took the unusual step of providing funds for a programme effectively
controlled by a tri-partite committee comprising business, labour and representatives from
it. A private sector consultancy firm appointed by the committee was responsible for the
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day-to-day management of the programme and its budget. However, it proved
inordinately difficult to align the state’s spending regulations with the project’s unusual
governance structure that essentially allowed a body outside the control of DTI to spend
monies from the DTI budget. This deceptively simple obstacle caused inordinate and
frustrating delays in the implementation of the project. It necessitated drawing IDC into
the funding process simply because its autonomy from central government’s funding and
procurement regulations allowed it the flexibility necessary to manage this project.
Ideally DTI, rather than the private management consultancy, should have assumed
responsibility for the overall management of the project. However, it was recognised from
the outset that DTI’s engagement with the substance of the project was significantly
determined by the highly variable quality of its sectoral directorates. In a number of
sectors — footwear, for example — where the DTI’s directorate was led by committed,
experienced individuals who enjoyed the respect of business and labour the project
proceeded relatively smoothly. Contact with the industry associations and unions was
uncomplicated and key issues were quickly identified. But this proved to be an exception.
As a rule, the sectoral directorates were weak and under-resourced and were not able to
play a positive role in the project — recall that these divisions had for years done little
other than manage managed trade protection and engagement in supply-side measures of
this type was a wholly new experience.
For this reason, a private sector management consultancy was contracted to run the
project. While this helped overcome some of the constraints associated with DTI, it meant
that government’s ability to internalise and, crucially, to diffuse the lessons learnt from
the project was compromised. In order to overcome this, the management of the project
was eventually handed over to a statutory body, the National Productivity Institute.
However, for a variety of reasons, this body is not highly regarded by either business or
labour and, in consequence, has not proved an effective project leader.
Business and labour also brought some difficult baggage into the project. Labour
approached WCP with some measure of suspicion. The unions are intensely suspicious of
the establishment of new workplace structures lest they undermine the authority of the
union structures and collective bargaining arrangements. Furthermore the unions suffer
crippling capacity constraints — although their national leadership is generally
sophisticated and easily capable of participating in the leadership of a programme such as
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the Workplace Challenge, this capacity is not easily replicated in local and workplace
union leadership. This of course exacerbates the leadership concerns with structures that
appear to replicate the functions of union committees at the workplace level. In a
programme like the Workplace Challenge these leadership weaknesses are particularly
constraining because a strong measure of resistance from workers has to be overcome —
changes in workplace organisation and programmes to enhance productivity in general
are associated with job loss and insecurity and are greeted with understandable
scepticism.
Business, for its part, is represented by Business South Africa. Business South Africa is a
relatively recently formed, high level business lobby with poorly developed links with it’s
often more powerful sectoral affiliates. The latter, not unlike their counterparts in the
DTI’s directorates, are also more familiar with lobbying for and managing trade
protection, than with providing supply-side services to their members. In consequence,
Business South Africa has not successfully promoted the Workplace Challenge among its
affiliates. Furthermore, the BSA’s leadership is drawn from the larger industrial concerns,
with little voice for smaller enterprises. As far as these larger firms are concerned, the
subsidies that the Workplace Challenge offers are too small to have a significant impact
on their operations.
The SDI and Workplace Challenge programmes are, by most measures, at opposite ends
of the spectrum of industrial policy programmes. The former is a large, high profile
programme spanning the country, indeed the region. Its objectives are massive and its
instruments encapsulate an impressive array of private and public sector institutions.
Workplace Challenge, on the other hand, is a small, modest programme, little heard of
beyond the ranks of its immediate beneficiaries. And yet both are bedevilled by aspects of
institutional failure.
The well-placed and powerful civil servants responsible for running the SDI programme
may have won support at the highest level of government but they ignored, in fact
specifically eschewed, the requirement to deliver the capabilities associated with the
programme in a manner that built local institutional capacity. The upshot is that the
infrastructure and large projects associated with SDIs were as poorly articulated with the
economies into which they were inserted, as were the elements of MEC of old.
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The Workplace Challenge was not stifled by an overweening central government. It
suffered rather from the absence of strategic leadership from government coupled with
weak, or, at least, inappropriately focused, institutions representing business and labor at
the point of implementation. The upshot was a program that has had little, if any, impact
beyond the firms directly involved in the process.
The programs were examined here but two of a myriad of supply-side programs initiated
by government. Indeed a criticism frequently leveled at DTI is that it adopted a shotgun
approach to the introduction of supply-side programs. Our own small survey supports the
contention that for all the resources devoted to introducing these programs they were little
understood, in fact one is hard pressed to find industrialists who had even heard of many
of these programs, let alone who understood how to access and take advantage of them.
Those that were actively championed and pursued by government were insufficiently
attentive to the need to build institutional capacity at lower levels of government or in
civil society. The need for this arises not simply from some abstract, albeit laudable,
notion in favor of maximizing citizen participation but rather because central
government’s direct capabilities are limited to producing large lumpy infrastructure and,
at best, to directly supporting and incentivising large capital intensive projects. The
“market” on its “own” is unlikely to catalyze activity beyond this — DTI has to ensure
that its interventions establish new institutional arrangements, new “rules of the game”
capable of attracting further investment. On the other hand, simply leaving this task to illequipped organs of civil society or lower levels of government will achieve little in the
absence of a strong framework of rules and incentives provided by government, indeed
rules and incentives designed precisely to strengthen focused institutional capacity. At
best their efforts will have little impact beyond their limited reach. In reality they will
probably achieve little even in their localised areas of influence.
What economists call game theory psychologists call the theory of social situations,
which is an accurate description of what game theory is about. Although game theory is
relevant to parlor games such as poker or bridge, most research in game theory focuses on
how groups of people interact. There are two main branches of game theory: cooperative
and noncooperative game theory. Noncooperative game theory deals largely with how
intelligent individuals interact with one another in an effort to achieve their own goals.
That is the branch of game theory I will discuss here.
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In addition to game theory, economic theory has three other main branches: decision
theory.
Decision theory can be viewed as a theory of one person games, or a game of a single
player against nature. The focus is on preferences and the formation of beliefs. The most
widely used form of decision theory argues that preferences among risky alternatives can
be described by the maximization of the expected value of a numerical utility function,
where utility may depend on a number of things, but in situations of interest to
economists often depends on money income. Probability theory is heavily used in order to
represent the uncertainty of outcomes, and Bayes Law is frequently used to model the
way in which new information is used to revise beliefs. Decision theory is often used in
the form of decision analysis, which shows how best to acquire information before
making a decision.
General equilibrium theory can be viewed as a specialized branch of game theory that
deals with trade and production, and typically with a relatively large number of individual
consumers and producers. It is widely used in the macroeconomic analysis of broad based
economic policies such as monetary or tax policy, in finance to analyze stock markets, to
study interest and exchange rates and other prices. In recent years, political economy has
emerged as a combination of general equilibrium theory and game theory in which the
private sector of the economy is modeled by general equilibrium theory, while voting
behavior and the incentive of governments is analyzed using game theory. Issues studied
include tax policy, trade policy, and the role of international trade agreements such as the
European Union.
Mechanism design theory differs from game theory in that game theory takes the rules of
the game as given, while mechanism design theory asks about the consequences of
different types of rules. Naturally this relies heavily on game theory. Questions addressed
by mechanism design theory include the design of compensation and wage agreements
that effectively spread risk while maintaining incentives, and the design of auctions to
maximize revenue, or achieve other goals.
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10.13 An Instructive Example
One way to describe a game is by listing the players (or individuals) participating in the
game, and for each player, listing the alternative choices (called actions or strategies)
available to that player. In the case of a two-player game, the actions of the first player
form the rows and the actions of the second player the columns, of a matrix. The entries
in the matrix are two numbers representing the utility or payoff to the first and second
player respectively. A very famous game is the Prisoner's Dilemma game. In this game
the two players are partners in a crime who have been captured by the police. Each
suspect is placed in a separate cell, and offered the opportunity to confess to the crime.
The game can be represented by the following matrix of payoffs.
not confess confess
not confess 5,5
-4,10
Confess
1,1
10,-4
Note that higher numbers are better (more utility). If neither suspect confesses, they go
free, and split the proceeds of their crime which we represent by 5 units of utility for each
suspect. However, if one prisoner confesses and the other does not, the prisoner who
confesses testifies against the other in exchange for going free and gets the entire 10 units
of utility, while the prisoner who did not confess goes to prison and which results in the
low utility of -4. If both prisoners confess, then both are given a reduced term, but both
are convicted, which we represent by giving each 1 unit of utility: better than having the
other prisoner confesses, but not as good as going free.
This game has fascinated game theorists for a variety of reasons. First, it is a simple
representation of a variety of important situations. For example, instead of confess/not
confess we could label the strategies "contribute to the common good" or "behave
selfishly." This captures a variety of situations economists describe as public goods
problems. An example is the construction of a bridge. It is best for everyone if the bridge
is built, but best for each individual if someone else builds the bridge. This is sometimes
refered to in economics as an externality. Similarly this game could describe the
alternative of two firms competing in the same market, and instead of confess/not confess
we could label the strategies "set a high price" and "set a low price." Naturally it is best
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for both firms if they both set high prices, but best for each individual firm to set a low
price while the opposition sets a high price.
A second feature of this game is that it is self-evident how an intelligent individual should
behave. No matter what a suspect believes his partner is going to do, it is always best to
confess. If the partner in the other cell is not confessing, it is possible to get 10 instead of
5. If the partner in the other cell is confessing, it is possible to get 1 instead of -4. Yet the
pursuit of individually sensible behavior results in each player getting only 1 unit of
utility, much less than the 5 units each that they would get if neither confessed. This
conflict between the pursuit of individual goals and the common good is at the heart of
many game theoretic problems.
A third feature of this game is that it changes in a very significant way if the game is
repeated, or if the players will interact with each other again in the future. Suppose for
example that after this game is over, and the suspects either are freed or are released from
jail they will commit another crime and the game will be played again. In this case in the
first period the suspects may reason that they should not confess because if they do not
their partner will not confess in the second game. Strictly speaking, this conclusion is not
valid, since in the second game both suspects will confess no matter what happened in the
first game. However, repetition opens up the possibility of being rewarded or punished in
the future for current behavior, and game theorists have provided a number of theories to
explain the obvious intuition that if the game is repeated often enough, the suspects ought
to cooperate.

If We Were All Better People the World Would Be A Better Place
Some of the power and meaning of game theory can be illustrated by assessing the
statement "If we were all better people the world would be a better place." This may seem
to you to be self-evidentally true. Or you may recognize that as a matter of logic this
involves the fallacy of composition: just because a statement applies to each individual
person it need not apply to the group. Game theory can give precise meaning to the
statement of both what it means to be better people and what it means for the world to be
a better place, and so makes it possible to prove or disprove the statement. In fact the
statement is false, and this can be shown by a variation of the Prisoner's Dilemma.
Let us start with a variation on the Prisoner's Dilemma game we may call the Pride Game.
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proud
not confess
confess
Proud
4.0, 4.0
5.4, 3.6
1.2, 0.0
not confess
3.6, 5.4
5.0, 5.0
-4.0, 10.0
Confess
0.0, 1.2
10.0, -4.0
1.0, 1.0
The Pride Game is like the Prisoner's Dilemma game with the addition of the new
strategy of being proud. A proud individual is one who will not confess except in
retaliation against a rat-like opponent who confesses. In other words, if I stand proud and
you confess, I get 1.2, because we have both confessed and I can stand proud before your
humiliation, but you get 0, because you stand humiliated before my pride. On the other
hand, if we are both proud, then neither of us will confess, however, our pride comes at a
cost, as we both try to humiliate the other, so we each get 4, rather than the higher value
of 5 we would get if we simply chose not to confess. It would be worse, of course, for me
to lose face before your pride by choosing not to confess. In this case, I would get 3.6
instead of 4, and you, proud in the face of my humiliation would get 5.4.
The Pride Game is very different than the Prisoner's Dilemma game. Suppose that we are
both proud. In the face of your pride, if I simply chose not to confess I would lose face,
and my utility would decline from 4 to 3.6. To confess would be even worse as you
would retaliate by confessing, and I would be humiliated as well, winding up with 0. In
other words, if we are both proud, and we each believe the other is proud, then we are
each making the correct choice. Morever, as we are both correct, anything either of us
learns will simply confirm our already correct beliefs. This type of situation - where
players play the best they can given their beliefs, and they have learned all there is to
learn about their opponents' play is called by game theorists a Nash Equilibrium.
Notice that the original equilibrium of the Prisoner's Dilemma confess-confess is not an
equilibrium of the Pride game: if I think you are going to confess, I would prefer to stand
proud and humiliate you rather than simply confessing myself.
Now suppose that we become "better people." To give this precise meaning take this to
mean that we care more about each other, that is, we are more altruistic, more generous.
Specifically, let us imagine that because I am more generous and care more about you, I
place a value both on the utility I receive in the "selfish" game described above and on the
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utility received by you. Not being completely altruistic, I place twice as much weight on
my own utility as I do on yours. So, for example, if in the original game I get 3 units of
utility, and you get 6 units of utility, then in the new game in which I am an altruist, I get
a weighted average of my utility and your utility. I get 2/3 of the 3 units of utility that
belonged to me in the original "selfish" game, and 1/3 of the 6 units of utility that
belonged to you in the "selfish" game. Overall I get 4 units of utility instead of 3. Because
I have become a better more generous person, I am happy that you are getting 6 units of
utility, and so this raises my own utility from the selfish level of 3 to the higher level of 4.
The new game with altruistic players is described by taking a weighted average of each
player's utility with that of his opponent, placing 2/3 weight on his own utility and 1/3
weight on his opponent's. This gives the payoff matrix of the Altruistic Pride Game
Proud
not confess
confess
proud
4.00, 4.00
4.8, 4.20*
0.80, 0.40
not confess
4.20*, 4.80
5.00, 5.00
0.67, 5.33*
confess
0.40, 0.80
5.33*, 0.67
1.00*, 1.00*
What happens? If you are proud, I should choose not to confess: if I were to be proud I
get a utility of 4, while if I choose not to confess I get 4.2, and of course if I do confess I
get only 0.4. Looking at the original game, it would be better for society at large if when
you are proud I were to choose not to confess. This avoids the confrontation of two proud
people, although of course, at my expense. However, as an altruist, I recognize that the
cost to me is small (I lose only 0.4 units of utility) while the benefit to you is great (you
gain 1.4 units of utility), and so I prefer to "not confess." This is shown in the payoff
matrix by placing an asterisk next to the payoff 4.2 in the proud column.
What should I do if you choose not to confess? If I am proud, I get 4.8, if I choose not to
confess I get 5, but if I confess, I get 5.33. So I should confess. Again, this is marked with
an asterisk. Finally, if you confess, then I no longer wish to stand proud, recognizing that
gaining 0.2 by humiliating you come at a cost of 1 to you. If I choose not to confess I get
only 0.67. So it is best for me to confess as well.
What do we conclude? It is no longer equilibrium for us both to be proud. Each of us in
the face of the other's pride would wish to switch to not confessing. Of course it is also
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not equilibrium for us both to choose not to confess: each of us would wish to switch to
confessing. The only equilibrium is the box marked with two asterisks where we are both
playing the best we can give the other player's play: it is where we both choose to
confess. So far from making us better off, when we both become more altruist and more
caring about one another, instead of both getting a relatively high utility of 4, the
equilibrium is disrupted, and we wind up in a situation in which we both get a utility of
only 1. Notice how we can give a precise meaning to the "world being a better place." If
we both receive a utility of 1 rather than both receiving a utility of 4, the world is clearly a
worse place.
The key to game theory and to understanding why better people may make the world a
worse place is to understand the delicate balance of equilibrium. It is true that if we
simply become more caring and nothing else happens the world will at least be no worse.
However: if we become more caring we will wish to change how we behave. As this
example shows, when we both try to do this at the same time, the end result may make us
all worse off.
To put this in the context of day-to-day life: if we were all more altruistic we would
choose to forgive and forget more criminal behavior. The behavior of criminals has a
complication. More altruistic criminals would choose to commit fewer crimes. However,
as crime is not punished so severely, they would be inclined to commit more crimes. If in
the balance more crimes are committed, the world could certainly be a worse place. The
example shows how this might work.
For those of you who are interested in or already know more advanced game theory, the
Pride Game has only the one Nash equilibrium shown - it is solvable by iterated strict
dominance. The Atruistic Pride Game, however, has several mixed strategy equilibria.
You can compute them using the fine open source software program Gambit written by
Richard McKelvey, Andrew McLennan and Theodore Turocy. One equilibrium involves
randomizing between proud and confess, so is worse than the proud-proud equilibrium of
the Pride game. The other is strictly mixed in that it randomizes between all three
strategies. The payoffs to that equilibrium gives each player 2.31 - so while it is better
than both players confessing for certain, it is still less good than the unique equilibrium of
the Pride Game.
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I'd like to thank Jie Zheng for his help. The "We are all better people" example is inspired
by and based on an academic paper by Sung-Ha Hwang and Samuel Bowles called "Is
Altruism Bad For Cooperation?" If you know some basic calculus the paper is very
readable, and I will provide a link as soon as they post it online. They provide a much
more persuasive and robust example of how altruism hurts cooperation, tightly linked to
experimental evidence. If you wish to learn more about game theory, there a variety
of good books on the topic.
10.14 Game Theory Computer Application
Game theory is a branch of applied mathematics that is used in the social sciences, most
notably in economics, as well as in biology, engineering, political science, international
relations, computer science, and philosophy. Game theory attempts to mathematically
capture behavior in strategic situations, in which an individual's success in making
choices depends on the choices of others. While initially developed to analyze
competitions in which one individual does better at another's expense (zero sum games),
it has been expanded to treat a wide class of interactions, which are classified according
to several criteria. Today, "game theory is a sort of umbrella or 'unified field' theory for
the rational side of social science, where 'social' is interpreted broadly, to include human
as well as non-human players (computers, animals, plants)" (Aumann 1987).
Traditional applications of game theory attempt to find equilibria in these games. In
equilibrium, each player of the game has adopted a strategy that they are unlikely to
change. Many equilibrium concepts have been developed (most famously the Nash
equilibrium) in an attempt to capture this idea. These equilibrium concepts are motivated
differently depending on the field of application, although they often overlap or coincide.
This methodology is not without criticism, and debates continue over the appropriateness
of particular equilibrium concepts, the appropriateness of equilibria altogether, and the
usefulness of mathematical models more generally.
Although some developments occurred before it, the field of game theory came into being
with the 1944 book Theory of Games and Economic Behavior by John von Neumann and
Oskar Morgenstern. This theory was developed extensively in the 1950s by many
scholars. Game theory was later explicitly applied to biology in the 1970s, although
similar developments go back at least as far as the 1930s. Game theory has been widely
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recognized as an important tool in many fields. Eight game theorists have won Nobel
prizes in economics, and John Maynard Smith was awarded the Crafoord Prize for his
application of game theory to biology.
10.15 Representation of Games
The games studied in game theory are well-defined mathematical objects. A game
consists of a set of players, a set of moves (or strategies) available to those players, and a
specification of payoffs for each combination of strategies. Most cooperative games are
presented in the characteristic function form, while the extensive and the normal forms
are used to define noncooperative games.
10.15.1 Extensive Form
The extensive form can be used to formalize games with some important order. Games
here are often presented as trees (as pictured to the left). Here each vertex (or node)
represents a point of choice for a player. The player is specified by a number listed by the
vertex. The lines out of the vertex represent a possible action for that player. The payoffs
are specified at the bottom of the tree.
In the game pictured here, there are two players. Player 1 moves first and chooses either
F or U. Player 2 sees Player 1's move and then chooses A or R. Suppose that Player 1
chooses U and then Player 2 chooses A, then Player 1 gets 8 and Player 2 gets 2.
The extensive form can also capture simultaneous-move games and games with imperfect
information. To represent it, either a dotted line connects different vertices to represent
them as being part of the same information set (i.e., the players do not know at which
point they are), or a closed line is drawn around them.
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10.15.2 Normal Form
Player
Player
1
chooses Up
Player
1
chooses Down
2
Player
chooses Left
chooses Right
4, 3
–1, –1
0, 0
3, 4
2
Normal form or payoff matrix of a 2-player, 2-strategy
game
The normal (or strategic form) game is usually represented by a matrix which shows the
players, strategies, and payoffs (see the example to the right). More generally it can be
represented by any function that associates a payoff for each player with every possible
combination of actions. In the accompanying example there are two players; one chooses
the row and the other chooses the column. Each player has two strategies, which are
specified by the number of rows and the number of columns. The payoffs are provided in
the interior. The first number is the payoff received by the row player (Player 1 in our
example); the second is the payoff for the column player (Player 2 in our example).
Suppose that Player 1 plays up and that Player 2 plays Left. Then Player 1 gets a payoff of
4, and Player 2 gets 3.
When a game is presented in normal form, it is presumed that each player acts
simultaneously or, at least, without knowing the actions of the other. If players have some
information about the choices of other players, the game is usually presented in extensive
form.
10.15.3 Characteristic Function Form
In cooperative games with transferable utility no individual payoffs are given. Instead, the
characteristic function determines the payoff of each coalition. The standard assumption
is that the empty coalition obtains a payoff of 0.
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The origin of this form is to be found in the seminal book of von Neumann and
Morgenstern who, when studying coalitional normal form games, assumed that when a
coalition C forms, it plays against the complementary coalition () as if they were playing
a 2-player game. The equilibrium payoff of C is characteristic. Now there are different
models to derive coalitional values from normal form games, but not all games in
characteristic function form can be derived from normal form games.
Formally, a characteristic function form game (also known as a TU-game) is given as a
pair (N, v), where N denotes a set of players and is a characteristic function.
The characteristic function form has been generalised to games without the assumption of
transferable utility.
10.15.4 Partition Function Form
The characteristic function form ignores the possible externalities of coalition formation.
In the partition function form the payoff of a coalition depends not only on its members,
but also on the way the rest of the players are partitioned (Thrall & Lucas 1963).
10.15.5 Application and Challenges
Game theory has been used to study a wide variety of human and animal behaviors. It
was initially developed in economics to understand a large collection of economic
behaviors, including behaviors of firms, markets, and consumers. The use of game theory
in the social sciences has expanded, and game theory has been applied to political,
sociological, and psychological behaviors as well.
Game theoretic analysis was initially used to study animal behavior by Ronald Fisher in
the 1930s (although even Charles Darwin makes a few informal game theoretic
statements). This work predates the name "game theory", but it shares many important
features with this field. The developments in economics were later applied to biology
largely by John Maynard Smith in his book Evolution and the Theory of Games.
In addition to being used to predict and explain behavior, game theory has also been used
to attempt to develop theories of ethical or normative behavior. In economics and
philosophy, scholars have applied game theory to help in the understanding of good or
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proper behavior. Game theoretic arguments of this type can be found as far back as
Plato.[1]
10.15.6 Political Science
The application of game theory to political science is focused in the overlapping areas of
fair division, political economy, public choice, war bargaining, positive political theory,
and social choice theory. In each of these areas, researchers have developed game
theoretic models in which the players are often voters, states, special interest groups, and
politicians.
For early examples of game theory applied to political science, see the work of Anthony
Downs. In his book An Economic Theory of Democracy (Downs 1957), he applies the
Hotelling firm location model to the political process. In the Downsian model, political
candidates commit to ideologies on a one-dimensional policy space. The theorist shows
how the political candidates will converge to the ideology preferred by the median voter.
For more recent examples, see the books by Steven Brams, George Tsebelis, Gene M.
Grossman and Elhanan Helpman, or David Austen-Smith and Jeffrey S. Banks.
A game-theoretic explanation for democratic peace is that public and open debate in
democracies sends clear and reliable information regarding their intentions to other states.
In contrast, it is difficult to know the intentions of nondemocratic leaders, what effect
concessions will have, and if promises will be kept. Thus there will be mistrust and
unwillingness to make concessions if at least one of the parties in a dispute is a
nondemocracy (Levy & Razin 2003).
10.15.7 Economics and Business
Economists have long used game theory to analyze a wide array of economic phenomena,
including auctions, bargaining, duopolies, fair division, oligopolies, social network
formation, and voting systems. This research usually focuses on particular sets of
strategies known as equilibria in games. These "solution concepts" are usually based on
what is required by norms of rationality. In non-cooperative games, the most famous of
these is the Nash equilibrium. A set of strategies is Nash equilibrium if each represents a
best response to the other strategies. So, if all the players are playing the strategies in
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Nash equilibrium, they have no unilateral incentive to deviate, since their strategy is the
best they can do given what others are doing.
The payoffs of the game are generally taken to represent the utility of individual players.
Often in modeling situations the payoffs represent money, which presumably corresponds
to an individual's utility. This assumption, however, can be faulty.
A prototypical paper on game theory in economics begins by presenting a game that is an
abstraction of some particular economic situation. One or more solution concepts are
chosen, and the author demonstrates which strategy sets in the presented game are
equilibria of the appropriate type. Naturally one might wonder to what use this
information should be put. Economists and business professors suggest two primary uses:
descriptive and prescriptive.
A. Descriptive
The first known use is to describe how human populations behave. Some scholars believe
that by finding the equilibria of games they can predict how actual human populations
will behave when confronted with situations analogous to the game being studied. This
particular view of game theory has come under recent criticism. First, it is criticized
because the assumptions made by game theorists are often violated. Game theorists may
assume players always act in a way to directly maximize their wins (the Homo
economicus model), but in practice, human behavior often deviates from this model.
Explanations of this phenomenon are many; irrationality, new models of deliberation, or
even different motives (like that of altruism). Game theorists respond by comparing their
assumptions to those used in physics. Thus while their assumptions do not always hold,
they can treat game theory as a reasonable scientific ideal akin to the models used by
physicists. However, additional criticism of this use of game theory has been levied
because some experiments have demonstrated that individuals do not play equilibrium
strategies. For instance, in the centipede game, guess 2/3 of the average game, and the
dictator game, people regularly do not play Nash equilibria. There is an ongoing debate
regarding the importance of these experiments.[2]
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Alternatively, some authors claim that Nash equilibria do not provide predictions for
human populations, but rather provide an explanation for why populations that play Nash
equilibria remain in that state. However, the question of how populations reach those
points remains open.
Some game theorists have turned to evolutionary game theory in order to resolve these
worries. These models presume either no rationality or bounded rationality on the part of
players. Despite the name, evolutionary game theory does not necessarily presume natural
selection in the biological sense. Evolutionary game theory includes both biological as
well as cultural evolution and also models of individual learning (for example, fictitious
play dynamics).
B. Prescriptive or Normative Analysis
On the other hand, some scholars see game theory not
Cooperate
Defect
-1, -1
-10, 0
0, -10
-5, -5
as a predictive tool for the behavior of human beings,
but as a suggestion for how people ought to behave.
Since Nash equilibrium of a game constitutes one's best Cooperate
response to the actions of the other players, playing a
strategy that is part of Nash equilibrium seems
Defect
appropriate. However, this use for game theory has
The Prisoner's Dilemma
also come under criticism. First, in some cases it is
appropriate to play a non-equilibrium strategy if one expects others to play nonequilibrium strategies as well. For example, see Guess 2/3 of the average.
Second, the Prisoner's dilemma presents another potential counterexample. In the
Prisoner's Dilemma, each player pursuing his own self-interest leads both players to be
worse off than had they not pursued their own self-interests.
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10.15.8 Biology
Unlike economics, the payoffs for games in biology are
Hawk
Dove
v−c, v−c
2v, 0
0, 2v
v, v
often interpreted as corresponding to fitness. In
addition, the focus has been less on equilibria that Hawk
correspond to a notion of rationality, but rather on ones
that would be maintained by evolutionary forces. The
Dove
best known equilibrium in biology is known as the The hawk-dove game
evolutionarily stable strategy (or ESS), and was first
introduced in (Smith & Price 1973). Although its initial motivation did not involve any of
the mental requirements of the Nash equilibrium, every ESS is Nash equilibrium.
In biology, game theory has been used to understand many different phenomena. It was
first used to explain the evolution (and stability) of the approximate 1:1 sex ratios. (Fisher
1930) suggested that the 1:1 sex ratios are a result of evolutionary forces acting on
individuals who could be seen as trying to maximize their number of grandchildren.
Additionally, biologists have used evolutionary game theory and the ESS to explain the
emergence of animal communication (Harper & Maynard Smith 2003). The analysis of
signaling games and other communication games has provided some insight into the
evolution of communication among animals. For example, the mobbing behavior of many
species, in which a large number of prey animals attack a larger predator, seems to be an
example of spontaneous emergent organization.
Biologists have used the game of chicken to analyze fighting behavior and territoriality.
[Citation needed]
Maynard Smith, in the preface to Evolution and the Theory of Games, writes,
"[p]aradoxically, it has turned out that game theory is more readily applied to biology
than to the field of economic behaviour for which it was originally designed".
Evolutionary game theory has been used to explain many seemingly incongruous
phenomena in nature.[3]
One such phenomenon is known as biological altruism. This is a situation in which an
organism appears to act in a way that benefits other organisms and is detrimental to itself.
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This is distinct from traditional notions of altruism because such actions are not
conscious, but appear to be evolutionary adaptations to increase overall fitness. Examples
can be found in species ranging from vampire bats that regurgitate blood they have
obtained from a night's hunting and give it to group members who have failed to feed, to
worker bees that care for the queen bee for their entire lives and never mate, to Vervet
monkeys that warn group members of a predator's approach, even when it endangers that
individual's chance of survival.[4] All of these actions increase the overall fitness of a
group, but occur at a cost to the individual.
Evolutionary game theory explains this altruism with the idea of kin selection. Altruists
discriminate between the individuals they help; and favor relatives. Hamilton's rule
explains the evolutionary reasoning behind this selection with the equation c<b*r where
the cost ( c ) to the altruist must be less than the benefit ( b ) to the recipient multiplied by
the coefficient of relatedness ( r ). The more closely related two organisms are causes the
incidence of altruism to increase because they share many of the same alleles. This means
that the altruistic individual, by ensuring that the alleles of its close relative are passed on,
(through survival of its offspring) can forgo the option of having offspring itself because
the same number of alleles are passed on. Helping a sibling for example, has a coefficient
of ½, because an individual shares ½ of the alleles in its sibling's offspring. Ensuring that
enough of a sibling’s offspring survive to adulthood precludes the necessity of the
altruistic individual producing offspring.[4] The coefficient values depend heavily on the
scope of the playing field; for example if the choice of whom to favor includes all genetic
living things, not just all relatives, we assume the discrepancy between all humans only
accounts for approximately 1% of the diversity in the playing field, a co-efficient that was
½ in the smaller field becomes 0.995. Similarly if it is considered that information other
than that of a genetic nature (e.g. epigenetics, religion, science, etc) persisted through
time the playing field becomes larger still, and the discrepancies smaller.
10.15.9 Computer Science and Logic
Game theory has come to play an increasingly important role in logic and in computer
science. Several logical theories have a basis in game semantics. In addition, computer
scientists have used games to model interactive computations. Also, game theory
provides a theoretical basis to the field of multi-agent systems.
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Separately, game theory has played a role in online algorithms. In particular, the k-server
problem, which has in the past been referred to as games with moving costs and requestanswer games (Ben David, Borodin & Karp et al. 1994). Yao's principle is a gametheoretic technique for proving lower bounds on the computational complexity of
randomized algorithms, and especially of online algorithms.
The field of algorithmic game theory combines computer science concepts of complexity
and algorithm design with game theory and economic theory. The emergence of the
internet has motivated the development of algorithms for finding equilibria in games,
markets, computational auctions, peer-to-peer systems, and security and information
markets.[5]
10.15.10 Philosophy
Game theory has been put to several uses in
Stag
Hare
Stag
3, 3
0, 2
Hare
2, 0
2, 2
philosophy. Responding to two papers by W.V.O.
Quine (1960, 1967), Lewis (1969) used game theory to
develop a philosophical account of convention. In so
doing, he provided the first analysis of common
knowledge and employed it in analyzing play in
Stag hunt
coordination games. In addition, he first suggested that
one can understand meaning in terms of signaling games. This later suggestion has been
pursued by several philosophers since Lewis (Skyrms (1996), Grim, Kokalis, and AlaiTafti et al. (2004)). Following Lewis (1969) game-theoretic account of conventions,
Ullmann Margalit (1977) and Bicchieri (2006) have developed theories of social norms
that define them as Nash equilibria that result from transforming a mixed-motive game
into a coordination game.[6]
Game theory has also challenged philosophers to think in terms of interactive
epistemology: what it means for a collective to have common beliefs or knowledge, and
what are the consequences of this knowledge for the social outcomes resulting from
agents' interactions. Philosophers who have worked in this area include Bicchieri (1989,
1993),[7] Skyrms (1990),[8] and Stalnaker (1999).[9]
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In ethics, some authors have attempted to pursue the project, begun by Thomas Hobbes,
of deriving morality from self-interest. Since games like the Prisoner's dilemma present
an apparent conflict between morality and self-interest, explaining why cooperation is
required by self-interest is an important component of this project. This general strategy is
a component of the general social contract view in political philosophy (for examples, see
Gauthier (1986) and Kavka (1986).[10]
Other authors have attempted to use evolutionary game theory in order to explain the
emergence of human attitudes about morality and corresponding animal behaviors. These
authors look at several games including the Prisoner's dilemma, Stag hunt, and the Nash
bargaining game as providing an explanation for the emergence of attitudes about
morality (see, e.g., Skyrms (1996, 2004) and Sober and Wilson (1999)).
Some assumptions used in some parts of game theory have been challenged in
philosophy; psychological egoism states that rationality reduces to self-interest—a claim
debated among philosophers. (see Psychological egoism#Criticism)
10.16 Types of Games
10.16.1 Cooperative or Non-cooperative
A game is cooperative if the players are able to form binding commitments. For instance
the legal system requires them to adhere to their promises. In noncooperative games this
is not possible.
Often it is assumed that communication among players is allowed in cooperative games,
but not in noncooperative ones. This classification on two binary criteria has been
rejected (Harsanyi 1974).
Of the two types of games, noncooperative games are able to model situations to the
finest details, producing accurate results. Cooperative games focus on the game at large.
Considerable efforts have been made to link the two approaches. The so-called Nashprogramme [clarification needed] has already established many of the cooperative solutions as
noncooperative equilibria.
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Hybrid games contain cooperative and non-cooperative elements. For instance, coalitions
of players are formed in a cooperative game, but these play in a non-cooperative fashion.
A symmetric game is a game where the payoffs for playing a particular strategy depend
only on the other strategies employed, not on who is playing them. If the identities of the
players can be changed without changing the payoff to the strategies, then a game is
symmetric. Many of the commonly studied 2×2 games are symmetric. The standard
representations of chicken, the prisoner's dilemma, and the stag hunt are all symmetric
games. Some scholars would consider certain asymmetric games as examples of these
games as well. However, the most common payoffs for each of these games are
symmetric.
Most commonly studied asymmetric games are games where there are not identical
strategy sets for both players. For instance, the ultimatum game and similarly the dictator
game have different strategies for each player. It is possible, however, for a game to have
identical strategies for both players, yet be asymmetric. For example, the game pictured to
the right is asymmetric despite having identical strategy sets for both players.
10.16.2 Zero-sum and non-zero-sum
Zero-sum games are a special case of constant-sum
A
B
–1, 1
3, –3
0, 0
–2, 2
games, in which choices by players can neither
increase nor decrease the available resources. In zero- A
sum games the total benefit to all players in the game,
for every combination of strategies, always adds to
B
zero (more informally, a player benefits only at the A zero-sum game
equal expense of others). Poker exemplifies a zero-sum
game (ignoring the possibility of the house's cut), because one wins exactly the amount
one's opponents lose. Other zero-sum games include matching pennies and most classical
board games including Go and chess.
Many games studied by game theorists (including the famous prisoner's dilemma) are
non-zero-sum games, because some outcomes have net results greater or less than zero.
Informally, in non-zero-sum games, a gain by one player does not necessarily correspond
with a loss by another.
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Constant-sum games correspond to activities like theft and gambling, but not to the
fundamental economic situation in which there are potential gains from trade. It is
possible to transform any game into a (possibly asymmetric) zero-sum game by adding an
additional dummy player (often called "the board"), whose losses compensate the players'
net winnings.
10.16.3 Simultaneous and Sequential
Simultaneous games are games where both players move simultaneously, or if they do not
move simultaneously, the later players are unaware of the earlier players' actions (making
them effectively simultaneous). Sequential games (or dynamic games) are games where
later players have some knowledge about earlier actions. This need not be perfect
information about every action of earlier players; it might be very little knowledge. For
instance, a player may know that an earlier player did not perform one particular action,
while he does not know which of the other available actions the first player actually
performed.
The difference between simultaneous and sequential games is captured in the different
representations discussed above. Often, normal form is used to represent simultaneous
games, and extensive form is used to represent sequential ones; although this isn't a strict
rule in a technical sense.
10.16.3 Perfect Information and Imperfect Information
An important subset of sequential games consists of games of perfect information. A
game is one of perfect information if all players know the moves previously made by all
other players. Thus, only sequential games can be games of perfect information, since in
simultaneous games not every player knows the actions of the others. Most games studied
in game theory are imperfect-information games, although there are some interesting
examples of perfect-information games, including the ultimatum game and centipede
game. Perfect-information games include also chess, go, mancala, and arimaa.
Perfect information is often confused with complete information, which is a similar
concept. Complete information requires that every player know the strategies and payoffs
of the other players but not necessarily the actions.
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10.16.4 Infinitely Long Games
Games, as studied by economists and real-world game players, are generally finished in a
finite number of moves. Pure mathematicians are not so constrained, and set theorists in
particular study games that last for an infinite number of moves, with the winner (or other
payoff) not known until after all those moves are completed.
The focus of attention is usually not so much on what is the best way to play such a game,
but simply on whether one or the other player has a winning strategy. (It can be proven,
using the axiom of choice, that there are games—even with perfect information, and
where the only outcomes are "win" or "lose"—for which neither player has a winning
strategy.) The existence of such strategies, for cleverly designed games, has important
consequences in descriptive set theory.
10.16.5 Discrete and Continuous Games
Much of game theory is concerned with finite, discrete games that have a finite number of
players, moves, events, outcomes, etc. Many concepts can be extended, however.
Continuous games allow players to choose a strategy from a continuous strategy set. For
instance, Cournot competition is typically modeled with players' strategies being any nonnegative quantities, including fractional quantities.
Differential games such as the continuous pursuit and evasion game are continuous
games.
10.16.6 One-player and many-player games
Individual decision problems are sometimes considered "one-player games". While these
situations are not game theoretical, they are modeled using many of the same tools within
the discipline of decision theory. It is only with two or more players that a problem
becomes game theoretical. A randomly acting player who makes "chance moves", also
known as "moves by nature", is often added (Osborne & Rubinstein 1994). This player is
not typically considered a third player in what is otherwise a two-player game, but merely
serves to provide a roll of the dice where required by the game. Games with an infinite
number of players are often called n-person games (Luce & Raiffa 1957).
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10.16.7 Metagames
These are games the play of which is the development of the rules for another game, the
target or subject game. Metagames seek to maximize the utility value of the rule set
developed. The theory of metagames is related to mechanism design theory.
10.17 History
The first known discussion of game theory occurred in a letter written by James
Waldegrave in 1713. In this letter, Waldegrave provides a minimax mixed strategy
solution to a two-person version of the card game le Her.
James Madison made what we now recognize as a game-theoretic analysis of the ways
states can be expected to behave under different systems of taxation.[11][12]
It was not until the publication of Antoine Augustin Cournot's Recherches sur les
Principes mathématiques de la théorie des richesses (Researches into the Mathematical
Principles of the Theory of Wealth) in 1838 that a general game theoretic analysis was
pursued. In this work Cournot considers a duopoly and presents a solution that is a
restricted version of the Nash equilibrium.
Although Cournot's analysis is more general than Waldegrave's, game theory did not
really exist as a unique field until John von Neumann published a series of papers in
1928. While the French mathematician Émile Borel did some earlier work on games, Von
Neumann can rightfully be credited as the inventor of game theory. Von Neumann was a
brilliant mathematician whose work was far-reaching from set theory to his calculations
that were key to development of both the Atom and Hydrogen bombs and finally to his
work developing computers. Von Neumann's work in game theory culminated in the 1944
book Theory of Games and Economic Behavior by von Neumann and Oskar
Morgenstern. This profound work contains the method for finding mutually consistent
solutions for two-person zero-sum games. During this time period, work on game theory
was primarily focused on cooperative game theory, which analyzes optimal strategies for
groups of individuals, presuming that they can enforce agreements between them about
proper strategies.
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In 1950, the first discussion of the prisoner's dilemma appeared, and an experiment was
undertaken on this game at the RAND Corporation. Around this same time, John Nash
developed a criterion for mutual consistency of players' strategies, known as Nash
equilibrium, applicable to a wider variety of games than the criterion proposed by von
Neumann and Morgenstern. This equilibrium is sufficiently general to allow for the
analysis of non-cooperative games in addition to cooperative ones.
Game theory experienced a flurry of activity in the 1950s, during which time the concepts
of the core, the extensive form game, fictitious play, repeated games, and the Shapley
value were developed. In addition, the first applications of Game theory to philosophy
and political science occurred during this time.
In 1965, Reinhard Selten introduced his solution concept of subgame perfect equilibria,
which further refined the Nash equilibrium (later he would introduce trembling hand
perfection as well). In 1967, John Harsanyi developed the concepts of complete
information and Bayesian games. Nash, Selten and Harsanyi became Economics Nobel
Laureates in 1994 for their contributions to economic game theory.
In the 1970s, game theory was extensively applied in biology, largely as a result of the
work of John Maynard Smith and his evolutionarily stable strategy. In addition, the
concepts of correlated equilibrium, trembling hand perfection, and common knowledge
[13]
were introduced and analyzed.
In 2005, game theorists Thomas Schelling and Robert Aumann followed Nash, Selten and
Harsanyi as Nobel Laureates. Schelling worked on dynamic models, early examples of
evolutionary game theory. Aumann contributed more to the equilibrium school,
introducing an equilibrium coarsening, correlated equilibrium, and developing an
extensive formal analysis of the assumption of common knowledge and of its
consequences.
In 2007, Roger Myerson, together with Leonid Hurwicz and Eric Maskin, was awarded
the Nobel Prize in Economics "for having laid the foundations of mechanism design
theory." Myerson's contributions include the notion of proper equilibrium, and an
important graduate text: Game Theory, Analysis of Conflict (Myerson 1997).
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
Appendix 1 and 2
The value of asking open-ended questions becomes apparent when the students turn in
their lab assignments. Invariably, no two lab reports will be identical.This provides a
great opportunity for in-class discussion in which students compare the results of their
analysis. In the course of the discussion, the instructor can help students identify the
sources of their differences – usually either different theoretical assumptions or different
ways of empirically modelling the same assumption.This kind of discussion is a critical
step in using this tool as a way of imparting a deeper understanding of the material, and
an unavoidable byproduct of this discussion is a better understanding of the methods too.
In small classes, this discussion can happen among the entire class. In larger classes,
students can be divided into smaller groups and asked to report the conclusions of their
comparisons to the larger group. Opportunities to use this assignment to teach other
important skills also exist. For example, writing skills can be practised if lab reports take
on the same format as a mini-research paper, starting with an introduction and literature
review that would discuss relevant readings and topics from the class. Oral presentation
skills might also be taught with this assignment if students take turns presenting their
results to the class.The ophistication of the labs should increase

International Review of Economics Education
Over the course of the semester, with a first lab perhaps just generating some descriptive
statistics and motivating further work.Depending on the ability levels of the students, the
labs can evolve to requiring more subtle ideas and more sophisticated specifications as
the semester progresses (e.g.dummy variables, interaction terms, qualitative dependent
variables, IV estimation, panel data models). Some of the lab assignments might require
students to learn statistical techniques beyond basic multiple regression but the teaching
of new statistical techniques in this context should be limited. Ideally, the course would
be taught within a programme that allowed students to be exposed to empirical analysis in
a variety of electives to make the economics curriculum more cohesive. In such a case, if
each course focused on only a few additional techniques, it would be feasible to expose
students to a variety of advanced techniques over the course of their undergraduate career.
If used in several different classes throughout the economics curriculum, this method
might teach students a good bit of the content of an applied econometrics course.
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
Benefits and Drawbacks
There are many benefits to this approach to teaching undergraduate economics. One of
the most important is that students will actually use the techniques they learn in their
statistics classes, allowing them to make connections across classes.Even if students are
currently using their knowledge of statistics to read material in more advanced courses, as
we all know there is a big difference between reading about statistical analysis and doing
it yourself.Another important benefit is that lab assignments offer students an alternative
way of demonstrating their knowledge other than in-class exams.Diversifying the types of
assignments helps the course appeal to students with different learning styles. In addition,
the empirical understanding of important concepts gained through these types of
assignments is a different kind of understanding than that gained by reading a textbook.
Students who are working on lab assignments, even at a rudimentary level, will have a
better understanding of assigned readings, including those that use more sophisticated
empirical hniques. Thus, this approach complements well the standard way of learning
economics. Lab assignments also lend themselves well to giving assignments at different
levels of difficulty. By requiring more sophisticated techniques or ideas, it is relatively
easy to increase the difficulty of the assignments as the semester rogresses, ensuring that
students are challenged throughout the course.
Furthermore, the process of considering appropriate empirical evidence for ideas can be
quite difficult for students as they typically do not get many opportunities to do this as
undergraduates. For those instructors who want to design classes that appeal

Integrating Computer Applications into Economics Electives
particularly to hard-working and intellectually curious students, this approach is very
useful.Often, these kinds of assignments can help students get started on their own
research project.Work initially done as part of an in-class lab assignment, especially one
that relies on an open-ended question, can expand and evolve into a student’s senior
thesis or an independent research project. Realistically, lab assignments in a course will
not turn into publishable research, but the exposure to the process can be a valuable and
important first step in learning how to do empirical research. For the few students who are
contemplating graduate school, lab assignments of this type can give them exposure to the
research process that will be helpful to them as they enter an economics PhD programme.
Another benefit of this approach is that it accommodates extensions that facilitate the
teaching of other important skills such as writing and speaking.As mentioned earlier, by
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requiring students to write up their results in a paper or present their results to the class in
an oral presentation, students can also be taught writing and speaking skills. Finally,
teaching in this way has personal benefits for the instructor. It often leverages our own
expertise as economists; and, for those in environments in which teaching and research is
carefully balanced, it encourages a synthesis of the twoactivities.
Of course, there are drawbacks.The most important are related to additional constraints
imposed by this method of teaching. First, in order to keep the course focused on content
and not statistical technique, it is important for students to take a statistics course that
teaches multiple regression analysis prior to taking the elective.This has the disadvantage
of potentially discouraging students from studying economics as it puts another hurdle in
front of students interested in the material taught in the elective classes.Also important,
however, is the fact that this teaching method potentially requires more resources (i.e.
smaller student to faculty ratios as well as reliable computing equipment). Students
answering open-ended questions may require more help from instructors. In addition, to
the extent that writing or speaking assignments are given in conjunction with the lab
assignments, class sizes may need to be reduced to make these components successful as
well. Finally, one must also take into account that by emphasising empirical work, given
time constraints, other work may be de-emphasised in class. Instructors can minimise this
concern by assigning straightforward parts of the textbook for students to read and learn
on their own.This strategy is facilitated by choosing a textbook that is very accessible to
the students.

International Review of Economics Education
An example from an economic growth class, although this teaching technique has a wide
application in most fields taught in the undergraduate economics curriculum, this section
provides more detail on how this strategy has been implemented in my class on economic
growth.This class is an upper-level elective with prerequisites of intermediate micro,
intermediate macro and an economic statistics class in which students have been
introduced to the concept of multiple regression. In addition to the labs, students in this
class are also responsible for reading carefully selected journal articles with empirical
components that complement the lab assignments in class. Each of them takes a turn
making a 10 to 15 minute presentation of the main points of one article and relating them
to previous articles and class discussions. Several of the students in the class are
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completing a capstone experience for the major and are required to write a final paper that
makes a policy recommendation that enhances long-run growth in a specific country and
uses regression analysis as supporting evidence for at least one of their points.The labs in
the class prepare the students to be able to complete this final assignment, which is one
step closer to independent research.An example of the senior project assignment is
included in Appendix 4.2 The level of econometric sophistication of the students is
relatively low at the beginning of the semester. Students generally know how to run
multiple regressions, but have not had much practice doing so and have no clear ideas of
how to match up theory and evidence. I spend one class at the beginning of the semester
reviewing key regression concepts, but most of the learning of statistics methods in this
class is accomplished as the students themselves develop a need to know more about
methods because they come to understand that they need to use them. The first lab of the
semester is completed within the first two weeks of classes and its purpose is to simply
introduce students to the data and some facts about the world distribution of income that
motivate many of the topics of the course throughout the semester. I compile one large
data set for use in all the labs and make that available to the students.The data set contains
about 100 variables compiled from World Bank Development Indicators, Penn World
Tables and data made available by authors of journal articles.Although it is true that much
of the data for many macroeconomic topics can be found on the Internet, manipulation of
that data can be time consuming for the students and it is a much more effective learning
experience if the students spend more of their time on nalysis. After the first, mostly
descriptive, lab, subsequent labs require students to become more ophisticated in their
analysis.The next lab requires students to use multiple Integrating Computer Applications
into
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Economics Electives
Regression analysis to explain an important growth variable such as investment or
education and a third lab might require even more sophistication by requiring students to
transform variables or use interaction terms to support their ideas.As might be expected in
a course in economic growth, endogeneity and causality are key issues in the journal
articles the students are reading, and we do spend some class time discussing the
importance of and ways of addressing these issues.The last lab of the semester requires
them to address these issues, possibly with instrumental variables estimation.
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Each lab is started in class, although students cannot finish them in one class period. I do
require that, in the initial lab period, they work with one other person in the class to help
them get started, but give them the option to do a joint or independent write-up. In
teaching during the actual lab period, it is important to balance the students need for clear
direction against the benefit of allowing them to think about questions for which there is
not obviously a right answer. I do emphasise to the students that they need to start with
their ideas and then work out the empirical implication of these ideas.Although giving
them one large data set with many variables reduces the temptation to run hundreds of
regressions, the concept that the theory should determine the empirics can be difficult for
some students.Much of the teaching during this initial lab period is, in fact, comprised of
conversations with the students about exactly what their ideas are. As students make
progress during the lab period, they can be prodded into fruitful directions with leading
questions from the instructor. Examples of these kinds of questions include: ‘Do you
think each year of education is equally valuable?’, ‘Will the effect be the same in poor
countries and rich countries?’ or ‘Do you think investment in 2000 can affect growth over
the 1960 to 2000 time period?’These questions are then followed up with more specific
questions about what their answer implies about the empirical specification (e.g.dummy
variables, interaction terms, appropriate time lags.) My goal at the end of each lab period
is to have every student leave with an nderstanding of the question they are answering in
the lab and the methods they will use to answer it.
Measures of success Ideally, to test the effectiveness of this method, one would like to be
able to randomly assign students in the same class with the same instructor to a control
group and an experimental group in which the students in the experimental group did the
additional lab assignments, but the students in the control group did not. However, as
explained above, effectively using this technique requires that it be integrated into the
entire course and doing so alters slightly how class time is International

Economics Education
Spent.Therefore, it is not feasible to have such an experimental design.An alternative way
of evaluating the success of this teaching technique is to ask whether or not students
enjoyed the course more.This kind of evidence can be found in teaching evaluations.Over
the past nine years, I have taught two elective courses, monetary policy and an economic
growth class. In some years, the courses were taught in the traditional manner, and in
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others the courses were taught following the methods described in this paper.All together,
there are nine sections, with four being taught in the traditional manner and five being
taught using computer applications.Whether taught with or without the labs, all sections
were approximately the same size. Evidence from the narrative part of the course
evaluations supports the idea that students enjoyed the course more when the computer
applications were included.Although some students admit that they do not like what is
perceived to be extra work in this class, almost all of them recognise the value. Students
overwhelmingly report on course evaluations that the experience is challenging and
rewarding, allowing them to explore ideas outside of the textbook. For example, one
student wrote,‘I really liked the way the course was designed… we were able to take what
we learned and apply it instead of studying just a bunch of graphs.’Another student
echoed that sentiment,‘The class wasn’t simply based on the textbook – we found our
own evidence to support the theories.’ In contrast, a student in the more traditionally
taught course complained that the structure of the course was ‘predictable’. The
sentiments expressed in these comments are borne out by a more systematic compilation
of ratings of the course.Although the college-wide teaching evaluations do not query the
students about their knowledge of economic theory, they do ask the students to rate the
overall effectiveness of the course and the teacher.Table 1 summarises the results of the
answers to these two questions by the methods used to teach the class.

Integrating Computer Applications into Economics Electives
In both cases, the students in the courses that integrated computer applications rated both
the course and the teacher as being more effective, suggesting that, on average, students
were more satisfied with the class when computer applications were integrated. Although,
the magnitude of the changes is not large, it should be noted that the upper bound of the
scale is six,making improvements in the average rating more difficult as the upper bound
is approached.This informal evidence from course evaluations points to the conclusion
that this method not only causes students to enjoy the course more, but it also actively
engages students in the study of economics.Together with the evidence from the
economics education literature discussed in the introduction, this suggests that using
computer applications is an effective teaching technique.
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Conclusion
This paper has described a way in which lab assignments can be integrated into
economics electives. Some evidence has been presented that suggests that students enjoy
economics courses more when they are taught in this way and are more actively engaged
in the material. Lab assignments also provide opportunities to teach a broad skill set that
is important to many undergraduate economics majors.The key feature of these
assignments is that their primary purpose is to use empirical methods to teach economic
theory.
Appendix 1: Sample lab for a money and banking, monetary policy
 Determinants of Inflation Expectations
Expectations play a very important role in determining future economic activity; and, in
this lab, you will explore the determinants of inflation expectations. The data provided
includes a measure of inflation expectations from the Philadelphia Fed Survey of
Professional Forecasters.The data in the variable called, expinfl, is the one year-ahead
forecast of annual inflation by the respondents to this survey. In other words, the data for
the 4th quarter of 2005 represents the forecast of annual CPI inflation made for 2005:Q4
in the 4th quarter of 2004. As you consider the appropriate empirical specification, please
be sure to consider the appropriate lags of variables to use in your regression as well as
whether the relationships you are testing require you to consider levels or growth rates of
your independent variables.
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International Review of Economics Education
A thorough write-up will:

describe the economic theory behind the development of your regression equation

discuss the importance of expectations in determining economic activity and the
importance of these expectations for monetary policy makers

discuss different theories of expectation formation and the support that your
results provide for each.

evaluate your regression equation and discuss the relative importance of each of
the independent variables you use in your regression in influencing expectations.
With the exception of the inflation expectations data, which was obtained from the
Philadelphia Fed, all data for this lab was obtained from onomagic.com.Variable
labels in the Stata data set provide data definitions.
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Appendix 2:
Sample lab for a development, economic growth or labour course

The Value of Education
Policy makers often have to make difficult choices about the best way to allocate limited
resources. Education is one means of making workers more productive and raising
incomes. But, of course, resources spent on education are resources not spent in some
other potentially useful way.In this lab you will help to inform this policy decision by
answering the question: what is an extra year of education worth? More specifically: if
the average education of the labour force is increased by one year, how much higher can
the typical country expect per capita income to be 25 years from now? In determining
how to answer this question, be sure to draw on the growth theory that you have already
learned.Discuss your regression specification, the onfidence that you have in your results
and consider potential omitted variables as well as the direction of causation between
your dependent and independent variables. Keep in mind that your overall objective is to
provide information that would be helpful to policy makers.Therefore, be sure to explain
your data and methods and include a recommendation in your conclusion.Integrating
Computer Applications into Economics Electives
Note: This lab is one of several labs written by the author to accompany Weil
(2005).More examples of several labs designed for a course in economic growth by the
author can be viewed
Appendix 3:
Sample write-up instructions for a course that emphasises writing All lab reports should
contain the following sections.

Executive Summary
In this section you will succinctly state your main findings.Often this section will be only
a few sentences, but a reader of this section should be able to determine quickly what you
have done and what your conclusions are.This section should be written after the rest of
the paper is completed.
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
Introduction and Literature Review
In this section, you will introduce the question you are trying to answer or the hypothesis
you are testing.You should motivate the reader in this section by explaining the
importance of this question.You should also eview the current literature related to your
question (i.e. the class readings and the textbook) to help to put your work in context.

Data Description
In this section you will describe the source and nature of your data.Often descriptive
statistics (e.g. means and standard deviations) are presented as a way of introducing your
data.

Analysis
The analysis section contains the details of your investigation. In this section you should
explain your method of analysis. In other words, you should answer the question: Why
did you use the techniques you used to answer the question you posed in the introduction?
You should also present your results in this section. Often, you will include graphs or
tables that summarise your results.

Conclusion
In the final section of your lab, you should state your main conclusions.You should
discuss any important limitations of your analysis, stating what data or information you
would have liked to have in order to answer your questions more thoroughly.
International Review of Economics Education
Appendix 4:
You have been hired as a consultant to the government of a specific country to analyse
that country’s current prospects for growth and make recommendations for policies that
could help to improve that country’s growth performance.Your assignment for this class
is to prepare a written report and give an oral presentation stating your findings. In
writing your report, you can assume that the government officials have taken (and
passed!) all the prerequisites for this class. Each of your recommendations must be
justified with either economic theory or with some empirical evidence that you supply
(i.e. you need to run a regression.) At least one of your recommendations must be
supported by theory and at least one must be supported by theory and empirical evidence.
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(You may have as many as four or five recommendations in total.) You should also use
the results of economics journal articles to support your points.

Choosing a country
You must choose a country by [date to be arranged].Nobody may choose to study the
United States.To ensure that everybody learns something from your presentation, each
senior project student must choose a different country, preferably in different regions of
the world (e.g. Latin America, East Asia, SubSaharan Africa, Europe, Former Soviet Bloc
countries, North America).Countries will be assigned on a first-come/first-serve basis.
Prior to selecting your country, I highly recommend that you do some preliminary reading
to make sure that the issues facing your country are of interest to you.Two sources of
country-specific information are the International Monetary Fund and the World Bank
(see links on this course’s home page).The staff of the International Monetary Fund
periodically prepares Country Reports that give detailed information on many countries.
(Go to the IMF website, click on publications and then search on IMF Staff Country
Reports to see a list of the reports available.Many can be downloaded from the Internet
immediately, but some are only available in hard copy, and obtaining them involves both
a fee and a delay.)
 Guidelines
Your paper should be approximately 15 pages in length (excluding exhibits). However, its
length may vary slightly from this number, depending on the issues you discuss.However,
if you find that your paper is less than 14 pages, you should reconsider whether or not you
have covered the topic thoroughly.Under no circumstances should you write a paper that
is longer than 20 pages. The oral presentation should last between 15 and 20 minutes.
Presentations that are longer than 20 minutes will be stopped before they are completed.
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