TEDx – University Of Strathclyde 2016

Today I had the opportunity to attend the 2016 TEDx conference at the University of Stathclyde. Under the heading WORLD 2.0 the conference engaged a conversation about our shared future and the need for aspiring for progression. Six speakers with diverse backgrounds were invited to talk and each of them in their very own way showed how the idea of a single person can make a difference in world 2.0.

Impressions of TEDxStrath16

Speaker 1: Edgar Grunewald

The first speaker invited to talk was Edgar Grunewald. Known as a WorldBuilder who is running his own YouTube channel Artifexian, Grunewald talked about how to construct an entire world using simple maths. He showed us how numbers can tell a story; that is a story of a planet and two stars. Ultimately it turned out to be the Star Wars planet Tatooine. Grunewald’s talk showed us how to construct imaginary places like Tatooine which feature in some of the most prominent creative works today – from books over movies to TV series. Grunewald taught us about the world of sci-fi and by walking us through the mathematics of the planet Tatooine ultimately proved that you can build imaginary worlds that have their place in reality.

Speaker 2: Sajjad Khan

The second speaker of the day was Sajjad Khan who is a student at the University of Strathclyde. He invited the audience to “come out of the bubble”; he gave an inspiring talk about human interaction and ways towards a mindful world society. He shared with us his experience of volunteering with a water project in Africa. He argued that his work, i.e. the installation of water pumps, was perceived as a huge development in technology by the local population. He then vividly contrasted this with the development in technology in our society and the large gap between these two worlds. This led him to ask what – in world 2.0 – the word humanity means and what a human is in this world. He questioned how we justify war and bloodshed if we cannot even fight poverty. He spread the vision that being different should be an opportunity to get to know another in world 2.0 and invited everyone in the audience to become a changemaker to realise the vision of an embracing world society.

Speaker 3: Catherine Cahn

The third speaker of the day was Catherine Cahn, COO of Twig World. Cahn’s talk was centred on the future of education. She reasoned that in world 2.0 the essential skills are human creativity, problem solving and analytics while subject knowledge has become worthless with the availability of google and the like. Yet governments have wrongly focused on subject matters while labeling the arts as useless. Cahn questioned whether this is the right way in world 2.0; that is having a curriculum of 40 percent numeracy/ literacy skills and 60 percent subject matter. She reasoned that we need to revamp the curriculum and move to phenomena based learning. She argued in favour of the primary school model, i.e. the model of a single teacher engaging with the class going through the steps of: (1) Question Generation, (2) Investigation and (3) Phenomena. Cahn argued that in secondary school the model has to become student driven. In her opinion students need to learn problem solving, going through the steps of research, prototyping, feedback, iterating and publishing. This would allow students to learn the essential skills of mastering their life in world 2.0, instead of overloading children with useless content knowledge.

Speaker 4: Prof. Robert Kalin

The fourth speaker of the day was Robert Kalin, a professor of the Civil and Environmental Engineering department at the University of Strathclyde. He talked about his work as a hydrogeologist and his passion for water as the foundation of life and the lack of access to sanitised water in many places, especially in Africa. He talked to us about the importance of groundwater and what it means for life. He reasoned that access to water is access to life; it underpins everything including our economy. Yet the investment in water as one of the sustainable development goals is failing faster than the increase in effort that is put in. This exemplifies in so-called ghost water points. Kalin’s vision is to go from reactive to proactive action, targeting preventative maintenance. In his opinion, everyone can make a difference despite universal access to clean water being a huge challenge. The first step is to make the sustainable development goals part of your life and think about them every day.

Speaker 5: Dr. Michael Groves

The fifth speaker of the day was Michael Groves, CEO of Topolytics. He gave a talk on Can geography save the world? He showed us how big data and analytics can give us the necessary insights for this mission by tracking commercial waste and emissions. He reasoned that geography can help us becoming more sustainable by measuring and managing waste and tackling the vast amount of urban waste and the plastics floating in the oceans. It can help us tracking the use of resources and the massive growth in the extraction of resources. For him, geography is a sustainability science. With digital mapping and data, waste can be managed and information about it can be shared. It feeds into the goal of a circular economy; designing products for re-use and tracking the distribution of materials and waste. He invited us also to check out the book Prisoners of Geography to learn more on the importance of geography in world 2.0.

Speaker 6: Stefan Celosia

The last speaker of the day was Stefan Celosia, ex-physics graduate from Strathclyde, who is now a professional musician, composer and producer. Under the heading Survival of the Funkiest, he explored with us the history of music and the importance of music in world 2.0. With the help of technology, music making today is more accessible than ever before and is increasingly about ideas and not skills. He argued that music is an important motivational tool for most people today and left us with the question: Is creativity a means to an end, or could it be the end itself?

I must say that the TEDx Conference at Strathclyde was my very first TED experience at close quarters. I have watched numerous TED and TEDx talks, but being part of such a conference yourself is mindblowing! When I reflect upon the day, I can say that the conference and especially the speakers indeed shared ideas worth spreading and I am very grateful that I was given the opportunity to attend the conference this year!




The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016

Just shortly before the announcement of this year’s winner of the Sveriges Riksbank Prize in Economic Sciences – commonly known as the Nobel Prize in Economics – the Guardian speculated about the 2016 top contenders. It named Olivier Blanchard, Edward Lazear, Marc Melitz and Paul Romer (Inman, 2016). However, with the announcement of the actual winner by Professor Göran K. Hansson, Secretary General of the Royal Swedish Academy of Sciences, all speculations came to an abrupt halt yesterday. The winners are:

Oliver Hart (Harvard) and Bengt Holmström (MIT)

“for their contributions to contract theory”

Bengt Holmström is “known for his research on the theory of contracting and incentives” (MIT, 2016). The 2016 Nobel prize explicitly honours Holmström’s contributions to principal-agent theory and Holmström’s informativeness principle. Oliver Hart is known for his work on contract theory, the theory of the firm, corporate finance, and law and economics (Harvard, 2016). The 2016 Nobel prize honours Hart’s contributions to contract theory in the case of incomplete contracts (The Royal Swedish Academy of Social Sciences, 2016).



Harvard (2016). Oliver Hart: Andrew E. Furer Professor of Economics. Available at: http://scholar.harvard.edu/hart/home [Accessed 11 October 2016]

Inman, P. (2016). Nobel prize in economics: the top contenders. The Guardian Online. Available at: https://www.theguardian.com/business/2016/oct/07/nobel-prize-in-economics-the-top-contenders [Accessed 11 October 2016]

MIT (2016). Bengt Holmstrom: Short Biography. Available at: http://economics.mit.edu/faculty/bengt/short [Accessed 11 October 2016].

The Royal Swedish Academy of Social Sciences (2016). Press Release: The Prize in Economic Sciences 2016. Available at: https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2016/press.html [Accessed 11 October 2016]

Glasgow Business Summit 2016

Today was the inaugural Glasgow Business Summit at the University of Strathclyde’s Technology and Innovation Centre. Organised by students, it focused on change, challenges and opportunities for Glasgow, Scotland and the global economy. It gathered a very diverse audience of students, graduates and business leaders as well as speakers from the public sector like Glasgow City Council to speakers from the private sector including EY, PwC and Barclays. Also scholars from the Strathclyde Business School and the Fraser of Allander Institute were invited to speak.

In the morning, the Executive Dean of our Business School, David Hillier, opened the Summit with the observation that Scotland is experiencing exiting times after the Brexit referendum. He argued that adaption and exploitation of opportunities are now key to success; hence the focus on ‘Change, Challenges, Opportunities’ for this year’s Business Summit. Another important point of Hillier’s opening was how to actually make the Summit a personal success. For most of the students in the audience – including me – it was our very first business conference. So Hillier gave us three overarching rules for the day:

  1. Meet someone new,
  2. Come up with a new idea and
  3. Learn something new.

With that piece of advice in mind, we started into the first panel discussion. Under the headline ‘Navigating the complexities: What are the realities behind building successful businesses?’ Jim McColl (OBE, Founder and CEO, Clyde Blowers Capital) and Russel Dalgleish (Managing Partner, Exolta Capital Partners) led an inspirational discussion about their journeys and how they have succeeded in growing successful businesses. Especially Jim McColl, who did an undergraduate Business degree at Strathclyde, was interesting to listen to. One could see his entrepreneurial mind set throughout the discussion. He has this particular attitude to never views things as a failure and he, in fact, does not accept failure. He has a clear goal in mind and is a very focused personality. For example, he talked about that he meditates and it seems that this has also helped him to have the right balance between knowing what he can do and being aware of the risks. He also stressed that his ‘stubborn value system’ has been key for his success. Having both a goal and integrity has helped him to progress to where he is now. He also said that by having a clear vision and real belief while working hard, he does not get constrained. Rather he sets an ambitious target and then asks ‘What do I need to do to get that?’. While I personally am not striving for a career similar to his, I was very much inspired by his drive and appetite for action. He serves as a role model for sticking to your principles, always being a person of integrity and believing in yourself and your vision.

Besides the first panel discussion, I was most interested in the talk by Dr. Graeme Roy just before lunchtime. Being the Director of the Fraser of Allander Institute, which is affiliated with the Economics Department at Strathclyde, he talked about the economic implications of Brexit. While his speech was only half an hour, he still managed to give the audience a broad overview of the state of Scotland’s economy with the risks, challenges and opportunities in the short and long term. He began with the four short term considerations for Scotland:

  1. Economic confidence
  2. Policy clarity
  3. Financial Market Volatility
  4. Pound Sterling Depreciation

First, he stressed that Scotland currently experiences large swings in confidence and there is heightened uncertainty, both of which have considerable effects on the economy (e.g. exchange rates). In terms of policy clarity, it is the discussion about the economic relationship with the EU and whether Scotland remains part of the customs union with a single common market. Financial market volatility is also important to consider as we see strong reactions of financial markets to news at the moment. Lastly, the sharp depreciation in Pound Sterling since the Brexit vote poses both opportunities (e.g. for exports) as well as challenges (e.g. for imports).

Dr. Graeme Roy continued by highlighting the importance of the EU for Scotland. For example, he argued that 40 percent of the country’s international exports go to the rest of the EU. What is more, 180,000 EU Nationals are living in Scotland today and EU firms operating in Scotland employ around 115,000 people here. However, despite the strong ties with the EU, the UK is just as important with 60 percent of Scotland’s total exports going to the rest of the UK. Hence one could say that Scotland faces a very difficult dilemma, being caught in the middle; post-Brexit UK on the one hand and the EU on the other hand.

Roy also looked at Scotland’s economic performance and the institute’s forecasts for 2017 and 2018. First, he showed concerns about Scotland’s recent slowdown in GDP growth. Scotland has been growing at a lower rate, much of it due to the reduced profitability of North Sea Oil, and the last figures of the institute actually suggest that the Scottish economy is stagnating now. Hence with a rather fragile and stagnating economy the Brexit referendum has caused more trouble than it would have with a very strong economy in the back. This is why the institute’s core forecast is slow GDP growth of less than 1 percent for the next two years together with a very uncertain outlook. Roy also stressed that the full economic implications of Brexit are not known yet and will probably not be known not before January 2017.

Having talked about the short and medium term considerations, Roy proceeded to the economic considerations in the long term. These are fivefold:

  1. Trading relationships
  2. International investment
  3. Population and labour market
  4. Fiscal contributions
  5. Dynamic effects

Firstly, Scotland will need to settle its trading relationships, including EU and non-EU. Second, it will need to attract international investment. This includes negotiating over the access to EU capital markets. Third, there are important demographic and migration trends to consider as well as regulation. Also fiscal contributions need to be settled and lastly dynamic effects like productivity and competition as well as innovation will be important long term considerations.

In the last part Roy presented the modelling results for 4 scenarios of Scotland post-Brexit. That is: (1) the Norway/ EEA Model, (2) the Swiss Model, (3) the Tree Trade Area, and (4) the WTO Membership. Of all four, the Norway Model would be the most integrated option. However, while there would be no tariffs on Scottish goods and services, Scotland would not be able to shape EU regulation and not be part of the customs union. Meanwhile it would need to retain the EU’s four freedoms, including the freedom of movement of people. The Swiss Model would be less integrated, followed by the free trade area. In the fourth scenario trade deals would only be based on the WTO membership. Overall, for all scenarios the institute found the adverse impact of Brexit to be significant for the Scottish economy and its magnitude crucially depends on the exact deal. For example, in the Norway Model the optimistic forecast is that GDP will be 2 percent lower than without Brexit. In the pessimistic forecast it is 3.1 percent. The negative impact is consistent even in the institute’s optimistic scenarios and there might potentially be dynamic effects. With this results of the institute in mind, Dr. Graeme Roy therefore stressed that the response of policy makers is crucial. Their forecasts are based on the ‘all else being equal’ assumption. It is now the policy makers’ turn to see what Scotland can do to counter that. Thereby Roy pointed towards the need for new opportunities. This includes building links to other countries and markets and also focusing on UK’s top class product, that is the universities and higher education.

In sum, while Roy stressed the challenges of Brexit and its adverse impact he sees room for new opportunities. I must say that this talk was my personal highlight of the day because it exemplified the day-to-day business of an economist at an economic research institute and how their work is meaningful for providing insights for policy makers and society to steer the economy. It was also very interesting to be guided through the institute’s methodology: clearly stating what we know and what we don’t know; what the assumptions are for presented scenarios and how precise the estimates of the presented forecasts are.

After a short lunch break, we headed back to the conference room for the discussion ‘Challenges and opportunities in global markets: A changing landscape for businesses?’ which was also chaired by Dr. Graeme Roy. The discussion focused on global markets moving into the digital age with both new challenges and opportunities for businesses. Challenges discussed were weak demand, particularly in Europe, after the financial crisis and the heightened uncertainty after Brexit. Other challenges are debt, the banking sector and the decline in support for free trade such as the opposition to TTIP. On the other hand, there are opportunities. The depreciation of the Pound Sterling, for example, has boosted price competitiveness. Also the digital age is boosting e-commerce, allowing for micro-multinationals, that is new start-ups that are global and digital. The discussion finished by stressing the importance of inclusive growth and the increasing demand for the ‘social good’. In sum, this panel discussion put Dr. Graeme Roy’s earlier speech on the Scottish economy into a broader perspective and also looked in more detail at what might be the solutions for stimulating the Scottish economy in the near term, i.e. the need for a new global market orientation and for Glasgow, in particular, becoming a major player in financial services and media. Digital services and platforms are also going to be key for staying innovative and having the ability to disrupt.

Overall the day was a very inspirational experience and to come back to David Hillier’s three rules for making the Summit my personal success; I think that I would satisfy all of them. It was a great day and I am sure the Business Summit will become even more popular over the next years.


Boom Bust Boom

Today our Alternative Economics Society at Strathclyde had their Welcome Meeting for the academic year. They screened the documentary Boom Bust Boom largely motivated by the global financial crisis of 2008 and the corresponding failure of standard economic theory. It is an attempt to explain the economics underlying booms and busts to a wider audience. In doing so, it features an impressive line-up of contributors from Macroeconomist Paul Krugman to Behavioral Economist Dan Ariely. It also features psychologist Daniel Kahneman and economists Steve Keen, Perry Mehrling and Robert J Shiller among others.

This documentary is by any means not the standard documentary I would have mind. It makes extensive use of animation, puppetry and songs coupled with expert insights and a good amount of sarcasm to explain why crashes keep happening and why our economic system is inherently unstable. The documentary starts off with a history of financial crashes. It revisits the Tulip Mania, South Sea and Railway Bubble, and the 1929 Crash. All four examples illustrate the common features of bubbles. A bubble has something magical or new inducing people to think that “this time it is different”. It is argued that people always find a reason to abandon their rational behaviour. In doing so there is a general tendency for periods of euphoria and pessimism with bubbles being of the self-fulfilling type.

The documentary also revisits the Great Depression after the Wall Street crash on the 29th of October 1929. It argues that the bubble preceding the Great Depression was different from other bubbles because it combined euphoria with excessive borrowing which is said to be the “most toxic combination in capitalism”. When the practice of buying on the margin, i.e. borrowing money to buy stocks, shot back, fear spread and the bubble eventually had to burst.

At some point after the 1929 Crash and the Great Depression, however, people’s memories started to fade. As the older generations died the younger generations made the same mistakes all over again. Similar to the reasons for the 1929 crash, the starting point was the creation of too much debt in the private sector. Exactly this is where the documentary introduces the work of Hyman Minsky which I referred to in earlier posts. Minsky essentially argued that stability leads to instability. In his today well-known financial instability hypothesis, he recognised that after an economic downturn government would pass stricter financial regulation. However, this would be followed by a prolonged period of stability which would make people overconfident and optimistic. The recovery from the last recession would subsequently turn into euphoria, followed by deregulation and the next bubble. Despite Minsky’s prediction of a major financial crisis 25 years before it actually happened he was largely disregarded in the Economics profession. Yet our society would have benefited greatly from Minsky’s insights; the documentary stresses that “anyone who read Minsky could have seen it coming”.

The lesson from Minsky is that capitalism is inherently unstable. Yet neoclassical economic models with the assumptions of rationality and a general equilibrium do not allow for instability and bubbles in the first place. The documentary rightly points out that models are at the core of economics and they do serve their purpose if their features resemble the real world in some meaningful way. Yet Steve Keen points toward the problem that neoclassical economists ignore banks, debt and money. Omitting these features from the economic model is what made it depart from the real-world economic system.

Another pillar in the documentary is free market ideology. In seeing the market as collectively rational with optimal allocation and distribution of wealth, deregulation followed and markets were left to their own devices. Yet free market ideology misses the importance of human behaviour in economics. The documentary goes back to the work of both Daniel Kahneman and Laurie Santos highlighting human tendency for irrationality. A major implication is to admit people’s biases in Economics and the documentary advocates for better policy-making around human biases. It uses the banking system as a major example for designing a banking system for humans instead of a system of fragility and systemic instability.

Lastly, the documentary addresses the need for a new Economics education. The experience of the financial crisis has led students to enquire about the mechanisms and reasons behind it. Yet standard Economics has little to offer to explain deviations from the general equilibrium model. The documentary calls for a more active debate in economics which is currently dominated by the mainstream. Its solution is to adopt a different approach in economics: (1) make it a piece of history and social thought and (2) make it something done together.

The documentary concludes with the lesson that people have learnt nothing from history. They tend to forget because it is in our human nature. Yet this sets us up for the emergence of future booms and busts and it is the Economics profession’s turn now to act and embrace its duty.

Overall, the documentary is great for getting the bigger picture of the global financial crisis and the importance of human behavior in macroeconomics. It revisits booms and busts from both a Keynesian and Behavioral Economics perspective. Sometimes I miss more diversity in explanations and solutions. Yet I think it does balance clarity through the use of animations and puppetry with rigor and economic theory. Being intended for a wider audience it serves its purpose in my opinion. Hopefully it is a wake-up call that Economics matters and that it matters to everyone in society. So if you want to hear more on the financial crisis of 2008 in a non-technical fashion and you like the ‘Muppets’, then this is clearly the right documentary for you.

Many thanks for reading,


Boom Bust Boom (2015). Documentary, Brainstorm Media, London. Directed by Terry Jones, Bill Jones, and Ben Timlett.

Michael Sandel on the Moral Limits of Markets

Recently I widened my weekly podcast subscription to Intelligence Squared. It describes itself as a forum for debate and intelligent discussion. What makes the organisation great is that they make their forums available as podcasts. I actually regret not having discovered them earlier, you really learn a lot by listening to the discussions on the go!

In May they re-broadcasted a special Intelligence Squared event from 2013 at which the American political philospoher Michael Sandel discussed his book What Money Can’t Buy: The Moral Limits of Markets. The event was a hybrid between a lecture and discussion and was actually even published by Intelligence Squared on Youtube.

So today I want to provide you with some of the highlights discussed to nudge you to watch the complete forum. The frame of the event was the question whether we want a society in which wealth conquers all aspects of life. In particular, Sandel argues that our market economy has transformed into a market society. While the former is an effective tool to organise productive activity, the latter is a society in which market values become a way of life. In a market society one can find market values in almost every domain of life. For example, Sandel points out that cash incentives are now increasingly used as policy instruments and highlights the case of “health bribes” which are cash incentives to nudge people into a healthy lifestyle. Is it ethical to pay people to lose weight?

Another area in which cash incentives are now increasingly used as policy instruments is education. He asks whether it is right to pay children to motivate them to study or to read. One of the objections put forward is that these cash incentives would undermine the children’s intrinsic motivation. One of the commentators for example suggests that you would put a contract on the gift of reading and incentivise passion. In her opinion this would not work because you essentially cannot put a price on passion and gifts. However, another commentators argues that we are often paid to learn a skill and that education belongs into this category. He argues that the interchange between teacher and student has to offer the student some recognition and one method to allow for this recognition is a cash incentive.

In the last part of the debate Sandel talks about whether money incentives are counterproductive. From the point of view of standard economic models and the well-known concept of homo economicus, it must be that offering people money to do something will increase their willingness to do this. However, in practice putting a price on something reduced people’s willingness to undertake it. Sandel puts forward empirical evidence from Switzerland which had to decide where to locate a nuclear waste site. After narrowing down the choice to a potential town they surveyed its residents and asked the following question:

“If the parliament chooses your town will you accept the nuclear waste site?” 

Thereafter they asked a follow-up question which seemed to make the deal more attractive:

“Suppose the parliament chooses your town and votes to allocate a financial compensation to each resident of the town yearly of up to $8,000, then would you approve?” 

If people were to behave like homo economicus, then the approval rate of the nuclear waste site would have increased because the monetary incentive would have increased the residents’ willingness to tolerate a nuclear waste site in their town. However, this was not what actually happened. The willingness to accept the nuclear waste site fell substantially in the follow-up question. Sandel points out that the residents did not want to be bribed. In the first question approval was motivated by a sense of public responsibility but when offered the $8,000 financial compensation the civic duty diminished into a financial transaction which people were not willing to approve of. Sandel argues that this monetary incentive crowded out the sense of public responsibility and corrupted civic duty.

A similar result was found in Israeli daycare centres. When introducing a fine for picking up children late the rate of late arrivals went up and not down. This was because the introduction of a cash incentive crowded out parents’ sense of feeling guilty. It transformed the issue into a financial transaction and parents did not have to feel guilty anymore but paid an appropriate amount for the “baby sitters”. But what is more, when reversing the fine due to its adverse impact the increased rate of late arrivals to pick up the children did not reduce back to the initial level. Once the parents’ sense of obligation to pick up their children on time was eroded, it could not be re-established that quickly.

Sandel final take-away from the discussion is important for the Economics profession. He points out that in order to make the decision where markets serve the public good and where they don’t, we have to go beyond economic efficiency and establishing incentives in order to nudge people into good behaviour (what is ‘good by the way?). Economists – like everybody else – have to ask about…

… whether introducing money into a certain practice will dissolve or displace or crowd out goods, attitudes, norms, values worth caring about (Sandel, 2013).

Sandel points out that we have been missing out on the debate where markets belong. Markets and market mechanisms like cash incentives have been established in many aspects of life without discussing the implications of transforming into a market society. A new moral public discourse is needed to create this debate: Where do markets belong and where do they not belong? Where do we benefit from introducing market mechanisms? In which areas will society be better off with the use of cash incentives?

Thanks for reading and I hope that you will enjoy the videos!


Sandel, M. (2013). Michael Sandel on the Moral Limits of Markets [Youtube video]. Retrieved from https://www.youtube.com/playlist?list=PL60B42C0FC74EF0CE 

The future of Auckland: What is the role of economics for urban policy?

During lunch break at AUT I read about an open seminar organised by The New Zealand Work Research Institute to be held on 31 March. The speaker Chris Parker (Auckland Council Chief Economist) would give a talk about The future of Auckland:  What is the role of economics for urban policy? I happily signed up, hoping to hear more about Auckland’s housing bubble and the council’s policy measures to allow for a long-run city development and growth.

The seminar was opened with reference to the house price-to-income ratio (median multiple) in Auckland. According to the World Bank this measure of housing market performance addresses both housing affordability and the presence of market distortions. As a rule of thumb a median multiple of 3.0 or less indicates good housing (Chaston, 2016). As I cannot remember the exact figures in the presentation I refer to the latest Demographia International Housing Affordability Survey of 2016 here. Auckland currently has a multiple of 9.7 in line with Melbourne and San Jose. This is only beaten by Hong Kong, Sydney and Vancouver worldwide. Well, that sounds like a real issue to me, so I was keen to hear about policy measures to increase affordability again.

As Parker concluded that housing has transformed from a consumption commodity into a speculation good he proposed a cyclical model to address urban planning and affordability with 3 key factors, namely:

  1. Investment in fixed assets (land and housing)
  2. Investment in productive assets (productive infrastructure)
  3. Urban land prices

As far as I understood, this model can either set off as a vicious or virtuous cycle. The former is started by investment in fixed assets driving up urban land prices. The latter is started by investment in productive infrastructure, moderating urban land prices.

The seminar then had an interesting twist to neoclassical land market models. Well, in university we have learned about Ricardian rent theory which proposes an inelastic (vertical) supply curve and to me this has made sense so far as land is ultimately a limited resource. You cannot create more land than you are endowed with. However, Parker introduced neoclassical rent theory with reference to Alan W. Evan’s book Economics, Real Estate and the Supply of Land (2004). He presented a model where the supply of land for urban development is actually upward sloping. To my understanding this is based on the argument that there are competing uses for land and because of the underlying motivations of landowners which are influenced by price. Ultimately this makes land for urban development a speculation good with the question when to harvest, i.e. sell the land. Another important factor is monopolistic competition in the land market. Land is assumed to be a heterogeneous good with location as the ultimate determinant. Certainly this gives landowners a lot more power than in a competitive market.

The policy recommendations in the seminar were to improve the efficiency of the land market in Auckland as well as introducing more rural land into the urban land market. Another interesting proposition was to provide more localised infrastructure solutions. The idea is to have planned corridors or designations for future infrastructure but that demand comes first.

The seminar concluded with a short Q&A. One interesting question was about Auckland’s transport system as this wasn’t covered by the presentation. I liked the idea that dysfunctionally managed networks which are already overused cannot become better by growing and the argument of having forgotten how to grow. For the short run propositions were congestion charging, dispersed land use and efficient pricing. In the long run, however, there would need to be growth and economic development and major transport projects.

Overall I really enjoyed the seminar. It gave me insights into the work of an Economist at Auckland city council. It was interesting to see that Economic models are actually used in decision-making and the analysis of Auckland’s land market!

Chaston, D. (2016). Median Multiples: House price-to-income multiple. [online] Available at: http://www.interest.co.nz/property/house-price-income-multiples [Accessed 02/04/2016].

Demographia (2016). 12th Annual Demographia International Housing Affordability Survey: 2016 Rating Middle-Income Housing Affordability. [online] Available at: http://www.demographia.com/dhi.pdf [Accessed 02/04/2016].

Evans, A.W. (2004). Economics, Real Estate and the Supply of Land. Oxford, UK: Blackwell.