“Lindau Was a Lesson in Building Courage and Confidence”

Devaki_Slider

When submitting my application for the 6th Lindau Meeting on Economic Sciences, I said that it would give me a platform to interact, exchange ideas and build collaborations with the best minds in the world: young enthusiastic people from across cultures and geographies. I now know that whatever you write, it is going to be an under-statement: my experience of Lindau was truly life changing, continuing to inspire me in my everyday life.

Lindau gave me the courage to believe in my dreams. It is very motivating to discover that there are so many young scientists who are working towards the common goal of making the world a better place to live.

I met people who have identified new economic problems brought about by the rapidly changing environment and who are using innovative ways to address issues of food wastage, environmental degradation and economic inequality. I now know that when I say that these are the causes that led me to study economics, I speak for many young people.

Lindau is the place to talk freely about your ideas and get valuable feedback from people who share your vision. This is the time and place to build networks that are already a step towards turning your ideas into actions.

The meeting is designed to create plenty of opportunities for informal conversations with Nobel Laureates over lunch or drinks. James Heckman spoke to us about his struggles in graduate school to come up with a research idea, in the process of which he read about a wide variety of topics. He told us: ‘Nothing I have learned has ever been non-useful.’ Bengt Holmström emphasised the role of serendipity, as opposed to luck, in his life: luck is random, but serendipity – that is, how well you use your luck – is not, he said.

I cannot tell you what you are going to experience because it will exceed all your expectations in one way or another.

The frontiers of science are often pushed by borrowing from other disciplines. I had a conversation with Nobel Laureate in Physics, Brian Schmidt, who had many insightful suggestions about the way we, economists, do research and how we can improve our techniques. Being an experimental physicist, he believes in the scientific use of data to answer important research questions and hopes that, in the future, more empirical economists will be honoured with the Nobel Prize.

One of the defining moments of my Lindau experience was being selected as a panellist alongside Nobel Laureate Eric Maskin and Howard Yana-Shapiro, chief agricultural officer of Mars Incorporated, to discuss problems and solutions to economic inequality in a globalised world. I seized the opportunity to draw on my own experience to talk about the problems of inequality in my home country, India.

In this respect, Lindau was a lesson in building courage and confidence: you have to speak what you believe in. The experience was rewarding. After the talk, many economists came forward to share their views on some of the issues I had raised.

Vladimir Petrov, a PhD student at University of Zurich, spoke about his experience of being involved in a start-up that is leveraging blockchain, an artefact of the new financial system, to build projects to save the environment. Carl Schramm, economist and entrepreneur, encouraged my initiative of building data to study entrepreneurship in developing countries. Discussions with Romesh Vaitilingam, writer and media consultant, taught me many important lessons about communicating economics to a broader audience without losing it in jargon.

 

Laureate Eric Maskin, Devaki Ghose and Howard Yana-Shapiro

Nobel Laureate Eric Maskin, Devaki Ghose and Howard Yana-Shapiro were on a panel discussing economic inequality at the Mars Science Breakfast during #LiNoEcon.

 

Interactions with Bruno Roche and Jay Jakub from Mars Incorporated contributed to my understanding of how collaborations between industry and academia can help address issues of economic importance, such as helping deprived communities. Lack of social and human capital in historically deprived communities hinders their participation in economic activities and restricts their purchasing power to buy goods from the market. Community-level interventions to invest in human capital can be beneficial for different stakeholders, starting from members of the community, policy-makers and multinationals.

As a confluence of ideas from both industry and academia, Lindau is different from any regular academic conference. It is not only about listening to seminars and raising questions. It is also about exchanging ideas with some of the brightest and most passionate young economists, drawing inspiration, engaging in conversations with Nobel Laureates and, most importantly, learning to express your own ideas.

My experience at Lindau opened windows of opportunities that I did not even know existed. It led me to foster connections with people who are deeply passionate about science and believe in using science to solve many of the world’s problems.

I highly encourage every young scientist to apply to the Lindau Meetings. I cannot tell you what you are going to experience because it will exceed all your expectations in one way or another. Oh, and did I not tell you that these five days are also packed with many fun activities, including music, dance and a boat trip to the pristine Mainau island?!

Young Women Economists in Lindau: Powerful Encounters

One of the reasons I applied to attend the 6th Lindau Meeting on Economic Sciences was the expectation of coming back brimming with self-motivation. Moreover, I expected to be deeply fascinated by the commitment of the pioneers of economic sciences, by their bravery in addressing world issues and by their lives as common individuals facing successes and failures. My expectations were by far exceeded.

I have always genuinely aspired to become an active participant in economics and to make a difference. My passion for the subject started with my postgraduate studies and further developed during my work at the United Nations and my academic experiences. A special opportunity offered by this meeting is the possibility of interacting with Nobel Laureates and other young academics, while sharing passions and values, understanding different cultures and exchanging ideas and future collaborations.

But what also fascinated me and made this experience even more magic and overwhelming was the passion, the eagerness and the determination of the many young women economists I had the pleasure of meeting in Lindau.

 

Zeinab Aboutalebi (left) and Angela De Martiis during the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Lisa Vincenz-Donnelly/Lindau Nobel Laureate Meetings

Zeinab Aboutalebi (left) and Angela De Martiis during the 6th Lindau Meeting on Economic Sciences, Picture/Credit: Lisa Vincenz-Donnelly/Lindau Nobel Laureate Meetings

 

One of the ideas that particularly got my attention during the meeting is what Nobel Laureate Bengt Holmström called serendipity. Among the various questions to the laureates, many young economists were eager to know the secret of their success: how did they do it?

A common answer was indeed serendipity. An unexpected discovery that occurs by chance, a valuable finding that was not looked for by others, being in the right place at the right time, or simply luck. Nevertheless, the role of chance – or luck – in science is also driven by passion and determination. Often, such unexpected findings come from an error in the scientist’s own methodology, according to scientists Kevin Dunbar and Jonathan Fugelsang. Passion and determination were in fact the two main elements that I sensed when talking with young women economists about their research interests.

During my week at the meeting, I had the honour of presenting my research in front of five Nobel Laureates – an invaluable experience – and the pleasure of interviewing several young women economists from different countries, cultures and backgrounds. They came from Africa, Russia, Iran, China, the United States, Germany and Italy, and they all have one element in common: passion.

When I asked them about their motivation for doing academic research, the first answer was indeed passion, eagerness to learn, to understand and provide valuable results to inform some of today’s most debated issues – such as climate change, economic sanctions, information asymmetry, inequalities, labour markets, growth theory and monetary policy. The women economists, and women’s participation in the economy more generally, provide a diversity of economic thinking, as Janet Yellen recently emphasised in a speech at Brown University.

This diversity of thinking comes from the fact that, as one of these women economists told me, economics is not just economics. Being an economist implies knowing about mathematics, statistics, natural sciences, law, politics, psychology, history, sociology and more. Economics means dealing with issues that involve institutions and individuals. All these elements together make it a powerful tool for improving people’s welfare and lives.

On the one hand, welfare is one of the motivations driving Linda Glawe, a young German economist from the University of Hagen, to focus on prolonged growth slowdowns in emerging market economies and on the concept of the middle-income trap. In a world in which more than five billion people live in middle-income countries, representing more than 70% of the world’s poor population, a slowdown in emerging markets will have strong implications for low and high-income countries. Therefore, the danger of a middle-income trap is of great relevance for future welfare. After publishing a literature survey on the middle-income trap, Linda’s current research aims to provide a theoretical contribution to discussions of future growth in China.

On the other hand, when we talk about welfare we often refer to the fact that countries have unequal living standards that makes them grow faster or slower than others. Therefore, some countries display higher inequalities in incomes, wealth and human capital. These issues are among the main research interests of Rong Hai, a Chinese young assistant professor in economics at the University of Miami.

In one recent paper, she and laureate James Heckman investigate the determinants of inequality in human capital with an emphasis on the role of credit constraints. The results show that both cognitive and non-cognitive abilities are important determinants of human capital inequality. In addition, credit constraints are important because young people cannot borrow enough against their future human capital and thus suffer from lower consumption when they are in school.

In a second paper, Rong finds that reducing income inequality between low and median income households improves economic growth. But reducing income inequality through taxation between median and high-income households reduces economic growth.

 

Angela De Martiis and other young economists during the 6th Lindau Meeting on Economic Sciences,  Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Angela De Martiis and other young economists during the 6th Lindau Meeting on Economic Sciences, Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

 

When investigating economic inequalities, there are many reasons to explore inequality within cities or states, especially if we consider that individuals move across space. Thus, the disparity of a particular area is also a reflection of the skills of these individuals as potential workers. From a labour economist perspective, Sarah Bana, an American Ph.D. candidate at the University of California, Santa Barbara, is interested in understanding the returns to skills and the role that skills play in earnings inequality in the US labour market.

One of her current research papers looks at displaced workers, those who lose their jobs as a result of a firm or plant closing. Analysing comprehensive occupational employment data, the results of her research suggest that vulnerable displaced workers’ difficulties in the labour market are a function of their skills and less related to the goods and services they were previously producing. This is due to the fact that the same set of tasks can be applied in the production of various goods and services, but there appears to be little scope for workers from shrinking occupations to find work with similar earnings, which may help to explain the large earnings losses.

As a researcher in labour economics, Sarah thinks of an individual’s work as their contribution to their family, community and society. But this may be hard for those workers who are displaced in worse labour market conditions.

Several studies investigate the effects of the global financial crisis on the labour market. The data from the displaced workers survey from 1984 to 2014 clearly show a sharp increase in the rate of job loss. Besides the effects on the labour market, the long-lasting impacts of the financial crisis on the economy and wider society have questioned the adequacy of the traditional tools in explaining periods of financial distress as well as the adequacy of the existing policy response.

At the same time, the financial crisis has shown that complex interconnections among financial institutions represent a mechanism for the propagation of financial distress and they are nowadays recognised as one of the key elements of potential financial instability or systemic risk.

This is one of the crucial issues that the young Italian economist Chiara Perillo, Ph.D. candidate at the University of Zurich, is investigating. In particular, she is exploring the implications of the unconventional monetary policies (such as quantitative easing) in the euro area by combining financial network analysis with econometric methods. Using the time evolution of loans granted from euro area banks to different institutional sectors operating in the euro area, her results show that since the beginning of quantitative easing there has been an increase in bank lending, but mostly addressed to the banking system itself.

Another element that drew my attention while getting to know the young women economists was their diverse backgrounds, another powerful tool for academic research in the diversity of thinking. Being Russian by origin and doing research based in Germany, Maria Kristalova, Ph.D. candidate at the University of Bremen, investigates the impact of the mutual sanctions between the EU and Russia, followed by the escalation of the Ukraine conflict in 2014. Her results show a division pattern of all EU-27 countries in two groups: the West European countries that recovered from the sanctions shock, and the East European and Baltic countries, which are still suffering with negative consequences.

Angela De Martiis (right) and Maria Kristalova during the 6th Lindau Meeting on Economic Sciences

Angela De Martiis with Maria Kristalova, Picture: Courtesy of Angela De Martiis

According to Maria, this topic is of crucial importance for gaining a better understanding of the costs of political decisions that might affect the aspired convergence of Europe. In a second research topic, Maria also looks at long-run co-evolution of innovation activities and public funding in German regions. The results show strong empirical evidence of its existence.

Another issue of crucial importance, one of the most controversial, is climate change. According to Jennifer Uju Okonkwo, a young Nigerian economist based at the University of Kiel, regardless of what sceptics think, research shows evidence that the climatic system is changing and this change has several negative consequences, such as rising sea levels, coastal flooding, droughts, global warming and changes in precipitation. Hence, there is a dire need to understand optimal ways to adapt to the changing climate. Her research thus aims at finding cost-effective strategies to manage climate change that could be beneficial to developing countries with limited adaptation funds.

When investigating the issue of climate change, we immediately come across divergent views and an asymmetry in information, thus generating inefficiencies in addressing and solving such a phenomenon. As a young Iranian economist working on applied microeconomic theory at Warwick University, Zeinab Aboutalebi is investigating the role of information asymmetry.

Her research is dedicated to tracing inefficiencies created through the strategic interaction among economic actors. The role of information asymmetry is crucial in shaping the resulting consequences and in reducing the inefficiencies using, for example, different incentive schemes, designing incentive mechanisms, delegation or persuasion techniques.

Zeinab is currently working on feedback in experimentation and how the goodwill of a principal to not discourage an agent, while providing him/her feedback about the result of the experiment, could cause large inefficiencies and uninformative communication between the principal and the agent. Information asymmetry and the lack of informative communication are thus the building blocks of most of today’s big phenomena.

From climate change, to inequality, displaced workers, sanctions, growth, monetary policy and information asymmetry, it was a pleasure to make this journey into the lives and research interests of seven young women economists – to discuss new research ideas, exchange views and laugh while talking about science and about a world that is a fascinating place still to be discovered with a pinch of serendipity and a lot of determination. Thank you for sharing your passion!

Young Economists Comment on the ‘Post-Truth’ Era

The economic consensus on such matters as the benefits of trade, technology and global integration has taken a political battering recently. We asked young economists of #LiNoEcon about their perspectives on what is often referred to as a ‘post-truth’ era, and what they think economists could or should do to combat it.

 

67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyI think it is hubris to think that the economic consensus has ever played a role in influencing the man on the street. While the effects of trade nationalism may be catastrophic in economic dimensions I feel that in other research disciplines (e.g., climate research) the stakes are much higher. Consequently, we should stay resilient, persistent and join our fellow researchers from other fields speaking up in the name of truth.

        Chris Flath from Germany

 

 

 

 

 

 

        Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           

 

 

67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyEconomists and other academic researchers are often wary of over representing their findings, which does not make it easy to communicate the complexities of these problems to the public.

Sarah Quincy from the US

 

 

 

 

 

 

 

 

 
 

 

           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

 

 

67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyI think that this fact is mainly the outcome of the financial crisis and, more importantly, of the growing inequality in our societies.

        Dimitris Papadimitriou from Greece

 

 

 

 

 

 

 

 

 

 

 
 
Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           

 

 

HelenaPolitical instability worldwide associated with migration flows and the financial crisis of 2008 (and thus rising income inequality) might be responsible for the development of extreme political and economic attitudes across society, especially in Europe.

Helena Chytilova from the Czech Republic

 

 

 

 

 

 

 

 
 
 
           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

 

 

6th Lindau MeetingI don’t think that this ‘post-truth’ phenomenon is a reaction against truth or science, but against ideology-based opinions disguised as facts.

        Pedro Degiovanni from Argentina

 

 

 

 

 

 

 

 

 

 

 

           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           

 

 

6th Lindau Meeting on Economic SciencesCommunicate, communicate, communicate. We need to better explain our work and results, and actively engage in a discussion with the greater public.

Sofie R. Waltl from Austria

 

 

 
 

 

 

 

 

 

 

 
 
           Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings           

 

 

6th Lindau MeetingI believe we as economists need to do a much better job of communicating ideas, basic economic concepts and research findings in a manner conducive to being easily understood by lay persons.

        Farooq Pasha from Pakistan

 

 

 

 

 

 

 

 

 

 

 

           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings          

 

 

67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyThe tackling of anti-intellectualism should follow from building a consensus that is capable of better foreseeing the consequences of the policies justified by it. Additionally, economists would be in a much better position to address anti-intellectualism if we embraced natural sciences, and built the profession as a natural offspring of other major disciplines.

Benjamin Leiva from the US

 

 

 

 

 

 

 

 

           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           

 

 

 

6th Lindau MeetingIn my opinion, the dissemination of information is the best way to combat the ‘post-truth’ mentality. Economists and researcher in various fields of study should try to connect their work with people; the debate should come out of closed circles, be more interactive and open to the dialogue in various areas of society using simple and easily accessible communication tools.

        Giovanna Zeny from Brazil

 

 

 

 

 

 

 

 
           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           

 

 

67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyWhile I believe it is important to speak in terms everyone can understand when explaining economic ideas, economists should not simplify so much as to say ‘trade is always good’ when we know that trade creates winners and losers.

Andrew Jonelis from the US

 

 
 

 

 
 
 
 
 
 
 
 
           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           

 

 

67th Lindau Nobel Laureate Meeting, 25.06.2017, Lindau, GermanyOur policies should have in mind the poorest, neediest, and least educated citizens in our societies. We need a Europe that takes care first of all of those citizens who do not travel abroad and do not speak any other idiom than their native language. Once we’ll have that Europe, we will be dramatically closer to a truly united Europe.

        Alessandro del Ponte from Italy

 

 

 

 

 

 

 

 

 

           Photo/Credit: Julia Nimke/Lindau Nobel Laureate Meetings           

#LiNoEcon Daily Recap – Saturday, 26 August

The 6th Lindau Meeting on Economic Sciences ended with the boat trip to Mainau Island. It was a day full of science, discussions, joy, genuine delight and even some tears. It is hard for us to say goodbye now but we will surely stay in touch. Enjoy the highlights of the last day of #LiNoEcon.

 

Video of the day:

 

Last glimpse of #LiNoEcon – we hope you enjoyed your time with us.

 

 

Picture of the day:

 

#LiNoEcon participants boarding the “Sonnenkönigin” on their way to Mainau Island.

6th Lindau Meeting on Economic Sciences 23.08.2017 - 26.08.2017, Lindau, Germany, Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog post of the day:

 

Panel Slider

At #LiNoEcon, three Nobel Laureates explored economists’ understanding of how policies on taxes, public spending and interest rates work together in a time of crisis.

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

This is the last daily recap of the 6th Lindau Meeting on Economic Sciences. The idea behind it was to bring to you the day’s highlights in a blink of an eye. We hope you enjoyed the meeting and wish you all safe travels home.

Blockchain Technology: ‘Proof-Of-Work’ Versus ‘Proof-Of-Stake’

Bitcoins. Photo/Credit: skodonnell/iStock.com

Bitcoins. Photo/Credit: skodonnell/iStock.com

 

Cryptocurrencies like Bitcoin and the blockchain technology that underpins them are gradually becoming household words. Although peer-reviewed research is only just beginning to develop on the topic, the cryptocurrency ecosystem is growing at an exponential rate. Everyday, new businesses, investors and researchers enter this dynamic space.

At the University of Liechtenstein, I have been working on an experimental blockchain project with Professor Dr Martin Angerer and Jonas Gehrlein, MSc from the University of Bern. Our research on blockchain technology has been an educational, demanding and exciting journey.

The terms ‘blockchain technology’ and ‘distributed ledger technology’ refer to a variety of different technologies that attempt to solve different problems. Cryptocurrencies and blockchain technology emerged after the 2007/08 global financial crisis. The most popular example of these technologies is Bitcoin.

Bitcoin is a decentralised and open-source digital currency that stores transactional data in a distributed database that is maintained by computers all around the world. The creator of Bitcoin, who is still unknown but goes by the pseudonym Satoshi Nakamoto, wanted to provide a decentralised, private and secure means of transferring value online that did not rely on trusting sovereign entities, central banks or financial intermediaries.

A major discussion in the cryptocurrency realm relates to the optimal algorithm for achieving a collective agreement on which transactions are valid and which are invalid within a distributed network. Currently, the two most popular methods are known as ‘proof-of-work’ and ‘proof-of-stake’.

Bitcoin’s proof-of-work algorithm uses large quantities of energy and hardware equipment, which have been estimated to cost approximately $400 million per year. Proof-of-stake is a newer invention that has not been rigorously tested in the market.

When my colleagues and I began our research project, we wanted to investigate the differences between these two consensus mechanisms in a laboratory environment. Our motivation was simple: if both systems achieve the same outcome but one system (proof-of-work) incurs a negative externality on the environment, then why are people still using it?

Despite the seeming superiority of proof-of-stake, market participants prefer proof-of-work. Using market capitalisation as a proxy for demand, the highest market capitalisation coins all rely on proof-of-work. But proof-of-stake is gaining popularity: Ethereum, the second largest market capitalisation coin, is expected to switch from proof-of-work to proof-of-stake during the next year.

Our research uses game theory and behavioural economics to study the strengths and weaknesses of these two competing systems in a lab environment with students.

Our first step was to boil down the complex nature of these consensus mechanisms into abstract concepts that could be easily modelled in a lab. We spent months reviewing the research literature and brainstorming possible set-ups for the experiment.

The lab setup for proof-of-work was relatively straightforward. We planned to draw from the public goods literature on network externalities. Students would be given the option to use a medium of exchange that incurred an internal personal cost or a medium of exchange that incurred an external cost for the environment.

Essentially, this represented the current fiat system versus the energy-guzzling Bitcoin. At this point, we were very excited about the direction of our research and about the contribution that it could make to the fields of economics and information science.

Unfortunately, our research hit an insurmountable obstacle when we tried to model proof-of-stake: we could not find a way to do it easily in a lab. We discussed potential drawbacks of the proof-of-stake system such as 51% attacks, deflationary spirals and uncertainty stemming from ambiguity. But we came to the conclusion that Bitcoin’s proof-of-work suffered from the same drawbacks, albeit to a lesser degree.

During my own reflection on the differences between proof-of-work and proof-of-stake, I came to the conclusion that these systems resemble our transition from a gold standard to a fiat standard. Like gold, Bitcoin uses electricity and capital equipment to mine new coins. The probability of randomly being chosen to create a block and receive a reward is equal to each miner’s amount of mining power divided by the total amount of mining power on the network.

On the other hand, proof-of-stake allows the users with the largest holdings to create coins out of thin air. In a proof-of-stake system, the probability of receiving a reward is equal to the fraction of coins held by the user divided by the total number of coins in circulation.

Following this logic, proof-of-stake would appear to be superior to proof-of-work because economic theory argues that the fiat system is superior to the gold standard due to deflationary spirals caused by hoarding. (Note, however, that my late uncle, the American economist Larry Sechrest, argued in his 1993 book, Free Banking: Theory, History, and a Laissez-Faire Model that the problems associated with the gold standard actually stemmed from regulation and not from the scarcity of gold.)

To date, my reflections have not helped us find a suitable set-up for the lab experiment: we have been unable to find a major setback of the proof-of-stake consensus mechanism. The only problem that I could find was quite philosophical in nature and too complicated to be easily modelled in a lab.

The twentieth-century Austrian logician, Kurt Gödel, argued that no system can prove its own correctness from within itself. In reference to proof-of-work and proof-of-stake, the former appears to solve Gödel’s incompleteness theorem while the latter relies on external truth to achieve consensus.

In a proof-of-work system, anyone can join the system and immediately determine the correct history of transactions in the blockchain because the correct chain is the longest chain by default. In comparison, proof-of-stake has not developed a method for ensuring that every computer in the network comes to the same conclusion on the correct history of transactions from within the system.

Instead, proof-of-stake relies on an external third party or host of third parties to establish agreement on the history of transactions. In plain terms: proof-of-stake establishes truth by appealing to an external anchor while proof-of-work establishes proof from within. Although the introduction of counterparties may not be a problem in every case, the original goal of the blockchain technology was to create consensus without intermediaries.

In the end, we could not find a suitable way to model proof-of-stake in a lab with humans. In our own analysis of this problem, we realised that there was a fundamental problem with the premise of our study: we were trying to model a lab experiment with humans based on a technology that was designed to minimise human interaction.

Although we have encountered this major setback in our study, we have learned a tremendous amount about blockchain technology and about our own strengths and weaknesses as researchers. Instead of giving up, we are going in a new direction with our blockchain research. After all, the journey for pioneers is never paved.

#LiNoEcon Daily Recap – Friday, 25 August

Friday was the last day in Lindau but not the last day of the meeting. Saturday is going to take the #LiNoEcon participants to Mainau Island, so while you are enjoying your last day on the picturesque island, let’s take a look at what happened yesterday. Here are our highlights from Friday:

 

Video of the day:

 

At #LiNoEcon, Laureate Jean Tirole comments on corporate social responsibility: “We need citizens and corporations to step in for the government and the market and try to do the common good.”

 

 

Picture of the day:

 

Laureate Myron Scholes conversing with young economists during a coffee break.

Myron Scholes in talk with young economists 6th Lindau Meeting on Economic Sciences 23.08.2017 - 26.08.2017, Lindau, Germany, Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

 

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog post of the day:

 

Sims

 

The myth of the independent central bank: economics writer Frances Coppola on Christopher Sims #LiNoEcon lecture.

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.

Winners and Losers From a ‘Commodities-For-Manufactures’ Trade Boom

 

Soy planting in Parana, Brazil.  Photo/Credit: alffoto/iStock.com

Soy planting in Parana, Brazil. Photo/Credit: alffoto/iStock.com

 

The rise of China has been one of the most important events to hit the world economy in recent decades. Rapid economic growth has had enormous implications within China, lifting millions of Chinese citizens out of poverty. But China’s rise has also deeply affected the economies of other countries in ways that we are only beginning to understand.

One fact that economists have learned from studying China’s impact on other countries is that competition from the booming Chinese manufacturing sector has had a big effect on manufacturing workers elsewhere. According to research by David Autor, David Dorn and Gordon Hanson, manufacturing employment has declined much more quickly in parts of the United States that produce goods imported from China.

These findings of negative impacts of Chinese competition for manufacturing workers have been corroborated by studies of European countries. For example, research by João Paulo Pessoa finds that UK workers initially employed in industries competing with Chinese products earned less and spent more time out of employment in the early 2000s.

But China is not only a competitor for other countries’ industries; it has also become an increasingly important consumer of goods produced elsewhere. In particular, China’s rapidly growing economy fuelled a worldwide commodity boom in the early 2000s.

This had an especially big impact on developing countries, whose swiftly rising exports to China became dominated by raw materials such as crops, ores and oil. Exports from low- and middle-income countries to China grew twelvefold from 1995 to 2010, compared with a twofold rise in their exports to everywhere else, so that China became an increasingly important trade partner for the developing world.

In 1995, commodities made up only 20%of these countries’ rather limited exports to China. But by 2010, nearly 70% of exports to China from developing countries were commodities (Figure 1A). Meanwhile, these countries’ rapidly growing imports from China consisted almost entirely of manufactured goods (Figure 1B).

 

Figure 1: Share of commodities in trade of developing countries Notes: ‘Commodities’ include products of the agricultural, forestry, fisheries/aquaculture and mining sectors. ‘Developing countries’ include non-high-income countries as defined by the World Bank, excluding countries in East and Southeast Asia, which tend to participate in regional manufacturing supply chains. Trade data is from CEPII BACI. Credit: Francisco Costa

Figure 1: Share of commodities in trade of developing countries. ‘Commodities’ include products of the agricultural, forestry, fisheries/aquaculture and mining sectors. ‘Developing countries’ include non-high-income countries as defined by the World Bank, excluding countries in East and Southeast Asia, which tend to participate in regional manufacturing supply chains. Trade data is from CEPII BACI. Credit: Francisco Costa

 

This swift transition to a new kind of trade relationship has sometimes been unpopular with China’s trade partners. For example, before a visit to China in 2011, Brazil’s former president Dilma Rousseff promised that she would be “working to promote Brazilian products other than basic commodities,” amid worries about “overreliance on exports of basic items such as iron ore and soy” (Los Angeles Times).

So for countries like Brazil, how did the benefits from the China-driven commodity boom compare to the costs of rising competition from Chinese manufactures?

In my research with Jason Garred and João Paulo Pessoa, published recently in the Journal of International Economics, we look at how the steep rise in ‘commodities-for-manufactures’ trade with China affected workers in Brazil. It turns out that Brazil’s evolving trade relationship with China in the early 2000s echoed that of the rest of the developing world:

  • First, trade with China exploded: just 2% of Brazil’s exports went to China in 1995, but this had risen to 15% by 2010.
  • Second, exports to China became increasingly concentrated in a few commodities (Figure 2A). In 2010, more than 80% of Brazilian exports to China were commodities, mostly soybeans and iron ore. In the first decade of the 2000s, almost all of the growth in export demand for these two Brazilian products came from China.
  • Finally, like the rest of the developing world, Brazil’s imports from China rose quickly but included almost exclusively manufactured goods (Figure 2B).

Our study analyses the 2000 and 2010 Brazilian censuses to check how the fortunes of workers across different regions and industries evolved during the boom in trade with China.

 

Figure 2: Share of commodities in trade of Brazil. ‘Commodities’ include products of the agricultural, forestry, fisheries/aquaculture and mining sectors. Trade data is from CEPII BACI. Credit: Francisco Costa

Figure 2: Share of commodities in trade of Brazil. ‘Commodities’ include products of the agricultural, forestry, fisheries/aquaculture and mining sectors. Trade data is from CEPII BACI. Credit: Francisco Costa

 

We first confirm that during this time, there was a negative effect of Chinese import competition on employees of manufacturing firms. Specifically, in parts of Brazil producing manufactured goods imported from China (such as electronics), growth in manufacturing workers’ wages between 2000 and 2010 was systematically slower.

But our findings also suggest that growth in trade with China created winners as well as losers within Brazil. Wages rose more quickly in parts of the country benefiting more from increasing Chinese demand, which were mainly regions producing soy or iron ore.

We also find that these regions saw a rise in the share of employed workers in formal jobs. Unlike jobs in the informal economy, jobs in the formal sector come with unemployment insurance, paid medical leave and other benefits, and so this increase in formality can be seen as a rise in non-wage compensation.

So while Brazil’s manufacturing workers seem to have lost out from Chinese import competition, rising exports to China appear to have benefited a different subset of Brazilian workers.

Our study concentrates on the short-run effects of trade with China on Brazilian workers. This means that our results don’t provide a full account of the trade-offs between the twin booms in commodity exports and manufacturing imports. For example, we don’t know what happened to the winners from the commodity boom once Chinese demand slowed in the mid-2010s.

We also do not consider the benefits to Brazilian consumers from access to cheaper imported goods from China. But what we do find suggests that trading raw materials for manufactures with China may not have been a raw deal for developing countries like Brazil after all.

#LiNoEcon Daily Recap – Thursday, 24 August

Thursday was packed with lectures, seminars and the first panel discussion of #LiNoEcon. In our mediatheque, you may find many great pictures, videos of exceptional lectures and thought-provoking blog contributions. There is so much more worth checking out than what we present to you in our daily recap, so do have a look. Enjoy the following highlights of Thursday!

 

Video of the day:

 

For #LiNoEcon young economist Eric Schaanning, the big policy challenges facing economists today include inequality, pension design, artificial intelligence and climate change. 

 

 

Picture of the day:

 

Laureate Daniel L. McFadden with “his” knowledge pylon that is part of the Lindau Science Trail.

Daniel McFadden standing next to

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog post of the day:

 

Blog of the day

‘Homo Economicus’ Reconsidered: Ben Chu on how Nobel economists rebel against simplistic conceptions of rationality at #LiNoEcon

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.

Housing Talk: Why You Should Never Trust a House Price Index (Only)

An ever growing housing market? Picture/Credit: G0d4ather/iStock.com

An ever growing housing market? Picture/Credit: G0d4ather/iStock.com

 

Whenever I attend a dinner party or wedding or just meet old friends for coffee, at some point the topic turns to house prices, real estate investment and what seems to be generally perceived as a boom in the housing market. It seems that almost everyone is interested in buying a house or apartment. Often the aim is not just to cover the basic human need for shelter, but also to participate in the assumed never-ending boom and grab a small piece of the rapidly growing housing cake. House prices never fall, right?

People enthusiastically tell me stories of friends (or friends of friends) who finance multiple properties entirely via loans with zero down-payment. After all, real estate investment is a safe haven, isn’t it? And the expected rent will more than cover the monthly loan instalment, won’t it?

The figure show a rental price (right) index for Sydney together with quality-adjusted rental and sales price distributions. Credit: Sofie R. Waltl

The figures show a rental price index (top) for Sydney together with its quality-adjusted rental price distribution (bottom). Credit: Sofie R. Waltl

But wait, my experience of obsessive ‘housing talk’ may be biased in at least three ways. First, I’m in my late twenties and so are my friends. Thinking about buying property is common, even necessary, for my age (and socioeconomic) group. Key decisions for the rest of our lives need to be made: should I stay in my first job or get (another) postgraduate degree? Should I go abroad and try out the expat life? Should I marry or break up with my long-term boy/girlfriend? What about kids? And hey, where and how will I live? Which leads to the obvious next question: to rent or to buy.

Second, I wrote a PhD thesis about housing markets. Although I focused on better ways of measuring dynamics in housing and rental markets and mainly dealt with technical problems in statistical modelling of such markets, most of my friends tend (wrongly) to conclude that I am an expert in real estate investment. Naturally, I end up being asked for advice about housing markets more often than most.

Third, as a native Austrian currently living in Germany, I mainly come across people for whom dramatic changes in house prices are a new phenomenon. After years of generally flat house prices, these countries have only recently seen bigger shifts.

Still, housing markets seem to be a hot topic and I rarely meet someone who’s not at all interested. I believe that widely reported changes in house price indices are the main reason for that.

In his famous book Irrational Exuberance, Nobel laureate Robert Shiller describes how first the US stock market (near its peak in 1999) and then the US housing market (around 2004) became socially accepted topics of conversation with broad media coverage. In fact, he writes, whenever he went out for dinner with his wife, he successfully predicted that someone at an adjacent table would speak about the respective market.

Shiller is well-known for his analysis of markets driven by psychological effects, which help to explain observed developments that a theory based on full rationality would rule out. Although most people are aware of housing bubbles of the recent past – for example, in Ireland, Japan, Spain and the United States – the belief in real estate as a quasi risk-free investment seems to remain unquestioned. The fact that sharp and sudden drops in prices are possible and happen regularly is widely ignored. 

The figure shows a sales price index for Sydney together with quality-adjusted rental and sales price distributions. Credit: Sofie R. Waltl

The figures show a sales price index (top) for Sydney together with its quality-adjusted sales price distribution (bottom). Credit: Sofie R. Waltl

Everyone is affected by movements in housing and rental markets. If someone owns a property, it is usually her single largest asset; if someone rents, the cost often takes up a large fraction of her monthly income. This is why turbulence in these markets has larger effects on households than, for example, swings in the stock market (Case et al, 2005). The social implications of skyrocketing house prices and exploding rents but also of crashing markets are huge – which means that these markets need to be closely watched by policy-makers.

A house price index measures average movements of average houses in average locations belonging to an average price segment – a lot of averages! It is usually heavily aggregated, which implies that just because a national house price index reports rising prices, not every house will benefit equally from these increases. In fact, there is large variation in the distributions of prices and rents, and these distributions also change significantly over time.

Houses are highly heterogeneous goods (particularly compared with shares or bonds): no two houses are the same. Therefore, house price indices should be quality-adjusted, with differences in house characteristics taken into account. Still, changes in house price indices are often driven by developments in certain sub-markets, which are mainly determined by the three most important house characteristics: location, location, location. 

Hence, house price developments are extremely heterogeneous even within urban areas (see McMillen, 2014, Guerrieri et al, 2013, and Waltl, 2016b), and thus the interpretation of aggregated national or even supra-national indices is questionable. For example, the S&P/Case-Shiller US National Home Price Index reports changes for the entire United States, the ECB and EUROSTAT publish indices for the European Union and the euro area, and the IMF even produces a global house price index.

Missing bubbly episodes in sub-markets when looking at such heavily aggregated figures seems unavoidable; and basing an individual investment decision on them is dubious. Similarly problematic is the assessment of a housing market using such aggregated measures for financial stability purposes.

Price map showing the average price (in thousand AUD) for an average house for different locations over time in Sydney. Credit: Sofie R. Waltl

Price map showing the average price (in thousand AUD) for an average house for different locations over time in Sydney. Credit: Sofie R. Waltl

A typical pattern is that markets for low-quality properties in bad locations experience the sharpest rises shortly before the end of a housing boom. Look at the lowest price segment in Sydney’s suburbs (black, dashed line) compared with the highest price segment in the inner city (orange, dotted line) around the peak in 2004. It is also this segment that experiences the heaviest falls afterwards.

A possible behavioural explanation is as follows: the longer a housing boom lasts, the more people (and also the more financially less well-off people) want to participate in this apparently prosperous and safe market. Steady increases reported by house price indices give the impression that the entire market is booming with no end in sight. Whoever is able to participate becomes active in the housing market and investments boom in yet more affordable properties – the lowest segment in bad locations.

A common misconception is the assumption that rising house prices necessarily translate into higher rents almost immediately. But when the price contains a ‘bubble or speculative component’, this is not always the case.

In general, economists speak of a bubble whenever the price of an asset is high just because of the hope of future price increases without any justification from ‘fundamentals’ such as construction costs (Stiglitz, 1990). Investing in over-valued property and hoping for the rent to cover the mortgage is thus more dangerous than it might appear (see Himmelberg et al, 2005, for the components of the price-to-rent ratio measuring the relationship between prices and rents; and Martin and Ventura, 2012, for asset bubbles in general).

 

The figure shows location- and segment-specific indices for Sydney. CBD refers to the Central Business District. Credit: Sofie R. Waltl

The figure shows location- and segment-specific indices for Sydney. CBD refers to the Central Business District. Credit: Sofie R. Waltl

 

While we’ve already seen that price developments are very diverse, the same is also true for the relationship between prices and rents. Thus, simply looking at average price-to-rent ratios may miss the over-heating of a sub-market and its associated risks.

Credit: Sofie R. Waltl

Credit: Sofie R. Waltl

Buying property is thus more delicate than urban legends about the safety of real estate investment suggest. Above all, developments in housing markets are diverse even within small geographical areas and one number alone can never appropriately reflect what is going on. A complete picture of the dynamics in housing markets is essential from the perspective of an investor as well as a policy-maker.

And in case you’re hoping for investment advice, here’s the only piece I can offer: just because everyone buys does not mean that YOU should go out and buy whatever you can afford. In fact, when everyone (including your friend with questionable financial literacy) decides to invest in real estate, it might be exactly the wrong moment. Never rely on house price indices only, but go out and collect as much information as possible. And don’t forget: location, location, location… 

 

 


The figures show quality-adjusted developments in the Sydney housing market, and are part of the results of my doctoral thesis Modelling housing markets: Issues in economic measurement at the University of Graz under the supervision of Robert J. Hill. I am very grateful for his valuable support and advice. Calculations are based on data provided by Australian Property Monitors. Results, which this article is based on, are published as Waltl (2016a) and Waltl (2016b). The part about price-to-rent ratios is currently under review at a major urban economic journal (here is a working paper version). My work has benefitted from funding from the Austrian National Bank Jubiläumsfondsprojekt 14947, the 2014 Council of the University of Graz JungforscherInnenfonds, and the Austrian Marshallplan Foundation Fellowship (UC Berkeley Program 2016/2017). The views presented here are solely my own and do not necessarily reflect those of any past, present or future employer or sponsor.

#LiNoEcon Daily Recap – Wednesday, 23 August

On Wednesday, #LiNoEcon was inaugurated with a keynote by ECB President Mario Draghi, followed by the first full day of the meeting programme with lectures and seminars. In the evening, young economists and laureates mingled at the Get-Together in Friedrichshafen, where Federal Minister Peter Altmaier welcomed the participants on behalf of the German government, stressing that the young economists were the ‘hope of the universe’.

 

Video of the day:

The Keynote by ECB President Mario Draghi during the opening ceremony

 

Picture of the day:

ECB President Mario Draghi talking to young economists after the opening ceremony

6th Lindau Meeting on Economic Sciences

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.

 

Blog of the day:

 

Euro area

On the Future of the Euro Area: #LiNoEcon young economist Benjamin Schäfer suggests ways to overcome the weaknesses in Europe’s monetary union.

Do take a look at more of our inspring blog posts.

 

Tweets of the day:

 

 

 

 

 

 

 

 

 

 

Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.