The Dismal Science?

Whether you have opened The Economist (of October 19th), The Financial Times Weekend Edition (of October 20th), or even The Guardian (online), there seems to be a problem. There has been a quite thorough beating of social science, at least with opinion. The Financial Times Weekend magazine dedicated itself to looking at physics, and while containing the more abstract concepts that have recently been developed, it also looked at the current state of “science”. The foundation of science is our use of empiricism, providing evidence in which to prove a hypothesis, the use of regression to examine the relationships between variables, and questioning our own answers. This is how ‘we do’ science.

The FT notes that at the turn of the 21st century there were claims that the century of breakthrough in physics was over, and now in its place we would see a revolution in biology pertaining to our understanding of biotechnology and genetics. This revolution hasn’t seemed to have happened yet, at least that is my belief. If anything physics has maintained its place as the breakthrough science, just earlier this month Peter Higgs and Francois Englert won the Nobel Prize for their contribution to our understanding of the Higgs Boson – a key step in understanding how mass is created and possibly the absence of it. It is obviously difficult to compare the sciences, and argue for which one is making the most ‘progress’. I am obviously biased because I take physics as a subject, and it has been a personal love of mine. However, maybe a bit of physics in economics would not hurt. By this I mean physicists are often attracted to explaining what seems to just be phenomena, the obvious is given simple and straightforward explanations, but it is the extraordinary that demands their attention.

This consideration of the natural sciences brings me onto the social sciences, and what the underlying theme was behind the FT, Economist, and the Guardian. Are the social sciences really sciences? Or are they just for lack of better wording social studies. Economics has become infamous as a result of the financial crisis, at the time we lacked explanation, our models failed to predict the crisis, and we have not really flourished in resolving it – whatever the growth figures suggest. The economist looked at a behavioural study completed in the early 90s known as the Mere-exposure effect; recent re-trials of the experiment have resulted in data that does not support the original hypothesis. Here lies the issue with social science, us. We have known this since the beginning; it’s not really an original thought: In economics we usually lament that consumers are not always rational, we make decisions on innate emotions which “don’t make sense”. So how can we actually make dependable models?

Moreover, why do we rely upon models that were developed over half a century ago to still attempt to predict, or change our economic situation? Can we allow ourselves to have mainstream economics? Clearly we thought that we need not worry about economic policy or research that would help when in economic crisis at the turn of the century, as that is what defined the 20th century, The Great Depression, The World Wars, etc. The respective crises had led to economists of the calibre of Galbraith, Keynes, Friedman, and Hayek all to consider how economies truly function. Thus we had an age of macroeconomic consideration, and the development of models which we have used up to this day. Aditya Chakrabortty from the Guardian says that those theories which have made up mainstream economics, has led to the current generation of economics to be in denial, and not consider the fact that we may have changed. Clearly this represents a problem, as the models haven’t changed.

The natural sciences are able to prove and disprove hypotheses, on the other hand social sciences especially economics lately only seem to be able to provide an opinion. When looking at economic courses at universities it is clear that maths is essential in part for microeconomics and statistical analysis. Alongside this you have the expected neoclassical and Keynesian theories. To some extent, this teaching of economics has not resulted in the desired results. There is a generation of economists who are making use or at least referring to models which by now possibly don’t actually provide an accurate observation of market, consumer, and supplier behaviour. Charkrabortty in his article states that economics should be a “magpie” subject, being taught with history, politics, and philosophy. I quickly noticed that this is how it was once done, all one has to do is look back to Adam Smith, David Hume, or David Ricardo. They were men of many traits and abilities, notably philosophy and history.

I believe to move economics into the 21st century we must recognise the plurality of the subject. When considering any model we often make note of the assumptions we place, when we apply these models to the real world it is necessary to remove these assumption and this can be achieved with the involvement of philosophy, politics, and history to provide at least a context to our decisions. We still as a society can become baffled with what should be simple, straightforward, “proven” economics by now. One simply has to look at the debate around HS2 in Britain. Keynesian economics suggest that we are stimulating aggregate demand to induce growth in the economy, monetarist theory would suggest that this wouldn’t work in the long run. The truth of the matter is we don’t know, here the monetarist theory is more easily defended as one can consider all the towns that will be passed by, or land that will have to be committed to the transportation. So there is debate, and we struggle to have an authoritative stance, as just yesterday the benefits of HS2 have been “lowered”.

We are at a key point in science and economics. We have the emergence of big data, which may actually enable us to predict current trends, and bring statistical analysis to a whole new scale. To do this, economics in my opinion needs to start behaving like the natural sciences in that we continually question what has been to some extent proven. Up until now we have been too comfortable with theories that ‘seem’ to work, there may be more room now for unorthodox economics, or at least involving more breadth in the base education of the subject. Look at any economics course at university and the stress is placed upon mathematics, for what is ultimately as we have established a behavioural subject, and that the Nobel Prize in economics this year further cemented as a variety of behavioural finance. The question now is how we incorporate effectively all the aspects of an ultimately extremely wide subject? It is time to either introduce more of the scientific method, or accept like history that there is a strong element of a subjective view, and how successful in a sense the subject is depends on how we view it.

For a bit of further reading check out:

http://www.theguardian.com/commentisfree/2013/oct/28/mainstream-economics-denial-world-changed

http://www.economist.com/news/leaders/21588069-scientific-research-has-changed-world-now-it-needs-change-itself-how-science-goes-wrong?fb_ref=activity

If you read anything read this article:

http://www.ft.com/cms/s/2/8461f5e6-35f5-11e3-952b-00144feab7de.html#axzz2jEkVT9iu

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Current State of The Blog

I apologize for the lack of content, the internet hiatus is now over as the summer begins and exams are over. I am looking forward to this point, as I will be releasing some hopefully useful revision material, but I am also going to take a more abstract view with considering how economics falls into place with everyday life.

There will finally be the fully fledged assembly of the economists and books section, which I have simply not had time to give. Once the Royal Economics Society Essay Prize deadline has passed, I will post my essay on here  and articles that were related with research.

The Wine Trade

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2012 saw the fully fledged re-emergence of the lucrative fine wine trade. At the forefront of development of the fine wine trade stands a company which has been trading wine since 1698. Berry Bros & Rudd have their original store located in London, and their expansion can be found in Hong Kong. They do offer high quality wine for purchase and consumption, but where they have created the greatest profit is the interest in fine wine as a long term investment.

The majority of fine wines available for investment come at a variety of prices; however they recommend a starting price of approximately £10,000. The attractiveness of the fine wine trade can be found in two areas, the first is boasting rights to having the finest collection of vintage and fine wine, as well as creating a relatively safe long term investment. The best wines only rise in price over time, and this is where the investment potential lies.

What really began to create a booming trade is the possibility of trading wines between investors; this started trade in order to gain new bottles by trading a currently owned bottle as well as an additional sum of money, in order to have a new more lucrative wine in the investment portfolio.

The credentials of this type of investment are still questionable especially if one is hoping to create a proper investment out of fine wine, the two deciding factors in the price of wine is the availability and critic opinion.

For an example a selected wine is Ch. Latour 1993 – Pauillac

The wine was made to a limited number of 200 cases which equates to 1,200 bottles. This can be analysed as the creation of perfectly inelastic supply, as the supply is at a fixed quantity. This particular vintage will never be produced again, and this is what helps to determine the value of wine.

The demand for the wine is decided by two factors the most important being the “Robert Parker Rating”, this rating will be the realisation of the demand for the bottle. The rating is done by Robert Parker the most internationally acclaimed wine critic. A bottle with a 90+ rating (out of 100 and 50 being deemed an “unacceptable wine”) means that there will be an instant increase in demand. Then what makes fine wine a lucrative investment is the factor of time, as demand increases over time as the value increases. This is shown in the graph below:

There are exceptions to the model below, some wines after passing a certain age are considered to lose their finesse and flavouring so they begin to slowly depreciate in value. Some wines are also subject to hype which tends to cause an upward shift in demand.

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A growing part of the trade is “En primeur” which is the acquisition of the wine before it has been bottled. This is becoming popular with those unable to buy bottles at peak prices, as prices are extremely low in the “En primeur” stage as there is the possibility that the wine ends up with bad quality, or fails to reach the status of a “fine” wine.

There is also the stage of initial valuation, before the wine is released for rating. This establishes what the producer believes the base price of the wine should be. Certain regions have experienced higher initial valuations for their wines, due to the difficulty of production and the result of extremely high quality wine. The wine trade is beginning to take on considerable form, and soon may rival the extremely well developed whisky trade. What some investors may find most disappointing is that the majority of the time they never taste the fine wines they trade, as opening the bottle will completely eradicate any value of the bottle.

The main aspect of the wine trade is that there is no longer a physical trade of the wine, the trade is done through bonded warehouses as this allows the wine to be exemopt from VAT and other taxes that different countries might levy. The exsistence of private fine wine collectors is rare, and this is what differentiates a fine wine investor and collector.

Berry Bros & Rudd have two royal warrants, and their biggest competitors Lay & Wheeler (wine merchants since 1854) are beginning to stock many single bottles with a valuation above £15,000. But what has increased the interest in wine as an investment commodity is the creation of London International Vintners Exchange (liv-ex), they created they Fine Wine 100 index which tracks the price of the most sought after wines in the world. This is a booming market which has already outperformed the FTSE 100 during various months throughout 2011 and 2012. The creation of the Fine Wine Index has led to a lot of foreign investment into European wines, especially from China. The reason behind this is the fact that fine wine has long held a status of opulence in Europe, and wine was never a big part of Asian culture. This has led to both the increased consumption of fine wine, and increased investment as highlighted by the liv-ex annual report of 2011.

However, times have changed and it is important to look at how the index has evolutionised. Between 2000 and 2010 the index traditionally offered double returns, this is similar to highly rated and investment grade bonds. It can be noted that in late 2010 the index began to shoot up and this was driven by new entrance in the market from Asia as previously mentioned. This created a hype around the fine wine index which brought to public attention in 2011 and 2012, however it can be noted that the index began to fade out by mid 2012 to levels that the index was in early 2010 before it became a trend. This can be attributed to the commodity charecteristic of wine.

I would argue that the characteristic of wine as a commoditiy is a hybrid between the investment chareteristics of percious metals and stones, and art. Precious stones and metals are always considered scarce by the market and always highly valued by society, but unlike wine they benefit from the fact that they do not expire. But this is where the artistic attribute comes in which keeps the value of wine for a given period of time, as each vintage of wine in unique, it is impossible to find two vintages alike whether it be fine or simple wine. This is why wine as a commodity for investment began to fade, as art can be maintained but wine after a certain amount of years simply expires and its value is wiped off.

Fine Wine has displayed itself at times as a worthwhile commodity to invest in, however the question remains what will become of the market once the traditional fine wine is consumed or begins to degrade,  and what will replace it?

Lay & Wheeler:

http://www.laywheeler.com/

Berry Bros & Rudd:

http://www.bbr.com/

Live Wine Stock:

http://www.liv-ex.com/

Updated: 22/01/13