Nurses, Death, and Terror on The Terraces

In this article I am going to look at the narrative side to econometric analysis, and what we gain from understanding bundles of data through an instrumental variable. There are various limitations to this type of analysis, in my opinion the most major one being the requirement of a natural experiment, and all the factors, which may go wrong alongside that. This is going to be based on a lecture by Matt Dickson a researcher who is currently looking at the raising of the school leaving age and consequent effects on the labour force survey. 


Policing and Crime

This is based on the academic paper “Panic on the Streets of London: Police, Crime, and the July 2005 terror attacks”

The government has a specific interest in policing and crime through an economic perspective due to the associated costs and its effect on the general population. The statistics used for this analysis are the total amount of recorded crimes per 1000 of population, and the amount of police officers per 1000 of the population, for a respective year in the United Kingdom.

We can see that the crime rate and police rate increased alongside each other from the 1960s onwards, but from 1990 onwards there is a decline. This applied for violent crimes, robbery, etc. In this we can conclude that more police officers does not facilitate more crime and vice-versa. In this there is a positive correlation, which does not tell us about causation in the relationship.

The academic paper mentioned above uses a fixed variable in order to examine the correlation, in that the influx of police was rare due to the terrorist threat. This allows a natural experiment to be created, as the increase in police had nothing to do with “conventional” crime.

The paper specifies a treatment group that consists of the London boroughs of Westminster, Kensington, Camden, Islington, and Tower Hamlet, while the controlled group is every other borough in London. There was hardly any difference in police deployment throughout those areas before the attacks. During the operation of increased policing due to the attacks where there was effectively police on every corner. Now considering the crime rate we see that before the period crime in the treatment areas was a bit higher, but then with expanded police force we see that the crime rate drops after and during the attack period for the treatment group. This had shown a definite decrease in crime rate, but it required a massive spike in the number of police per 1000. The data allows us to establish that there was an approximate elasticity of how changing policy changes the crime rate. Resulting in an elasticity of 0.38, so a 10% increase in police numbers reduces crime by approximately 4%.

The critique that we may employ here is that due to the very nature of the natural experiment, it may have had an unaccounted for effect on the operation of crime. There is also no control comparison so a terrorist attack without a changed police response. Making it difficult to immediately take this statistical analysis at face value, clarifying the limitation of natural experiment.

However, the results are still interesting. Allowing us to expand our analysis into what kind of policing would be required to keep crime at a desired level, accepting the fact that we cannot eradicate crime. The cost of developing this kind of police force can be brought into consideration or whether other methods can be introduced which would be as effective but at a lower cost, in this noting the CCTV network developed throughout London.


Nurses Pay & Death

In healthcare payment for nurses is based on equity, in that everyone does the same job therefore they should have the same pay. However, this may have unintended consequences on the service that nurses provide, and the extent to which agency nurses are employed.

If we consider where there is a greater use of agency nurses and death rate from heart attack we see a concentration around London, the Home Counties, and a few Northern cities. In this one may suggest that the quality of agency nurses is lower hence the death rate. However, we can note that there may be reverse causation. Hospitals with high death rates struggle to employ and maintain staff; thereby making agency nurses a requirement. It is also an assumption that agency nurses are more likely to give poor service.

We can breakdown this relationship through considering outside wages as a third variable because it affects the use of agency nurses but not necessarily the quality of the hospital. Carol Propper and John Van Reenan outline the employment of agency nurses and the quality of healthcare in greater detail in the paper “Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labour Markets on Hospital Performance”


School and Wages

How much is education worth?

Education has an impact on fiscal policy, welfare, labour, and crime. Increasing education could lead to a decrease in crime, and a variety of other relationships. Highlighting the importance we place on education in economics.

Considering a distribution of hourly wages and years of schooling we may note a positive relationship whereby years of schooling increases alongside hourly wage. Some problems we run into when considering education:

  • Education is not randomly distributed amongst the population.
  • People choose how long to remain in education.
  • There are unobserved and unmeasureable factors that lead to higher wages.
  • We hope that we can pick two random people and by years of education be able to assign them a wage

The natural experiment used here looks at the school leaving ages from 1949 to 1967:

The people who were forced to stay in school just stayed the one more year after 15. This made them move from the 15 age group to the 16 age group leaving, at that point around 60% had left school but this had a positive effect on wages.

RoSLA – Raising of the School Leaving Age

Pre-RoSLA and Post-RoSLA comparison, the average age of leaving education increased, and meant that 1/3 people stayed in school longer. The policy change made this an effective natural experiment. We can consider the indifference difference:

A whole extra year of schooling meant a 6% increase in hourly wage. Why did it have this effect?

Breaking up periods, when you could leave school. This resulted in a far greater proportion with academic qualification for those that could not leave before the summer exams. It does it for a greater extent to those that are post-RoSLA.

Dickson and Smith in 2011 have looked in detail at the labour force survey and the effect of raising the school leaving age if we were to exploit another increase in the minimum leaving age. This would be exploited again, by moving the age bracket again achieving higher qualification, resulting in a greater wage in theory. The question brought here is to what extent will this relationship hold?

Education is always a difficult variable due to our inability to measure to what extent it has been effective, the issue that arises is that even if everyone got the same education individuals would have gained different benefit. Let alone the fact that there are a variety of programs and courses, which pupils may take.

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Iron Laws & The Foundation of Economics

When one asks who the founder of economics is, one would struggle not to say Adam Smith. Almost every book on the subject has at some point referenced or quoted Smith, he is as Galbraith would remark “the central tradition”.  I have recently taken some issue with seeing Smith as the central foundation of economics, especially as his work has become and has been the central part of conventional wisdom.

David Ricardo & Thomas Robert Malthus may have come after Smith but their significance is often disregarded, whether it is at schools teaching economics or some universities courses. This can firstly be attributed to the bleaker image of life that Ricardo and Malthus portray. Secondly, there seems to be a disparity between economic thinking and the way it is taught, as economic history is experiencing a renaissance of types in regards to its importance.

Ricardo often receives acclaim in his contribution to comparative advantage, trade, and protectionism.  However, he was an integral part in the development of our understanding of wages, developing the “Iron Law of Wages”. Malthus is most well-known for his dictation of the “Malthusian Catastrophe”, which ultimately defines the bounds of scarcity and ultimately poverty in relation to wages. As such one reason Smith may be a more popular source is due to his optimism, but in that he does not pay too much attention to the issues of inequality, distribution of capital, and the existence of poverty. Smith concentrates on the development of wealth and where the individual pursuit of wealth helps society as whole which are far more appealing ideas. Whereas Ricardo and Malthus both reached conclusions that were far from pleasant, to some extent a result of the society they lived in.

The Iron Law of Wages can be considered through the Malthus foundation where population growth occurs as a consequence of wages being above subsistence levels, and population decline occurs as a consequence of wages being below subsistence levels. As below subsistence levels the labourer cannot complete labour. This was concluded in his “catastrophe” where eventually population would surpass agricultural production, ultimately reducing all of society to subsistence levels. Now there are a variety of critiques to Malthus’s conclusion, especially now considering modern conditions as one can consider “surplus population” as a condition that is met where there is surplus wealth. Additionally, one can consider the development of science and technology which can lead to substantial increase in production with little or no change in population, so to some extent one can argue that Malthus’s reasoning is outdated.

Ricardo’s foundation for the Iron Law of Wages draws upon greater flexibility denoting natural prices and market prices. Where the natural price of labour is at subsistence level, but the market price could exceed this level indefinitely if there is a constant increase in capital. As he reasons that an increase in capital facilitates in a greater demand for labour. This is all accumulated in his Law of Rent which considers the return from land in regards to production, which then corresponds with wages. This ascertains that wages are not dependent upon the productivity of labour but in a sense marginal land where production is dependent upon the quality of land. This to some extent argues that the Iron Law of Wages fails to predict wages in the same manner that considering land does; it also disenfranchises the landowner from deciding land rents as it is wholly dependent upon the productivity of the land. Yet again this leaves one with the feeling of outdated concepts as we no longer have such a dependency on land as the central form of capital.

Even though the economics that Ricardo and Malthus respectively developed was applicable at their time it is less so now. But what is important to realise is the influence these concepts of wage, rent, and profit had and have on modern economics. Karl Marx had to some extent based his approach on Ricardian thought, examining the productivity of labour in regards to wages, but viewing labour as a unit of production rather than as a human source.  Thereby, Ricardo and Malthus had influenced one of the most dramatic economic deviations in recent history, on the basis of uniform productivity from a unit of labour exclusive to some degree of market forces. Even more so it allows a comparison of how wages are set now, and to what degree do workers get paid in regards to their marginal productivity or contribution, versus market created prices.

It is possible that we have spent far too much time including Smith in our teaching of economics, that we have not appreciated the contribution of other significant economists. The use of economic history can provide a strong foundation of economic thought and its development, as long as the study involves both orthodox and heterodox views. Let me take this opportunity to lament that Alfred Marshall should be far more involved in IB/A-Level textbooks than just the Marshall-Lerner condition, considering the importance of his Principles of Economics in 1890.

The question is shall I talk about Piero Sraffa next, or back off economic history for a while, and take it back to microeconomics and types of markets?

Introduction to Theory of The Firm

Fixed Costs → do not vary with output
Variable Costs → vary with output

Revenue of a firm is always dependent on the output.

Materials         → Variable Cost (leather, stitching, etc.)
Capital             → Fixed Cost (sewing machines, leather tanner, etc.)
Labour             → Fixed/Variable Cost (depends on type and payment)
Transport         → Fixed Cost (short term)
Marketing        → Fixed Cost (does not vary with output)
Factory            → Fixed Cost (same size, does not vary with output)

Factory p1

Short Term: The length of time in which one factor of production is fixed (factory determines whether or not the firm operates in the short term or the long term).

Long Term: The length of time over which at least one factor of production becomes variable (i.e. need a new factory to increase output).

The Law of Diminishing Marginal Returns:

Picture2

 

This graph shows how output increases over the initial short term, but in the long term output decreases. This can be explained by several factors, such as there are only so many facilities, employees waiting to use machines, rate of productivity declines as employees may begin chatting to each other or the machinery is now inefficient.

The classic example is “too many cooks in the kitchen”, if the oven is used by one cook the other cook cannot use it, if one cook used all the fish the other cook cannot use it, etc. The limitation of output increases over time due to inherent problems.

If this graph meets the x-axis and goes below it, it identifies the result of less productivity. As at any point below the x-axis adding a greater amount of a factor of production subtracts from the total output.

As a consequence of The Law of Diminishing Marginal Returns:

Picture3

 

Shown above is the example of how adding a unit of labour increases the costs involved in production. The reason marginal cost is at the trough while marginal productivity is at the peak is because the cost of introducing more labour was small in comparison to the increased output. Therefore it can be stated that the cost is counteracted by the increase in output.

This is evident if the following example is given, at one unit of labour 100 baseballs are outputted, as there is an additional unit of labour introduced there is an additional 150 baseballs outputted, this counteracts the cost of hiring the additional unit of labour as the output has increased by 150%.

Picture4

For Marginal Revenue it can be noted that as price decreases, quantity increases. This is because for the producer to sell the next good they will have to reduce the price of their good, in the sense of revenue you have to lower the price to sell more. As there is more supply the price drops as the good is less scarce.

Profit Maximisation: This is where Marginal Revenue is equal to Marginal Cost (MR=MC, Q-P)

At point Q1 there is greater marginal revenue then marginal cost, this is still a point of profit but if you stop at point Q1 you forsake possible profit and this is highlighted by the blue triangle. This is why it is worthwhile for the producer to increase one of the factors of production to increase the marginal cost with the goal of reaching the point of profit maximisation.

At point Q2 there is a greater marginal cost whereas, there is less marginal revenue. This point can be seen as equally inefficient as point Q1, as again there is loss represented by the green triangle. However it can be argued that it is better to be on this side as through this you achieve a greater market share, which is a long term interest.

Notes:

Every firm will attempt to reach the point of profit maximisation, the price of the product does not matter to the firm, and the interest is in profit.

Definitions:

Marginal Revenue: The extra revenue that an additional unit of product will bring.

Marginal Cost: The extra cost that an additional unit of product will bring.

Picture5

The introduction of average revenue allows the producer to see where the price of the good should be in order for the firm to maximize profit. The average revenue can be identified as demand, and while it is in the interest of the firm to maximize profit the accurate pricing of the good is essential.

Average Revenue: Total revenue per unit of output. When all output is sold at the same price, average revenue will be the same as price.