THE SCHUMPETER The Economics Society Magazine

Issue 2

Ashes to Ashes: Hedge Funds' Fluctuating Tendancies

Fahad Memnon

Route 66: The Death of American Infrastructure

Tim Robinson

Financial Reform

Joao Marinho

Web 2.0 is the Future of the Corporate World

Sammy Sung

Why Has the UK Not Adopted the Metric System?

David Osborne

The Monetarists

Tim Robinson

Does Monetary Policy Need an Upgrade?

Aime Sindelar

Thomas Aquinas: An Economist for our Time?

David Osborne

News and Extra

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Ashes to Ashes: Hedge Funds' Fluctuating Tendencies
Much like any team sport, areas of investment
factor in many key elements that help skew the
game in one side’s favour. Among these are field
conditions, weather conditions, team
cohesiveness and a matter of luck (though for
investments, these aptly apply both literally as
well as metaphorically).
The field conditions favoured an array of
hedge funds: lack of industrial regulation and
disclosure requirements coupled with an
enormous sum of financial-backing, spells prime
prospects for any profit-centric organization.
Moreover, with a growing financial sector and an
ever-present effort to reduce potential losses in
market operations, the sun shone ripe with
opportunity.
Though provided with a great business
environment, hedge funds have been plagued
with poor form and horrible fortunes, which for
the most part of their 60-year history have denied
them consistent top honours. Though ascending
to great heights is no easy task, ensuring that the
pressure does not deter you from achieving and
maintaining presidential status is equally vital.
The hedge fund industry’s history is
highlighted by inclinations to reach high, but
cursed with near-death experiences; achieving
prominence in the early 1960s by outclassing
mutual funds by double-digit figures yet
incurring huge losses going into the 1970s.
Emerging yet again during the 1980s-90s with
promising hedge funds, the likes of John
Meriwether’s Long-Term Capital Management
(two years of 40% absolute returns), Julian
Robertson’s Tiger Fund (31.7% absolute returns,
as reported in August 1998), Renaissance
Technologies’ Medallion Fund (averaging 35%
annual returns after fees since 1989) and George
Soros’ Quantum Group of Funds (41% annual
returns after fees for the better part of the 1990s).
Nevertheless, while QGF stirred controversy
within the confines of the Bank of England in
1992 by devaluing the strong pound; the
aforementioned former two (LTCM and Tiger)
collapsed horrendously in 1998 and 2000
respectively.
Today, with the likes of Renaissance
Technologies, Man Group PLC and Soros Fund
Management LLC, hedge funds have acquired a
fair degree of stability with regard to its business
- By Fahad Memon
climate. With performances accumulating assets to
the value of $2.68 trillion by the end of 2007, as
reported by the 2008 Hedge Fund Asset Flows and
Trends Report, the industry appeared set to eclipse
its inauspicious past.
Unfortunately, with the world, and more
specifically the financial sector, at the mercy of a
global crisis: hedge funds were no doubt likely to
meet their share of problems. As banks entrapped
themselves in a sub-prime lending fiasco, hedge
funds became sitting targets; namely by Porsche
and Bernard Madoff.
In late October 2008; to the horror of an
abundance of hedge funds, whom assumed short
positions on Volkswagen shares (expecting future
prices to go down; they in effect opted to sell their
shares at higher prices and reacquire them at
cheaper values), Porsche revealed a 74% stake in
the German motor company. With another 20%
held by the German state of Lower Saxony, hedge
funds anticipated a short squeeze scenario given
only 6% of shares were unassigned. Volkswagen
share prices skyrocketed as numerous hedge funds
sought after covering their short positions and
minimizing their losses. The car manufacturer
subsequently became the world’s most valuable
business (through market capitalization),
regardless of peoples’ demand for Volkswagen
vehicles as the share price exceeded €1,000. Hedge
funds bawled as they hopelessly watched their
industrial infrastructure break down before them.
Bernie Madoff, mugshot (US Department of Justice)
 Nonetheless, with the manslaughter of to protect investors.
Porsche-Volkswagen still in effect, another The hedge fund industry has crumbled yet
calamity arrived in the form of arguably the again, and despite the fact that history illustrates
greatest con in the history of finance. The inevitable resurgence, the question to ask: is this
announcement, in December 2008, revealing Mr. round of trials and tribulations over yet? Or will
Madoff’s business affair, which captivated the mess left behind by Porsche, Madoff and the
countless hedge funds with its low volatility financial sector as a whole result in, as The
appeal, was fundamentally a Ponzi scheme. Also Economist predicts: “perhaps half of all hedge
known as a pyramid scheme; it rewards investors funds [going out] out of business”?
with guaranteed high returns from their own
investment capital. There is essentially no formal Fahad Memon
business activity attached to the generation of
these proceedings as promised gains fuel
successive reinvestments, allowing for antics to 1. The Economist, issue 51 of 2008, p.20,
be carried on for a prolonged period. The list of “The Madoff affair; Dumb money and dull
Madoff’s investors, representing a who’s who of diligence,” paragraph 5, lines 4-6
hedge funds, as well as other members of the
economy; who adamantly flocked into the trap,
sought little reason to suspect the falsified
verisimilitude. Considering that a former
NASDAQ chairperson was running the ship,
who would question the undertakings? Certainly
not the U.S. Securities and Exchange
Commission (SEC), whom felt no sense of
unconventionality as pertained to Bernard
Madoff’s money-making procedures despite
countless ‘red flags.’
Among the hedging victims was AIA
(Access International Advisors), which suffered
an incredible $1.5 billion, including money
personally invested by fund manager René
Thierry Magon de la Villehuchet. Denoting
feelings of grief and responsibility for losing
such sizeable sums from his highly-esteemed
European clients, de la Villehuchet committed
suicide and was found dead in his office on
December 23rd, 2008.
Counting all other individuals and
entities; ranging from celebrity figures like
Steven Spielberg to financial intermediaries,
such as HSBC, and foundations, like New York
Law School (via Ascot Partners), Madoff’s asset
management operations have caused $50 billion
worth of damages. At present Bernard Madoff
faces a lengthy 150-year prison term and $170
billion forfeiture of wealth.
A conspicuous scar has been left on the
reputation of many high-profile hedge funds the
like of Man Group and Tremont Capital
Management whom “charge whooping fees…
largely on the basis of their ability to pick out
clever people to manage their clients’ money.”1
With recent overwhelming debacles, their
unregulated freedom may also be under threat
with the SEC seeking to continue to its aim for
implementing further laws for disclosure in order
Route 66: The Problem of American Infrastructure
"Sixty-Six is the path of a people in flight"
- 'The Grapes of Wrath', Steinbeck
"The Mojave Desert is almost frightening...There is
something infinitely wearying about seeing one summit
after another prove to be an illusion, range replacing
range with ruthless monotony."
- 'The Ballad of Route 66', Christopher Hitchens
"You'll see Amarillo
Gallup, New Mexico
Flagstaff, Arizona
Don't forget Winona"
- '(Get Your Kicks On) Route 66', Bobby Troup
"Once I built a railroad; now it's done. Brother, can you
spare a dime? "
- 'Brother, can you spare a dime?', E.Y. "Yip"
Harburg
Tod Stiles and Buz Murdock drove down it in a
Corvette in the CBS show 'Route 66'; Christopher
Hitchens followed in their footsteps writing 'The
Ballad of Route 66'; and Bobby Troup and Nat
King Cole got their kicks on it. Route 66 is the
iconic American highway which once stretched
from its upper-Eastern point in Chicago, Illinois
down to its lower-Western end in Los Angeles,
California.
It was in 1926 that Cyrus Avery persuaded the
Joint Board of the American Association of State
Highway Officials to route a road through his
hometown of Tulsa, Oklahoma. Avery called this
road, directed across the desolate plains, the 'Main
Street of America', and in its heyday it became the
'path of a people in flight'; the artery of income for
the small stores that dotted its length. Millions
travelled along the road, and thousands made their
living off the travelling mass.
When the route opened it provided a direct
connection between the City of Angels and the
Windy City. Chicago was the embarkation point
for those moving west, and Route 66 the conduit.
Route 66
Route 66 was built linking up a number of rural
- By Timothy Robinson
communities, allowing farmers to transport grain,
and allowing trucking firms to operate across those
areas. Route 66 became a highway in 1927, and
was gradually paved over the next decade. Thanks
to the labour provide by the Great Depression it
became the first highway to be fully paved, in
1938.
The Rise of the Roadside
The highway led to a boom in the economies of
the towns along it, and a dearth of imagery, poetry
and illusions to the American Dream. Along with
Route 66 and the other highways came the
inception of 'Service Stations', of roadside cafes
and restaurants and the necessary maps and guides.
The increase in road travel and vacation led to an
increase in ranches and motels. The 1930s saw a
rise in roadside food stalls, these expanded up until
the wartime period. Most famously perhaps was
the expansion of a small hot dog stand from and
airport in Monrovia, California onto Route 66: In
1940 brothers Richard and Maurice McDonald
built their stand in San Bernardino, California on
Route 66. In 1948 they adapted it to focus sales on
burgers and walk-up sales windows; McDonald's
in its modern form was born.
One obvious implication of the rise of the
highways, was the rise of the roadside petrol
stations. By the beginning of the 30s the standard,
prefabricated designs began to be introduced to the
road system by the Pure Oil Company, the Phillips
Petroleum Company, and later by Texaco. Nick
Freeth and Paul Taylor write in 'Travelling Route
66' of the road 'providing easy access to gas, water
and other essentials.'
Many of the motels along 66 were family owned
operations, made popular first by the affordability
and mass movement in the Depression and
secondly by the post-World War 2 popularity of
the automobile.
Each of these business areas grew up with the
rising importance of the US Highways.
The Economic Slump
The road was built against the backdrop of
America enduring the plight of the Great
Depression.
As mentioned, it was these dire circumstance
that allowed the transition of the road from its
origin to a superhighway. The road surface
changed from gravel to paved thanks to the
labour available during the Depression Era
exodus of mid America.
This never more so than the movement of people
escaping the Dust Bowl (centred around the
Oklahoma and Texas panhandles), migrating to
California and to work along Route 66. When
the winds began to destroy the plains agriculture
The builders of Route 66 were local farmers,
miners and villages who flocked to the road.
The Symbol
Tucumcari, New Mexico plays home to one of
many monuments to Route 66: a sculpture of the
numerals. Tucumcari itself is a monument to US
construction projects. The city grew out of a
'tent city' built by the Pacific Railroad Company
for the construction workers, notorious for gun
fights it was originally called 'Six Shooter
Siding'.
The End of the Road
Route 66 began to die in 1956; President Dwight
Eisenhower signed the Highway Act, and the
famous road was bypassed by a series of strings
of limited access highways which left the small
towns along Route 66 ignored. It took about
three decades for the slow decline as the
interstate highway system was completed.
The bypass destroyed the viability of the stores
along the highway, and of the service stations,
and the once popular motels.
In 1984 Williams, Arizona was the last town
along Route 66 bypassed. In 1986 Route 66 was
decommissioned. The road had left behind it a
changed scenery, the west coast had changed
itself from the frontier to the metropolis with one
of the most dramatic movements of people in the
US history, facilitated, enabled even, by Route
66.
The Newest New Deal
President Barack Obama had spoken of a
National Infrastructure Reinvestment Bank ($60
Billion over 10 years to finance transportation
projects) Now, with the news of recession, the
talk has shifted from just the need to replace
some of the United States' weakened
Sculpture in Tucumcari, New Mexico
infrastructure to the use of the investment as a
stimulus. Placing $25 billion into immediate use
into a 'Jobs and Growth Fund' for infrastructure
they had planned to create a million jobs (by way
of comparison: the US unemployment rose around
2.75 million between January and November of
last year). Even this aim has expanded to stimulus
bill ('The American Recovery and Reinvestment
Act, 2009'), which passed through the American
legislator and was signed into law recently. Of
this bill $111bn will go towards infrastructure,
which Lawrence Summers described as the biggest
investment since Dwight Eisenhower's.
Regardless of the new investment placed into the
US infrastructure to solve its myriad problems
(from bridge collapses to inefficient roads in poor
condition, to insufficient rail capacity) the era of
Route 66 came to an end with its slow redundancy.
In 2009 the funding for the preservation of Route
66 Corridor may end, the 1999 act authorising $10
million to preserve the properties along Route 66
only created funding for a ten year period.
As a travel guide this piece won’t be useful, since
66 wanders across the Texas panhandle and
through a large portion of the Mojave, there are far
more appealing roads. However as a microcosm
of the American experience and the impact and
influence of the open road on American culture
and economy it is without parallel.
For more on the preservation program see:
http://www.nps.gov/history/rt66/prgrm/index.htm
Financial Reform
In July 2007 the collapse of two hedge funds
owned by Bear Stearns, specialised in trading
collateralized debt obligations (CDOs), was a
signal of the turmoil to come in the financial
services industry. The market for CDOs had
become illiquid and it turned out these assets
were overvalued based on mark-to-market
accounting. This resulted in other banks
around the world having to write-down the
value of similar toxic assets. As the
exposures to these assets were slowly
unravelled, they were found to be of very
large proportions. This was possible due to
the leverage undertaken by banks and the
resulting swelling of their balance sheets. In
2007 RBS had a balance sheet of £1.9
trillion, larger than UK GDP.
Through the subsequent months we have
seen record losses by banks in the US and
Europe. What has followed is the failure of
many renowned institutions. Some were
acquired (the most notable ones through
government support), some were liquidated
and others were partly or fully nationalised.
Of the five largest US investment banks,
three no longer exist independently and the
remaining two have become deposit-taking
institutions in order to call on the Federal
Reserve as a lender of last resort. Both in the
UK and US major banks (Citi and RBS) have
become partly nationalised. Furthermore, the
governments on both sides of the Atlantic
have set up insurance schemes for these
banks’ toxic assets. The need to restore
functionality and confidence in the banking
sector is undisputed; however there is much
debate over the method used. There are
strong arguments for alternative measures
such as full nationalisation or the purchase of
the toxic assets, as opposed to the insurance
of these.
Looking towards the future, leaders from
around the world have expressed the need for
reform of practises and regulation of the
industry. Take for example Gordon Brown’s
recent address to the US congress over the
matter. This highlights the importance of a
coordinated effort and the inclusion of so
many countries in the discussion is a clear
- By Joao Marinho
sign of a shifting global balance. Both on an
individual and collective level, certain key
areas regarding the financial system need to
be addressed:
Risk management practises by banks and
other institutions must be scrutinised. Current
models used are clearly flawed and this is
largely attributable to the time-scale they are
based on. Most models only factor in the past
10 years which has been a period of relative
stability. More stringent stress tests must be
carried out, using a larger time-scale, and it is
the responsibility of regulatory bodies, such
as the FSA, to oversee these. Furthermore,
once completed, the results from these stress
tests should be made publicly available.
Financial institutions should now focus on
what was once considered their core services.
We can expect to see a large reduction in
more risky activities, such as proprietary
trading, and a focus on advisory and
traditional products by the investment banks.
The exacerbated risk taking culture was
strongly illustrated by AIG’s financial-
products division. One of the world’s
relatively stable and largest insurance
companies was brought to its knees by
hedge-fund like activity from one division
able to exploit a gap in the regulatory system.
US Federal Reserve Chairman Ben Bernanke
has recently expressed his anger at this.
One of the most concerning areas uncovered by the crisis is that of institutions that are “too large to
fail”. Indeed, under current conditions, failures of companies such as RBS, AIG and Citigroup
would create immeasurable shocks through both the financial services industry and the wider
economy. Bank bonds represent a quarter of US investment grade corporate bonds and the potential
collapse in confidence in the bond market alone would be disastrous. However, given most banks’
recent poor administration, the continued government bail-outs may create moral hazard where the
upside of risk taking is large but there is a limited downside.

Therefore governments and regulatory bodies must work together to establish a system where large
institutions can go bankrupt without the large systemic risks.

Stability in the financial services industry is of paramount importance and essential to the recovery
of the real economy. We are currently going through a painful process and although the flaws and
limitations of our system were exposed, the system’s ability to adapt and change is in itself its
greatest strength. Changes in the coming months are expected. The financial services landscape is
very different from 2 years ago and new reform will re-shape it further.

Joao Marinho is a student at Queen Mary, University of London

WEB 2.0 IS THE FUTURE OF THE CORPORATE WORLD
A ccording to Moore’s Law (1958), the numbers
of transistors on a computer chip would double
every year. What Moore probably did not have in
mind was that the concept would evolve into
something more than just technological. This year
at university has proven that in more than one
occasion. Lecturers are increasingly trying to
emphasize the importance of knowledge
management. Trying to teach students that
technology has come to that point where it is not
just about inventing new technology anymore, but
that there are millions of ways to utilize this
technology and the transformation of Web 1.0 to
Web 2.0 is the full proof of this.
A recent article in the Financial Times
described how businesses have started applying
Web 2.0 to their businesses, but managers tend to
misunderstand what Web 2.0 really is. With more
than 10 million hits on Google, there is still a huge
argument going on about the meaning of Web 2.0.
Some people use it as a marketing model, while
others believe it to be an entirely new theory. The
exact idea of Web 2.0 started at the Web 2.0
conference hosted by O’Reilly Media in 2004.
According to Tim O’Reilly (2005), founder and
CEO of O’Reilly Media, Web 2.0 does not have
any hard boundaries, but rather contains a core with
a set of principles and practices that demonstrate
some or all of them.. Though there are already
many websites that qualify as being part of Web
2.0, analysts believe it can be exploited more
thoroughly. This does not have to mean that Web
2.0 is constrained with ideas that have to do with
the internet alone. The possibilities of Web 2.0 are
phenomenal.
The rise of Web 2.0 has given innovative
opportunities to potential entrepreneurs and
perhaps too many brilliant ideas. The Economist
wrote that venture capitalists may have wasted
money by investing in too many new businesses
that are focused on e-commerce this year. It is not
surprising that with the success of numerous Web
2.0 applications, there will be people who also want
a piece of the pie and even though many will fail
exploiting this concept, it should be very much
stimulated.
One of the concepts that was born together
with Web 2.0 is the Intelligent Exploiter framework
that was completed only recently by two professors
of CASS Business School, Clive Holtham and
Nigel Courtney. This framework tries to describe
the complex skills and roles involved in effectively
handling information, communication and
technology. What is perhaps more important is that
it shows how technology can be more than just new
hardware or software. It can be difficult to
- By Sammy Sung
GTEC 2008, Image by Mike Gifford
via Wikimedia Commons
convince managers that knowledge
management and intelligence exploiting is a
long-term investment that can significantly
improve the company’s position on the market.
The biggest obstacle to knowledge
management is to convince business leaders
that the free-flow of information is not always
a bad thing. Postcodes today, for example,
describe more than just the location of your
house. When employees at the supermarket
type in your postcode, they can tell what you
like to eat, how often you do your shopping,
how much money you spend, etc. These are
important details, it will tell the supermarket
what they should focus on and how much
priority they should give a particular product.
It also explains to employers that perhaps they
should purchase a more diverse range of
products.
The whole idea of using information
should of course not be limited to just
postcodes. Knowledge Management is defined
as the technologies that are involved in creating
disseminating and utilizing knowledge data.
Constantly recording information could help
organisations understand customer behaviour
and segment them into appropriate target
groups. As businesses expand to bigger
organisations, it is often the micro management
that they lack. Occasionally it lies in the tiny
details like knowing and sharing information
about customers that can improve the company
considerably and as the papers have been
collectively suggesting, managers have
understood this and are slowly changing.
 Web 2.0 has caused business to quietly revolutionize organisations from within, but it has
started to catch the attention of business leaders. According to David Bailey, of PA
Consulting, Web 2.0 has already evolved into a tool that is has proven to be powerful in
product development areas (2008). The concept has received positive feedback from
customers as waiting time has been reduced with the use of wikis. Many organisations use
social-networking sites as a tool for marketing to reach a wider audience. Record labels use
YouTube to evaluate how successful a song is and how attractive an artist is to a new market.
For many artists coming from East Asia, it is considered a massive challenge to enter the US
market. Therefore having a powerful and attractive marketing strategy could make a
difference. Utilizing websites like Youtube could then prove to be a worthy instrument on
testing popularity.

Executives may find that Web 2.0 is already being implemented into their organisations
without their knowing. It has proven itself to be effective and powerful to the corporate world.
Soon it will be necessary for businesses to implement Web 2.0 as it becomes impossible to
compete without. At the current rate, technology will begin their next step towards Web 3.0
which Jonathan Richards of The Times describes as “giving the internet itself a brain”.
Intelligent exploiting will soon become crucial for organisations to keep up with customer
demand and it is up to the executives utilize that and maintain their position on the market.

Sammy Sung is a Business Studies Student of Cass Business School, and the current
President of the Economics Society.

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Why, Unlike the Rest of the Civilised World, has the United
Kingdom not Adopted Metric Road Signs?
2.0 F C W - By David Osborne

The United Kingdom, just like every developed

country, excluding the United States, is officially
metric, so why do road signs show miles, yards and
feet, although designed and manufactured in
millimetres? The metric system was developed to
allow for an international standard in weights and
measures. This article aims to ascertain why the UK
continues to be an anomalous example of a metric
country by keeping its road signs imperial. It will
assess the estimated costs of converting the road signs,
the economic benefits of using a single system of
measurement versus the economic costs of using
imperial signage whilst being officially metric. It will
also compare Ireland’s metric switchover in 2005 to
the lack thereof of the UK. This article will also ignore
the failed target to convert road signs by 1975.
There are varying estimates of how much a switchover
to metric signage would cost. According to the White
Paper on Metrication “The most expensive operation
within the field of public administration will be the
conversion of all road signs showing miles (or mph) to
Source: UKMA (2006), DfT(2006)
kilometres (or kph). The cost of conversion of all road This graph compares the estimates of the
speed signs is likely to be about £2m and of all road conversion costs with the total expenditure on
signs indicating distance appreciably more”. roads in the year 2006-2007. Notice that the
(Department of Trade and Industry, 1972 paragraph UKMA’s lower estimate is almost negligible
107). In today’s prices (Using the Retail Price Index) compared to total expenditure.
that estimate is around £21 million. Since then, the only for England, however the estimates
Department for Transport (DfT) and the UK Metric are for the entire Kingdom. Therefore,
Association have both made estimates about the cost adding the Scottish and Welsh road
of converting road signs. The DfT estimated that the expenditure would lower the percentage of
cost would be between £565 million and £644 million. expenditure for both estimates.
(Department for Transport 2006) The UK Metric The Republic of Ireland was in a similar situation
Association however estimated the cost of the as the UK until January 2005, when they converted
switchover to be significantly less, approximating their road signs to metric. Ireland’s Department of
costs between £31 million and £160 million (Paice Transport (DoT) estimated that the switchover
2006). In the period 2006-2007, expenditure on roads would cost € 11.5 million. In reality, the switch
was approximately £7.01 billion for England alone had a price tag of € 10.5 million (€1 million less
(Department for Transport 2008). The UKMA than the estimate). (Paice 2006). In addition to the
estimates amount to 0.49% and 2.3% of the DfT’s switchover costing less than expected, the
total expenditure on roads, whilst the estimates from conversion day went with no hiccoughs. The
the DfT amount to 8.06% and 9.19% of total Republic of Ireland is much smaller than the UK in
expenditure. The graphs included illustrate the terms of population and land area, so converting
previous figures. road signs there is inevitably going to be cheaper
There are facts about these estimates that need to be than in the UK. However, the cost-effective
taken into consideration: approach taken by Ireland towards metrication of
• The estimates made by the DfT were made signage could be emulated by the UK.
based on previous estimates in 1989. The UK’s reluctance to switch over to metric units
• The Estimates made by the UKMA are based on road signs has many implicit as well as explicit
on the 2005 Irish switchover. costs.
• The figure for total expenditure on roads is
 Source:UKMA (2006) & DfT (2006)
This graph compares the difference in estimates, between the UK Metric Association and the
Department for Transport.

An implicit cost of not going metric is the waste of the metric education, which has
been taught in British schools since 1974 (Paice 2004). According to the British
Weights & Measures Association, “By the time most young people reach their 20s,
metric education has been replaced by the practical experience of British units”.
(British Weights and Measures Association 2001). This statement is reality. Education
is a benefit in kind and therefore is a burden of the taxpayer. The fact that a metric
education is all but useless on British roads means that the taxpayer’s money is being
wasted. A less subtle cost of using imperial signage is the fact that they have the
potential to result in, especially among the European drivers. There have been
countless news reports of Heavy Goods Vehicles from the Continent striking low
bridges where signs are exclusively imperial, because lorry drivers from the continent
do not understand imperial measures. This costs millions in repairs to bridges, railway
lines, roads and Lorries each year and in extreme cases has resulted in injuries. (UK
Metric Association 2008).

There is no good reason why Britain has not adopted metric road signage. There is
poor excuse that the British population incorrectly view the metric system as a
European Union imposition on British culture. The cost of conversion is also
perceived to be a deterrent to adopting metric signage, but the longer it is left, the
more expensive it will become. The fact that the metric system is the official system of
measurements in the every country in the world (excluding Burma, Liberia and the
United States,) means that it is inevitable that Britain will have to convert road signs to
metric at some point in time (As will Burma, Liberia and the US). Furthermore, the
fact that the Republic of Ireland, Australia, New Zealand and Canada have recently
converted their road signs to metric must infer that there are economic benefits from
the switchover. By clinging on to imperial signage, the UK is doing nothing but
hindering the benefits of being a metric nation. In conclusion, the UK still uses
imperial road signs because there has been no thorough up-to-date research into the
matter, in addition to general political ignorance.

David Osborne is an Economics Student at The City University, London

 The Monetarists: The Rise of Monetarism
- By Timothy Robinson

“Inflation is always and everywhere a monetary existed a natural rate for unemployment, as such
phenomenon. To control inflation, you need to control monetary policy had only a short term impact on the
the money supply” unemployment rate. Worse, to maintain a rate of
- Milton Friedman unemployment below that the of natural rate would
require ever accelerating rates of inflation. This theory
“At last, I have discovered the cause of Christmas!” had pre-empted the occurrence of data supporting it.
- Nicholas Kaldor (Noting that money supply increases in December and
declines in January)
Both this narrative of the power of monetary policy from
Friedman and Schwatz and the existence of a natural
rate of unemployment allowed a reassessment of the use
T o cover the entire history of the development of of fiscal and monetary policy. However, this all
Monetarism would be too grand a scope for this article, occurred against a backdrop of high fiscal expenditure,
so it the really should be titled Friedman's Monetarism, and the rejection in practice of the monetarist precept to
or a short history of Modern Monetarism from 1956. have stable, predictable monetary policy.
Why 1956? That year Chicago Economist Milton
Friedman published a series of essays, one of which he The US had a series of arguably Keynesian Presidents,
wrote titled "The Quantity Theory of Money: A JFK, Johnson and the "Great Society" programmes
Restatement." Friedman set out a version of the QTM, (Medicare, Medicaid, the War on Poverty), even to
which in essence meant that an increase in money Nixon's famous, oft misquoted, statement: "I am a
supply would increase spending, people would not hold Keynesian now in economics". Less memorable
the additional money in idle balances. Friedman saw perhaps than Friedman's "In one sense, we are all
the relation between money and prices as a uniformity Keynesians now; in another, nobody is any longer a
on the order of that found in the physical sciences. He Keynesian". The same year as this quote was written in
aimed to save the QTM from the "atrophied and rigid Time magazine, 1965, saw the US Government
caricature" of it; to restore the version that had been operating an expansionist policy, Federal spending
maintained in Chicago. reached a then record high of $121 billion.

Money Matters Meanwhile the UK saw the publication in 1959 of the

Two reasons for the growth of Monetarism: one stated Radcliffe Report, rejecting the prescription of a steady
by Friedman in his 1967 Presidential Inaugural Address growth in money supply (the k percent rule), it set the
to the American Economic Association (AEA): the "re- tone for monetary policy in the UK through the 1960s.
evaluation of the role money played from 1929 to 1933".
What Brad Delong called the emergence " from the old Political Monetarism
oral Chicago monetarist tradition of the Great I will end on a short description of the political influence
Depression era". Not stated in the AEA address is the of Monetarism throughout the 70s and 80s. Delong has
role Friedman himself played in this. His work with argued this branch of monetarism differed from its
Anna Schwartz A Monetary History of the United States Classical Monetarist cousin: The political form of
from 1867 - 1960 was an ambitious project to generate a Monetarism argued velocity of money was stable;
series for the stock of money throughout the period; money stock was the only required variable, and that
early data for the stock of money was not available. fiscal stimulus would not boost demand, unless financed
This piece, so wrote the journalist David Smith, had the by printing money. In 1976 Jim Callaghan told the
sense of reading a 'whodunnit'. Labour Party conference that Keynesian demand
management was finished, and then the late 70s and
The second was the content of the address itself: what early 80s saw the elections of Thatcher and Reagan and
monetary policy can and cannot do. Friedman examined the concept of Keynesian fiscal policy lost its lustre
the negative relation between unemployment and amongst the political class. Thatcher, who said at the
inflation, famously known as the Phillips Curve. This Conference in 1968 that the essential role of government
relation, which held in the research of Phillips, was managing money supply, was able to put this into
Samuelson and Solow, began to disappear in the 1970s. practice.
Friedman outlined the theory of a long-run Phillips See Also:
curve where the trade-off no longer existed; where there 'The Rise and Fall of Monetarism', David Smith.
'The Monetarist Counterrevolution', Brad Delong
DOES MONETARY POLICY NEED AN UPGRADE?
The current economic crisis is being discussed
over various types of media. However, most of
the time it is difficult to understand what
solutions have been applied to solve what and
why. In particular, it is hard to understand why
the governments decided to bail out only the
banking industry and no other. Why has the
interest been cut to 1.5%? The current
economics crisis is complicated until you listen
to what experts say about it and read the
textbooks to get detailed explanations of
economic elements playing a key role in
determining our fate during this uncertain time.
I attended a conference that discussed the
subprime turmoil and the speaker pointed out
that the current economic crisis will never be
resolved wholly by fiscal policy but by monetary
policy. The conference was held at the time the
UK government had just promised to reduce the
VAT to 15%. I did not want to believe that the
speaker was just against the government’s
decision but I left puzzled. The reason I was
confused was that the monetary policy already
applied to solving the current economic crisis,
had not yet given any positive result. The first
banking bail out had already been granted and
the UK base interest rate reduced from 3% to
1.5% and nothing had changed. More often, we
are told it will take time for the effect of the bail
out to show but as I write this, a second cash bail
out is to be issued to the banks!
I find out that the monetary policy’s functions
are to control money supply, set the interest rate
and ration the amount of credit. Rationing the
amount of credit involves a central bank
restricting banks' total lending to a certain
amount, or reduce lending to riskier customers or
for non essential purchase and control the level
of hire purchase credit. This function was
abandoned by the UK government since it
prevented free competition in financial markets.
Consequently, it can be concluded that the only
elements of the monetary policy to determine our
fate in this crisis are the money supply and the
interest rate.
An increase in the money supply reduces the
base interest rate in the money market and as a
result investments are increased. Furthermore,
the increase in money supply increases real
balances, providing surplus cash to consumers
- By Aime Sindayigaya
who can start spending, as a result businesses
activities increase and the demand for labour and
capital rises. One problem with the increase in
money supply is that when it is not well controlled
it may lead to inflation. It would be fine if and
only if our government could apply the same
strategy and increase the money supply such that
spending increases, without rising the rate of
inflation. What does it take to increase the money
supply then?
The Bank of England in Threadneedle Street, London
England
One of the techniques to increase the supply of
money suggested in the economics book, is the
central bank to inject the money in the banks. By
October 2008 the UK government had injected
approximately £37 billion into the banking
industry in the form of a bailout. Part of the reason
such a large amount of money is only granted to
the banking sector and not to any other sector, is
because the banks have the capacity to expand the
money supply. In fact, when banks receive extra
cash from the Central Bank, they use the fund as a
basis of credit creation. While this sounds simple,
what are the implications of the second element of
the monetary policy: interest rates?
Textbooks suggest that banks’ willingness to take
the extra money offered by the central bank
depends on the interest rate the central bank
charges. The lower the base interest rate, the more
banks are willing to accept the fund. Each time
money is injected into an economy, the supply of
money is increased whilst the demand for money
is reduced; and a new equilibrium in the money
market is formed.
So you can understand the reason for reducing view, banks are concerned with the health of their
the base interest rate when the bail out was balance sheet; that is why banks are very cautious
granted in October 2008. The reduction of the of who they lend to. Even lending between banks
base interest rate by the central bank is not profit themselves is difficult as the LIBOR is above the
oriented; it is a matter of economic mechanism. normal estimated market level. In fact one of the
Sometimes the base interest can be reduced by solutions being studied at the moment by
the monetary policy committee with the governments worldwide is to buying all toxic
objective of increasing borrowing within an assets from banks. There is a hope that this action
economy. In this situation the interest rate is cut will adjust the banks’ balance sheet and prompt
and then the central bank carries out the them to resume lending.
necessary operations to adjust the money supply In conclusion, it is hard to convince people that
so that the equilibrium on the money market normal monetary policy will sort out the current
reflects the newly set base interest rate. This economic crisis. There is a need for the banks,
situation happened in the UK, in November, governments and economists to cooperate on a
December 2008 and January 2009, the interest global basis and design a strong monetary policy
rate was cut to 3%, 2% and 1.5%. The reduction framework which can handle extreme situations,
in the base interest rate also means that the and is still suitable for our modern, innovative
London Interbank Offered Rate (LIBOR) used financial sector.
for banks when lending to each other, is
presumably reduced. In normal economic times Aime Sindayigaya is a Postgraduate Student at
the LIBOR is set 0.1 or 0.2 above the base City University, London.
interest; meaning that at the moment the LIBOR
should be 1.6% or 1.7%, but instead it is 2.17%.
(At the time of writing)
The action taken by the government to bailout
the banks is justified as a way to stimulate
spending in the economy through injecting
money into the banking industry, with a hope
that banks will pass on the fund to consumers as
credit. There has not been any hesitation in the
banks taking the money offered and the Bank of
England cutting the base interest rate to stimulate
borrowing and investment, but yet the banks are
not lending. The question we may ask ourselves
is why the banks are not willing to lend?
One reason might be that banks want to operate
on higher liquidity ratio particularly if they
believe people will want to withdraw cash. This
could be the situation we are in at the moment as
banks fear that what happened to Northern Rock
may happen to them. As a result banks have
probably chosen to hold a bigger portion of
liquid assets in the event of a bank run. Another
possible reason is that banks do not want to be
declared insolvent and end up like Lehman
Brothers; as a result banks must ensure an
adequate and guaranteed level of assets is
maintained against their liabilities by increasing
their deposits and not lending. Many British
banks have written off credit generated from the
subprime lending, hence their balance sheets
have been heavily affected. Therefore, the extra
fund received from the Bank of England may not
be used for credit creation but to fill in the gap in
the banks’ balance sheet created by the losses
generated from the subprime business. In my
St. Thomas Aquinas: was he an economist of our time?
- By David Osborne, City University

Usury, which is condemned in the Bible,

Torah and Koran, may be as far as many
minds go when it comes to connecting
religion and economic principles. However
religious figures have had much more
influence on the economic principles of our
day than we may wish to believe. A notable
figure in this respect is St. Thomas Aquinas,
who was an Italian Dominican priest.

We’re familiar with Adam Smith’s works on

the division of labour, but did the principle of
division of labour really begin with Smith? In
“Summa Theologica II”, (published five
hundred years before Smith’s) “The Wealth
of Nations,” Aquinas states:

“One man does not suffice to perform all

those acts demanded by society, and
therefore it is necessary that different persons
be occupied in different pursuits.”

This view is one built upon Smith, in order to

form his view on the subject. It highlights the
similarities between economic thinkers
throughout time.
However, Aquinas’ “economic” perspectives
were not all in tandem with those of famous
economists such as Smith. For example;
Government Intervention, where Smith argued
that each person acting in selfish greed
benefits the economy on a whole, therefore
government intervention was absolutely
unnecessary. Aquinas’s view differed
considerably. He believed that government
had a duty to regulate the economy, but only
within reason.
In the wake of the Credit Crunch, we can
see the effects of both types of economy.
The “selfish” Economy as according to
Smith, has taken a severe beating, and
governments are beginning to use the
theory of regulation brought forward by St.
Carlo Crivelli's depiction of St. Thomas Aquinas
from the Demidoff Altarpiece c. 1476
Thomas Aquinas. 1
David Osborne is an Economics Student at
the City University, London.
Notes:
1
Thomas Aquinas: A Pioneer in the Field of Law &
Economics, Robert W. McGee, Barry University
Published in Western State University Law Review, Volume
18, No. 1 (Fall, 1990), 471-483.
2 St. Thomas Aquinas, Quaestiones quodlibetales vii. 17; cf.
Summa Contra Gentiles iii 132; Contra Impugnantes Dei
Cultum et Religionem v. 27, as quoted in Dino Bigongiari,
The Political Ideas of St. Thomas Aquinas ix (1953).
News Summary
Patrick Minford speaks at the University
The former adviser to the Treasury Sir Patrick
Minford, Professor of Economics at Cardiff
University, spoke on the Causes or and the
Response to the Credit Crisis in a talk titled
"Looking up while going down: The Causes and
Consequences of the Current Economic Crisis"
The Schumpeter Online
The Schumpeter is now online at
theschumpeter.blogspot.com
The Economics Society has also launched a
Facebook group to provide immediate updates on
events to members. Join us at:
www.facebook.com/group.php?gid=31445513286
Hearsay and Anecdotes
Thinking Inside the Box
The Bentham Project launches a blog.
The famous 18th Century economist Jeremy
Bentham has been reborn courtesy of a new blog
from the Bentham Project. Jeremy Bentham will
offer his thoughts through the website hosted by
the Nature Network London. Look for an
introduction to the new fortnightly blog at:
www.ucl.ac.uk/Bentham-Project/info/blog.htm
"Pay what you want"
London Restaurant runs Freakonomics scheme
The Little Bay restaurant in London ran a scheme
offering patrons the chance to decide how much
the meal is worth. The owner, Peter Ilic, provided
customers with no cheque giving them the
opportunity to decide whether to pay between a
"penny and 50 pounds".
Pictures of the Recession
Slate Magazine looks for the iconic images of this
recession to go alongside the breadlines and wagons of
the Great Depression.
www.slate.com/id/2211959/
Any Comments/Contributions, contact: econsoc@city.ac.uk
Quotes
" If the issue was to stabilize the financial
system and prevent a collapse, and get by the
point where the market is rattled wondering
which big institution will go down next, I think
on a scale of one to 10 we are very close to 10."
- Henry Paulson, US Treasury Secretary.
(In a comment to the WSJ CEO Council on
the 17th of November 2008. On the 23rd of
November Citigroup was given a $20 billion
direct investment and the government backed
$306 billion in loans and securities.)
"[T]he objective ought to be increased protection
against systemic risk, and increased protection
for consumers...So it seems to me that you have
to find the optimum balance between increasing
protections against risk and maintaining the
benefits of market-based systems, as opposed to
the objective of minimizing or even eliminating
risk"
- Robert Rubin, Former US Treasury
Secretary, at the same event.
"Beneath the surface of overall stability in the
UK economy lies a remarkable imbalance
between a buoyant consumer and housing sector,
on the one hand, and weak external demand, on
the other... a large negative demand shock might
result in an undershoot of the inflation target for
some considerable time."
- Mervyn King, Governor of the Bank of
England, in a speech given to the London
School of Economics in November 2002.
"The SEC continues to roar like a mouse, and
bite like a flea...I gift wrapped and delivered
the largest Ponzi scheme in history to [the SEC],
and somehow they couldn't be bothered to
conduct a thorough and proper
investigation...[The SEC is] both a captive
regulator and a failed regulator"
- Harry Marcopolis, a Private Fraud
Investigator who wrote a report to the SEC
titled: "The World's Largest Hedge Fund is a
Fraud", in his testimony to Congress in the
Madoff Hearing.