All the usual characteristics of a barter system were seen. For one, almost all deals were bilateral. But given that not all goods bartered could be used directly, additional barter deals were created to garner goods that could be used directly. Complicated barter chains were created, resulting in substantial problems for the Russian economy.

Distortions in prices and the true value of output occured, though this could also be said to have been an advantage as production and employment were maintained in economically unfavourable conditions. Transactionary flows were easily hidden from tax authorities given the general informality of barter. Weaknesses in the Russian financial sector were exacerbated, with both short-term and long-term loans severely constrained.

However, the barter system did bring a couple of benefits to the transiting Russian economy. Besides the positive effects on production and employment outlined earlier, favourable effects were seen on Russian firms themselves. The bankruptcies of many Russian firms were avoided as trading continued through barter even as mountains of debt lay unresolved.

But one of the most interesting parts of the issue is that barter was (and is) not exclusive to domestic trade. Consider the recently rekindled proposed exchange of 250,000 tons of Thai raw chicken for 12 Russian SU-30 MK jets. If successful, we would very well have to admit that so many years after cash as a means of exchange was popularised, barter can still coexist side by side.

Although I’ve actually finished Jeffrey Sachs recent (relatively, at least) book, The End of Poverty, I don’t think I’m anywhere near the mental state required to write a full review on it. So… this post will just contain my initial review of the book.

Now, I aim to make all my posts complete within 400 or so words, so don’t expect a lengthy critique of The End of Poverty. Anyway, here it is.

I’ll be honest and say outright that I found the book to be a very dry and perhaps even unemotional textbook on how humanity can end extreme poverty by 2025. Even when Sachs attempts to illustrate his points through his extensive experience as an advisor to poor governments and head of Columbia University’s Earth Institute, I found that there was little that I could classify as humour or wittiness.

Of course, I would be the first to admit that the topic itself - poverty and its long-awaited eradication - is intrinsically stale. Dryness aside, Jeffrey Sachs has written a compelling manual on how governments should “think big” and fulfill their obligations towards ending poverty. Detailed points, buffetted by well-researched facts, provide most of the necessary substantiation.

However, while Sachs is highly critical and lucid on many points, including what should work towards the economic development of the world’s poorest countries, he seems to write based on sheer idealism when it comes to the various problems that we will face in getting the engine started and maintained. As the Economist has noted, the End of Poverty is

…briefly marred by some pretty soft-headed stuff about the evils of unilateralism, the war in Iraq and the moral and intellectual failings of the Bush administration. Mr Sachs states these views as though they follow from his hard-learned economic wisdom—which of course, whether right or wrong, they do not. On the other hand, Mr Sachs is far too kind to anti-globalisation activists, applauding their fervour and conviction while gently disagreeing with their policy ideas, which in fact he regards as ignorant and ruinous (why not extend the same courtesy to the Bush administration?).

So, how should one judge the content of this book? Well, I would rate the book’s detailed and perhaps even, fervent, description of world poverty very highly, but drop that rating to a far more modest level when considering the various prescriptions (ranging from the practical to the almost ridiculous) Jeffrey Sachs suggests.

However, as this is just my initial review of the book, I have no intention of giving an overall rating just yet.

For more reviews of Jeffrey Sachs’ The End of Poverty, visit metacritic.com.

You can purchase the book, The End of Poverty: Economic Possibilities for Our Time, through Amazon.com (aff. link).

Speculative flows have become one of the most fearsome forces in the world - capable of delivering great currency instability and financial crises, especially at times of economic uncertainty. In our region alone (South-East Asia), we’ve experienced the 1997 Asian Financial Crisis that started in Thailand, and eventually consumed most countries in Asia. The Russian rouble’s meltdown in 1998 and the Argentinian crisis in 2001 are more recent, but possibly less devastating examples.

It is in the wake of this powerful speculative force that the Tobin tax has been considered. In 1978, James Tobin - a Nobel-prize winning economist - first suggested a small tax on foreign exchange transactions, that would be applied on most, if not all, major economies. The tax would just be tiny one, about 0.1 to 0.5 percent, payable on all spot or cash exchange rate transactions, to deter speculative activity. It was argued that this would make speculative transactions more costly and would therefore, reduce the volume of such transactions - leading to possibly greater exchange rate stability.

There is another critical advantage from the Tobin tax: Substantial revenue (in the hundreds of billions annualy) which could be used towards internationally-agreed purposes, including poverty eradication. Such a large amount of money would easily fulfill Jeffrey Sachs’ requirements, laid out in his latest book, The End of Poverty. Last but not least, the Tobin tax would return an element of control over the financial markets to the various governments - though little as that may be.

But if the Tobin tax was perfect, we would probably have seen it implemented by now. There are problems with both the tax itself and the implementation process. Firstly, consider the magnitude of the tax. All parties agree that the tax should be minimal - easily less than 0.5% - but considering that currencies have devalued by up to 50% during recent crises, would such a small penalty even sting? But raising the Tobin tax would result in penalising conventional business activity, so there doesn’t seem to be a solution from this end.

What about the most traditional of taxation nightmares, tax avoidance? Financial instruments are now so sophisticated that the only way to ensure that speculators are locked solid would be taxing every sort of financial instrument available today. This would mean taxing derivatives like foreign exchange futures, which would generally result in serious management problems as no money is actually exchanged on the spot. This administration problem actually holds for even the general implementation of the Tobin tax given the large number of foreign exchange markets and transactions.

But even with all the negative notions attached to the Tobin tax, it has not been denied that the tax would be a useful one if implemented correctly. The problem is the lack of international support and cooperation towards its introduction. Even global organisations like th International Monetary Fund (IMF) have not declared their support for the idea. As such, it is likely that we will have to live with the current currency instabilities for a long time to come.

But that doesn’t mean that your O-Level calculus course (yes, that’s all you’ll need) should go wasted. It really isn’t difficult to mathematically derive the MPC from a consumption function. So, let’s try it.

1. Consider a simple consumption function of: C = 100 + 0.7Y, where C = Consumption and Y = Income.
2. Remember that in mathematics-speak, the MPC can be considered as the rate of change of consumption with respect to income. So, this means that the MPC can be found be differentiating the consumption function.
3. Thus, formula-wise, MPC = dC/dY.
4. Using the formula on the function in (1), you will get MPC = 0.7.

Yeap, that’s it. Simplistic perhaps, but what do you expect from something this simple?

The horizontal axis indicates the percentage of the population, from poorest to richest, while the vertical axis indicates the percentage of national income that a given percentage of the population receives. Therefore, complete equality is indicated by a straight 45 degree line through the origin, as any point on the line will correspond with a given percentage of the population earning the same percentage of national income, e.g. the poorest 50% earning 50% of national income.

But generally, lines are exceptions when it comes to the Lorentz curves. It’s far more realistic for Lorentz curves to actually look like curves that point “inwards”, i.e. towards the bottom right, as that indicates a non-zero degree of inequality. In a situation of perfect inequality, where national income is completely channeled to 1 person, the curve would look like a reverse ‘L’.

Normally though, the curves themselves are insufficient for use as it isn’t really conclusive (or easy, for that matter) using one’s eyes to judge different Lorentz curves. Of course, the curves can be expressed as mathematical functions (e.g. quadratic functions), making it possible to integrate the area under the curves, and thus, allowing us to compare areas as a means of comparing the degree of inequality. But there is a more effective and popular way of precisely measuring the degree of inequality indicated on a Lorentz curve, and that is the Gini coefficient.

But an explanation of the Gini coefficient is probably too long to fit in this post, so I’ll leave it for another one.

John Sloman’s Economics (5th Ed.) comes with a few interesting examples. Let me quote just one:

If bank advances are a good indicator of aggregate demand, the government may choose to control bank lending. But as soon as it does, bank lending will become a poor indicator. If people’s demand for loans is still high and bank loans are becoming difficult to obtain, people will simply go elsewhere to borrow money. If you regulate part of the financial system, you are likely to end up merely diverting business to other parts which are unregulated.

Note: Bolded emphasis is my own.

I found Goodhart’s Law (and its applications) rather interesting (though seemingly obvious), but that’s primarily because I wasn’t taught this in A-Level Economics. But more interesting perhaps, is the possibility of a Reverse Goodhart’s Law:

It has been waggishly asserted that the stability of the economic recovery that took place in the United Kingdom under John Major’s government from late 1992 onwards was a result of Reverse Goodhart’s Law: that, if a government’s economic credibility is sufficiently damaged, then its targets are seen as irrelevant and the economic indicators regain their reliability as a guide to policy.

Now, if you were to ask me how useful this tidbit of information is going to be later, well…

(1) John Sloman. Economics (5th Edition).

But while this topic is probably the very first one any economics student will encounter, few actually pay attention to it in lectures, or bother to even glance at the corresponding topic in textbooks. Heck, I know I didn’t bother at least. To me, economics, then, was an academic subject of its own, separate from history and moral studies (unlike pre-Smith and Marshallian times), that focused exclusively on everything money-related. Yes, this is the most oft-used, yet incomplete definition applied to economics.

So, what is economics?