Ha-Joon Chang - Economics - The User's Guide

In the US, the share of manufacturing in GDP fell from 17 per cent to 12 per cent in current prices between 1987 and 2012. But, in constant prices, it actually rose a little, from 11.8 per cent to 12.4 per cent during this period. Between 1990 and 2012, the share of manufacturing in Switzerland’s GDP fell from 20 per cent to 18 per cent in current prices. But when calculated in constant prices, it actually rose from 18 per cent to 19 per cent. The Swiss data are from Eurostats. The US data are from the US government’s Bureau of Economic Analysis (BEA).

In Finland (1975–2012), the share in current prices fell from 25 per cent to 17 per cent but the share in constant prices rose from 14 per cent to 21 per cent. In Sweden (1993–2012), the corresponding figures were a fall from 18 per cent to 16 per cent and a rise from 12 per cent to 18 per cent. The data are from Eurostats.

Between 1990 and 2012, the share of manufacturing in the UK ’s GDP fell from 19 per cent to 11 per cent in current prices, representing a 42 per cent decline. It fell from 17 per cent to 11 per cent in constant prices, representing a 35 per cent decline. The data are from Eurostats, issued by the European Union.

All the data are from the World Bank.

For a more in-depth discussion, see G. Palma, ‘Four sources of “de-industrialisation” and a new concept of the “Dutch Disease”\'7d’, paper presented at the EGDI (Economic Growth and Development Initiative) Roundtable of the HSRC (Human Sciences Research Council) of South Africa, 21 May 2007, downloadable at: http://intranet.hsrc.ac.za/Document-2458.phtml.

The physical intensity of a natural disaster is much less important than the adaptability of the human community that it affects in determining its impacts. For example, the 2010 earthquake in Haiti, which killed over 200,000 people and has scarred the country for a generation, was only 7 on the Richter scale, which would have killed no more than a handful of exceptionally unlucky people in Japan.

The GDR framework identifies the share of burden for each country in reducing greenhouse gases to prevent the potentially catastrophic ‘two-degree warming’, considering both historical responsibility for global warming and capacity to bear the burden of adjustments.

See Aldred, The Skeptical Economist , Chapter 5, for further details.

Our perception of the risk of nuclear power stations is distorted by the fact that nuclear accidents have very high profiles in the news media, not least because they usually happen in rich countries. But, unbeknownst to the outside world, at least a few thousand coalminers die in accidents every year in China alone. We don’t even know how many people have died from pollution from coal burning over the last couple of centuries all over the world. The 1952 Great Smog of London is said to have caused anything between 4,000 and 12,000 extra deaths, but that is just one – admittedly by far the worst – of dozens of years when Britain suffered from coal pollution. Today, many people in cities in China, India and elsewhere die prematurely from respiratory diseases caused by coal pollution. If we add all of these ‘silent deaths’ up, we can easily say that coal has ‘killed’ far more people than nuclear energy, even if we accept the most extreme – and highly disputed – estimates of one million extra deaths caused by the Chernobyl disaster (mostly through cancer due to increased radiation).

It is important to note that depositors of a bank include its borrowers. When you borrow money from a bank, it opens a deposit account for you, credited with the agreed sum, rather than paying you that amount in cash. So, by borrowing money from a bank, you also become one of its depositors.

This special kind of confidence trick is actually used quite often in economic management. Another prominent example is the use of government deficit spending in a recession. The government initially spends ‘money it does not have’ and runs a budget deficit. But the spending increases demand in the economy, which stimulates business and makes consumers more optimistic. If enough businessmen and consumers begin to form positive expectations for the future as a result, they will invest and spend more. Increased investment and consumption then generate higher incomes and thus higher tax revenues. If tax revenues increase sufficiently, government deficit may be eliminated, which means that the government had the money that it spent after all.

The original GM, established in 1908, produced Buick. Between 1908 and 1909, it acquired a series of companies producing Oldsmobile, Cadillac and other brands, as well as what subsequently became its truck division. It acquired Chevrolet in 1918.

This merger did not work – to the extent that it was described as ‘the biggest mistake in corporate history’ by the current Time-Warner CEO, Jeff Bewkes – and was undone (this is known as ‘de-merger’) in 2009. AOL ’s business failed to grow as predicted at the time of the merger (it was at the height of the dot.com bubble) and there were irreconcilable differences between the corporate cultures of the two companies.

The numbers in their names denote the number of companies whose share prices make up the index.

Martin, Money , p. 242

When commercial banks deal with individuals, taking deposits from them or lending them money to buy houses or cars, they are said to engage in ‘retail banking’. When they deal with businesses – lending them money, taking deposits from them – they are said to engage in ‘corporate banking’.

Even though people, including myself elsewhere, have called both these products ‘financial derivatives’, it is more accurate to separate the two types of products for reasons I explain below.

Things got more complicated over time. CDOs-squared were created by pooling tranches from CDOs and structuring them in the way described above. And then CDOs-cubed were created by creating a structured debt product out of tranches of CDOs-squared. Even more high-powered CDOs were created.

A lot of what I say about derivatives is derived from B. Scott, The Heretic’s Guide to Global Finance: Hacking the Future of Money (London: Pluto Press, 2013), pp. 63–74 and my personal discussions with its author. J. Lanchester, Whoops! Why Everyone Owes Everyone and No One Can Pay (London: Allen Lane, 2010), Chapter 2, provides a less technical but an insightful explanation.

I thank Brett Scott for suggesting this example. In this sense, we can say that securitized debt products are derivatives in that they ‘derive’ their value from underlying assets. However, in the same vein, we can say that shares are also derivatives, as companies also have ‘underlying’ assets, such as physical equipment and other assets (like patents and other intellectual properties). Thus, all distinctions between different types of financial assets are in the end fuzzy.

Scott, The Heretic’s Guide to Global Finance , p. 65.

Scott, The Heretic’s Guide to Global Finance , pp. 69–70.