.: The Red Brick – Dubai College's Student Newspaper :.

There seems to be no end in sight to our economic woes. We do not seem to be in control of events, instead events seem to be controlling us. At times like these, it becomes imperative to delve into the past to search for answers and we have found some: those ‘evil’ Wall Street bankers have been criticised relentlessly, governments have been blamed for not watching over financial markets and the ‘New Classical’ economists have been slammed for championing the cause of unbridled free market capitalism as well as failing to predict the dire economic climate we find ourselves in today. However, I think we need to look even deeper and question the very purpose of economic activity.
Economic activity has the ability to transform societies for the better. It can lift people out of poverty. Capitalism, in my opinion, is a necessary step to move from deprivation to prosperity. However, its usefulness is outlived beyond a certain point, after which the costs of the wealth-producing treadmill are too high. Increasing wealth beyond this point does not improve people’s happiness and the dream of bliss attached to the accumulation of riches remains a delusion.
Unfortunately, many of the advanced economies in the West passed this point around two decades ago. Societies in developing economies are rapidly approaching this point as they strive to attain double digit growth. The twin ideals of capitalism and globalisation that have been so dominant for the past two decades have destroyed communities wrecked the environment, undermined democracy and created greater income inequality. They have led to a money-obsessed society; one where people have lost their sense of morality as well as the values that define their culture and heritage. The human race has been sucked into the process of cultural homogenisation and moral degeneration-a process that we have to reverse to ensure that we live more fulfilling and prosperous lives in the future.

The University of Chicago is an intellectual Mecca.Its faculty has won more Nobel Prizes than any other university on the planet. They have revolutionized the economics profession.In the 1970’s, when the world was gripped by stagflation, economists started to blame the government for having too much interference in the economy.Keynesian was out of fashion by the turn of the next decade. Led by Milton Friedman (a product of the University of Chicago), a new school of thought emerged: the New Classical school. It was pioneered by the Chicago boys. They believed that markets will always be efficient and self-correcting since consumers will have perfect information and therefore make rational decisions. It was an approach that had strong policy prescriptions-a minimal role for government. All the government had to do was make sure inflation was kept low and stable and make sure businesses were not choked by high takes. The University of Chicago backed up this efficient market hypothesis with complex stastical and mathematical models to prove that the free market was the best route towards prosperity. Economics had suddenly become more quantitative like physics and maths, an exact science rather than history or philosophy.

The ‘New Classical’ or ‘Chicago School of thought’ was music to the ears of right-wing conservative politicians like Ronald Reagan and Margaret Thatcher who simultaneously came to prominence across both sides of the Atlantic in the 1980’s.Reagen aggressively cut taxes on wealthy business owners and deregulated major sectors of the economy. What resulted was an extended stock market boom in the early 1980’s.For the rich, the Reagan years signified seemingly unrivalled prosperity. Around the same time, Margaret Thatcher, also known as the ‘Iron Lady’, was ruthless in smashing trade unions and strikesas she saw them as being highly disruptive towards business activity. Moreover, she embarked on a privatisation drive, throwing government-run industries into the choppy waters of competition. The term ‘Thatcherism’ was coined for the reduction of state economic involvement and unleashing the ‘powers of free enterprise.’

Then in 1990, the Berlin Wall fell and the Soviet Union disappeared.These tumultuous events symbolised to many the victory of democracy and unbridled capitalism. It prompted Harvard historian Francis Fukuyama to announce the ‘end of history’. He proclaimed that Western liberal democracy along with free market capitalism was the only way forward for the world. There was no alternative. Communism and socialism appeared to be nonsense. The belief in the free market was stronger than ever and the ‘New Classical’ school or the ‘Chicago School,’ as it is often referred to since some of its highest priests taught at the University of Chicago, became standard macroeconomic theory.

If we travel in time to September 2008, the world was a vastly different place from two decades ago. It was in freefall.Financial markets were in meltdown. Banks lent too much, consumers were riddled with high debt and the bursting of the housing market bubblewas the trigger that left the world reeling. A question begs to be asked: was the crisis due to a fundamental intellectual failure of the Econ profession? The free market was certainly not efficient and self-correcting. Deregulation of the financial and banking sector throughout the 1980’s and 90’s has had disastrous consequences. Banks have lent recklessly and the financial sector has been marred with insider tradingand various credit card schemesto extract as much from the hapless consumer. Westill have not recovered from the Great Recession of 2008.Maybe academic economists, most of whom have lent towards the New Classical school over the past two decades, need to have a re-think of what they have preached for so long.As Paul Krugman famously wrote, ‘the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men.’

AmanNavani

“Summer has come and past, the innocent can never last”- most of you will recognize this quote from a Green Day song however it is eerily applicable to what is happening in our world right now! I’m sure that many readers have continuously wondered what Mr. Hill is talking about in assemblies when he tells us that a difficult future lays before us; well the simple answer is that his, along with our parent’s, our generation have created a huge economic problem that has worsened and reached its tipping point this summer. This article will analyse one of the key economic issues that escalated during the summer months and relate it to how it shapes our future.

Now I’m sure that the big issue that comes to mind when talking about the summer of 2011 is Greece. In order to understand the issues surrounding the debt ridden nation we must first be aware of the functions of the European Union and how significant it is to our analysis. Despite the fact the EU was officially formed way back in 1958, the date which is of real importance to us is 1^st January 1999; the day the eurozone was formed. It was on this New Year’s Day that 17 countries adopted the Euro as its currency thereby agreeing to an economic and monetary union. What this essentially means is that it is the sole responsibility of the European Central Bank to make decisions regarding monetary policy that will apply to all nations using the euro; this is of huge significance as it means that the ECB controls the supply of money and interest rates within the eurozone. In spite of the fact that each member country has no direct control over its monetary policy no state has ever left the eurozone. Is this about to change?

So we turn our attention to Greece. First one needs to understand that Greece has been spending beyond its means for over 10 years. It now owes 150% of its GDP, which in real terms means it owes one and a half times its country total output per year. It has borrowed so much money that it can only afford to pay off the interest on the sums borrowed but can only afford to pay off that part with borrowed money, so its caught in a trap. As Greece cannot and will never be able to pay back the money they owe it is inevitable that it will default (basically the government becomes bankrupt) at some point in the future. Right now the question is not if but when, and more importantly, in my opinion, how?

Personally I don’t believe that there will be an unstructured default whereby the government simply runs out of money, instead what will (or should!) happen is that the eurozone will concede that it is the end of the line for trying to bail out Greece. Once the union accepts that the country is not able to repay its loans, they will take some haircuts; that is that the debts will be written down allowing a default. Consequently there will be a program to deal with this scenario in a structured way in order to protect the integrity of the eurozone and the euro itself. Okay that seems to work, so crisis averted right?

Not in the slightest; the problems that this default could entail are aplenty. Foreign banks, including those in France, Germany and Belgium, who are owed money from the Greek government in bonds, are the losers in this scenario. Moreover if Greece does default, it begs the question as to what will happen to other countries who could be facing similar difficulties, namely Portugal, Italy, Spain and Ireland. Surely this would raise doubts as to the merit of continuing the euro, right?

Wrong; Germany’s economic dominance means that it inevitably ends up carrying many of the weaker countries along with it and, when someone mucks it all up (just like Greece), the German tax payers end up paying the price. The fact that Germany is perhaps most committed to the idea of the EU makes the irony all the more tragic, and the frustration all the more palpable.

But will Germany repeat this process for four other countries? This is the most important question that has arisen from summer 2011; will the euro last if changes to the system aren’t implemented? What will happen to the European Union as a whole should the euro disintegrate? How will this affect the dynamic of Europe both politically and socially? In all honesty I do not know the answer to that question, but what I do know for certain is that, regardless of how the situation pans out, it is our generation that will be forced to deal with the consequences.

Until now, it has been the norm to refer to the economy as having three main sectors in order to easily classify and evaluate markets. The primary sector being the extraction or harvesting of raw materials, the secondary sector being manufacturing, and the tertiary sector being the service industries. However, a newer, more dynamic sector is strongly emerging and threatening to take over the global economy.

The ‘quaternary’ sector is best described as the knowledge-based part of the economy, including services such as information technology, education, research and development, consulting and other knowledge-based services.

The meteoric rise of Apple bears testament to the fact that the IT industry is strongly becoming the largest part of the economy, and more evidence that the quaternary sector deserves recognition as a sector of its own in the economy. Apple has now firmly established itself as the world’s most valuable publicly traded company, after a tug of war between the IT heavyweights, and ExxonMobil, the American oil and gas corporation, who had held the coveted spot for the past 5 years or so. A month after Apple first edged past ExxonMobil; they now boast a huge lead of about $35.87 billion, which deserves huge credit, given that just 3 months prior, ExxonMobil’s market cap was about $50 billion greater.

This has all happened amidst the resignation of the charismatic co-founder, chairman and CEO of Apple, Steve Jobs, who has often been characterised as the Thomas Edison or Henry Ford of his time. Branded one of the Silicon Valley’s leading egomaniacs, his return to Apple in 1997, following a 12 year gap due to differences with the board at the time and saved a firm which was 90 days away from bankruptcy. He has truly been instrumental in turning this garage based company into the international superpower that it is today.

Another man who has had his share in the recent limelight is the TIME person of the year for 2010, the youngest self-made billionaire in the world, and the co-founder, CEO and president of the social networking phenomenon, Mark Zuckerberg. Facebook’s rise to the top has been even quicker and more eventful than that of Apple. Despite the numerous problems it has faced from lawsuits, ex-partners, governments, politicians and the more conservative generation, its success is undeniable, as it has carved out a new market for itself and in essence created a brand new industry- social networking. The rise of this industry and its huge success leads the way for the quaternary sector to rise to the fore of most developed economies.

The case of the online auction site, e-Bay, is a bizarre one, as it could be put under either the tertiary sector or the quaternary sector, as it amalgamates the retail aspect of the tertiary sector with the IT aspect of the quaternary sector to enable it to be where it is now. This is one area where the quaternary sector is quite different to its other three counterparts, it can be integrated into any of the other three sectors, and since there is some debate in regard to its exact definition, some economists are reluctant to consider it as a sector of the economy of its own.

The example of the big 4 auditing and consulting companies goes a long way to show just how important the quaternary sector is to the global economy. The big 4, which consists of Deloitte, Ernst & Young, KPMG and PwC (PricewaterhouseCoopers), employ close to 650,000 of the global workforce between them, and have a total revenue of about $100 billion. This is staggering for just 4 firms, considering the fact that at a time when all firms are trying to cut costs, consultancy would be one of the first things they would cut back on, as it is sometimes seen as an ‘extra’ cost. However, others claim that consultancy is critical in enabling a firm to make profits and perfecting their strategy to stay above the other firms in that particular market, some firms simply won’t exist if it weren’t for these consulting giants. Whatever your opinion on it may be, there is no denying the fact that the industry’s value to the economy is on the up and that it is an extremely sought after industry to go into for high quality university graduates.

The quaternary sector has been a sleeping giant until late, but the success and worldwide recognition of these firms has gone a long way to proving that the quaternary sector is on its way up and in the years to come will continue to develop and grow into a major sector of the economy in most developed countries. At a time when everything is moving towards becoming digital and the ease of use of computers is increasing day by day, the digital revolution has already begun which will herald the way for this sector of the economy to bloom into, what some analysts say, the most important sector of the economy.