I am an Affiliate Faculty Member of the Microeconomics of Competitiveness program at Harvard Business School, and a big fan of Michael Porter – his work consistently reminds me of the importance of bringing clarity to management practice.
I also like his inclination for frameworks rather than models. If your goal is to interpret and assess, as opposed to measure and predict, a framework is a critical analytical tool. One that I especially like is his explanation for what determines competitiveness. For example, consider the following slide (which I believe originates from here).
I’ve given this framework a lot of thought, but I don’t think it fits as neatly into the Diamond model as is often claimed. For example in this NBER paper Porter (and co-authors) present an enlarged version:
This clearly shows that the Diamond model is intended to be a more detailed view of the “Quality of the National Business Environment” segment. But consider something like nutrient rich soil, or a large natural harbour. One might think that constitutes an endowment. But it is also a relevant “Factor input condition”. Indeed what’s the difference between the “Supporting and Related industries” and “State of Cluster Development”? I suspect this is why Figure 3 above has dropped endowments and clusters, and renamed it a “Foundational Competitiveness Index”. I think this is a shame, because the “What Determines Competitiveness” slide is clearer, and more coherent, than the FCI.
I think Porter’s attempt to force fit the Diamond model into the Competitiveness index creates an opportunity to take the “What Determines Competitiveness” slide in a new direction. Indeed I think it complements nicely the “Growth is Like an iPhone” analogy:
In my attempts to merge the three level analogy with a template that my students can use in class, and with all appropriate nods to Prof. Porter, this is the “Country Competitiveness Dashboard“:
Rather than viewing the Diamond model as a subset of the “Business environment”, I see it more as a strategic tool that cuts across the whole Country Competitiveness Dashboard. In other words step 1 is to populate the dashboard, and ensure that you are covering all bases. Step 2 is to conduct a Diamond analysis – which is better suited at the cluster level than the national level anyway.
The endowments above are rooted in economic growth theory, but I am always struck at how important they seem to be when reading geopolitical accounts. The list below shows some of the typical go to areas when trying to understand the starting position of a country.
This short course provides provides a survey of global poverty and a discussion of the causes of prosperity. Particular emphasis is placed on the institutions required for market exchange, and the importance of economic calculation. As a satellite photo of the Korean peninsula makes clear, socialist planning is literally groping in the dark. We will look at the theoretical reasons behind this claim, and the empirical validation that economic freedom matters.
The course does not rely on any previous study of economics.
Lectures (3 sessions)
The course is designed to tie into Chapters 4 and 12 of the following (amazing) textbook:
Economics matters: The link between economic institutions and global prosperity
In this lecture I will ask some broad and fundamental questions about the application of economic theory to the real world, and the role of the economist as a force for making the world a better place. I will try to convince you that we have a fairly good understanding of what causes economic growth, and how important this is for raising living standards and improving people’s quality of life. In other words, economics matters.
11:00am Session 2
Groping in the dark: Why socialist calculation is impossible
2:00pm Session 3
Economic transition in Central and Eastern Europe: Shock therapy or gradualism?
Downloads of the lecture handouts will be available soon.
There are three components to the dynamic AD-AS model.
The first is the Solow curve, which shows the growth rate that would exist (i) if prices were perfectly flexible; (ii) given the existing real factors of production. It can be derived from the Solow growth model and since this treats capacity as being independent of inflation, it is depicted as a vertical line. Improvements in research & development; better infrastructure; increased competitiveness; higher quality education and training; labour market flexibility; or natural events such as more conducive weather would all constitute a positive productivity (or “real” or “supply side”) shock, increase the Solow growth rate, and shift the Solow curve outwards.
The second component is the Aggregate Demand (AD) curve. This can be defined as combinations of inflation and real growth for a specified rate of total spending, and is far more intuitive than the traditional AD curve. This is because instead of being based on other curves (necessitating an explanation of the Pigou effect, for example) it is instead based on a dynamic version of the equation of exchange:
Since the AD curve simply shows how any given amount of (M+V) can be split between P and Y, it will only shift if there is a change in M (i.e. the money supply) or V (confidence).* In terms of what constitutes a velocity shock, we can switch from looking at the left hand side of the equation (our posited increase in total spending) to the right hand side of the equation (how it is being spent). After all an increase in spending must be spent on something. The composition of total spending is household spending, business spending, and government spending.
Potential sources of increased spending are thus fiscal policy (either changes to government spending or changes to taxes) or wealth effects. An important caveat is that generally speaking changes in the growth rate of V tend to be temporary and thus only changes in M can generate sustained inflation.
If prices were perfectly flexible, the Solow curve and AD curve would suffice. For example, if the Solow growth rate were 3% and the central bank increased M from 5% to 10% this would lead to an equivalent increase in inflation (from 2% to 7%).
However if prices aren’t perfectly flexible, the dynamic AD-AS model shows how the economy can deviate from potential GDP growth. This requires the third component, the Short Run Aggregate Supply curve (SRAS). The SRAS shows the relationship between P and Y for a given expected inflation rate. As with the traditional AD-AS model, the labour market plays a key role in economic adjustments, and so “sticky” wages (i.e. those that don’t adjust quickly to new conditions) are problematic. For example, if revenues are rising at a faster rate than wages (which constitute a large share of the firms costs), firms will appear to be profitable and will expand their output. Similarly, if prices fall quicker than wages, production will appear to be unprofitable, and they will reduce output. It is due to inflation expectations that we might expect wages to lag behind prices – if inflation is higher than expected output will rise. If inflation is lower than expected output will fall. This explains the upward sloping shape of the SRAS curve.
Underpinning the SRAS is the concept of the signal extraction problem, which implies that in the short run (i.e. whilst prices are adjusting) there may be a positive relationship between inflation and real growth. The reason the SRAS curve is flatter below Y* is because wages are especially sticky in a downwards direction. Basic money illusion means that workers tend to be hostile to nominal wage cuts. And the SRAS curve is steeper above Y* because there’s a limit to how fast the economy can grow – it can’t indefinitely exceed the Solow growth rate.** Given that the SRAS holds for a given rate of inflation expectations, the only thing that can cause it to shift is a change in those inflation expectations. This may appear to underplay the importance of the SRAS curve, but in fact it clarifies the difference between SRAS and the Solow curve. It is tempting to think of the difference in terms of calendar time, for example that a period of bad weather, causing a poor harvest, will primarily affect the SRAS. This is because it is a temporary event that hasn’t altered the underlying production capacity, and if there is nothing to say that bad weather will cause a reduction in supply in the long run, it shouldn’t affect the long run supply curve. However the dynamic AD-AS model makes it a lot clearer to understand why the above reasoning is incorrect. An adverse weather event – even a temporary one – is a real shock, and will therefore impact the Solow curve and not the SRAS. The SRAS shows how the price mechanism facilitates but also can disrupt the adjustments in response to either real (Y*) or nominal (AD) shocks.
* It is tempting to treat M as monetary policy and V as fiscal policy but this wouldn’t be correct. Most central banks use interest rates (specifically a short term risk free rate) as their main policy tool. If the “velocity of circulation” refers to the speed at which money turns over, then this is a function of people’s demand to hold money (relative to their demand to hold goods and services). In other words V is the inverse of the demand for money. If the demand for money is high, people hold onto cash, and velocity is therefore low. Hence central banks can either affect the money supply, or try to influence the demand for money by manipulating the price (i.e. interest rates). This actually helps aid a discussion about quantitative easing. Given that interest rates are very low many central banks have reinstated the quantity of money (through the process of quantitative easing) as a policy tool that can be used in addition to interest rates.
** The above could also be considered a “Lucas” curve, since it follows his islands parable and emphasises the labour market. We might also think of it as a “Hayek” curve if we focus more on the capital market. Entrepreneurs confuse a temporary reduction in real interest rates (due to an increase in the money supply) with a permanent one (or at least one consistent with an increase in real savings) and invest in capital-intensive production plans. The Austrian claim is that this will be self-reversing and bring on a recession. We can incorporate this into the analysis here by stressing that particular increases in AD (i.e. when money supply exceeds the demand to hold it) will – as Cowen and Tabarrok argue happens ordinarily – cause a reverse shift in AD later on, but also end up causing a reduction in Y* through a negative shift in the Solow curve. Monetarists would say an increase in AD ultimately leads to an increase in P. Austrians would say that it increases P and reduces Y*.
I consider the power of economic reasoning to stem from its applicability, and therefore take a broad and eclectic position of what would constitute suitable subject material. For a general management thesis I don’t require students to work on the same research topics that I do. Indeed, there are several topics that I have thoughts and ideas on which I’d be delighted to see students run with. It is important to stress that an interesting topic is a necessary but not sufficient condition. You also need to identify an interesting research question within that topic. I’ve provided some examples of topics that I find interesting below:
These are only general guidelines and there’ll always be a gap between my judgement and your understanding of my judgment. But just because the grading is subjective does not make it arbitrary. I will assign an A, B, C or D grade to the following dimensions:
Purpose – are the aims and objectives clearly set and have they been met?
Originality – is this new? Interesting?
Focus – is the work precise?
Literature review – is the thesis aware of and able to critically discuss existing literature?
Methodology – are the methods chosen appropriate?
Analysis – has the entire process been transparent and correctly interpreted?
Implications for management – does it have relevance to the professional community?
Quality of presentation – is it clear and does it add value to the written work?
Quality of written work – are there any errors?
Quality of communication with supervisor – were the expectations of the supervisor managed effectively? Was help asked for when necessary? Was it an enjoyable experience for all?
For more details on grade ranges see page 8 of my guide for students, however you should adjust the passing grades such that what I deem to be a C grade for a thesis would get a mark of 55-60; a B is 70-80 and an A is 85+. Don’t make me send you this.
This short course provides an overview of the ways in which governments try to influence the economy. It will provide an explanation of what monetary and fiscal policy are, and why they are used. We will assess the ECB’s response to the financial crisis and the 2009 Obama stimulus bill. Emphasis will be on providing a framework for participants to refine their own opinions.
The course does not rely on any previous study of economics. However, a familiarity with economic terms (such as “inflation”, “GDP”, “balance sheet”), and an awareness of contemporary policy debates (such as zero lower bound monetary policy), will be useful. The course is aimed at people who watch Newsnight but don’t quite feel they understand the economic foundations of what’s being said.
Lectures (2 sessions)
Case discussion (1 session)
Workshop (1 session)
The only mandatory readings are provided in the schedule below. However the course is designed to tie into the following (amazing) textbook:
In 2008 I was asked to provide a short, intensive bootcamp for incoming students. This page is a collection of the resources that I used for that course. It contains some slides that define and explain key concepts, and also provides some examples of numeracy tests. In addition, I noticed that many students – particularly females – felt that they “weren’t math people”. I’ve done a video to discuss these fears. I hope you find these resources helpful.
I also recommend the following page, which is full of links:
“Game Theory”, or the science of strategy, is a big topic that leads in many fascinating directions. This post will provide a basic understanding of what Game Theory is, and how it can be utilised in management situations. In addition to providing my own course material, I have also attempted to tie into some of the amazing resources that already exist.
My advice for you is to watch this video, and then choose one (or more) of the additional readings.
The handouts for my lecture slides are here (note there is some additional content compared to the version in the video). If you are an instructor then email and I’ll send you the raw powerpoint file (containing surprises and solutions). I like to follow a lecture on Game Theory with the following classroom exercise:
Beckman, S. R., “Cournot and Bertrand games” Journal of Economic Education, Vol.34, No.1, pp.27-35 (see here for the handouts, email me for a Teaching Note).
I also utilise the following at the start and end of the Game Theory lecture: Oligopoly Game 42 and “Cheating for a $20” (email me for the Teaching Note)
Here are some recommendations, depending on your level of interest and time constraints:
Professional educators understand the limitations of student evaluations, and yet the culture of external assessment is attempting to incorporate a similar thirst for trivial feedback on our peer-review. As someone who enjoys sharing a classroom with colleagues, and is genuinely keen to share ideas on effective pedagogy, I wanted to outline a possible way to conduct teaching feedback. I will write it from the perspective of the instructor conducting the audit.
Acquire the course outline and read it as closely as you expect students to read your outline.
Meet with your colleague to discuss the audit. Get a good understanding of where the session you will be observing fits into the course as a whole. Make sure you’re aware of any specific areas that they would like feedback on.
Attend the whole class. Arrive early and leave at the end. Alternate roles between being a student and an observer. It might be a good idea to talk to students about any specific questions you have, but even if you think this would be a good idea ensure that the person you are observing is ok with that.
Write a letter to the person you observed, thanking them, and providing your reflections. If there are specific areas of weakness that you believe you’ve identified keep this document private. By all means copy in Programme Management (with prior agreement) but address it to your colleague.
Take your colleague out to lunch, go over the feedback, and give them an opportunity to respond. Agree on what parts you should share with other colleagues, and external examiners. The written feedback it should be tailored to the specific course objectives that you’ve ascertained from step 1 and 2.