Greg Manikiw on the Yin and Yang of Economics

December 15, 2007 at 8:50 am | Posted in competition, corporations, economics, economy, escher, free market, government, income dostribution, individual freedom, individual rights, liberty, market, market forces, Michael Kruse, MNC. economics, monopoly, poverty, right and left, selfish, socialism, taxation, trickle down, wealth distribution, world GDP | 2 Comments
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How do the right and left differ?

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The conclusion of today’s ec 10 lecture:

In today’s lecture, I have discussed a number of reasons that right-leaning and left-leaning economists differ in their policy views, even though they share an intellectual framework for analysis. Here is a summary.

  • The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
  • The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
  • The right sees competition as a pervasive feature of the economy and market power
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  • as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
  • The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.

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  • The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.

    There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.

    Greg Manikiw on himself: “… a professor of economics at Harvard University, where I teach introductory economics (ec 10) among other courses.”
    Thanks to Michael Kruse for posting this up on his own exciting blog: Kruse Kronicle and that’s also a link to his excellent new series on “Living Simply in Abundance”.
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How to be a Good Lemming

November 30, 2007 at 4:12 pm | Posted in communism, culture, developing economy, economy, fairness, filthy lucre, free market, global evils, God's kingdom, goods and services, human-performed, industrial evolution, justice, kingdom ethics, kingdom of God, mammon, market, MNC, multinational corporartion, per capita, poverty, real value, redundancy, socialism, trickle down, value addition, wealth distribution, world GDP | Leave a comment
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‘Tis the season to be jolly… would be quite frivolous if it were not at the same time also so profoundly real.
The Christmas season in the West is a time especially set aside for spending, purchasing, buying, gifting, and generally being very, very, jolly.

25k.jpgIn the U.S. the spending season kicks off with a bang at Thanksgiving, but all over the world, common sense will lead us to suspect that the jolliest of traditional seasons will begin soon after the annual harvest. Give a couple weeks or a month for all that excess to start getting distributed, and then them holidays, and that spending will ensue – it makes good sense.

In India we have that grand ‘festival of lights’, Diwali, that is strategically placed after the first harvest in October or November and then, in the South of India, there is a second celebration (Pongal) that comes right after the second monsoon season in mid-January and that forms the very exciting and satisfying climax to our times of splurging.

Economies and spending cycles that keep them vibrant have to be based on the presence of excess, and most times that excess is only available for a short while right after the harvest. Holidays are also timed to help to distribute all that ‘excess’ and just as efficiently as possible! Any great delay between when the excess arrives and the application of peak marketing pressure to get people to spend may result in that excess getting channeled into savings accounts – economists don’t like that at all. When we have plenty, and so much that we can even think in terms of excess, the purse strings will be at their loosest. Marketing has to strike while the iron is hottest but that is not the end of the story. We too help out by apparently just temporarily choosing to collectively forget that the upcoming year may hard and long.

Marketing the world over, is geared to maximise its hype just at these times. Spend – buy – purchase – CHARGE IT – or the ubiquitous EMI with 0% interest!

This year, the absolutely essential gadget is…

Everybody simply HAS to have this!

The teaser SAAALE! drags you out, ‘pushes’ you over that last little hump of caution, and then…inflation US

Insidiously, we also might not notice that we will really have to shell-out just a bit more this year than we did last year to get that ‘absolutely essential’ something. Economic cycles rely on the feeding frenzy to slip into the inflation mode too, for this is the one time of year that folks will be blithely unaware that the essentials just got a bit dearer. The small incremental adjustments will slip quietly into place in the corners of our subconscious even before we have time to register them, for there is so much else of an exciting nature to capture and hold our collective consciousness in thrall.

banknote-euro-usdollar.jpgValue addition is one culprit, but the yen for bigger profits is certainly another. For the corporates, turnover should increase, and so too should the return on investment, the profit margin. Balance sheets will be anxiously prepared as the financial year draws to a close. At stake is the size of the share price pie for that depends on ‘the figures’.

To the economist, inflation is a godsend. Deflation, when prices actually drop, (do you see red in the diagram above?) is an absolute disaster and must come straight out of hell. Modern economies rely on inflation to create the space in which value addition creates levels of work both in manufacturing/marketing and in services/marketing. More jobs, more earning, more spending, more money – MORE

Those little entries on corporate balance sheets called profit (net after taxes) quietly also rely on inflation. The trend is paradoxically opposed by innovation and new technologies! The whole complex process works together to keep standards of living on a slow rise that is slightly worse than what the actual inflation level would lead us to expect.

At some point people do question whether this all adds up. Of course it doesn’t, not nearly, but it sure looks good while it’s flowing along. Pension plans will be the most obvious harbingers of the bad news that eventually inflation catches up with you.banknote-rupee.jpg Other painful reminders include the cost of health-care, health insurance, and medicines. Long term savings plans and incremental investments will yield something but much less than they should when compared to the damage that inflation has quietly been inflicting.

Money and easy credit are the end of a very long road that has separated our spending from the realities of our actual contributions to life. Think about it, as it is you’re just the last stop between the ATM and the corporation that owns the store that you’re heading to with the plastique in hand!

What would happen if inflation were to stop? What would happen if our governments printed just enough notes to maintain a fixed amount of money in circulation? What would happen if value addition were to be replaced by true value? What would happen if the purchasing power of a dollar or of a rupee were to become rock steady?

Have you thought about it this year-before you start (or at least finish) spending that bonus?

What will this Christmas/Pongal bring I wonder? Is it perhaps even possible to have fun and fellowship with friends and without money? Will anyone believe that you love them anyway even though you didn’t push your plastic a few thousand more over its already strained limit?

GOLD > Coins > Bills of exchange > CREDIT Þ Transactions

FARMING CONCRETE – India at 50/50

November 17, 2007 at 9:56 pm | Posted in corporate agriculture, developing agriculture, fairness, farmer suicide, free market, honesty, human-performed, justice, openness, planning commission, socialism, Yogi Berra | 4 Comments

We, the people of India, always seem to be at the crossroads.

For a country that is thought to be developing fast, a lot of the time we are quite uncertain as to our direction, and even more confused about our ultimate destination. Instead we are very busy doing what Yogi Berra once advised : “When you come to a fork in the road, take it.”

Everyone seems to silently assume that our goal in ‘development’ is to become a clone of ‘developed’ economies as much like the U.S. or Britain, or Japan, and to transform into this heavenly vision just as soon as possible.

Having traditionally been socialist in spirit but officially non-aligned, India has largely come out of ‘the socialist trap’, and now appears to be leaning towards a capitalist, ‘free market’ economy, somewhat to the delight of those who like possessing, and using, Capital. Or, so goes the assumption at present, but do we really wish to become ‘more developed’ in this limited and warped sense?

What are we turning ourselves into? What are we to become? We have indeed emerged, but to what? At present we Indians seems to me to be in the grip of a particularly thick fog. We are incapable of seeing our own noses, let alone tackling any bigger questions. And one of the biggest questions revolves around what we are going to do with agriculture.

Here is today’s biggest fork in the Indian Road: 50% (yes, one half) of India’s 1.1 billion population is now urban. The growing urbanisation of rural populations is driven by the death of small farming as a viable way to make a living. As making a livelihood out of farming becomes less attractive to families and (by design) much more attractive to corporates, the trend will be that smaller farms will be abandoned to be consolidated by larger, capital rich, corporates who will then complete the mechanisation of agriculture (in the name of efficiency) and try to completely eliminate rural labour.

What are we going to do to employ the up-coming flood of ex-farmers? The number of farmer suicides is growing (though we seem to hardly notice) by leaps and bounds every year. Do we just let them quietly continue to commit suicide? What a convenient solution…

The problem of course, is more general than just agriculture. In a comment on a previous post, Mahil had alluded to the increasing drive for specialisation in our developing world. As the machine, aided by intelligent computerised control, takes over both production and process, where will human-performed jobs come from? From a different angle, another tough question to answer now is : How will our nation’s wealth eventually be distributed? Do justice, and fairness, and honesty, and openness have a say in our direction into the future?

Admittedly, our problems in India are not small ones. With a population of well over a billion people, somewhat scarce natural resources, limitations on arable land, and weather that always seems intent on either starving us with drought or starving us with deluges, it’s perhaps not surprising that we seem fixated on wondering mostly about the when and the where of the next meal.

The pundits tell us that now, security is the name of the game. Do you own a house? Have you financially planned for your children’s educations, and more worryingly, their marriages? have you got a couple of credit cards? Are you keeping up with the Krishnans?

The idea of planning, beyond the matter of the family’s survival, is not something that includes our neighbors, our rural cousins and our nation at large.

Being shortsighted produces a situation that is rife for those who do have longer term agendas to quietly set their plans in train. Our politicians seem sometimes to be hand-in-glove and sometimes (rarely) simply dupes. Eventually, when the truth of massive sell offs does emerge, all will perhaps claim to have been too easily fooled! This is not in any sense a ‘conspiracy theory’. I refuse to believe that folks that are so good at ingeniously lining their own pockets are as dumb as they wish us to believe on the questions of development and overall direction.

In theory, we have something called a ‘planning commission’. The only problem is that this too is a ‘socialist’ leftover and as such this commission now does little of substance. The current head is someone who explicitly believes in deregulating everything. The resultant “Five Year Plans” have become manifestos of what to dismantle first, and of how fast the markets can be ‘liberated’.

Our politicians are just as intent on survival (in the narrowest sense) as anyone else, but they are far-sighted enough to ensure that their monetary genealogies will survive for at least a few generations of their own profligate progenies.

In other words, motive and opportunity are known to be present in all developing economies. These are the ingredients of economic murder. Our economic c(r)ooks are particularly intent on making them coincident TODAY in India.

So, what are we going to do about it? Are we prepared to continue to be myopically concerned with our own little selves? Are you prepared to let your child’s nation’s future be quietly sold off to the highest bidder?

Is Mass Production Ethical ?

November 7, 2007 at 9:56 am | Posted in communism, consumerism, economy, free market, industrial evolution, loss of self, mechanisation, redundancy, specialisation | 3 Comments

Successful and well developed economies in today’s world are mostly of the ‘free market’ design. These are economies where a modicum of free enterprise is only slightly limited by government regulation (except in agriculture, but we are not taking that topic up today). The alternative of top down control and no private ownership (communism) has died a natural death.

Both systems were outgrowths of the industrial revolution of the 19C. When looked at from an individual standpoint, by relieving the individual or family unit of the need to accomplish all basic tasks pretty much for themselves, and by introducing the incredible efficiencies of mechanisation, the individual is freed up to do other things, and these things necessarily, will now involve specialisation if one is to fit in to the overall framework. The economy mass produces stuff by mechanised processes that are increasingly automated with as few people as possible controlling as much process as possible.

Work, for an individual, is defined as the specialised, narrow, thing that that individual has been trained to do. The individual has to fit into whatever slots are available in the economy of the day.

So, the training of the individual, education also has to become specialised. Now, in India, there is no more point in getting an ‘arts degree’. There is no utility in it. Job requirements do not include something as impractical and unspecialised as an ‘arts degree’. Furthermore, if one wants to change lines of work, say after five or ten years of experience, one finds that one is starting the new job at the bottom of the ladder- the earnings ladder! The only thing that counts is a proven ability to perform and that comes only with experience.

We know all of these things and they don’t overly disturb us for we are fairly confident that the whole thing hangs together and works pretty durn well. After all, what we need is a job, and some job security, and for prices to remain affordable, and for there to be opportunities and time for recreation and the family. What else does one want from a healthy, sound economy?

I would suggest that we have blinded ourselves to who and what we really are. We do this and allow ourselves to be duped because it is the easiest thing to do. We are comfortable enough, our families are pretty much taken care of, so what could really be wrong?

What we have gained is security.
What we have lost is our SELVES.

What happens to human beings that become redundant? What happens to machines that become redundant? The human has become nothing more than a machine, filling a slot in the endless cycle of mass production.

Mass production is good. Mass production runs the economy. Without mass production there would be no economy and there would be no prosperity.

We have gained the whole world-
But, we have lost ourSELVES.

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