Monday, September 02, 2013

A letter to Mr.Tariq Ali


To : Mr.Tariq Ali

Dear Sir,

I heard your excellent speech about journalism, whistle-blowers at Chennai.
It was an eye-opener in many ways.

I can call myself as a 'neo-liberal'  (but opposed to neo-conservatives) and
of course disagree with you on some issues (and not all issues).

1. You have clubbed neo-conservatives like Bush & Co, Heritage Foundation, etc
along with neo-liberals (a loosely defined term). They are bitterly opposed to
each other in many important matters like foreign policy, Iraq invasion, abortion, 
secularism and Christian fundamentalism,  military spending, etc.

2. Economic freedom certainly promotes political freedom and civil liberties. It 
is not a cliche or mere rhetoric of the 'right' as you said. Best example is Chile 
and India. India is now more democratic and free than 70s when 'socialists' 
dominated the political scene and Indira was the PM for more than 17 years. 
Corruption and bad governance are major issues today, but we need not 
'fear' the PM today like in those days, when enormous amount of economic 
and political power was concentrated in New Delhi. Media today in India is more 
freer than those decades. Esp electronic and internet media. Suppose if Indian 
govt had not liberalised many sectors in India from 1991, I could not be mailing 
you now ; and internet, computers and telecom would be still at the level in 
today's Myanmanr.

In Chile, as Milton Friedman argued correctly, free market policies under the 
dictator Pinochet subsequently created new social dynamics which destroyed his
dictatorship and ushered in democracy. The emergence of new middle class, wealth
and opportunity for upward mobility by poor created this change.

from M.Friedman's speech about Chile :

"..The economic development and the recovery produced by economic freedom in
turn promoted the public's desire for a greater degree of political freedom exactly
what happened, if I may jump from one continent to another, in China after 1976
when the regime introduced a greater measure of economic freedom in one sector
of the economy, agriculture, with great success. That, too, generated pressure for
more political freedom and was one of the major factors underlying the
dissatisfaction that led to Tiananmen Square.

In Chile, the drive for political freedom, that was generated by economic freedom
and the resulting economic success, ultimately resulted in a referendum that
introduced political democracy. Now, at long last, Chile has all three things:
political freedom, human freedom and economic freedom..."

I am an entrepreneur with nearly 25 years of experience in many sectors. I have
seen the dramatic change in India in these years : reduction of poverty levels,
unemployment levels, etc. I come from a small textile town in Tamil Nadu and
know something about the poverty levels, standard of living in the 70s and 80s.
when compared to today's India.

The is no viable alternative to the much maligned 'neo-liberalism' ; Yes, it is an 
imperfect system, but so far man has not invented a better one !

And an article I wrote about the fallacy of labour theory of surplus value :


Thanks & Regards
K.R.Athiyaman

Dear Sir,

In continuation with my earlier mail about you speech in
Chennai, you spoke about the corporatisation of media and
reduction of free press now. But the following points need to

be discussed :

1. In the heydays of socialism in India, esp under Indira
Gandhi, when corporate taxes were raised to confiscatory
rates of 98 % (for highest marginal rate), all media house
and other corporates were under the mercy of govt ministers
and bureaucrats. As it was impossible to operate honestly,
tax evasions was rampant and hence the threat of income
tax raids were always hanging over the heads of media
houses. There was acute shortage of news print and foreign
exchange (due to closed economic polices and license raaj).
Hence the print media was totally under the thumb of the
govt, unlike today. Moreover as there was not much private
sector (like today), in those days the major part of advertisement
revenue was from ad from govt and govt run companies. Hence
there was less freedom for media then when compared to now.
No wonder the quip about media during the emergence of
1975-77 :'When they were asked to bend, they crawled' !!

2. There was total govt monopoly in electronic media then.
only doordarshan and AIR. No private channels were permitted
until 'neo liberalsim' in 90s. and no private telecom and airlines
too. Hence communication was restricted while the govt run
TV was totally a propaganda instrument of the govt. Today,
with hundreds of channels, we get all kinds of news and views.
Certainly current situation is much much better than the 70s.

3. Poverty levels were terrible until the 90s due to stagnant
economy. In spite of doubling of population levels to 1.25 billion
today, poverty ration is reducing fast due to the much maligned
'growth'. Pls refer to the front page report from The Hindu :

Poverty levels down by 15% in eight years
http://www.thehindu.com/.../article4921497.ece...

And this rapid change is due to implementation of 'neo-liberal'
polices. Hence sweeping generalisations about neo-liberalism is
wrong, esp in Indian context.

And finally a word about your tirade against Montek Singh
Ahluwaliah. He and Manmohan Singh saved India during the
1991 balance of payments crisis. But for their vision and hard
work in those critical years, India would have become bankrupt
(like Zimbawae recently) with soaring hyper inflation and hunger.
History will record their contribution more accurately. You may
disagree with them, but to label them as 'conservatives' is
superficial.

Sir, you mentioned about the misuse of the term 'reforms'
whenever economic issues are mentioned. But more misused
are the terms 'progressive' and 'conservative' ; these are mere
labels which assume a lot. And the term 'conservative' is
unfairly stuck on many idealists right simply because the are
pro-market. Conservative means to conserve the status quo
and against any change, esp of standard of living of the poor.
Nothing can be farther from truth. The present neo liberal
polcies of the 'conservatives' are applied in most parts of the
world, not because of any 'imperialistic' conspiracy, but simply
because they are now deemed as rational and better than old
polices of statism. And these conservatives are more
'progressive' in their outlook than the real 'progressives'.

Thursday, March 14, 2013

Fallacy of Karl Marx’s Das Capital : Labour theory of surplus value

Fallacy of Karl Marx's Das Capital : Labour theory of surplus value

'Exploitation of the workers' is the moral basis for all forms of
leftist ideologies and Marxism. This concept has permeated the
collective conscience of human kind in the past 200 years like no
other concept before. The moral basis provided by this concept had
caused more deaths, mayhem, mass murder, suppression of human rights,
stagnation of economies and corruption than any other ideology
including Nazism or any religious dogma. But the whole basis for this
concept of exploitation of the surplus value of labour by the
capitalists, which is derived from Karl Marx's magnum opus "Das
Capital' is an invalid and disproved hypothesis.

Marx argued in Das Capital that the one and only source of profits
(which accumulate into capital subsequently) is the exploitation of
'surplus' value of labour for which the workers are not paid. He
evokes complex mathematical models to 'prove' this hypothesis. But
when this 'value' is translated in prices, the theory looses its
validity. According the Das Capital, profits are derived solely from
the surplus value of labour. He makes no allowance for the
enterprising and organising skills of the 'entrepreneur-capitalist' ;
But we shall see that the profits are created solely by the
entrepreneur's abilities and hard work.

The following projections are put forth by Marx based on labour theory
of surplus value :

1. Profits tend to fall within a business cycle as well as in the long
term due to come due to competition among capitalists who will
innovate and introduce labour saving machines to reduce cost of
production. As the surlplus value of the labour is the only source for
profits, introduction of more machines that displace labourers will
reduce the profits.

2. Each business cycle will be progressively worse than the previous
one and at the end of each business cycle, the smaller firms will be
bought out by large firms which will grow in size.

3. The standard of living of the workers will always tend to border
the subsistence levels and can never ever increase to reasonable
standards.

4. As the troughs of each business cycle tends be lower than the
trough of the previous cycle, this downward spiral of the whole system
will ultimately end in a massive collapse of the capitalistic system
itself from which the socialistic state will emerge.

But the economic history of the world since Marx's time has not
progressed as per the above projections. Business cycles have not
worsened in the way he predicted nor did profits fall with the
introduction of labour saving machines. Most importantly the standard
of living and working conditions of the workers have improved
dramatically in the past 150 years ; Especially in the developed
nations in Europe, N.America, Japan, S.Korea, Taiwan, etc. Even in the
developing nations like India, China, Chile, Botswana, etc the average
standard of living of the proletariat has improved a lot in the past
60 years.

All these results contradict Marx's hypothesis and hence it can be
assumed that the basis of his theory : surplus value of labour itself
is invalid. For the workers are always paid first according to the
market value of their labour, while the capitalist-entrepreneur may or
may not get the rewards for his risk taking and entrepreneurial
abilities. Some practical points that need to be explained by
Marxists are :

1. Assuming two or more similar companies engaged in the same industry
are located within the same industrial estate with similar capital
structure, machineries and labourers, the output, profitability and
growth of each unit varies considerably. Assuming the labour
productivity is the same for all the workers in this area, then what
can be the explanation for the sharp difference in the efficiency,
output, and profit margins of these companies ?

2. What explains the very high profit ratios in many industries which
had dramatically reduced the labour component in their production
costs by introducing automation and innovative machineries during the
course of a few decades. For example, in agriculture and textiles in
developed nations, in spite of the tremendous shift of populations
from these sectors to other sectors as a result of introduction of
enormous machines, the profitability in these sectors had not fallen
proportionately. Marxists may try to explain this paradox by arguing
that the surplus labour that went into the manufacturing of these
machines are the reason. But this again gives rise to the same
question about those industries that produce capital goods. No valid
and empirical proof exists for this theory !

3. According to Das Capital, the net surplus value in a system is
constant (and will vary with the variation of the workers population
only) ; But in reality the 'surplus' within many systems have
increased exponentially while the workers population had not grown
proportionately. Hence how did this exponential growth of total
surplus value occur ?

Any worker turned entrepreneur (there are many) would vouch for the
fact that it is the entrepreneurial ability that makes the vital
difference in the performance of the firm. All these worker turned
entrepreneurs had started their lives as workers, working along
millions of similarly placed workers. But some of them managed to save
and / or get into partnerships with co-workers to start small firms
which ultimately grew into giants. All the corporate giants in this
world were once tiny start ups fired by the sheer enthusiasm and
determination of those pioneers. Can anyone name any company which is
continuously existing in its present size and form for many centuries
? Petrochemical giants, pharma majors, automobile majors, IT majors,
companies like Walmart, CNN, Dell, Sony, Apple, Virgin Atlantic, etc :
all were founded by pioneering individuals with nothing but their bare
hands. Their legal heirs had expanded these companies into giants over
the decades.

There are of course, criminal elements among capitalists and corporate
who misuse the loopholes in the rule of law, especially in the
developing nations which have high levels of corruption and cronyism.
But these are exception rather than the rule. Generally in nations
where the rule of law is upheld systematically and where the ethics
remain high, (like in Scandinavian nations, etc) the misuse by
companies are rare. But Marxists usually cherry pick these exception
to paint a distorted picture while glossing over the terrible crimes
caused by their socialistic alternative to the system.

It is always the risk taking, hard working and pioneering effort of
the entrepreneur that makes the difference. Nothing else ; neither
government 'help' nor 'looting' from the public nor wars. These
pioneers are heroes and not the villains (who exploit the workers)
that they are portrayed to be by the Marxists. I salute them all.
All the nations which had allowed full freedom for these innovators
and pioneers to get along their vision, without blocking their
entrepreneurship in any manner had prospered over the centuries, while
all those nations which did the opposite stagnated and remained
impoverished. Indian and Japanese experience since 1947 are the
prime examples for this basic difference.

However the myth of 'exploited' workers still wreck havoc and is very
difficult to eradicate from the minds of emotional idealists who only
see the sharp contrast between the poor and the wealthy. Only way to
eradicate poverty and usher in prosperity on a mass scale is thru a
free market system based on liberal democracy along with a welfare
state.

Tuesday, October 09, 2012

World Economic Crisis – causes and solutions


World Economic Crisis – causes and solutions

The financial meltdown that started in 2008, which originated in the subprime mortgage market in US housing sector ultimately threatened the entire world economy and we have still not recovered from it fully. The root causes are :

1.US government’s ambitions in promoting home ownership among all sections of its citizens, for which government backed financial giants Freddie Mac and Fannie Mae were created and subsidized. This incentivized the private sector banks to dump the ‘toxic assets’ into the willing hands of the government entities. Also tax concessions were given for the incentivizing home loans to subprime categories, whom otherwise would not have been serviced by the lenders.

2.The interest rates in US markets were artificially held down to near 1 % levels from the years 2000 to 2004 (and even after) by the US Federal Reserve Board with the objective of ‘pulling up’ the economy from the recession caused by the dot com bubble collapsing in 2000. This unleashed the mother of all credit booms as the real rate of interest was higher than the rate set by Federal Reserve.

3. The US government budget deficits rose continuously to fuel the unsustainable levels of spending for defense, social security and for the Iraq and Afghan wars. US trade deficits (net of imports over export revenues) too rose to alarmingly high levels. All these should have depreciated the value of US dollar in an ideal currency market. But the exporting nations like China, Japan, OPEC (which sells most of its oil to US) artificially propped up the value of the US dollar (so as to help their export booms) by buying US treasury bills limitlessly. If (a very big IF) this has not been done, US dollar would have sunk like stone and hence the US consumer and government spending would not have reaching these crisis levels. But as US dollar is the reserve currency of the world and most of the international trade and investments are done in dollars, this self correction of currency values that is the basis of any undistorted market did not occur in currency markets of the world.

4.The wall street banks are held as the prime villains in this drama. But this is only partially true. They could act recklessly not because of lack of regulations but mainly due to the unprecedented money supply created due to the above three factors. The entire world was awash with unsustainable money supply in those booming years.

5. Creation of the Euro currency in Europe was another major blunder which exuberated the distortions to an ideal money market. The corrective measures that come to play in a undistorted currency market (where the value of a nations currency is determined by the inherent strength of its economy, its budget deficits, inflation and interest rates) could not happen within Euro areas as well as in US money markets.

The US and the world seem not to have learnt any worthwhile lessons from this major crisis and in future similar booms and busts will recur as public memory is short and economic illiteracy is widespread.

The corrective measures that should be put in place now are :

11.    Massive reduction in US budget deficits by reducing US military and other expenditures. Closing of government backed housing loan mortgage institutions.
22.    China and other Asian exporting nations should abandon (or at least reduce) the distortions they create in artificially propping up the US dollar. Especially the Chinese role in this is huge and unsustainable in the long run.
33.    Euro currency should be abandoned in a calibrated manner or otherwise the Euro area will collapse due to internal contradictions in the long run. This will pull down the world economy when it occurs. Ireland and Spain suffer needlessly due to Euro while basically they remain solvent and were growing economies in the past.
44.    All the nations should try to reduce their budget deficits and contain unwanted and wasteful expenditures, especially military spending. (this is a tall order and idealistic, but if it continues unabated then crisis will recur)


Thursday, September 09, 2010

Food Vs Clothing in India

There is a great deal of debate, reports and analysis
about the shortage of basic needs in India,
esp about food, healthcare and education needs.

But so far, i have not seen anything on the second most important
of the basic needs : Clothing

there is too much data on nutriciton deficiency, malnutrition, crisis in
agriculture, farmers sucides, food production, etc. But so far nothing
about clothing.

Clothing and textile industry has been allowed to evolve into full
fledged capitalistic model with economies of scale, etc after LPG.
Hence there is no supply constraints and prices too have
faller drastically when compared to the 70s and 60s. the poorest of
the poor are now better

and fully clothed than ever before. I guess for those who lived thru 50s, 60s
and 70s, witnessed torn and old cloths worn by poor and middle class.
Clothing was a luxury and owning terlin shirt was a prestige issue. Now,
a poor labourer can buy a piece of cloth (s shirt or saree) with his/ her one
or two day wages. I guess it cost more than these wage rates in the
olden days.

Can we have an informed debate about this ?

and land ceiling acts prevented Indian agricultre into evolving into full
fledged large corporate farms of 1000s of acres of size (or collective
farms of communist states). Only coffee and tea plantations have
been exemtped because they will not be viable on tiny or small
scale. But the logic behind allowing very large farms of coffee or
tea equally applies to other agriculture farms like paddy, wheat,
sugarcane, fruits, etc.

Any inputs about the comparisons between these two vital
needs : Food Vs Clothing in India ? I guess the entry of Reliance
made a big difference in this field..

Wednesday, September 23, 2009

Rajaji on Sri Sri Prakasa and Nehru’s policies :

Rajaji writes about Sri Sri Prakasa and Nehru's policies  :

 

Hear Sri Sri Prakasa, veteran patriot who can justly be called  
a born congressman whose disinterested attachment to the Indian
National Congress dates from the Home Rule movement up to date :

 

"For me, after fifty years in public life, the pain is intense
when I see what the private citizen has come to, and what power
has been vested in the hands of those who are in Government employ.

 

I certainly did not work for a Swaraj like that, and am sorry
that I am alive to see what is going on in my unhappy land. To
the rulers I would say that it is no fun ruling a people who have
lost all self-respect ; who regard the taking and giving of bribes
as a matter of course; abd who surrendered themselves to the
position that either one must get into Government and exercise
irresponsible authority, or be a slave to be exploited and
maltreated as may please the powers-that-be."

 

How much conviction and feeling there must be, one can imagine,
before the above could be written by a veteran Congress-man who
joined in the fight for Indian freedom with Mrs.Beasant first
and then with Gandhiji and served in parliament for many years
before he was appointed Governor of one state after another.
Sri Sri Prakasa is not the only one who feels in this way;
he is one of a great number of good people who feel the same.

 

Sri Jawaharlal Nehru, urged by patriotic impulse, and early
indoctrination committed the blunder of taking India out of
the path of humility and put it in the race for industrialization,
and did all he could to transform our ideology into that of
Soviet Russia. This was the fatal step that brought us to the
present position out of which it requires not only wisdom but
indomitable courage to save India. Social justice and removal
of disparities of opportunity and equitably distributed welfare
are great and worthy ends. But the fatal mistake was the plan
to achieve this by the shortcut of heavy borrowing and central
planning and permit-license-regime which has brought in its
wake all that makes Sri Sri Prakasa lament so bitterly.

 

December 18, 1965 Swarajya

 

Source : Satayam Eva Jeyate   Vol : III  page : 170


Monday, August 17, 2009

Financial crisis? No, capitalism as usual


http://swaminomics.org/articles/20090805.htm

Financial crisis? No, capitalism as usual

by
Swaminathan S. Anklesaria Aiyar

Dated: August 05, 2009

Just five months ago, when stock and commodity markets hit rock bottom, capitalism was viewed as seriously if not terminally sick. The Financial Times ran a series of articles labeled "The Future of Capitalism." Economists, politicians, and philosophers saw the Great Recession of 2007-09 as a historic watershed, and produced new visions of a changed capitalism.

Today, that looks like much ado about nothing. Stock markets are booming, commodity prices are rising, and shipping rates have tripled. Pessimists warn of rising defaults in credit cards, commercial realty and corporate debt, so we could have a double-dip recession. But markets believe the worst is over. Despite political and public outrage over "casino capitalism" the financial reforms being contemplated across the world are not fundamental.

Four months ago, pundits waxed eloquent about learning lessons for reform from the financial crisis. Today the greatest lesson of all seems to be that capitalism, with all its flaws, can cope with Great Recessions. We have always had financial crises and always will: that's the nature of capitalism. The system will always need reforms to keep pace with changing technologies and innovations. Yet it has proved its resilience. Mark Twain once said that rumours of his death were greatly exaggerated. The same can be said of capitalism.

In years ahead, financial regulation will definitely increase. But this will change capitalism's profile only slightly, since the financial sector was the most regulated one even before the crisis. Hedge funds, the least regulated financial entities of all, survived the crisis without bailouts, even as banks, the most regulated entities, suffered badly. Regulation does not prevent all crises: Japan had the most regulated financial sector among developed countries but suffered a lost decade in the 1990s. Lesson: while the future will see more regulation, financial crises will still happen.

Stiffer capital adequacy norms look certain, to check the excessive leverage of the last decade. Yet history suggests that financial innovation will ultimately find ways round regulations. Bank regulation was ultimately circumvented by a shadow banking system, and off-balance sheet vehicles. Expect ultimate circumvention of the new regulations. This will not be entirely a tragedy. The gains of financial innovation may initially be eclipsed by losses, but the losses are typically checked after a fiasco whereas the gains become permanent.

In future, most derivatives will have to be traded through a clearing house, ending the counterparty risk that sank the asset-backed securities market. Despite criticism, securitization will continue with modifications. Banks will be able to securitise mortgages subject to retaining a certain proportion of mortgages they originate, a safeguard against excessive risk-taking in mortgage origination.

Some flaws will not be reformed at all. A special US problem is that its mortgages are non-recourse loans: the lender can get back the house after a default, but cannot go after the other assets of the borrower. This encourages massive willful default. Mortgage lenders in India, Europe and most countries, can go after other assets. But US politicians portray the entire housing bust as an evil perpetrated by lenders on innocent home buyers, and this political theatre avoids making borrowers accountable too. This carries the seeds of a future bust.

Politicians rail against excessive executive pay, and pay curbs have been instituted in companies being bailed out. Yet there is no move to fundamentally change payment structures in solvent companies. Some reformers want bonuses to be clawed back after a fall, but in many cases the employees may have left, and it is difficult to pinpoint accountability for innovations several years after they arise.

There is vague talk of reducing the global imbalances that exacerbated the crisis, but no sign of a credible remedy. Neither the IMF nor Financial Stability Forum have the requisite powers to check future imbalances. Asian countries still want to build high reserves as insurance, perpetuating global imbalances. This too has the seeds of a future bust.

Politicians want to check future bubbles, but are unclear how to do so. There will always be differing opinions on when exactly a boom becomes a bubble. Besides, bursting an asset bubble without damaging the overall economy is problematic. High interest rates will check a housing bubble, but will also hit corporates and consumers, and may cause a recession. Imposing stiff margin requirements to check a stock market bubble might drive money into other assets and cause bubbles there.

In sum, no major overhaul of capitalism seems on the cards. The rapid transition from despair in March to the stock market boom today suggests that the markets don't really see the need for great change. The existing system has survived the Great Recession, and that is seen as Great News.

Is this because humans are utterly myopic? No, moaning and groaning about the failings of capitalism are really part of political theatre in a recession. In my youth, the Communist Party would meet delightedly during every recession and proclaim that capitalism was now in its final death throes. Even after the collapse of communism, dirges are still sung by other parties. The singing ends abruptly as economies pick up again, and turns out to be more a recession ritual than an anthem for reform.

Recessions are viewed by the public as outcomes of policy blunders, as tragedies that cost jobs and production. That's certainly true. But recessions are also essential correctives to the excesses inbuilt in a capitalism system driven by animal spirits, innovation, the search for higher returns, and euphoria. The system works through creative destruction. This entails boom and bust, greed and failure, euphoria and panic, fast growth and recession. Recessions and financial crises may look like blemishes of capitalism, but are actually integral to its process of creative destruction.

So, even after reforms, expect more financial crises and recessions in the future. We would be wise to institute reforms that reduce the risks, but even wiser to understand that the risks cannot be ended without ending enterprise and innovation too.

http://swaminomics.org/articles/20090805.htm

 

Thursday, July 16, 2009

The bogey of "inequality"

Dear Friends,
 
I am amused and irritated whenever i read and hear about the cry
"...growing inquality of incomes" etc whenever people comment about
liberalisation, etc.
 
I am not an economist and not much aware of economic theory.
But shouldn't the net poverty ratio and absolute number of people
in poverty be the most important criterion when we discuss about
"growing inequality" ?
 
Suppose a nation has 100 % people below poverty line and
all living on one square meal a day ; and another nation has
10 % people below poverty line, 80 % middle class and
10 % in rich category. Statistically, the first nation has
most equality of income and what not, than the second
nation. So which is better ?
 
I suppose, theoritically, with relative statistics, it
is possible to prove that war torn and starving Rawanda or
Sudan has less 'income inequality' than, say Sweden.
 
there is similar talk about China and India. But both these
large nations are much much better when compared to
1980.
 
Relative statistics ?

---------------
a reply from my Professor :
 
Dear Athiyaman,

At this URL you would get technical reasons for what you had stated so
clearly and elegantly in understandable English on inequality.  You will
have to (free) download the article from the site.

S.Neelakantan.
 

Ayn Rand and Atlas Shrugged

Dear JeMo,
 
As my english typing is much faster, i write this in english..
 
Ayn Rand did not advocate anti-humanitarianism or is not
for or against common charity or service. it is much more
complex than that. she had clarifed in Atlas Shrugged about
this. Her idea is about human motivation and what or which
CREATES everything and anything in this world. She does
not condemn or object to charity or helping fellow men.
But that motive (of helping fellowmen at ANY cost) alone is
not to be propounded as the most moral while all other
motives are immoral. this is her argument and stand.
Only her idea of selfishness is much misunderstood and
condemned.  Anyone who works for his profit and builds
an empire (thru legal means without usurping the rights or
properties of any other fellow men) cannot be and
should not be termed as a 'selfish' ,etc. In fact, it is
because of these entrepreuners and innovators that
we are able to live a much much better standard of living
than our forefathers. this cheap computers and internet
and transport and food and clothes, etc ; anything and
everything here..
 
And about the (false) sense of guilty consciousness instilled
into the psyche of entrepreneurs (like me) and industrialists
thru the incessant preaching of moralists and communists
and leftists (What ever that may mean), that we are
exploitators and inhuman creatures who are the enemies
of the working class and such. this kind of preaching which
is totally wrong and illogical has been going on in the name
of religion and socialism since time immorial. Ayan Rand
exposes these myths and talks about the state of
"guiltless spontaneousness" ; it is very important point.
 
Ayn Rand's whole philoshophy was against this tirade.
Yes, She is harsh and sounds abrasive and cruel at times.
and some illogic or impractical aspects in her characters
and plots. But, still she is one the greatest and original thinkers
20the century. No writer or philoshoper of her times came
out sharply in defence of capitalism (this term is a misnomer
and much misunderstood ; the ideal world shouild be
free enterprise, the stress on the term "free") than her.
 
We must view her in the context of her time and back ground.
She was hounded out of USSR and worked her way up in
US as a refuge. and there was a larger than life debate in her
days about the merits and demerits of capitalsim and
communism.
 
And pls don;'t conclude about her from the attitude of
IAS and IPS officer cadres. and we cannot generalise
about these ICS fellos too. Compare their attitude towards
civil servants of US or EU where they have very less
job security and hence more professional. The arrogance
of Indian IAS wallahs is not be confused with Ayan Rand.
 
And she died in her flat in New York in 1982, with her mind
fully alert to the end. Certainly she did not loose her
faculty or was confined to any institution, as you had
mentioned in your blog post. Pls read her associate
and a famous psyhologist Natheinel Branden;s book
about her. (Judgement)
 
Pls see :
 
 
about her not so famous book :
 
Capitalism: The Unknown Ideal: (very important book)
 
 
 
more later.
--
Regards / அன்புடன்

K.R.Athiyaman  / K.R.அதியமான்

Wednesday, April 29, 2009

Distortions in money markets due to government interventions

Dear Friends,
 
There is lot of talk all over the world over the failure of capitalism
and neo-liberalism. and about market failuers, etc. Vaild enough.
 
But were the markets, esp, money markets, really 'free' enough ?
 
Many many distortions as follows :
 
1.Unlike all other commodities, products and services,
legal tender money of all nations is issued, controlled
and printed only by governments. But a few centuries
back they were private 'banknotes' baked by gold.
Hence, this is a basic and vital distortion of market.
Imagine a state where there are numerous 'currencies'
issued by banks and which gain the trust and goodwill
of the people thru reputation and past history.
 
And this legal tender certainly is printed and pumped into
the sytem with no qualms or norms for the quantity to
match the national output/GDP proportionally. Hence,
the old story of chronic deficts and chronic inflation
which distorts all price signals, etc.
 
The Central banks further distort the money markets,
by 'fixing' the rate of interest periodically to
'stimulate' the economy or etc. The rates in a ideal
free market will always be allowd to 'float' freely
and be determined by market forces.
 
Hence twin distortions of supply of money and
interest rates make this far from a free market.
 
2.Goverment subsidies, and gurantees like underwriting
home mortage loans by the twin gaints Freddie Mac and
Faany Mae. Hence the 'incentive' to dump 'toxic assets'
created without any sense of responsiblity or ownership
on govt funded FI distorts free markets.
 
3.Tax rates are universally deemed to be too high and
unfair by most people.But govts deems them necessary
to finance its operations, esp dpefence budget.
Hence evasion of taxes everywhere leads to creation of black
money and this money has to be stashed and stored in
a 'secure' area.  Flows into areas when otherwise it would
not due to this distortion.
 
4.Free convertiblity of currencies : Not all currencies of the
world are fully and freely convertible. Hence the emergence of
carry trade. (borrow yen at near 0 % interest in Japan,
convert into USD and invest in a asset yielding better
returns. This is a major distortion.
 
5. US dollar as reserve currency and the currency for most
international trade and investement. Suppose if there is
no 'reserve' currency and all transactions are done only
in local currencies. (e.g : India trades with Saudi in
only riayls or rupee, etc) ; hence USD is artifically
over valued and the entire world subsidies US trade
and other deficts, while US can keep on funding
itself by printing USD limitlessly. this is a major
distortion of money marktets.
 
An Ideal free market : (theoritical utopia)
 
Free flow of goods ,capital, labour and technology
across the world. suppose if there are no
individual nations and trade blocs and cartels
like OPEC. and no central banks and defence
budgets, etc. People of the world are free to
migrate and export / import seemlessly with
no borders / taxes, etc. All transactions are
volunatary free contracts between individuals and
companies, etc with NO govt intervention in
labour. money market, etc. Taxes are very
very minimum to fund govt areas of police,
courts and minimum welfare (?) only
And numerous currencies of private banks
backed by their assets or good will, etc.
No black money, tax havens, carry trade,
negative interest rates created by central
banks, etc. That is currencies are actually
a medium of exchange only and a tool
to extract inderect tax by govts...
 
Then if there is market failure, it
will be a valid argument.
 
Important links :
 
Who murdered the financial system?
by Swaminathan S. Anklesaria Aiyar
http://www.swaminomics.org/articles/20081022.htm
 
Excess speculation or excess money? (June 29,2008)
http://swaminomics.org/articles/20080629.htm
 
How to Turn a Recession into a Depression 
 
Did the Fed, or Asian Savings, Cause the housing bubble ?
 
Deepak Lal: The global financial crisis
 
The Fed Didn't Cause the Housing Bubble
 
Petro dollars Vs Petro Euros
 
 
--
Anbudan / அன்புடன்

K.R.Athiyaman  / K.R.அதியமான்

Chennai - 96

http://nellikkani.blogspot.com  

http://athiyamaan.blogspot.com

http://athiyaman.blogspot.com

Thursday, April 02, 2009

How to Turn a Recession into a Depression

http://cato.org/pubs/policy_report/v31n2/cpr31n2-1.html
by William A. Niskanen

Four federal economic policies transformed the Hoover recession into the Great Depression: higher tariffs, stronger unions, higher marginal tax rates, and a lower money supply. President Obama, unfortunately, has endorsed some variant of the first three of these policies, and he will face a critical choice on monetary policy in a year or so.

Trade

The Smoot-Hawley Tariff Act was passed by the House in May 1929, before the stock market collapse in October, and was enacted in June 1930 despite the opposition of many economists and several leading businessmen. Tariffs were increased 60 percent on 3,200 imported products, although most imports remained duty free. Moreover, most of the tariffs were in dollars per unit, so the real cost of the tariffs increased with the subsequent deflation. This act provoked 60 other governments to enact retaliatory tariffs. The higher tariffs and the general recession reduced total world trade by about two-thirds by 1933, and the U.S. unemployment rate increased from 7.8 percent when the Smoot-Hawley Act was enacted to 25.1 percent in 1933.

Senator Obama had been a cosponsor of the Fair Currency Act of 2007, which would have authorized a countervailing duty on imported products from a nonmarket economy with an undervalued exchange rate. Although directed primarily against China, it was also broadened to include Canada and Mexico. Approval of this act would surely provoke some form of retaliation; the United States is especially vulnerable to retaliation by China, because we are dependent on China to finance our current account deficit. A statement by Treasury secretary-designate Timothy Geithner during his confirmation hearing increases the prospect that the Obama administration will rule that China has manipulated its currency. During his campaign for the presidency, Obama also proposed opening up NAFTA to renegotiate the labor and environmental standards, and he opposed the several outstanding bilateral trade agreements that had been negotiated but not yet approved. During the congressional deliberations on the 2009 fiscal stimulus bill, however, President Obama expressed caution about any Buy America provision that might provoke trade retaliation.

Labor

The Davis-Bacon Act of 1931 required that labor employed on a federally financed construction project be paid no less than the local rates on a similar project. The Norris- LaGuardia Act of 1932 made "yellow dog" contracts, which made an agreement not to join a union a condition for employment, unenforceable in federal courts, and it banned any federal injunctions in nonviolent labor disputes. This was followed by the 1935 Wagner Act—which guaranteed workers' rights to organize unions, collective bargaining, and strikes—and the 1938 Fair Labor Standards Act, which established a federal minimum wage and banned child labor. These acts increased the real price of labor services, especially in the industrial sector, and were an important contributor to the substantial increase in the unemployment rate during the Great Depression.

Senator Obama had been an original cosponsor of the Employee Free Choice Act of 2007, the primary effect of which would be to outlaw secret ballots on the decision to certify a union. Another provision of this proposed law would authorize the government to write the labor contract in newly unionized firms if management and the union have not agreed to an initial labor contract within a specified time. Obama has also been a consistent supporter of higher minimum wages, which increases the unemployment rate of young unskilled workers.

Taxes

A year before the bottom of the Great Depression, the Revenue Act of 1932 increased the top marginal federal tax rate on personal income from 25 percent to 63 percent, increased the corporate tax rate from 12 percent to 13.75 percent, and doubled the estate tax rate. The Revenue Act of 1936 further increased the top marginal tax rate on personal income to 79 percent and the rate on undistributed corporate profits to 42 percent. These two revenue acts increased federal tax rates more than in any other peacetime period and extended the length of the Great Depression by substantially weakening the incentive to work, save, invest, and increase productivity.

During his presidential campaign, Senator Obama proposed a combination of tax credits for low- and middle-income households, a substantial increase in marginal tax rates for those with an annual household income over $250,000, and several selective changes in business taxation. The top marginal rate on income would be increased from 35 percent to 39.6 percent, the marginal payroll tax would be increased from 1.45 percent to 5.45 percent (plus an equal increase to the employer), and the rate on capital gains and dividends would be increased from 15 percent to 20 percent. A phase-out of the personal exemption and specific deductions would add about 4.5 percentage points to the marginal tax rate (an estimate by the Tax Foundation).

The total marginal tax rate, thus, would be increased from 36.45 percent to 49.55 percent, reducing the after-tax return to additional earnings by about one-fifth; a lot of small business owners and professional couples would be subject to these higher marginal tax rates. Obama has not proposed a reduction in the corporate tax rate, although this rate is now the second highest among the industrial nations. His proposed changes in business taxation are designed to change the composition of U.S. business activity, increasing taxes on oil and gas companies and on U.S. multinationals that defer repatriation of foreign profits in favor of companies that produce renewable energy and increase domestic employment.

Obama's proposed federal tax rates do not look unusual compared to federal taxes before the Reagan-era rate reductions, but they would be a significant increase relative to recent years at a time when many other governments are reducing their personal and business tax rates.

Monetary Policy

In retrospect, the origin of the Great Depression seems surprisingly similar to recent conditions— with one huge exception. The Federal Reserve had increased the money supply from 1921 through 1927 by around 60 percent, contributing to the rapid increase in stock prices. In early 1928, however, the Federal Reserve began a policy of monetary restraint that continued through May 1929, increasing the discount rate from 3.5 percent to 5 percent in three stages. This triggered the stock market collapse in October.

The fall in stock prices and the subsequent general deflation led to a large increase in the demand for money. Following the collapse of the Bank of the United States in December 1930, however, the Federal Reserve increased interest rates again in early 1931. From 1929 to 1933, the money supply declined by around one-third, constrained by the rules of the gold standard, although the Federal Reserve Bank of New York had consistently urged a policy of monetary expansion. During this period, the number of U.S. banks also declined by around one-third due to either failure or merger.

This combination of a large increase in the demand for money and a substantial reduction in the supply of money was the primary cause of the first phase of the Great Depression. This period of monetary contraction ended only in 1933 when President Roosevelt raised the price of gold by 75 percent, permitting a renewed expansion of the money supply. In 1936 and 1937, however, the Federal Reserve doubled bank reserve requirements, leading to the short sharp recession of 1937–38 within the longer period of the Great Depression.

The monetary policy that led to the current recession was similar to the policy that led to the first phase of the Great Depression. The Federal Reserve maintained an expansionary monetary policy from 2001 into 2004, with a federal funds rate lower than the general inflation rate, contributing to both the housing boom and the increase in stock prices. Then from mid-2004 through mid-2007, the federal funds rate was increased by 4.25 percentage points, leading to a decline in residential investment beginning in the spring of 2006 and a decline in the stock market and national output beginning in the fall of 2007.

As in the 1930s, the decline in stock prices and the subsequent deflation greatly increased the demand for money and other financial instruments such as Treasury bills. The major difference from the earlier period is that the Federal Reserve has maintained a very aggressive monetary policy since mid-2007, reducing the federal funds rate by 5 percentage points. Moreover, beginning last fall, the Federal Reserve has purchased a wide range of private and public financial instruments, doubling the monetary base since last August. This dramatic change in monetary policy is primarily attributable to the lessons from Fed Chairman Ben Bernanke's studies of the monetary policy mistakes during the 1930s.

The very rapid increase in the monetary base since last August was, I believe, the correct response to the huge increase in the demand for money and is likely to be much more effective than any fiscal stimulus plan. But it presents a potentially large future danger. At such time as there is a revival of some general inflation and increased confidence in the security of nonmonetary assets, the demand for money will decline to a more normal level relative to total money income.

At that time, the Federal Reserve and the Obama administration will be faced with a very difficult choice—allow a high rate of inflation or raise interest rates fast enough to avoid that outcome. The first option would be the policy of inaction; the second option would require selling most of the financial assets that the Federal Reserve has accumulated in the past few months. My guess is that the time for this difficult choice is not too far off, probably in the next year or two, a guess based on observing that there has already been some increase in stock prices and commodity prices since November. And that will be a difficult time to make this difficult choice. Bernanke's term as Fed Chairman expires in January 2010 and, of course, there will also be a congressional election that fall, reducing the incentives and support for a rapid increase in interest rates. The second option would also present the potential for a W-shaped recession and recovery, extending the period of weak economic growth to avoid a high rate of inflation. In either case, the only way to avoid being faced with such a difficult choice in the more distant future is to correct the conditions that led this recession to be a financial crisis. This would require restructuring the mortgage market such that mortgages and mortgagebacked securities are more liquid and their risks are more transparent.

Other Related Policies

The trade and labor policies of the 1930s were designed to maintain the prices of products and labor services, usually at the expense of the amounts supplied. Other policies had the same objectives and effects. The 1933 National Industrial Recovery Act authorized cartels to maintain prices; until this act was declared unconstitutional in 1935, for example, members of these cartels were subject to fines for discounting. The most egregious of such policies was the Agricultural Adjustment Act of 1933; until this act was declared unconstitutional in 1936, this act authorized payments to farmers to reduce their acreage under cultivation. In effect, these policies established a floor under prices that prevented many product and labor markets from clearing, given the decline in nominal demand. These policies were an important reason why total output did not recover to the 1929 level until 1939, and the unemployment rate at the end of this decade was 17.2 percent.

Several current agricultural programs also have much the same objective and effects. The price of milk is maintained by a government- authorized cartel, the price of sugar by a quota on imports, and the price of corn has been increased by a regulation that requires a substantial production of corn-based ethanol as a motor fuel. I do not know Obama's position on the dairy cartel. During his campaign for the presidency, however, Senator Obama was a strong supporter of both the sugar quota and the ethanol program.

One other policy of both the Hoover and Roosevelt administrations was a substantial increase in federal expenditures for public infrastructure, especially hydroelectric facilities. These programs did not reduce total output but they were clearly not effective, given the combination of other policies, in reducing the depth or duration of the Great Depression. The government of Japan enacted a substantially larger public infrastructure program in the 1990s, also with no effect on ending what turned out to be a decade of very low economic growth. A major provision of President Obama's fiscal stimulus proposal, of course, is a substantial increase in federal expenditures for public infrastructure. Fed Chairman Bernanke was correct to observe recently that "Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."

Conclusion

The most important lesson of this paper is to avoid repeating the policies that increased the depth and duration of the Great Depression, particularly in combination. Unfortunately, some of these policies still have broad political appeal—limiting international trade, strengthening unions, other measures to support the prices of some products and labor services, and higher taxes on the wealthy and the income from capital. One important lesson that we seem to have learned from the 1930s is to avoid reducing the supply of money in response to an increased demand for money. Another important lesson that we have not yet learned is that some government spending for infrastructure may be both popular and valuable but is not very effective in countering a recession.

We have yet to learn the lessons about what caused the current recession and the general financial crisis. The United States had experienced 11 prior recessions since World War II without a general financial crisis, so something new must have happened that caused the current financial crisis. My judgment is that the government policies and private practices that changed the way mortgages are financed are that dangerous new development, but that is a story for another occasion. In this respect, I agree with Chairman Bernanke's recent conclusion that "we should revisit capital regulations, accounting rules, and other aspects of the regulatory regime to ensure that they do not induce excessive procyclicality in the financial system and the economy."

This article originally appeared in the March/April 2009 edition of Cato Policy Report.

Thursday, January 29, 2009

MTC bus serives unable to meet the rising demand : reasons and solutions

To
 
The Editor,
The Hindu 
Chennai
 
Dear Sir,
 
This is with reference to the news report about lack of sufficent MTC buses in
Chennai suburbs.
 
MTC suffers from the typical govt monopoly PSUs. Corruption, mis-management
and above all the crucial lack of flexibilty and adaptability that is the norm in any
private enterprise. Hence the acute shortage of bus services to meet the ever
increasing demand. Only soloution is to allow private sector to compete with
MTC in all routes (as in rest of Tamil Nadu). The new routes can be auctioned
in a transparent manner. The dramatic change / improvement in telecom services
since liberalisation began is a very comparable situation. 
 
MRTP stations offer an excellent and a crucial hubs for bus stands, mini bus
stands and vans. But MTC is unable to service them effectively. Without this
proper connectivity between MRTP railways and bus transport sytem, the 
thousands of crores poured into MRTP will be under utlised and the public
loose out.
 
Thanking You
 
Yours Sincerely
K.R.Athiyaman

my old mail to chennai Traffic Commisoner :


From : K.R.Athiyaman,
        Perungudi, Chennai - 96

Respected Sir,

The following is my article published in
Adyar times some time ago, regarding
traffic problems.

Lack of sufficient public transport forces us, middle
class people to use two wheelers. And in the suburbs,
maxicab vans ply illegally (an open secret), and
provide a much needed fill-up to the demand. And
the public are greatly dependent on such vans, which
provide a valuble and cheap service. Ans they have to
regularly bribe the traffice constables and RTO
officials to run their much needed services.

The MTC bus service is inefficent and not enough.
The whole MTC system is corrupt, and nearly bankrupt
through mis-mangemsnt, top heavy bureacracy, etc. It
can never be revived or revitalised.

We request you to use your good offices with the CM to
implement the announced privatisation of the bus (mini bus)
transport system. We would be grateful to you if this
can be done. and it will go a long way in easing the
traffic conjestion. And legalising the maxicab
operators is much needed.

Thanks & Regards
K.R.Athiyaman

my article :

Traffic Problems and Solutions

Phenomenal rise in private vehicles has resulted in
traffic congestion.Due to an acute shortage of buses
(especially during peak hours),commuters tend to buy
two wheelers or cars as soon as they can afford to own
one. Until 1980 it was normal for most middle class
people to travel by buses.

Nationalisation of buses in 60s resulted in creation
of goverment monopoly and corruption in this sector.
Mis-management, pilferage and lack of transparency and
accountability of government bus transport
corporations resulted in huge losses and acute
shortage in bus services to meet the growing demand.

The argument against privatisation that the private
operators will not service remote and loss making
routes has yet to be proved. Government MTC services
in loss making areas are curtailed. For example
many routes in Nanganallur, Chennai has been
withdrawn citing lack of patronage.

The existing private bus routes are now sold in black
market for crores of rupees. Yet private buses are
better maintained and profitable. There is a vested
interest lobby of existing private bus owners (permit
holders),bureaucrats,politicians and trade unions of
govt corporations who oppose deregulation and
privatization of bus transports. Even mini-buses are
not allowed to expand service areas. Share autos are
opposed by regular auto drivers union.

If, instead of nationalization of buses, free
competition and low taxes were encouraged since
independence, then there would have been an excellent
and efficient public transport system. The culture of
owning private vehicles for commuting would not have
grown this much. A single bus can carry upto 60
commuters while lack of bus forces these 60 commuters
to own and travel by two-wheelers, there
by shrinking road space and increasing pollution.

Private bus stands and  parking lots (bus stops along
main roads and highways) can be permitted and
encouraged. Two wheeler taxis can be allowed in
suburbs and remote areas.

Decentralisation and delicensing of transport sector
will result in better services and reduce traffic
congestion.

---------------------------------------------

போக்குவரத்து நெரிசலும், சோசியலிசமும்

பேருந்து வசதி போதுமானதாக இல்லாததால் தனியார் வண்டிகள் பெருகி நெரிசல்
மிகுந்துள்ளது. Peak Hourல் எந்த வழித்தடத்திலும் பேருந்துக்குள் ஏற
முடிவதில்லை. போதிய எண்ணிக்கையில் பேருந்துகளை இயக்க அரசாங்கத்தால்
இயலவில்லை. காரணம் நஷ்டம் மற்றும் ஊழல். 70களில் தேசிய
மயமாக்கப்படுவதற்கு முன் TVSம், LGBயும் அருமையான சேவையினை செய்தன.
சோசியலிசம் என்ற பெயரால் இன்று கடுமையான பற்றாக் குறை, ஊழல் மற்றும்
நெரிசல். பேருந்தில் ஏற முடியாதவர்கள் இரு சக்கர வாகனங்களை வாங்க
முயல்கின்றனர். அவை மலிந்து விட்டன.சென்னையில் ஒரு 700 மினி பஸ்களுக்கு
permit வழங்கப்பட்டால் (ஏல முறையில்) பிரச்சனையைக் குறைக்கலாம். தனியார்
பேருந்து மற்றும் parking மற்றும் bus stops அனுமதிக்கப்பட்டு, மினி
வேன், ஷேர் ஆட்டோ, இரண்டு சக்கர டாக்ஸிகளும் அனுமதிக்கப்பட்டால்
பொதுமக்களுக்கு மிகப் பயன்படும். நெரிசல் குறையும்.

இடது சாரிகளும், ஆட்டோ யூனியன்களும், எம் டி சி பஸ் யூனியன்களும் ஊழல்
அதிகாரிகளும், அரசியல் தலைவர்களும் இதற்குக் கடும் எதிர்ப்பு
தெரிவிக்கின்றனர். முதலாளி வளர்ந்து விடுவானாம். மோனோபோலி வந்து
விடுமாம். டெலிகாம்மில் நடந்துள்ள புரட்சி இந்த வாதங்களைத் தகர்க்கிறது.
BSNLன் மோனோபோலி உடைந்தவுடன் சேவை மலிவாகவும், சிறப்பாகவும் ஆனது.
அனைத்துத் துறைகளிலும் இதே கதைதான்.

ஆனால் பூனைக்கு யார் மணி கட்டுவது? எங்கள் ஊரான கரூரில் பஸ் கட்டுமான
தொழில் பெருகியுள்ளது. பல முக்கிய தடங்கள் (உம்; சேலம் - ஈரோடு) பல கோடி
ரூபாயில் கைமாறுகின்றன. (பெர்மிட்டின் விலை, கருப்பு பணத்தில்). மேலும்
புதிய வழித் தடங்கள் அனுமதிக்கப் படவேயில்லை. கேரளாவில் புதிய வழித்
தடங்கள் அனுமதிக்கப்பட்டுள்ளன.

இதற்கு விடிவு காலம் என்றோ? அதுவரை மக்கள் மிருகங்களை விடக் கேவலமான
முறையில் பஸ்களில் திணிக்கப்பட்டு தொங்கிக் கொண்டுதான் செல்ல வேண்டும்..

--

Anbudan

K.R.Athiyaman, Chennai - 96

http://nellikkani.blogspot.com
http://athiyamaan.blogspot.com