Individual Liberty, Free Markets, and Peace

Food Vs Clothing in India

2010-09-09T00:13:00.001-07:00

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..

Rajaji on Sri Sri Prakasa and Nehru’s policies :

2009-09-23T07:49:00.001-07:00

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

Financial crisis? No, capitalism as usual

2009-08-17T23:04:00.001-07:00

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

The bogey of "inequality"

2009-07-16T22:50:00.001-07:00

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.

http://www.cato.org/pub_display.php?pub_id=10351#

Some other interesting issues:
http://www.economist.com/world/asia/displaystory.cfm?story_id=14052240&fsrc=rss

http://www.economist.com/opinion/displaystory.cfm?story_id=14034893&fsrc=rss

http://denniscooper-theweaklings.blogspot.com/2009/07/alan-presents-question-do-angels-in.html

S.Neelakantan.

Ayn Rand and Atlas Shrugged

2009-07-16T22:47:00.001-07:00

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 :

http://capitalism.org/

about her not so famous book :

Capitalism: The Unknown Ideal: (very important book)

http://www.aynrand.org/site/PageServer?pagename=objectivism_nonfiction_capitalism_the_unknown_ideal

more later.

--
Regards / அன்புடன்

K.R.Athiyaman / K.R.அதியமான்

Distortions in money markets due to government interventions

2009-04-29T22:29:00.001-07:00

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

http://cato.org/pubs/policy_report/v31n2/cpr31n2-1.html

Did the Fed, or Asian Savings, Cause the housing bubble ?

http://mises.org/story/3203

Deepak Lal: The global financial crisis

http://www.business-standard.com/india/news/deepak-lalglobal-financial-crisis/20/08/341241/

The Fed Didn't Cause the Housing Bubble

http://online.wsj.com/article/SB123672965066989281.html#

Petro dollars Vs Petro Euros

http://web.nps.navy.mil/~relooney/Rel_MEJ_S04.pdf

--
Anbudan / அன்புடன்

K.R.Athiyaman / K.R.அதியமான்

Chennai - 96

http://nellikkani.blogspot.com

http://athiyamaan.blogspot.com

http://athiyaman.blogspot.com

How to Turn a Recession into a Depression

2009-04-02T23:28:00.001-07:00

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.

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

2009-01-29T20:59:00.001-08:00

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

Who murdered the financial system?

2008-10-24T03:32:00.001-07:00

Who murdered the financial system?

by Swaminathan S. Anklesaria Aiyar

http://www.swaminomics.org/articles/20081022.htm

Dated: October 22, 2008

Leftists claim that the global financial crisis was caused by reckless
deregulation and greed. Rightists blame half-baked financial
regulations and perverse incentives. Actually, the financial sector is
deeply regulated, with major roles for both the state and markets. It
was not one or the other that failed but the combination.

The best metaphor for the mess comes from Jack and Suzy Welch, who
recall Agatha Christie's "Murder on the Orient Express." In this
novel, 12 people are suspects in a murder. And 12 turn out to be
guilty. What starts as a whodunit concludes as an everybody-dun-it.

In the same spirit, allow me to present the 12 murderers of the US
financial system.

1. The Federal Reserve Board. Alan Greenspan, Fed Governor in
1987-2006, was once hailed as a genius for keeping the US booming, but
is now called a serial bubble-maker. He presided over bubbles in
housing, credit, and stock markets. He said it was difficult to
identify asset bubbles in advance, so anti-bubble policies might be
anti-growth. It was better to let bubbles build, and sweep up after
they burst. Bernanke, like Greenspan, ignored the US housing bubble
till it burst.

2.US politicians. Envisioning a home for every American, regardless of
income, they provided excess implicit and explicit housing subsidies.
One law forced banks to lend to sub-prime poor borrowers. Legislators
created Fannie Mae and Freddie Mac, government-sponsored entities that
bought or underwrote 80% of all US mortgages, and enjoyed exemption
from normal regulations. Politicians ignored Greenspan's warning that
such a dominant role for two under-regulated giants posed a huge
financial risk.

3.Fannie Mae and Freddie Mac. They resisted regulation, and spent over
$ 2 million lobbying legislators against any tightening of rules. As
mortgagers of last resort they should have been especially prudent.
But they bought stacks of toxic mortgage paper—collateralized debt
obligations (CDOs)—seeking short-term profits that ultimately led to
bankruptcy.

4.Financial innovators. Their ideas provided cheap, easy credit, and
helped stoke the global economic boom of 2003-08. Securitisation of
mortgages provided an avalanche of capital for banks and mortgage
companies to lend afresh. Unfortunately the new instruments were so
complex that not even bankers realized their full risks. CDOs smuggled
BBB mortgages into AAA securities, leaving investors with huge
quantities of down-rated paper when the housing bubble burst.
Financial innovators created Credit Default Swaps (CDSs), which
insured bonds against default. CDS issues swelled to a mind-boggling $
60 trillion. When markets fell and defaults widened, those holding
CDSs faced disaster.

5.Regulators. All major countries had regulators for banking,
insurance and financial/ stock markets. These were asleep at the
wheel. No insurance regulator sought to check the runaway growth of
the CDS market, or impose normal regulatory checks like capital
adequacy. No financial regulator saw or checked the inherent risks in
complex derivatives. Leftists today demand more regulations, but these
will not thwart the next crisis if regulators stay asleep.

6.Banks and mortgage lenders. Instead of keeping mortgages on their
own books, lenders packaged these into securities and sold them. So,
they no longer had incentives to thoroughly check the creditworthiness
of borrowers. Lending norms were constantly eased. Ultimately, banks
were giving loans to people with no verification of income, jobs or
assets. Some banks offered teaser loans—low starting interest rates,
which reset at much higher levels in later years—to lure unsuspecting
borrowers.

7.Investment banks. Once, these institutions provided financial
services such as underwriting, wealth management, and assistance with
IPOs and mergers and acquisition. But more recently they began using
borrowed money—with leverage of up to 30 times—to trade on their own
account. Deservedly, all five top investment banks have disappeared.
Lehman Brothers is bust, Bear Stearns and Merrill Lynch have acquired
by banks, and Morgan Stanley and Goldman Sachs have been converted
into regular banks.

8.Rating agencies. Moody's and Standard and Poor's were not tough or
alert enough to spot the rise in risk as leverage skyrocketed. They
allowed BBB mortgages to be laundered into AAA mortgages through CDOs.

9.The Basle rules for banks. These international negotiated norms
provided harmonized regulatory checks on financial excesses across
countries. The first set of norms, Basle-I, was widely criticized as
too rigid and blunt. So countries agreed on Basle-II, which allowed
banks to use credit ratings and models based on historical record to
lower the risk-ratings of many securities. This dilution of norms led
to excesses everywhere. Iceland's banks went bust holding
loans/securities totaling 10 times its GDP. The dilution of
risk-rating in Basle-II helped inflate the financial bubble.

10.US consumers. Their savings used to be 6% of disposable income some
time ago, but more recently has been zero or even negative. They have
gone on a huge borrowing spree to spend far more than they earn. This
excess is reflected in huge, unsustainable US trade deficits.

11.Asian and OPEC countries. They undervalued their currencies to
stimulate exports and create large trade surpluses with the US. They
accumulated trillions in forex reserves, and put these mostly into
dollar securities. This depressed US interest rates, and further
fuelled borrowing there.

12.Everybody. Consumers, corporations, banks, politicians, the
media--indeed everybody-- was happy when housing prices boomed, stock
markets boomed, and credit became cheap and easily available. Bubbles
in all these areas grew in full public view. They were highlighted by
analysts, but nobody wanted to stop the lovely party. Everybody liked
easy money and rising asset prices. This trumped prudence across
countries.

So, forget the left-versus-right or regulations-versus-markets debate
on the financial crisis. States, institutions, markets and everybody
else was guilty. These actors will for some years don sackcloth and
ashes, adopt stiffer regulations, and listen to lectures on the
virtues of prudence and restraint. But after seven to ten years of the
next business upswing, I predict that we will once again have a new
generation of bubbles, evading whatever new checks have been put in
place. When everybody loves bubbles, they are both irresistible and
inevitable.

http://www.swaminomics.org/

Where did all this money come from ?

2008-10-17T21:08:00.001-07:00

Dear Sir,

The current ciris is in finanacial markets and tooted in sub-prime
mortages, as we all know. First of all, the money market has severe
govt intervention for several decades when fiat money was invented and
gold
standard was abandoned.

Some centuries ago the currecy were issued by banks backed by their
gold or other assets. Hence the original name : bank notes. Govts all
over the world 'nationalised' the currecy issuing system and established
Central Banks with sole monopoly over issue of legal tender. This is first
of all certainly not free market in the real sense.

Secondly, the chronic defict financing of all nations over decades
pumped in more money into the sytem than the sytem could absorve
thru growth in real GDP. This is true of most economies.

And US is in a unique position : its currency USD is the reserve
currency and most of world trade occurs in USD. And hence the
entire world funds the US deficts which is in trillions and trillions
over the decades. US govt prints and pumps in trillions and
trillions of USD into the world economy over the decades. The
cumulative effect of all this should be taken into account while
blaming 'free markets' alone for all this mess.

I vividly remember our discussion about value and money ; and
about the functions of money : as a medium of exchange, measure of
value, etc ; Especially the function : 'store of value' ; The accumulated
'surplus values' or capital or whatever the term flows all around the sytem
in search of investemtn avenues and good return on investemnts.
As the term value is tricky to define and contantly fluctuates in
currency and debt markets, the cumulative effect of too much money
chasing too few goods or avenues for investment seems the crux of
all issues.

The old deficniton for inflation : "Too much money chasing too few
goods" : This seems to aptly apply for this financial market mess.
Combined with the govt gurantess of the twin giants for many trillions
(Freddie and Fannie), etc.

The word cheap money, easy credit, easy money, etc are all result of
this too much fiat money ? And as the govt is the both the issuer of
money and lender of last resot, it also controls the effective interest
rates by tinkering with Fed rates. All these are certainly govt intervention
and not free markets. Last year i read in major papers that the world
boom in equity and real estate is a function of global liquidity. Means ?

Excess liquidity ? And cyclic asset bubbles are always regular
happenings. What about the net amount of M4 or legal tender that
exists in the world economy at any given moment ?

The crisis is not in manufacturing or other services. Hence to term
all this as the failure of free enterprise capitalism is pre mature.

Anyway, I guess no one wants to get back to socialism. In US no one
seems to re-establism the, say : ICC (Interstate Commerce Commission)
which throttled many sectors like trucking (like our license raaj in India
as on date).

More later..

Anbudan
Athiyaman

Holiest of all holies

2008-10-14T00:30:00.001-07:00

Dear Freind,

I could not make myself very clear to you while arguing about free
market capitalism. The UN decleration of fundamental rights covers all
aspects of life.

http://www.unhchr.ch/udhr/lang/eng.htm

and free enterprise is but a part of this declration : right to
property, right to do business and employ anybody thru volountary
free contracts ; and above all rule of the law and non-violation of
anyone's basic rights thru any means for any objectives.

All the rights of every human should not be violated by any other
individual or group or company or army or a nation or parliament or
statute or religious body, etc. that is the crux of it all. Violation of these
rights by any isim is wrong and
unjustifiable.

I consider these basic rights as the holiest of all holies in life.

Violation of property rights took place in Nandigram and elsewhere. Pls
compare how lands for mines and industires were / are acquired in the
West (say in Germany or Canda). but Gujarat SEZ land aquisition was
voluntary, free and fair.

http://www.expressindia.com/latest-news/SEZheavy-Gujarat-Thanks-to-the-states-landacquisition-policy-for-no-Nandigrams-here/273221/

Pls see my latest post :

http://nellikkani.blogspot.com/2008/06/museum-of-communism.html

anbudan
Athiyaman

Pains of a slowing miracle economy

2008-10-11T08:14:00.001-07:00

http://swaminomics.org/articles/20081005.htm

by : Swaminathan S. Anklesaria Aiyar

Pains of a slowing miracle economy

Dated: October 5, 2008

I am not usually a pessimist. But I predict that India will suffer a
lot of pain in the next 18 months, as the economy slows down along
with the current global slowdown.

The US, Europe and Japan are sinking into recession together. Forget
claims that India has decoupled from the US and can keep growing fast
regardless. India and most developing countries are indeed much less
dependent on the US economy than in the past. So, Indian growth will
be dented rather than smashed. GDP growth will slide from 9 % last
year to 7% this financial year, and to maybe 6% next year.

Now, 7% is a miracle growth rate by historical standards. You might
think that declining from super-miraculous to merely miraculous growth
cannot be particularly painful. You would be dead wrong. The direction
of change matters more than the absolute level. Rising from 5% to 7%
is blissful, but falling from 9% to 7% is painful. And a subsequent
tumble to 6% will be more painful still.

To appreciate why the direction of change matters so much, recall the
1990s. India went bust in 1991, reformed by globalising, and reaped
the reward of fast growth. GDP growth averaged 7.5% in the three-year
period 1994-97. India's growing integration with the world economy
enabled it to share in the global economic boom of those years.
Foreign institutional investors flooded into all emerging markets,
including India, sending stock market prices spiraling.

Indian optimists thought that miraculous growth was here to stay. But
along came the Asian financial crisis in 1997, and the Indian economy
slumped along with the global economy. Indian GDP growth averaged just
5.5% in the next five years.

Now, 5.5 % may not sound too bad, just a modest deceleration from the
7.5% of the preceding boom. Indeed, India's 5.5% at the time was one
of the fastest growth rates in the world. Yet the change in direction,
from acceleration to deceleration, caused enormous pain.

Industrial growth crashed in 1997-98, and barely limped forward for
years. Many industries had borrowed massively during the mid-1990s
boom to invest in world-class new plants, for which there was suddenly
no demand. Huge projects were abandoned unfinished, with companies
defaulting on mega-loans. These financial defaults brought the lending
institutions also to the verge of bankruptcy, from which they were
saved mainly by creative accounting and a friendly RBI. Medium and
small companies crashed along with their larger brethren. Employment
went into a tailspin. Stock markets crashed and companies stopped
repaying fixed deposits, so household investors suffered trauma.

The budgets of the central and state governments assumed steady growth
of revenue year after year. But the 1997 slowdown hit tax collections.
Meanwhile, a bumper Pay Commission award hugely inflated the wage
bills of central and state governments. So, governments, corporations,
employees and households investors were all sucked downward into a
whirlpool of distress. The only saving grace was the IT boom, sparked
by the global YK2 scare. But that turned out to be a bubble, and it
burst in 2001.

Difficult though these years were, they did not witness economic
collapse. India did not revert to the old Hindu rate of growth of 3.5%
witnessed in the three decades after independence. GDP growth in
1997-02 averaged a solid 5.5%. But the direction of change was
downward, not upward, and that was enough to cause widespread
distress.

I fear we are about to see a repetition of that process. As in the
1990s, a booming world economy first lifted Indian growth (and stock
markets) to new heights for several years, giving rise to the illusion
of permanency. As in the 1990s, the subsequent global slump is going
to cause an Indian slump too. As in the 1990s, the fiscal problems of
the government are going to be exacerbated by a Pay Commission award.

However, we are much better prepared for this downturn than in the
1990s. Our foreign exchange reserves are almost $ 300 billion,
cushioning our balance of payments. Corporations have not gone on a
borrowing spree paying 20% interest, as they did in the 1990s—they
have large cash reserves, modest debt-equity ratios, and interest
rates are much lower today. The banking system is in relatively good
shape today. The latest Pay Commission award this time is less onerous
than the 1997 one. Our savings rate has crossed 30%, and can keep
financing a healthy rate of investment. Infrastructural sectors like
telecom, power, roads, and ports will be only minimally affected by a
recession.

Nevertheless, pain will be widespread and sometimes deep. Income and
job opportunities will slacken, sometimes dramatically. Many companies
will suffer shrinkage or bankruptcy, especially small ones. Boom
sectors like transport, restaurants, trade, real estate and exports
will go into reverse gear. Credit will tighten, for consumers as well
as companies. Corporate profits will slump. The revenues of central
and state governments will fall, curbing their ability to alleviate
distress. The stock markets will fall further, and the Sensex may fall
below 10,000. Tighten your seat belts: we are running into rough
weather.

An Open Letter to my Friends on the Left

2008-10-02T07:25:00.001-07:00

An Open Letter to my Friends on the Left

http://myslu.stlawu.edu/~shorwitz/open_letter.htm

Steven Horwitz
Department of Economics
St. Lawrence University
sghorwitz@stlawu.edu
September 28, 2008

My friends,

In the last week or two, I have heard frequently from you that the
current financial mess has been caused by the failures of free markets
and deregulation. I have heard from you that the lust after profits,
any profits, that is central to free markets is at the core of our
problems. And I have heard from you that only significant government
intervention into financial markets can cure these problems, perhaps
once and for all. I ask of you for the next few minutes to, in the
words of Oliver Cromwell, consider that you may be mistaken. Consider
that both the diagnosis and the cure might be equally mistaken.

Consider instead that the problems of this mess were caused by the
very kinds of government regulation that you now propose. Consider
instead that effects of the profit motive that you decry depend upon
the incentives that institutions, regulations, and policies create,
which in this case led profit-seekers to do great damage. Consider
instead that the regulations that may have been the cause were
supported by, as they have often been throughout US history, the very
firms being regulated, mostly because they worked to said firms'
benefit, even as they screwed the rest of us. Consider all of this as
you ask for more of the same in the name of fixing the problem. And
finally, consider why you would ever imagine that those with wealth
and power wouldn't rig a new regulatory process in their favor.

One of the biggest confusions in the current mess is the claim that it
is the result of greed. The problem with that explanation is that
greed is always a feature of human interaction. It always has been.
Why, all of a sudden, has greed produced so much harm? And why only in
one sector of the economy? After all, isn't there plenty of greed
elsewhere? Firms are indeed profit seekers. And they will seek after
profit where the institutional incentives are such that profit is
available. In a free market, firms profit by providing the goods that
consumers want at prices they are willing to pay. (My friends, don't
stop reading there even if you disagree - now you know how I feel when
you claim this mess is a failure of free markets - at least finish
this paragraph.) However, regulations and policies and even the
rhetoric of powerful political actors can change the incentives to
profit. Regulations can make it harder for firms to minimize their
risk by requiring that they make loans to marginal borrowers.
Government institutions can encourage banks to take on extra risk by
offering an implicit government guarantee if those risks fail.
Policies can direct self-interest into activities that only serve
corporate profits, not the public.

Many of you have rightly criticized the ethanol mandate, which made it
profitable for corn growers to switch from growing corn for food to
corn for fuel, leading to higher food prices worldwide. What's
interesting is that you rightly blamed the policy and did not blame
greed and the profit motive! The current financial mess is precisely
analogous.

No free market economist thinks "greed is always good." What we think
is good are institutions that play to the self-interest of private
actors by rewarding them for serving the public, not just themselves.
We believe that's what genuinely free markets do. Market exchanges are
mutually beneficial. When the law messes up by either poorly defining
the rules of the game or trying to override them through regulation,
self-interested behavior is no longer economically mutually
beneficial. The private sector then profits by serving narrow
political ends rather than serving the public. In such cases, greed
leads to bad consequences. But it's bad not because it's
greed/self-interest rather because the institutional context within
which it operates channels self-interest in socially unproductive
ways.

This, my friends, is exactly what has brought us to the mess we are now in.

To call the housing and credit crisis a failure of the free market or
the product of unregulated greed is to overlook the myriad government
regulations, policies, and political pronouncements that have both
reduced the "freedom" of this market and channeled self-interest in
ways that have produced disastrous consequences, both intended and
unintended. Let me briefly recap goverment's starring role in our
little drama.

For starters, Fannie Mae and Freddie Mac are "government sponsored
enterprises". Though technically privately owned, they have particular
privileges granted by the government, they are overseen by Congress,
and, most importantly, they have operated with a clear promise that if
they failed, they would be bailed out. Hardly a "free market." All the
players in the mortgage market knew this from early on. In the early
1990s, Congress eased Fannie and Freddie's lending requirements (to
1/4th the capital required by regular commercial banks) so as to
increase their ability to lend to poor areas. Congress also created a
regulatory agency to oversee them, but this agency also had to reapply
to Congress for its budget each year (no other financial regulator
must do so), assuring that it would tell Congress exactly what it
wanted to hear: "things are fine." In 1995, Fannie and Freddie were
given permission to enter the subprime market and regulators began to
crack down on banks who were not lending enough to distressed areas.
Several attempts were made to rein in Fannie and Freddie, but Congress
didn't have the votes to do so, especially with both organizations
making significant campaign contributions to members of both parties.
Even the New York Times as far back as 1999 saw exactly what might
happen thanks to this very unfree market, warning of a need to bailout
Fannie and Freddie if the housing market dropped.

Complicating matters further was the 1994 renewal/revision of the
Community Reinvestment Act of 1977. The CRA requires banks to to make
a certain percentage of their loans within their local communities,
especially when those communities are economically disadvantaged. In
addition, Congress explicitly directed Fannie and Freddie to expand
their lending to borrowers with marginal credit as a way of expanding
homeownership. What all of these did together was to create an
enormous profit and political incentives for banks and Fannie and
Freddie to lend more to riskier low-income borrowers. However
well-intentioned the attempts were to extend homeownership to more
Americans, forcing banks to do so and artificially lowering the costs
of doing so are a huge part of the problem we now find ourselves in.

At the same time, home prices were rising making those who had taken
on large mortgages with small down payments feel as though they could
handle them and inspiring a whole variety of new mortagage
instruments. What's interesting is that the rise in prices affected
most strongly cities with stricter land-use regulations, which also
explains the fact that not every city was affected to the same degree
by the rising home values. These regulations prevented certain kinds
of land from being used for homes, pushing the rising demand for
housing (fueled by the considerations above) into a slowly responding
supply of land. The result was rapidly rising prices. In those areas
with less stringent land-use regulations, the housing price boom's
effect was much smaller. Again, it was regulation, not free markets,
that drove the search for profits and was a key contributor to the
rising home prices that fueled the lending spree.

While all of this was happpening, the Federal Reserve, nominally
private but granted enormous monopoly privileges by government, was
pumping in the credit and driving interest rates lower and lower. This
influx of credit further fueled the borrowing binge. With plenty of
funds available, thanks to your friendly monopoly central bank (hardly
the free market at work), banks could afford to continue to lend
riskier and riskier.

The final chapter of the story is that in 2004 and 2005, following the
accounting scandals at Freddie, both Freddie and Fannie paid penance
to Congress by agreeing to expand their lending to low-income
customers. Both agreed to acquire greater amounts of subprime and
Alt-A loans, sending the green light to banks to originate them. From
2004 to 2006, the percentage of loans in those riskier categories grew
from 8% to 20% of all US mortgage originations. And the quality of
these loans were dropping too: downpayments were getting progressively
smaller and more and more loans carried low starter interest rates
that would adjust upward later on. The banks were taking on riskier
borrowers, but knew they had a guaranteed buyer for those loans in
Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were
"greedy" for new customers and riskier loans, but they were responding
to incentives created by well-intentioned but misguided government
interventions. It is these interventions that are ultimately
responsible for the risky loans gone bad that are at the center of the
current crisis, not the "free market."

The current mess is thus clearly shot through and through with
government meddling with free markets, from the Fed-provided fuel to
the CRA and land-use regulations to Fannie and Freddie creating an
artificial market for risky mortgages in order to meet Congress's
demands for more home-ownership opportunities for low-income families.
Thanks to that intervention, many of those families have not only lost
their homes, but also the savings they could have held onto for a few
more years and perhaps used to acquire a less risky mortgage on a
cheaper house. All of these interventions into the market created the
incentive and the means for banks to profit by originating loans that
never would have taken place in a genuinely free market.

It is worth noting that these regulations, policies, and interventions
were often gladly supported by the private interests involved. Fannie
and Freddie made billions while home prices rose, and their CEOs got
paid lavishly. The same was true of the various banks and other
mortgage market intermediaries who helped spread and price the risk
that was in play, including those who developed all kinds of fancy new
financial instruments all designed to deal with the heightened risk of
default the intervention brought with it. This was a wonderful game
they were playing and the financial markets were happy to have Fannie
and Freddie as voracious buyers of their risky loans, knowing that US
taxpayer dollars were always there if needed. The history of business
regulation in the US is the history of firms using regulation for
their own purposes, regardless of the public interest patina over the
top of them. This is precisely what happened in the housing market.
And it's also why calls for more regulation and more intervention are
so misguided: they have failed before and will fail again because
those with the profits on the line are the ones who have the resources
and access to power to ensure that the game is rigged in their favor.

I know, my friends, that you are concerned about corporate power. So
am I. So are many of my free-market economist colleagues. We simply
believe, and we think history is on our side, that the best check
against corporate power is the competitve marketplace and the power of
the consumer dollar (framed, of course, by legal prohibitions on force
and fraud). Competition plays mean, nasty corporations off against
each other in a contest to serve us. Yes, they still have power, but
its negative effects are lessened. It is when corporations can use the
state to rig the rules in their favor that the negative effects of
their power become magnified, precisely because it has the force of
the state behind it. The current mess shows this as well as anything
ever has, once you realize just what a large role the state played. If
you really want to reduce the power of corporations, don't give them
access to the state by expanding the state's regulatory powers. That's
precisely what they want, as the current battle over the $700 billion
booty amply demonstrates.

This is why so many of us committed to free markets oppose the
bailout. It is yet another example of the long history of the private
sector attempting to enrich itself via the state. When it does so,
there are no benefits to the rest of us, unlike what happens when
firms try to get rich in a competitive market. Moreover, these same
firms benefited enormously from the regulatory interventions they
supported and that harmed so many of us. The eventual bursting of the
bubble and their subsequent losses are, to many of us, their just
desserts for rigging the game and eventually getting caught. To reward
them again for their rigging of the game is not just morally
unconscionable, it is very bad econonmic policy, given that it sends a
message to other would-be riggers that they too will get rewarded for
wreaking havoc on the US economy. There will be short-term pain if we
don't bailout these firms, but that is the hangover price we pay for
15 years or more of binge lending. The proposed bailout cannot prevent
the pain of the hangover; it can only conceal it by shifting and
dispersing it among the taxpayers and an economy weakened by the
borrowing, taxing, and/or inflation needed to pay for that $700
billion. Better we should take our short-term pain straight up and
clean out the mistakes of our binge and then get back to the business
of free markets without creating an unchecked Executive branch
monstrosity trying to "save" those who profited most from the binge
and harming innocent taxpayers in the process.

What I ask of you my friends on the left is to not only continue to
work with us to oppose this or any similar bailout, but to consider
carefully whether you really want to entrust the same entity who is
the predominant cause of this crisis with the power to attempt to cure
it. New regulatory powers may look like the solution, but that's what
people said when the CRA was passed, or when Fannie and Freddie were
given new mandates. And the very firms who are going to be regulated
will be first in line to determine how those regulations get written
and enforced. You can bet which way that game is going to get rigged.

I know you are tempted to think that the problems with these
regulations are the fault of the individuals doing the regulating. If
only, you think, Obama can win and we can clean out the corrupt
Republicans and put ethical, well-meaning folks in place. Think again.
For one thing, almost every government intervention at the root of
this crisis took place with a Democratic president or a
Democratic-controlled Congress in place. Even when the Republicans
controlled Congress, President Clinton worked around it to change the
rules to allow Fannie and Freddie into the higher-risk loan market. My
point here is not to pin the blame for the current crisis on the
Democrats. That blame goes around equally. My point is that hoping
that having the "right people" in power will avoid these problems is
both naive and historically blind. As much as corporate interests were
relevant, they were aided and abetted, if unintentionally, by
well-meaning attempts by basically good people to do good things.The
problem is that there were a large number of undesirable unintended
consequences, most of which were predictable and predicted. It doesn't
matter which party is captaining the ship: regulations come with
unintended consequences and will always tend to be captured by the
private interests with the most at stake. And history is full of cases
where those with a moral or ideological agenda find themselves in
political fellowship with those whose material interests are on the
line, even if the two groups are usually on opposite sides. This is
the famous "Baptists and Bootleggers" phenomenon.

If you've made it this far, I am most grateful. Whether or not you
accept the whole argument I've laid out here, I do ask one thing of
you: the story I told at the start of the role of government
intervention in this mess is true, whatever your grander conclusions
about the causes and cures are. Even if you don't buy my argument that
more regulation isn't the cure, to blame this mess on "the free
market" should now strike you as an obvious falsehood and I would
hope, in the spirit of fair play, that you would stop making that
claim as you speak and write about the ongoing events of the last two
weeks. We can disagree in good faith about what to do next, and we can
disagree in good faith about the degree to which government
intervention caused the problems, but blaming a non-existent free
market for a crisis that clearly was to some extent the result of
government's extensive interventions in that market is unfair. So if I
have persuaded you of nothing else, I hope deeply that I have
persuaded you of that.

In the end, all I can ask of you is that you continue to think this
through. Explaining this crisis by greed won't get you far as greed,
like gravity, is a constant in our world. Explaining it as a failure
of free markets faces the obvious truth that these markets were far
from free of government. Consider that you may be mistaken. Consider
that perhaps government intervention, not free markets, caused
profit-seekers to undertake activities that harmed the economy.
Consider that government intervention might have led banks and other
organizations to take on risks that they never should have. Consider
that government central banks are the only organizations capable of
fueling this fire with excess credit. And consider that various
regulations might have forced banks into bad loans and artificially
pushed up home prices. Lastly, consider that private sector actors are
quite happy to support such intervention and regulation because it is
profitable.

Those of us who support free markets are not your enemies right now.
The real problem here is the marriage of corporate and state power.
That is the corporatism we both oppose. I ask of you only that you
consider whether such corporatism isn't the real cause of this mess
and that therefore you reconsider whether free markets are the cause
and whether increased regulation is the solution.

Thanks for reading.

Steve

http://myslu.stlawu.edu/~shorwitz/open_letter.htm

F.A. Hayek’s Dreaming of Swatantra

2008-08-12T23:49:00.001-07:00

Dreaming of Swatantra

Modern India's only stab at a successful liberal party started in
August 1959; the Swatantra Party would have entered its 50th year this
month, if it had survived as a national political force

Cafe Economics | Niranjan Rajadhyaksha

Nobel laureate Amartya Sen — who is not a free-market liberal — has
spoken on how contemporary India needs a right-wing political party
that is both secular and committed to an open economy. This is a good
time to go back to the issue, for two reasons. First, we have seen how
economic reforms were blocked by the Left to begin with and have now
been hijacked by the crony capitalism of the Samajwadi Party. Second,
modern India's only stab at a successful liberal party started in
August 1959; the Swatantra Party would have entered its 50th year this
month, if it had survived as a national political force.

Countries with low levels of trust and high levels of corruption tend
to be more wary of free market capitalism Fifteen years of high
growth, thanks to economic reforms, should have created a strong
political base for liberal party. It hasn't. I am often surprised at
how even people who have benefited from economic reforms still believe
that the government should control prices to beat inflation or that
companies are making too much profit at the cost of society. Is it any
wonder that no party is ready to face the electorate with a free
market agenda?

The interesting question is why this happens. The answer involves more
than political failure. The nature of Indian society and capitalism
are also part of the answer.

An interesting new research paper by Philippe Aghion of Harvard
University, Yann Algan of the Paris School of Economics, Pierre Cahuc
of the Ecole Polytechnique and Andrei Schleifer of Harvard University
offers one set of clues. They have mapped the relationship between
demands for regulation in a country and the level of distrust between
its citizens.

What these four economists show from their study of rich nations is
that people ask for more government regulation when they do not trust
their fellow citizens. They have used a concept that has attracted a
lot of attention over the past decade and more — social capital. Any
economy needs physical capital (tools), financial capital (money) and
human capital (skills) to grow. It also needs social capital (trust).
Economist Kenneth Arrow once said that virtually "every commercial
transaction has within itself an element of trust, certainly any
transaction conducted over a period of time. It can be plausibly
argued that much of economic backwardness in the world can be
explained by the lack of mutual confidence."

Aghion and his three fellow authors show in their July paper,
Regulation and Distrust, that countries with low levels of trust in
other persons, companies and political institutions are more likely to
have more regulations on economic activity. But this regulation leads
to low growth and corruption, as we know from our own experience of
the licence permit raj. "What is perhaps most interesting about this
finding…is that distrust generates demand for regulation even when
people realize that the government is corrupt and ineffective; they
prefer state control to unbridled production by uncivil firms," say
the economists.

The way companies earn profits does affect the popularity of
capitalism. In a paper published in 2006, Rafael Di Tella of Harvard
Business School and Robert MacCulloch of Imperial College ask: Why
Doesn't Capitalism Flow to Poor Countries? They say the most important
factor is corruption, which cuts into the "moral legitimacy of
capitalism". Di Tella and MacCulloch add: "Existence of corrupt
entrepreneurs hurts good entrepreneurs by reducing the general appeal
of capitalism."

These two pieces of research show that the popularity of a free market
political party will depend on both the level of trust in a country
and whether profits come from competitive markets or oligopolies
protected by the state.

Economic historian Douglass C. North and his colleagues have given us
what they call a conceptual framework to interpret human history. They
say that societies emerge as "limited access orders". Here, the
political system is used to limit economic participation and impose
social order. The lack of economic competition leads to excess profits
that are used to limit violence and maintain political stability.

North says that some societies later evolve into "open access" orders.
Here, there are few restrictions on economic and political
participation, which is another way of saying that these societies
have open economies and open political systems. Order is maintained
through the competitive process.

There is a famous story about Margaret Thatcher. Soon after she became
head of the Conservative Party in the UK, she is said to have reached
into her briefcase and pulled out a copy of F.A. Hayek's Constitution
of Liberty, a book that explains with great clarity why liberal
systems lead to freedom and prosperity. Interrupting the speaker, she
is said to have banged the book down on the table and said: "This is
what we believe."

Is there any Indian politician who has similar convictions — and the
guts to make them public?

Your comments are welcome at cafeeconomics@livemint.com
http://www.livemint.com/2008/08/13000901/Dreaming-of-Swatantra.html

Aleksandr Solzhenitsyn Is Dead at 89

2008-08-04T07:37:00.001-07:00

Aleksandr Solzhenitsyn Is Dead at 89

http://www.nytimes.com/aponline/arts/AP-Obit-Solzhenistyn.html?_r=2&hp&oref=slogin&oref=slogin

MOSCOW (AP) -- Aleksandr Solzhenitsyn, the Nobel Prize-winning author
whose books chronicled the horrors of the Soviet gulag system, has
died of heart failure, his son said Monday. He was 89.

Stepan Solzhenitsyn told The Associated Press his father died late
Sunday, but declined further comment.

Solzhenitsyn's unflinching accounts of torment and survival in the
Soviet Union's slave labor camps riveted his countrymen, whose secret
history he exposed. They earned him 20 years of bitter exile, but
international renown.

And they inspired millions, perhaps, with the knowledge that one
person's courage and integrity could, in the end, defeat the
totalitarian machinery of an empire.

Beginning with the 1962 short novel "One Day in the Life of Ivan
Denisovich," Solzhenitsyn devoted himself to describing what he called
the human "meat grinder" that had caught him along with millions of
other Soviet citizens: capricious arrests, often for trifling and
seemingly absurd reasons, followed by sentences to slave labor camps
where cold, starvation and punishing work crushed inmates physically
and spiritually.

His "Gulag Archipelago" trilogy of the 1970s shocked readers by
describing the savagery of the Soviet state under the dictator Josef
Stalin. It helped erase lingering sympathy for the Soviet Union among
many leftist intellectuals, especially in Europe.

But his account of that secret system of prison camps was also
inspiring in its description of how one person -- Solzhenitsyn himself
-- survived, physically and spiritually, in a penal system of
soul-crushing hardship and injustice.

The West offered him shelter and accolades. But Solzhenitsyn's refusal
to bend despite enormous pressure, perhaps, also gave him the courage
to criticize Western culture for what he considered its weakness and
decadence.

http://en.wikipedia.org/wiki/Aleksandr_Solzhenitsyn

Mao's "Cultural Revolution" - Real facts

2008-07-14T05:30:00.001-07:00

http://members.fortunecity.com/stalinmao/China/Cultural/Cultural.html

The Cultural Revolution was launched by Chinese Communist Party
chairman Mao Zedong during his last decade in power (1966-76) to
renew the spirit of the Chinese revolution. Fearing that China would
develop along the lines of the Soviet model and concerned about his
own place in history, Mao threw China's cities into turmoil in a
monumental effort to reverse the historic processes underway.

During the early 1960s, tensions with the Soviet Union convinced Mao
that the Russian revolution had gone astray, which in turn made him
fear that China would follow the same path. Programs carried out by
his colleagues to bring China out of the economic depression caused by
the Great Leap Forward made Mao doubt their revolutionary commitment
and also resent his own diminished role. He especially feared urban
social stratification in a society as traditionally elitist as China.
Mao thus ultimately adopted four goals for the Cultural Revolution:
to replace his designated successors with leaders more faithful to his
current thinking; to rectify the Chinese Communist Party; to provide
China's youths with a revolutionary experience; and to achieve some
specific policy changes so as to make the educational, health care,
and cultural systems less elitist. He initially pursued these goals
through a massive mobilization of the country's urban youths. They
were organized into groups called the Red Guards, and Mao ordered the
party and the army not to suppress the movement.

Mao also put together a coalition of associates to help him carry out the
Cultural Revolution. His wife, Jiang Qing, brought in a group of
radical intellectuals to rule the cultural realm. Defense Minister Lin
Biao made certain that the military remained Maoist. Mao's longtime
assistant, Chen Boda, worked with security men Kang Sheng and Wang
Dongxing to carry out Mao's directives concerning ideology and
security. Premier Zhou Enlai played an essential role in keeping the
country running, even during periods of extraordinary chaos. Yet there
were
conflicts among these associates, and the history of the Cultural
Revolution reflects these conflicts almost as much as it reflects
Mao's own initiatives.

Mao formally launched the Cultural Revolution at the Eleventh Plenum of the
Eighth Central Committee in August 1966. He shut down China's schools,
and during the following months he encouraged Red Guards to attack all
traditional values and "bourgeois" things and to test party officials
by publicly criticizing them. Mao believed that this measure would be
beneficial both for the young people and for the party cadres that
they attacked.

The movement quickly escalated; many elderly people and intellectuals were
not only verbally attacked but were physically abused. Many died. The
Red Guards splintered into zealous rival factions, each purporting to
be the true representative of Maoist thought. Mao's own personality
cult, encouraged so as to provide momentum to the movement, assumed
religious proportions. The resulting anarchy, terror, and paralysis
completely disrupted the urban
economy. Industrial production for 1968 dipped 12 percent below that of 1966.

During the earliest part of the Red Guard phase, key Politburo leaders were
removed from power--most notably President Liu Shaoqi, Mao's
designated successor until that time, and Party General Secretary Deng
Xiaoping. In January 1967 the movement began to produce the actual
overthrow of provincial party committees and the first attempts to
construct new political bodies to replace them. In February 1967 many
remaining top party leaders called
for a halt to the Cultural Revolution, but Mao and his more radical
partisans prevailed, and the movement escalated yet again. Indeed, by
the summer of 1967 disorder was widespread; large armed clashes
between factions of Red Guards were occurring throughout urban China.

During 1967 Mao called on the army under Lin Biao to step in on behalf of
the Red Guards. Instead of producing unified support for the radical
youths, this
political-military action resulted in more divisions within the
military. The tensions inherent in the situation surfaced vividly when
Chen Zaidao, a military commander in the city of Wuhan during the
summer of 1967, arrested two key radical party leaders.

In 1968, after the country had been subject to several cycles of radicalism
alternating with relative moderation, Mao decided to rebuild the
Communist Party to gain greater control. The military dispatched
officers and soldiers to take over schools, factories, and government
agencies. The army simultaneously forced millions of urban Red Guards
to move to the rural hinterland to live, thus scattering their forces
and bringing some order to the cities. This particular action
reflected Mao's disillusionment with the Red Guards because of their
inability to overcome their factional differences. Mao's efforts to
end the chaos were given added impetus by the Soviet invasion of
Czechoslovakia in August 1968, which greatly
heightened China's sense of insecurity.

Two months later, the Twelfth Plenum of the Eighth Central Committee met to
call for the convening of a party congress and the rebuilding of the
party apparatus.
>From that point, the issue of who would inherit political power as the Cultural Revolution wound down became the central question of Chinese politics.

When the Ninth Party Congress convened in April 1969, Defense Minister Lin
Biao was officially designated as Mao's successor, and the military
tightened its grip on the entire society. Both the Party Central
Committee and the revamped Communist Party were dominated by military
men. Lin took advantage of Sino-Soviet border clashes in the spring of
1969 to declare martial law and further used his position to rid
himself of some potential rivals to the succession. Several leaders
who had been purged during 1966-68 died under the martial law
regimen of 1969, and many others suffered severely during this period.

Lin quickly encountered opposition. Mao himself was wary of a successor who
seemed to want to assume power too quickly, and he began to maneuver
against Lin. Premier Zhou Enlai joined forces with Mao in this effort,
as possibly did Mao's wife Jiang Qing. Mao's assistant Chen Boda,
however, decided to support Lin's cause. Thus, despite many measures
taken in 1970-71 to return order and normalcy to Chinese society,
increasingly severe strains
were splitting the top ranks of leadership.

These strains first surfaced at a party plenum in the summer of 1970.
Shortly thereafter Mao began a campaign to criticize Chen Boda as a
warning to Lin. Chen disappeared from public in August 1970. Matters
came to a head in September 1971 when Lin himself was killed in what
the Chinese asserted was an attempt to flee to the Soviet Union after
an abortive assassination plot against Mao. Virtually the entire
Chinese high military command was
purged in the weeks following Lin's death.

Lin's demise had a profoundly disillusioning effect on many people who had
supported Mao during the Cultural Revolution. Lin had been the high
priest of the Mao cult, and millions had gone through tortuous
struggles to elevate this chosen successor to power and throw out his
"revisionist" challengers. They had in this quest attacked and
tortured respected teachers, abused elderly citizens, humiliated old
revolutionaries, and, in many cases, battled former friends in bloody
confrontations. The sordid details of Lin's purported assassination
plot and subsequent flight cast all this in the light of traditional,
unprincipled
power struggles, and vast numbers of Chinese people began to feel that
they simply had been manipulated for personal political purposes.

Initially, Premier Zhou Enlai benefited the most from Lin's death, and from
late 1971 through mid-1973 Zhou tried to nudge China back toward
stability. He encouraged a revival of the educational system and
brought back into office a number of people who had been cast out.
China began again to increase its trade and other links with the
outside world, and the economy continued the forward momentum that had
begun to build in 1969. Mao personally approved these general moves
but remained wary lest they call into question the basic
value of having launched the Cultural Revolution in the first place.

During 1972, however, Mao suffered a serious stroke, and Zhou learned that
he had a fatal malignancy. These events highlighted the continued
uncertainty over the succession. In early 1973 Zhou and Mao brought
back to power Deng Xiaoping. Zhou hoped to groom him to be Mao's
successor. Deng, however, had been the second most important purge
victim at the hands of the radicals during the Cultural Revolution.
His reemergence made Jiang Qing and her followers desperate to firmly
establish a more radical path.

>From mid-1973 until Mao's death in September 1976, Chinese politics shifted
back and forth between Jiang Qing and those who supported her (notably
Wang Hongwen, Zhang Chunqiao, and Yao Wenyuan, who with Jiang Qing
were later dubbed the Gang of Four,) and the Zhou-Deng group. The
former favoured ideology, political mobilization, class struggle,
anti-intellectualism, egalitarianism, and xenophobia, while the latter
promoted economic growth, stability, educational progress, and a
pragmatic foreign policy. Mao tried unsuccessfully to maintain a
balance between these two forces while he struggled to find a
successor who would embody his preferred combination of each.

From mid-1973 until mid-1974 the radicals were ascendant; they whipped up a
campaign that used criticism of Lin Biao and of Confucius as a thinly
veiled vehicle for attacking Zhou and his policies. By July 1974,
however, the resulting economic decline and increasing chaos made Mao
shift back toward Zhou and Deng. With Zhou hospitalized, Deng assumed
increasing power from the summer of 1974 through the late fall of
1975, when the radicals finally convinced Mao that Deng's policies
would lead eventually to a repudiation of the Cultural
Revolution and of Mao himself. Mao then sanctioned criticism of these
policies by means of wall posters (ta-tzu-pao), which had become a
favoured method of propaganda for the radicals. Zhou died in January
1976, and Deng was formally purged (with Mao's backing) in April. Only
Mao's death in September and the purge of the Gang of Four by a
coalition of political, police, and military leaders in October 1976
paved the way for Deng's subsequent reemergence in
1977.

Although the Cultural Revolution largely bypassed the vast majority of the
people who lived in rural areas, it had serious consequences for China
as a whole. In the short run, of course, the political instability and
the constant shifts in economic policy produced slower economic growth
and a decline in the capacity of the government to deliver goods and
services. Officials at all levels of the political system learned that
future shifts in policy would jeopardize those who had aggressively
implemented previous policy. The result was bureaucratic
timidity. In addition, with the death of Mao and the end of the
Cultural Revolution (the Cultural Revolution was officially ended by
the Eleventh Party Congress in August 1977, but it in fact concluded
with Mao's death and the purge of the Gang of Four in the fall of
1976), nearly three million party members and countless wrongfully
purged citizens awaited reinstatement. Bold measures were taken in the
late 1970s to confront these immediate problems, but the Cultural
Revolution left a legacy that continued to trouble China.

There existed, for example, a severe generation gap; individuals who
experienced the Cultural Revolution while in their teens and early
twenties were denied an education and taught to redress grievances by
taking to the streets. Post-Cultural Revolution policies--which
stressed education and initiative over radical revolutionary
fervour--left little room for these millions of people to have
productive careers. Indeed, the fundamental damage to all
aspects of the educational system itself took several decades to repair.

Another serious problem was the corruption within the party and government.
Both the fears engendered by the Cultural Revolution and the scarcity
of goods that
accompanied it forced people to fall back on traditional personal
relationships and on bribery and other forms of persuasion to
accomplish their goals. Concomitantly, the Cultural Revolution brought
about general disillusionment with the party leadership and the system
itself as millions of urban Chinese witnessed the obvious power plays
that took place under the name of political principle in the early and
mid-1970s. The post-Mao repudiation of both the objectives
and the consequences of the Cultural Revolution made many people turn
away from politics altogether.

Among the people themselves, there remained bitter factionalism, as those
who opposed each other during the Cultural Revolution often shared the
same work unit and would do so for their entire careers.

Perhaps never before in human history has a political leader unleashed such
massive forces against the system that he created. The resulting
damage to that system was profound, and the goals that Mao sought to
achieve ultimately remained elusive.

http://members.fortunecity.com/stalinmao/China/Cultural/Cultural.html

Excess speculation or excess money?

2008-07-05T22:47:00.001-07:00

Excess speculation or excess money?
By Swaminathan S. Anklesaria Aiyar

From ancient times, Indian rulers have always blamed inflation on the
perfidious bania. That is happening globally today. Politicians
everywhere are blaming speculators for high inflation.

Actually, inflation occurs when too much money chases too few goods.
Today, no great shortfall in goods is evident. World oil production is
rising, though slowly. Mineral and metal production is up. The FAO
predicts a record global harvest in 2008.

But the world has long been awash in money. The US kept interest rates
at just 1% for years after the 2001 recession. This encouraged
Americans to spend more than they earned, creating a huge US trade
deficit and corresponding trade surpluses in China and other Third
World exporters. Initially, this flood of dollars lifted all global
boats — world GDP grew at record rates in 2004-08. Inflation was kept
down by rising productivity, and by outsourcing manufacturing and
services respectively to low-wage centres in China and India.

Money supply expanded fast in Third World countries too (including
India). This was partly because central banks bought up dollars in
forex markets rather than let their currencies appreciate.

Alas, a flood of money cannot for long lift production alone. Soon it
starts raising prices. First the excess money raised housing prices,
and everybody was happy. Then it raised stock market prices, and
people were very happy. Finally, the flood of money raised consumer
prices, and suddenly people are very unhappy.

When world growth is so high that spending outpaces commodity
production, commodity prices will rise to signal that growth needs to
slow down. But this is politically unpalatable. Slower growth hits
jobs and incomes. Rather than permit this, governments everywhere try
to stimulate the economy with even more money.

The US Fed has not only slashed interest rates to 2% but provided
hundreds of billions of dollars to the stricken financial sector to
help it escape the consequences of its excesses. This new dollar flood
has worsened inflation.

World commodity prices have shot up in the last two years, spilling
over into higher consumer prices. Politicians globally are looking for
culprits, and finding them in speculators. Hundreds of billions of
dollars have gone in recent years into two investment areas. First,
purchases in forward commodity markets — contracts for delivery of
commodities at specified future dates. Second, commodity index funds —
mutual funds that mimic the price of a group of commodities by buying
and selling futures. Such funds have attracted $240 billion in recent
times.

Has this sent commodity prices skyrocketing? Very doubtful. Yes,
investors are buying forward contracts worth billions. But for every
buyer of contracts, hoping for rising prices, there has to be a
seller, hoping for falling prices. Speculation is necessarily a
two-way street. Besides, every contract expires and is settled at the
due date, so such speculation is self-terminating.

Forward trading is mostly paper trading, and must not be mistaken for
hoarding. World commodity stocks today are generally low by historical
standards. Massive forward trading has not translated into hoarding.

Academic studies have long attempted to find whether forward trading
causes a rise in current prices. No clear link has ever been
established. Price manipulation is possible in thin, weakly regulated
markets. It is not evident in big commodity markets. The US has just
enacted legislation limiting the size and financing of forward trades
in oil. Past experience suggests this will have a marginal impact at
best.

There is hardly any forward trading in iron ore, yet its price is up
76-95% in new contracts. By contrast, huge forward trading in sugar
has left world prices low. Nickel futures are down from a peak of
$60,000/tonne last year to just $22,000. Wheat futures once spiked to
$13/bushel but are now down to $9/bushel. There is no clear link
between forward trading and skyrocketing prices.

When the interest rate is lower than the inflation rate — economists
call this a negative real interest rate — money supply is definitely
excessive. India, the US and many other countries have negative real
interest rates today. A recent Merrill Lynch study suggests that a 1%
fall in the real interest rate increases commodity prices by 17% in 10
months. If this is even partially true, the main culprits have been
not speculators but governments printing excess money. Worse, this
excess money was often used to subsidise oil prices, stoking demand
further.

Today, at last, governments across the globe are reluctantly reducing
oil subsidies and starting to fight inflation through a monetary
squeeze, even if it means slowing growth. Squeezing money in India
alone will produce only limited results. For good results, central
bankers of the world should get together for coordinated action. But
no such initiative is in sight.

Politicians are quick to take the credit when the economy does well,
and to blame others when things go wrong. They must take the
responsibility for bad as well as good policies. Banias may be quick
to grasp the inflationary potential of bad policies, and profit from
it. But the root cause of rising prices lies elsewhere.

http://www.swaminomics.org/

Universal Declaration of Human Rights

2008-06-18T22:17:00.001-07:00

Universal Declaration of Human Rights

Preamble

Whereas recognition of the inherent dignity and of the equal and
inalienable rights of all members of the human family is the
foundation of freedom, justice and peace in the world,

Whereas disregard and contempt for human rights have resulted in
barbarous acts which have outraged the conscience of mankind, and the
advent of a world in which human beings shall enjoy freedom of speech
and belief and freedom from fear and want has been proclaimed as the
highest aspiration of the common people,

Whereas it is essential, if man is not to be compelled to have
recourse, as a last resort, to rebellion against tyranny and
oppression, that human rights should be protected by the rule of law,

Whereas it is essential to promote the development of friendly
relations between nations,

Whereas the peoples of the United Nations have in the Charter
reaffirmed their faith in fundamental human rights, in the dignity and
worth of the human person and in the equal rights of men and women and
have determined to promote social progress and better standards of
life in larger freedom,

Whereas Member States have pledged themselves to achieve, in
cooperation with the United Nations, the promotion of universal
respect for and observance of human rights and fundamental freedoms,

Whereas a common understanding of these rights and freedoms is of the
greatest importance for the full realization of this pledge,

Now, therefore,

The General Assembly,

Proclaims this Universal Declaration of Human Rights as a common
standard of achievement for all peoples and all nations, to the end
that every individual and every organ of society, keeping this
Declaration constantly in mind, shall strive by teaching and education
to promote respect for these rights and freedoms and by progressive
measures, national and international, to secure their universal and
effective recognition and observance, both among the peoples of Member
States themselves and among the peoples of territories under their
jurisdiction.

Article 1
All human beings are born free and equal in dignity and rights. They
are endowed with reason and conscience and should act towards one
another in a spirit of brotherhood.

Article 2
Everyone is entitled to all the rights and freedoms set forth in this
Declaration, without distinction of any kind, such as race, colour,
sex, language, religion, political or other opinion, national or
social origin, property, birth or other status.

Furthermore, no distinction shall be made on the basis of the
political, jurisdictional or international status of the country or
territory to which a person belongs, whether it be independent, trust,
non-self-governing or under any other limitation of sovereignty.

Article 3
Everyone has the right to life, liberty and security of person.

Article 4
No one shall be held in slavery or servitude; slavery and the slave
trade shall be prohibited in all their forms.

Article 5
No one shall be subjected to torture or to cruel, inhuman or degrading
treatment or punishment.

Article 6
Everyone has the right to recognition everywhere as a person before the law.

Article 7
All are equal before the law and are entitled without any
discrimination to equal protection of the law. All are entitled to
equal protection against any discrimination in violation of this
Declaration and against any incitement to such discrimination.

Article 8
Everyone has the right to an effective remedy by the competent
national tribunals for acts violating the fundamental rights granted
him by the constitution or by law.

Article 9
No one shall be subjected to arbitrary arrest, detention or exile.

Article 10
Everyone is entitled in full equality to a fair and public hearing by
an independent and impartial tribunal, in the determination of his
rights and obligations and of any criminal charge against him.

Article 11
Everyone charged with a penal offence has the right to be presumed
innocent until proved guilty according to law in a public trial at
which he has had all the guarantees necessary for his defence.
No one shall be held guilty of any penal offence on account of any act
or omission which did not constitute a penal offence, under national
or international law, at the time when it was committed. Nor shall a
heavier penalty be imposed than the one that was applicable at the
time the penal offence was committed.

Article 12
No one shall be subjected to arbitrary interference with his privacy,
family, home or correspondence, nor to attacks upon his honour and
reputation. Everyone has the right to the protection of the law
against such interference or attacks.

Article 13
Everyone has the right to freedom of movement and residence within the
borders of each State. Everyone has the right to leave any country,
including his own, and to return to his country.

Article 14
Everyone has the right to seek and to enjoy in other countries asylum
from persecution. This right may not be invoked in the case of
prosecutions genuinely arising from non-political crimes or from acts
contrary to the purposes and principles of the United Nations.

Article 15
Everyone has the right to a nationality.
No one shall be arbitrarily deprived of his nationality nor denied the
right to change his nationality.

Article 16
Men and women of full age, without any limitation due to race,
nationality or religion, have the right to marry and to found a
family. They are entitled to equal rights as to marriage, during
marriage and at its dissolution.
Marriage shall be entered into only with the free and full consent of
the intending spouses. The family is the natural and fundamental group
unit of society and is entitled to protection by society and the
State.

Article 17
Everyone has the right to own property alone as well as in association
with others.
No one shall be arbitrarily deprived of his property.

Article 18
Everyone has the right to freedom of thought, conscience and religion;
this right includes freedom to change his religion or belief, and
freedom, either alone or in community with others and in public or
private, to manifest his religion or belief in teaching, practice,
worship and observance.

Article 19
Everyone has the right to freedom of opinion and expression; this
right includes freedom to hold opinions without interference and to
seek, receive and impart information and ideas through any media and
regardless of frontiers.

Article 20
Everyone has the right to freedom of peaceful assembly and association.
No one may be compelled to belong to an association.

Article 21
Everyone has the right to take part in the government of his country,
directly or through freely chosen representatives.
Everyone has the right to equal access to public service in his country.
The will of the people shall be the basis of the authority of
government; this will shall be expressed in periodic and genuine
elections which shall be by universal and equal suffrage and shall be
held by secret vote or by equivalent free voting procedures.

Article 22
Everyone, as a member of society, has the right to social security and
is entitled to realization, through national effort and international
co-operation and in accordance with the organization and resources of
each State, of the economic, social and cultural rights indispensable
for his dignity and the free development of his personality.

Article 23
Everyone has the right to work, to free choice of employment, to just
and favourable conditions of work and to protection against
unemployment.
Everyone, without any discrimination, has the right to equal pay for
equal work.
Everyone who works has the right to just and favourable remuneration
ensuring for himself and his family an existence worthy of human
dignity, and supplemented, if necessary, by other means of social
protection.
Everyone has the right to form and to join trade unions for the
protection of his interests.

Article 24
Everyone has the right to rest and leisure, including reasonable
limitation of working hours and periodic holidays with pay.

Article 25
Everyone has the right to a standard of living adequate for the health
and well-being of himself and of his family, including food, clothing,
housing and medical care and necessary social services, and the right
to security in the event of unemployment, sickness, disability,
widowhood, old age or other lack of livelihood in circumstances beyond
his control.
Motherhood and childhood are entitled to special care and assistance.
All children, whether born in or out of wedlock, shall enjoy the same
social protection.

Article 26
Everyone has the right to education. Education shall be free, at least
in the elementary and fundamental stages. Elementary education shall
be compulsory. Technical and professional education shall be made
generally available and higher education shall be equally accessible
to all on the basis of merit.
Education shall be directed to the full development of the human
personality and to the strengthening of respect for human rights and
fundamental freedoms. It shall promote understanding, tolerance and
friendship among all nations, racial or religious groups, and shall
further the activities of the United Nations for the maintenance of
peace.
Parents have a prior right to choose the kind of education that shall
be given to their children.

Article 27
Everyone has the right freely to participate in the cultural life of
the community, to enjoy the arts and to share in scientific
advancement and its benefits.
Everyone has the right to the protection of the moral and material
interests resulting from any scientific, literary or artistic
production of which he is the author.

Article 28
Everyone is entitled to a social and international order in which the
rights and freedoms set forth in this Declaration can be fully
realized.

Article 29
Everyone has duties to the community in which alone the free and full
development of his personality is possible. In the exercise of his
rights and freedoms, everyone shall be subject only to such
limitations as are determined by law solely for the purpose of
securing due recognition and respect for the rights and freedoms of
others and of meeting the just requirements of morality, public order
and the general welfare in a democratic society. These rights and
freedoms may in no case be exercised contrary to the purposes and
principles of the United Nations.

Article 30
Nothing in this Declaration may be interpreted as implying for any
State, group or person any right to engage in any activity or to
perform any act aimed at the destruction of any of the rights and
freedoms set forth herein.

Surplus value theory

2007-12-05T21:01:00.001-08:00

Surplus value theory fails to take into account the efforts of the capitalist / manager ; MOTIVE power is the most basic issue here. all capitalists and great industrial captains like Ford, Rockfeller, Carneige, Birla, etc started as workers (in any one generation ago) and there are no permanent super rich family for thousand years or so. All these people, thru their industry, skill and strong organising power rose to the top.

Unlike caste in India, class as understood by marxists is not a fixed and inflexible division. workers can become capitalists and vice versa thru indiviual efort or folly. hence the rigid division of class is not scientific or valid.

What prevents all the workers to turn into entrepreners and make it big ? only a few are able to it inspite of severe hardships. G.D.Birla's grandfather was a ordinary worker in the 19th cent. now we have Bill Gates, N.R.Narayamurthy, Sameer Bhatia, textile barons in Karur, Thirupur, etc. all started with nothing and bare hands and made it to the top while their peers remained in their worker status. so what is the compasision ?

the term expolitation is a misnomer. huge population (which increases supply of labour to high volumes), govt deficts which erode real wages, high taxes, etc are major reasons for worker 'exploitations'

The organising power and the ability to motivate, manage and uplift a industrial unit cannot be quanitfied easily like the hours or amount of labour a worker puts in. Marxisim fails to understand this vital aspect of human nature. The drive and involvement needed to build up a business. hence most communist factories are less efficent and crumbled in the long run as histroy proves repeatedly. there may be exceptions where exceptionally driven and talented individuals, who were genuine communists (that is they are ready to put in their best effort for the betterment of the 'commune') create efficient eneterprises. For such efficency and sucess, all the palyers must be motivated to do their best in return for minimum salary (to each according to his needs).

the crux of the problem is 'from each according to his ability' ;without proper and logical rewards (as in a free market economy) such output of individual is simply not possible.

humans are ego centric and will put in their best efforts and drive only when there is a proper reward or profit.

Fund Schooling, Not Schools

2007-09-19T23:56:00.001-07:00

From India Uncut Blog published by Amit Varma

20 September, 2007

Fund Schooling, Not Schools

This is the 32nd installment of my weekly column for Mint, Thinking it Through.

I read a news report a couple of days back that amazed me. It was about a small village named Maji in the Yunnan province of China. The nearest school lies across the Nujiang river. There is no bridge, though a steel cable runs across.

How do the 500 children of this village get to school? The report states, "They fasten themselves to the cable with a metal carabiner and a rope and slide across the 200-metre wide canyon." The youngest child, A Qia, is four years old, and makes the crossing by herself. A five-year-old named A Pu has been quoted as saying, "I used to dream of having a bridge, but then I learned that my dream was too expensive."

My column today is not about bridges—not the kind that go across rivers anyway. It is about education. I never had to cross a canyon using a rope and a metal carabiner to get to school, and if the prospect had come up in my privileged home when I was a kid, I would probably have asked my dad if the metal carabiner was chauffeur-driven. I always took education for granted, the same way I took food for granted, and did not have to worry about where my next meal would come from. Much of India is not so lucky.

Poor people want education for their kids desperately and viscerally. They want their children to have a better life than they did, and they know education is the ticket. And for 60 years they have been cheated. The state has promised them quality education, has collected taxes for that purpose, and has failed.

Studies on the state of education in this country confirm what we see around us. A 2005 study of government schools by Pratham, an NGO, found that 35% of schoolkids surveyed between the ages of seven and 14 failed a reading test involving a simple paragraph, and 41% of them could not subtract or divide. A 2006 study found that half the children who enrol in the first standard drop out before reaching the eighth. A 1999 government report stated that just 53% of the accredited public schools in rural North India were engaged in teaching during surprise visits on school days.

The problem here is not one of funding. The government has thrown enormous amounts of money into education, and continues to do so. The problem here is of choice. Most poor parents across the country have no option but to send their kids to government schools, which, because of the way the incentives are aligned, are often dysfunctional.

The way out of this is to put parents in charge of the money that is supposedly being spent on their children's education. Parents have much more at stake than the state, and are better equipped to take the right decisions for their children. Milton Friedman first proposed a method of enabling this: education vouchers. Under this system, the state does not directly fund schools, but gives school vouchers to parents. Parents use the vouchers to send their kids to a school of their choice, and the school exchanges vouchers in return for cash from the government. As in any other sector, competition then ensures that schools lift their standards and minimize wastage.

This will give optimum results if competition is allowed to flourish. Right now, it isn't. A 2001 study by the Centre for Civil Society (CCS) found that it takes 14 licences from four authorities to open a private school in Delhi, a process that can either take years or much under-the-table money. Schools must conform to a number of unnecessary parameters such as government-trained teachers and playgrounds of a specified size. Also, bizarrely, private schools are not allowed to operate for a profit—while many work around this by setting up trusts and suchlike, others are simply scared away.

But won't private schools be expensive? That's what I would have thought, given the posh urban schools where my friends and I were educated, but the reality is different. Entrepreneurs in the poorest parts of India, in slums and villages, have started cheap schools with bare bones facilities to fulfil what is obviously a raging demand. And studies have shown that, with survival at stake, these schools use money twice as efficiently as government ones.

In 2005, James Tooley and Pauline Dixon did a study that found that 65% of schoolchildren in Hyderabad's slums attended private schools instead of free government ones. And last year, CCS conducted a study (pdf link) that revealed that 14% of households in Delhi earning less than Rs5,000 per month chose to send their kids to a private school. Their studies showed that even the poorest of the poor, from maids to autorickshaw-drivers to peons, expressed their preferences clearly, even when they could barely afford it.

There is one clear reason for the miserable state of education in this country: the state has funded schools, not schooling. For India's sake, that must change.

* * *

I had covered much of this territory in my January Op-Ed in the Wall Street Journal Asia, Why India needs school vouchers. For more on school choice, check out Andrew Coulson's paper, How Markets Affect Quality (pdf link).

Also, my thanks to Shrek for pointing me via email to the China story. I've also received many insights about school choice from chatting with Raj Cherubal of CCS and my friend Gautam Bastian. I hope to continue those conversations.

* * *

DEFICIT FINANCING ; Rajaji in Swarajya 1960

2007-08-08T23:45:00.001-07:00

DEFICIT FINANCING ; Rajaji in Swarajya 1960

PROF. B. R. Shenoy is bringing out for lay readers a
booklet on inflation in India, in which he deals with
the causes of the evil and the remedy. I have had the
privilege of reading the manuscript and this is what I
have gathered from what the Professor sets out with
clarity and with figures. I have no doubt the booklet,
when published, will help people to understand the
gravity of the situation. In all low income countries,
expansion of money put in circulation results quickly
in price rises. Inflation is the word used when we
look at the cause and discuss the situation in terms
of money. Price rise is the phrase used when we speak
from the point of view of commodities. If the
expansion of money, whatever be the motive or reason
for such expansion, outpaces the physical volume of
output of commodities, we have a state of inflation
and prices rise as a result.

The Ministry of Commerce publishes the average of
wholesale prices. From the hand-outs of the Reserve
Bank of India we can obtain information about money
supply. There has been a continual rise in the general
index of prices. We see also that money supply has
considerably expanded, faster than the output of
national products.

With 1938-39 as base, the general index of prices in
August 1960 was 478, a rise of nearly five times. The
present changeover of the base from 1938-39 to 1952-53
obscures the enormous magnitude of the price rise.

Government collects funds from the people by taxation,
loan issues, small savings and profits of public
sector undertakings.

From these funds disbursements are made for
administrative expenditure, repayment of past loans,
and Plan investment outlay. When these and other items
of disbursements exceed the total receipts, what is
called budget deficit arises. These deficits are
covered by notes printed at the Government Security
Press at Nasik. This is called deficit financing.

This expansion of money is followed by what is called
secondary expansion through credits given by
commercial banks. For every Rs.100 crores of
additional Nasik money, there is usually another
Rs.100 crores of credit creation.

Inflation that now prevails in India began in 1955-56.
Budget deficits rose from 97 crores in 54-55 to 225
crores in 55-56. In 57-58 the Plan outlay was so great
that, with additional defence expenditure, the budget
deficit that year reached a peak of 495 crores. These
yearly deficits have a cumulative action.

The rise in prices due to inflation reduces the value
of money and life becomes unhappy for people living on
wages and fixed incomes. Their real income is reduced,
and some of them would have to draw on past savings
for current expenditure.

The rise in price corrodes all savings. This leads in
the case of the better placed classes to the transfer
of their savings to urban property, to gold and to
concealed exports of capital. Speculative transactions
acquire additional attraction. Hoarding of goods is
encouraged, eating into savings. For a time production
may be deceptively stimulated on account of higher
prices, but soon it gets retarded on account of
increased costs. Foreign purchasers of our goods will
move to other markets. Imported goods rise in price
giving windfall profits to importers and smugglers.

As a result of inflation, income shifts from the
masses to upper income groups. The middle classes are
most hit. The strike of the Union Government employees
was a symptom of this suffering. Industrialists and
their labour force, who are able to extract a share in
the receipts, do not suffer much but the condition of
the vastly larger number of farm lands is worsened.

Inflation must be followed by price controls and
import restrictions. These produce a great deal of
economic and social disorder and injustice. The
controls over steel, coal, cement, sugar, rubber,
fertilizers and food-grains have cast a gloom over the
life of the people.

Far from equalizing incomes, the policy of controls
makes the rich richer. The stagnant percapita
consumption of cloth and of food-grains is the best
evidence of the condition of the people, and this has
resulted from the misguided policies of the present
administration. In the case of all imported goods
including gold, there is a great gap between landed
cost and market price, ranging from 30 per cent to 500
per cent, depending on the nature of the commodity.
The difference between the landed cost of gold and the
market price is seventy rupees per tola. The import
markets are illegal and the gap between cost and
market price is officially ignored but this does not
nullify the reality. The benefit of all the gaps in
cost of imports and market price goes to importers and
smugglers. Excluding government imports where the
difference may be treated as a concealed tax,
according to a reliable estimate, the ill-gotten gains
on imports during two years would be of the order of
Rs.1,000 crores. This amount has several co-sharers -
corrupt officials who handle the issue of licences,
the recipients of the licences, including both those
who just sell them in the black market and real
importers. The accounts of cost are falsified by
inter-sales and the like, so as to bring the declared
cost to near the market price, and so as also to
replenish the importers for their payments for the
purchase of the licences and for corrupt transactions
with officials and go-betweens. All these incomes are
tax-free, being illicit in nature. It is these
earnings that enable some people to give large
political donations to the ruling party and also to
other groups for purchasing peace. The beneficiaries
of the illegal gain, on account of import controls,
are the upper income groups and the money is obtained
from those who consume the imported commodities or
articles into the production of which such imported
materials go. The total anti-social money that goes
thus from consumers' pockets to upper income groups
has been estimated as being of the order of Rs.300
crores per year. Inflation, import restrictions and
other controls have affected the moral standards of
the nation, and have led to the emergence of a new
undesirable profession engaged in touting for
obtaining licences, permits and contracts, in illicit
trafficking in import licences, and in smuggling gold,
diamonds, watches, cigarettes, fountain pens, razor
blades, photographic accessories, etc. The talent for
enterprise tends to gravitate around officialdom and
to practices to become rich quickly without spending
energy.

In the absence of inflation and controls, the talent
and resources would be actively engaged in adding to
national wealth under the free play of competition,
the normal road to progress. Inflation and controls
discourage efficiency and progress and honesty.

Easy money being available to some under controls and
inflation, they favour continued 'planning' which to
them means continued inflation and controls which
provide them opportunities to amass money. Political
parties in power also favour controls, as these give
an opportunity for the exercise of power and for
acquiring personal and political gains. Conscience
pricks are quelled by the thought that it is all done
in the national interests and the gains are only an
incidental by-product.

Never were the interests of the anti-social elements
so well looked after as under the present
administration. These controls must go or the
Government should change, if the country is to be
extricated from the morass it has got stuck in. It is
not true, as is argued sometimes, that rising prices
and controls and import restrictions and exchange
controls are inherent in a developing economy. The
experience of other countries-Canada, Belgium, West
Germany, Mexico, Japan, Italy and France-have
demonstrated the untruth of this plea.

It is not true, as is sometimes stated, that prices
all over the world have risen. West German national
income rose in real terms at 13 per cent per year in
each year of the period 1951 to 1958. But prices rose
there by less than one per cent per year, 5 per cent
only in all seven years. And West Germany was in the
forefront to remove restrictions on imports and on
payments abroad. In ever so many countries price
stability and surplus in balance of payments, and
abolition of restrictions on imports and payments,
have gone together with rapid economic growth.

Since 1955, Indian price-rise stands out almost alone.
Prices in May 1960 in India were 33 per cent higher
than in 1954. In France and Italy prices declined
during that period. In Germany, Belgium and Japan and
other countries the annual price rise was 1 per cent
or at most 2 per cent.

There is a notion that curtailing bank credit will
reduce inflation. Bank credit is so closely related to
deficit financing that keeping the latter going and
reducing inflation by control over credit is a
futility. It only adds to the confusion. To restrict
credit against food-grains and certain other
commodities would raise the cost of banking services
generally, and in particular the cost of credit to the
trade in those commodities, which are essential for
the economic life of the community. Naturally, such
policies encourage advances against assets outside the
banned list and drive the business of credit from
scheduled banks to others which are not under control.
The policy of credit controls has demonstrably failed.
Tampering with the credit- machinery will not achieve
anything as long as deficit financing is continuing.

The fact is that the attempt to 'invest' non-available
resources - which is what deficit financing amounts
to—is a wrong and futile policy. No plan can be larger
than the resources available for investment, be it
internal or that obtained from generous outsiders.
Even as water is no substitute for milk, inflation is
no real resource. The fallacy produces high prices and
distress. A plan based on inflation will retard
progress instead of accelerating it.

The Third Plan is tremendously inflationary. The overt
deficit financing of this Plan is Rs.550 crores. This
is misleading. Without totalitarian and physical
suppression of consumption, in order to mop up
people's money by reducing consumption, the amount of
supposed availability of savings estimated at Rs.7,200
crores is an over-estimate. The over-estimate is at
least of the order of Rs.1,300 crores.

Thus what the Plan requires by way of foreign aid,
(over and above the amount required for repayments
due) is not Rs.2,790 crores but Rs.5,350 crores. The
deficit financing therefore will not be only Rs.550
crores as planned but six times that figure. If the
foreign aid does not arrive according to the time
table, whatever the causes may be, the gap will be
much greater. And there are good reasons for
apprehending this.

We know that deficit financing to the extent of Rs.367
crores during the five years ending 59-60 led to a
price rise of 32 per cent. The deficit financing
inherent in the Third Plan will certainly involve
'runaway inflation', like the one that swept over
Germany after the first World War. During the five
months ending August 1960, prices have been rising at
a rate computed at 14.2 per cent per annum. This is an
indication to take note of Deficit financing has
already gone too far. Foreign aid and drafts on
currency reserves, cannot go on indefinitely. Holding
the price line, which is continually promised, would
be just King Canute's command to the waves of the sea.

It is pathetically argued that inflation will be
stopped by increase in production. Inflation retards
production. It drives up costs and the commodities
manufactured must be sold at higher prices. Prices and
costs rise simultaneously with inflation, and will
continue to rise with continuing inflation. Inflation
is the disease and the prices only indicate the
temperature. There is no good attempting to reduce the
symptom while keeping the disease going. Fair price
shops of any kind or number cannot achieve control of
prices. Even if buffer stocks released for sale
depress food prices artificially, this will shift
agriculture to other than food-crops, and render the
food position worse. Any commodity distribution at
arbitrary prices will fail, because the stocks will be
bought up as soon as they are put on the market, and
go to feed the black market. The cost of any remedy
put in action by way of subsidies will ultimately fall
on the shoulders of the tax-payers. The net result, so
far as the price level is concerned will be nil. The
price problem resulting from inflation cannot be
corrected by a change in the machinery of
distribution. The diagnosis must be kept in mind when
treatments are attempted The money let loose being the
cause, remedies other than reducing the money flow
will not avail.

The favourite notion that prices result from traders'
conspiracies is stupid. Such conspiracies are
impossible. The prevailing price rise is not the
outcome of either monopolies or impossible
conspiracies but of deficit financing. Prices have
risen despite bumper crops and heavy annual import of
food-grains of three million tons for four years.

To stop prices from rising, we must restore the
balance between the flow of production and the flow of
money. Inflation and excessive State interference are
the two evils of the Indian economy of today. If and
only when these two evils are removed, can we expect
to be saved from rising prices. If not, it is a case
of the ground being prepared for communists to take
totalitarian charge.

September 24, 1960 Swarajya

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A question about economic polices in India in 1984, for probabale cause of the Bhopal disaster

2007-05-26T07:28:00.001-07:00

To : Union Carbide Ltd

Dear Sirs,

I am a Indian entrepreneur based in Chennai,India
and very much intersted in economic polices
and free enterprise system.

Until 1991 India was in the vice like grip of
socialistic economic polices intiated by
Congress party from 1952. Free enterprise was
throttled and excessive goverment controls and
regulations strangeled our economy and corrupted
our system.

There was (and still is) no proper exit policy
for loss making and failed industries. And labour
laws are still rigid.

I am trying to research about such aspects.
There is very little data available about the
business profits and losses of Union Carbide India
Ltd and its Bhopal plant. Declining sales and
profits were reported. Was the plant under
utilised ? Suppose if exit and labour policy
in India were similar to USA in 1984, could the
tragedy been prevented ? Was UCIL unable to close
or sell its assets or wind up its unviable
operations in India due to legal and economic
polices followed in 1980s ?

Was the Bhopal plant making losses and unviable,
but forced to operate due to polices of government ?
Was UCIL prevented from closing or liquaditing
or selling its assets by socialistic polices of
govt of India at that time (before 1984) ?

Fertiliser policy is still a muddle and has resulted
in making many govt and private units sick.

Can you please send a detailed answer to my above
queries ?

Thanks & Regards

K.R.Athiyaman

Ethics, Corruption, and Economic Freedom

2007-05-25T08:47:00.001-07:00

Ethics, Corruption, and Economic Freedom

by Ana Isabel Eiras

Heritage Lecture #813

The subject of ethics has increasingly been present in economic analysis, 1 although not without considerable debate. Some economists believe that the importance of economics is purely technical. Others believe that moral considerations in economic analysis provide a more accurate picture of possible outcomes since it takes into consideration the human aspect of economic actors--that is, people.

I confess that, as an economist, it makes me nervous to insert subjective measures such as morality and ethics when I do my own analysis, both because my conclusions may be applicable only to a few cases and because morality and ethics are hard to measure. But since economics is the study of choice, human behavior cannot be ignored in economic analysis if we want to have a meaningful insight into people's economic life.

I will try to explain corruption, therefore, in economic terms and show how economic freedom removes opportunities for corruption and promotes ethics not just for its moral implications, but also because of its economic value.

Ethics, according to Merriam-Webster's dictionary, is "the discipline dealing with what is good and bad...." In general, we call unethical those actions for which there is a social consensus that they are a bad thing. 2

Corruption has several meanings, depending on whether it takes place in the public or private sector; however, for most people corruption is something unethical, something considered a wrongdoing. A closer look at human behavior in economic life suggests that, in some instances, corruption does not reflect so much a lack of ethics as it reflects a lack of economic freedom.

Economic Freedom and Corruption

To better understand the link between corruption and economic freedom, let me first describe economic freedom and then explain how its absence fosters corruption. I will examine the relationship between economic freedom and corruption both in the form of informal economic activity and in the public-sector bureaucracy.

According to The Heritage Foundation/Wall Street Journal annual Index of Economic Freedom, economic freedom is "the absence of government constraint or coercion on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself." 3

The Index measures the level of economic freedom in 161 countries around the world. To measure economic freedom, it focuses the study on 10 different factors:

Trade policy,
Fiscal burden of government,
Government intervention in the economy,
Monetary policy,
Banking and finance,
Capital flows and foreign investment,
Wages and prices,
Property rights,
Regulation, and
Informal market.

The Index provides a framework for understanding how open countries are to competition; the degree of state intervention in the economy, whether through taxation, spending or overregulation; and the strength and independence of a country's judiciary to enforce rules and protect private property. The 10 factors of the Index allow anyone to see how much or little economic freedom a country has.

Some countries may have freedom in all factors; others may have freedom in just a few. One of the most important findings of the Index is that, as Frederick von Hayek foresaw more than 60 years ago, economic freedom is required in all aspects of economic life--that is, in all of the 10 factors--in order for countries to improve their economic efficiency and, consequently, the living standards of their people.

The Index shows that corruption does not always reflect inherent unethical behavior. This is particularly the case for those who are forced out of the formal economy into the informal economy through burdensome regulations, taxation, and weak property rights.

Economic Freedom and the Informal Economy

Charts 1 and 2 illustrate the relationship between economic freedom and the size of the informal economy as a percentage of GDP in OECD [Organisation for Economic Co-operation and Development] countries and 22 transition economies. 4 Chart 1 shows a positive correlation between these two factors. As economic freedom vanishes, the informal economy takes a larger share of GDP.

On average, as shown in Chart 2, the size of the informal economy in economically unfree and repressed economies is almost three times the size of the informal economy in free economies, and almost double the size of the informal economy in mostly free economies.

These charts illustrate the perverse effect of economic repression on the ethics of ordinary people and on the perpetuation of their poverty conditions. For example, in most developed countries, people have a better standard of living thanks to credit access. In the United States, for example, without credit, I would not have a house, or a car, or a TV, or a vacation, or many of the products that add comfort and convenience to my life. Credit makes it possible for me, an ordinary middle-class person, to improve my standard of living in many ways.

To have access to credit, however, I need to prove that I have an income or property. To prove that I have income, I need a formal job, and to prove that I have property, I need a property title.

The amount of available formal jobs depends, of course, on how easy or difficult it is for people to invest, whether in a small retail shop to sell groceries or in a big factory. The friendlier the business environment, the more likely formal jobs will be available. According to the Index of Economic Freedom, however, in most low- to middle-income countries, it is extremely difficult for small and medium investors--which are the largest source of jobs--to operate, both because of the regulatory environment and because of the lack of a strong rule of law.

Consider labor regulations in Argentina. In this country, an employer must grant, by law, several employee benefits, including holidays, vacations, sick leave, health insurance, paid overtime, an annual bonus, and some paid months before laying off an employee. 5 Or take France, where employers must grant, by law, at least 2.5 working days of paid vacations per month; pay over 30 percent in contributions to social security; offer a complementary pension scheme, 35 hours of work per week, and time off; and abide by a burdensome bureaucratic procedure to dismiss employees. 6

The immediate problem with this kind of legislation is that it assumes that all employees are equally good, equally responsible, and equally productive, which is not true. If the employee arrives late, treats customers poorly, and makes the employer lose money, the law grants that employee the same benefits that it grants to a good employee.

Perhaps large businesses, like a multinational factory, can afford to comply with these regulations because of the size of the business and its diversification around the world. But the burden of these regulations destroys small and medium entrepreneurs, who may put their entire savings at stake in their investment.

Small and medium businesses therefore choose to do business and create jobs in the informal sector, where these benefits are negotiable and tied to performance, and not forced by law. This is a clear case in which the rules of the state create perceived unethical behavior by private employers and employees when what is really in question is the ethics of such a regulatory burden in the first place.

If they do not have a job, people can still get access to credit if they have a property title to use as collateral. According to Peruvian economist Hernando de Soto, many of the poor in the developing world have property but the bureaucracy they have to go through in order to get a property title is, at best, huge. 7 For example, in Perú, "to obtain legal authorization to build a house on state-owned land took six years and eleven months, requiring 207 administrative steps in 52 government offices.... To obtain a legal title for that piece of land took 728 steps." 8

It is just as bad in other countries, such as Egypt, where it takes 77 steps in 31 government offices (anywhere from six to 14 years), or the Philippines, where it takes 168 steps through 53 offices (anywhere from 13 to 25 years). The poor own many things that they could use as collateral, but it is bureaucratically impossible for them to validate their property rights. As a result, they are unable to convert what they own into capital and, therefore, raise their standard of living.

Informality is a response to economic repression, not to something inherently unethical in those who circumvent legislation. What is most unethical about informality is the condition in which the government forces the poor to live. Informally employed people are condemned to a standard of living that is significantly lower than that of formally employed people, who have credit access. Also, informality creates a culture of contempt for the law and fosters corruption and bribery in the public sector as a necessary means to navigate the bureaucracy.

Economic Freedom and the Rule of Law

Charts 3 and 4 illustrate the relationship between economic freedom and the level of corruption in 95 countries around the world. 9 Chart 3 shows a strong correlation between these two factors. As economic freedom vanishes, corruption flourishes. On average, as shown in Chart 4, the level of perceived morality--as a contrast to corruption--in economically free countries is almost four times the level of perceived morality in the public sector in mostly unfree or repressed economies, and almost 60 percent greater than in mostly free economies.

Having a weak rule of law significantly adds to the level of corruption in the public sector as well as the amount of informal activity. A weak judiciary is a "blind eye" on anything done outside the law. With a weak judiciary, corruption goes unpunished and informality flourishes.

This is one of the most serious problems we find in the world today. Of 161 countries evaluated in the 2003 Index of Economic Freedom, 108 received bad scores in both regulation and property rights," undermining any effort to improve the living standards of the poorest in those 108 countries.

Conclusion

To be sure, there are cases of corruption that respond to the unethical nature of the corrupt individual. But for the most part, the unethical behavior stems from the environment in which individuals must interact. Convoluted regulations and weak rule of law foster a culture of corruption and informality both in the private and public sectors.

In the public sector, convoluted regulations and weak rule of law provide ample opportunities for public officials to accept bribes without punishment. In the private sector, those two factors push some people to do business informally as a means to survive and others to profit far more than they would if the possibility of bribery did not exist. The result is an increasingly unequal society, in terms of the opportunity to create wealth and improve living standards.

To fight corruption and informality, it is essential to understand that corruption is a symptom--of overregulation, lack of rule of law, a large public sector--not the root of the problem. The perceived problem is unethical/corrupt behavior of the private sector, which leads the government to press more on private-sector activities. The real problem is the government action/regulations causing undesired behavior of the private sector. The optimal solution would be to eliminate burdensome regulations so that unethical behavior does not occur.

Countries must advance economic freedom in all possible areas of the economy, with particular emphasis on regulations affecting small and medium business, in order for corruption and informality to decrease. The Index of Economic Freedom is an excellent guide to identify what is obstructing economic activity and, therefore, perpetuating poverty.

Countries must also preserve the independence and effectiveness of the judiciary to punish corrupt actions. Economic freedom with a strong rule of law will foster a culture of investment, job creation, and institutional respect--all essential factors in massively improving the living standards of ordinary people.

--Ana Isabel Eiras is Senior Policy Analyst for International Economics in the Center for International Trade and Economics at The Heritage Foundation. These remarks were delivered at a conference on the "Ethical Foundations of the Economy" in Krakow, Poland. 10

1. See Daniel Hausmann and Michael McPherson, "Taking Ethics Seriously: Economics and Contemporary Moral Philosophy," Journal of Economic Literature, Vol. XXXI (June 1993), pp. 671-731. See also Leonard Silk, "Ethics in Economics," American Economic Review, Vol. 67, No. 1 (February 1977).

2. Merriam-Webster's Collegiate Dictionary, Tenth Edition (Springfield, Mass.: Merriam-Webster, 2002), p. 397.

3. Gerald P. O'Driscoll, Jr., Edwin J. Feulner, and Mary Anastasia O'Grady, 2003 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2003), p. 50.

4. Friedrich Schneider (see Charts 1 and 2) used the physical input (electricity) method, designed by Daniel Kaufmann and Aleksander Kaliberda. Overall (official and unofficial) economic activity and electricity consumption have been empirically observed throughout the world to move in lockstep with an electricity/GDP elasticity that is usually close to 1. By having a proxy measurement for the overall economy and subtracting it from estimates of official GDP, Kaufmann and Kaliberda derive an estimate of unofficial GDP and DYMIMIC method (dynamic multiple-indicators multiple-causes, a model that measures the link between the unobserved variables [the shadow economy] to observed indicators) to measure the size of the informal economy in transition countries in Central and Eastern Europe and in states of the former Soviet Union. For the OECD countries, either the currency demand method (first used by Phillip Cagan, who calculated a correlation of the currency demand and the tax pressure--as one cause of the shadow economy--for the United States over the period 1919 to 1955) or the DYMIMIC method is used to estimate the size of the shadow economy.

5. The Labor Market and Its Legal Context, Executive Summary, Deloitte & Touche, July 2003.

6. Country Commerce: France, Economist Intelligence Unit, June 2002.

7. Hernando de Soto. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000).

8. Idem.

9. The TI Corruption Perceptions Index (CPI) ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians. The CPI focuses on corruption in the public sector and defines corruption as the abuse of public office for private gain. The lower the score, the higher the level of corruption. For details about how the CPI is done, see http://www.transparency.org/.

10. The author would like to thank John Lyneis, an intern at TheHeritage Foundation, for his valuable research assistance.

2007-05-10T23:47:00.000-07:00

11/15/2006
Traffic Problems and Solutions

2/19/2006
Why Indians beame cynical and corrupt ?

2/01/2006
Peter Drucker : tax evesion leads to cynicism

1/30/2006
reg : creamy layer misusing reservation policy

6/29/2005
An enreupreuner's viewpoint about tax-evasion &Tax/GDP ratio

5/03/2005
Why poverty in India ?: govt deficits & inflation

5/03/2005
govt deficits & inflation

5/02/2005
On National Debt

5/02/2005
To : Communists & Socialists of India

5/02/2005
The real cost of Socialism in India

5/02/2005
MNCs & child labour

5/02/2005
What keeps India backward ?

Traffic Problems and Solutions

2006-11-14T23:20:00.000-08:00

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.

Why Indians became cynical and corrupt ?

2006-02-19T22:14:00.000-08:00

India achieved freedom in 1947 after intense struggle
and sacrifice by a dedicated and idealistic people. We
have slowly lost the high ideals and honesty since
then.

The main culprit is the socialistic economic model
followed since 1950, coupled with population
explosion. Socialistic polices, in the name of
egalitarianism, created crony capitalism (license,
permit, quota raj), along with confiscatory tax regime
and double digit inflation.

The government printed enormous quantity of money to
finance its huge programs and investments. It resulted
in double digit inflation. Additional resources were
raised through very high taxation (upto 95 % income
tax rate). The triple attacks of inflation, license
raj and high taxation eroded our values and morals. A
bloated bureaucracy was created to administer the
economy, which was a breeding ground for corruption
and cronyism. Tight controls and regulations strangled
economic growth with high unemployment.

Industrialists and traders began to evade taxes which
were perceived to be unfair. The tax administration
became increasingly corrupt. Respect for the rule of
law slowly decreased. The cynicism spread slowly and
political parties promised the heaven for the people
and began to purchase votes. Subsidies and propaganda
of government machinery changed the values and outlook
of common man, who began to look upon the government
to for all his wants. When the voters began to sell
their votes for money and other considerations,
corruption set in. Irresponsible trade unionism
(especially of government sector employees) eroded
work ethics of the organized sector, while the
unorganized sector (who are the majority) were
helpless and squeezed.

Black economy is as large as the 'official economy'.

Individual initiative and enterprise were discouraged
and a whole generation of Indians became job-seekers
instead of job creators. There were isolated pockets
of excellence where enterprising attitude of locals
resulted in prosperity for the region. For example
textile industry grew in Coimbatore district while
trucking industry in Namakkal.

Reckless borrowing of governments, which were living
beyond their limits, resulted in a debt trap and high
inflation. All this took our nation to near bankruptcy
in 1990-91. And since liberalization began in 1991,
economic growth is high and the hidden potential of
our economy has been unleashed.

We are a living proof of the prediction of Lord
Keyenes who said '..there is no surer way of
undermining a nation's character than by undermining
her currency..'

'High taxation leads to evasion, which makes people
cynical ; and this cynicism is a slow poison which
ultimately destroys democracies' says Peter Drucker
in his book, The New Realities. (1999)

Our cynical attitude is highlighted in the way vested
interests and apathy have distorted, reservation
policy, trade unionism, subsidies and environmental
issues.Economic health can be restored, but morals of
a people, once lost, is difficult to repair. It may
take many decades for full restoration.

Peter Drucker : tax evasion leads to cynicism

2006-02-01T04:04:00.001-08:00

Dear Sir,

While chatting you had mentioned about the connectionbetween tax evasion and cynicism. The following is from P.Drucker's 'The New Realities " (pp69-70)'....once the govt take, especially if collected thru taxes, exceeds a certain percentage of gross national productor personal incomes - the fiqure seems to be around35-40 percent or so - a silent but highly effective'tax revolt' starts. People stop working ; what is the point if the additional income is being taxed anyway ?Worse, people begin to cheat. A 'grey economy'develops. In the US there was almost no tax cheating before 1960...

'...Attempts to stamp out or even to curtail the graye conomy are ineffectual as long as tax rates remainhigh.In fact, while everyone loudly condemns the greayeconomy, most people not only participate in it but consider it morally justified and, in fact, 'clever'.But this undermines the moral cohesion of scoiety, Itproduces a dangerous political poison, cynicism.'

Seventy years ago Schumpeter warned that inflationwould destroy free society. After WW 1 , the inflations in Europe, esp in Germany amply bore out Schumpeter's warning...'

Regards
Athiyaman

reg : creamy layer misusing reservation policy

2006-01-30T20:41:00.000-08:00

From : K.R.Athiyaman, Chennai - 96

To : Thriru.Ki.Veeramani Ayya Avargal, Chennai

Anbulla Ayya,

The creamy layer (that is, those who are
upper middle class and above) among
BC/SC/ST communities continue to enjoy
the benifits of reservation unashamedly.
(i hail from such a family).

We propose that economic criteria should
also be included as an additional qualification
for being eligible for reservation benefits.
Families whose annual income is above say,
Rs.1,80,000/- and where the parents are well
educated may be deemed as FCs. And many schools,
where annual fees are above Rs.60,000 may be
classified as FC schools.

Reservation was meant to be a short term
issue and never a permenent institution as
it has become now. And there should be a
standing committe consisting of eminent
jurists, educationalists and honest people
to perodically evaluate the effects/abuse
of reservation benefits. The whole process
should a dynamic one, not a static one, which
is now a vote bank issue and nutured by
vested interests. And there should be a
maximum limit for resrvation (and not the
present >70%), which should be gradually
brought down.

And in promotion among govt staff only
seniority, merit and efficency should be
the criteria. Only one generation of any
family must be eligible for the benefits.
Subsequent generation must be deemed FCs.

Unfair reservation benefits to numerous
well off students has created resentment
and heart burn among FCs and many fair
minded people. The caste divisions has become
more rigid and divisive (esp in govt offices).

I am sure Thandai Periyar and Ambedhkar would
endorse my above views if they are alive today.
They were basicaly honest in all issues.

DK should have functioned as a bridge between
BCs and SCs (esp in rural areas) and established
peace committes for stopping caste clashes.
The aliented SCs have formed many organisations
of their own to fight for their rights, instead
of joinning DK. Blaming brahmins alone for all
the ills of the society will not solve any thing.

Thanks & Regards

K.R.Athiyaman
Chennai

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An enreupreuner's viewpoint about tax-evasion & Tax/GDP ratio

2005-06-29T01:24:00.000-07:00

To : Prod. Cp.P.Chandrasekar, JNU, New Delhi

Dear Sir,

I am an entreupreuner running a SSI unit (molding)
at Chennai.

We are taxed at 35 % income tax ; and sales, excise
and power tax (as indirect -cross subsidy to domestic
consumers) constitute a good chuck of our turn-over.
Our power bill comes at a whopping 35 % of our monthly
turnover.

I undertand that you are advocating rising the tax-GDP
ratio even higher. GDP is the total turnover of all
industries, enterprises, indiviuals, etc. It is the
total annaul sales turnover. Not the gross profit,
as many are misled to belive.

Now, we make some 15 % profit on our annual turnover .

So, we cheat on income tax with the help of accountants and auditors.
We inflate the expenses, sell without invoices, try to
con the tax adminisntrators. We bribe them to avoid
penalisation. We feel that the present tax rates and
regime are grossly unfair and very high (incl of power
subsisdy that we foot).

The govt comes in as a 1/3 partner without putting any
capital at the end ofthe year (while never sharing our
losses or problems).

We work hard and take great pains in running the unit
profitably. It is my hard earned money and i have the
fundamental right to spend it as i deem fit. i try to
treat my workers with compassion and sensitivity.
But charity and service will be at my terms, not at
any one else's.

I propose that JNU professors and economists/authors
may be taxed at a 'progressive' rate of some
73 % of gross income. Rs.10,000 p.m may be enough for
you to live comfortably. Or i suggest that you resign
your safe govt job and enter self employement like
publishing, etc, so that you may understand our
feelings and problems.

Over taxation in the 50s and 60s at some 90 % max plus
licence raj with 20 % inflation had wrecked our
economy and morals. A whole generation of would-be
entreupreuners were made into govt-job seeking
weaklings and enterprising nature was punished as
'profit-mongers' ; Any working man (like you or me)
works for making money (be it salary or wages or
profit) ; then why is it that only capitalists alone
are blamed as 'selfish'.

We have a more objective insight into human nature
than any Marxists. Man will work hard and give his best
only when there is an incentive to gain (profit, etc).
Otherwise, in a regulated and controlled set-up, like
in govt jobs, ineffeicney and sloth plus corruption
floursihes. How is it that many pvt enterprise better
and cheaper services than govt (like in transport or
telecom).

Thanks & Regards
Athiyaman
Chennai

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govt deficits and inflation

2005-05-03T00:55:00.000-07:00

Dear Sir,

Thnaks for your prompt reply to my mail.
the combined deficits of central and all stare govts
is more than 10% of GDP. And inflation may have fallen
in recent years ; and the current rise is due to
crude oil prices, etc.But still the basic reasons for
the 5 % inflation (that is according to govt
statistics) is too high. In reality, for the layman
and consumers, prices more than double in a decade.
And real rate of inflation is always higher than the
govt statistics.

The formula
rate of inflation = rate of growth of money suppy -
rate of growth of GDP
is always valid.

And it is obvious govt pumps in about 15% of money
into the economy. Pls elaborate and educate us all
about this fraud commited in the name of 'public
good'. and most state govts will be bankrupt soon,
even thought the economy may grow and look healthy.
Maharastra seems to top the list.

And Germany which sufferd terribly in the after math
of both the world wars experienced hyper-inlfation.
And till date the Germany's main objective is to keep
inflation below 2 % (or so). And that is why she is
today the strongest and healthiest economy in Europe.
We should learn from Germany's history.

thanks & Regards
Athiyaman
Chennai

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On National Debt

2005-05-02T01:12:00.000-07:00

On National Debt

The idea of National Debt has become outdated. Nowadays people look upon it as some sort of benignant tumour, growing all the time, taking all the space but giving no pain; so why worry about it?

Nothing can be more dangerous to the stability of the government than the above view. History has repeatedly shown us countries and empires fail mainly because they become bankrupt. Wars, revolutionaries, epidemics, succession disputes are all only the immediate provocation for a crisis; but ultimately countries fail because they are bankrupt by the time that crisis arrives; because their taxation reaches unreasonable levels; because the people become so disgusted with the government they’d rather see it disappear.

The Government of India is a shining example of Spencer’s Law: Men will go for the rational solution, but only after exploring all other avenues. After experimenting with every possible scheme that goes against the basic tenets of economics, under the sweeping label of ‘socialism’, it has finally found that, to become rich there is no alternative to profit-making. Still, in managing its finances, it is yet to exhaust all the avenues and come to a reasonable understanding.
Let us get our basics straight: the economic laws that hold good for a household hold good for a country. A country has to earn more and spend less to make a profit; a country has to borrow if its expenditure exceeds its income; and a country can become insolvent the same way a family becomes. Anyone who tells you otherwise is either cheating himself or cheating you.

The cute little tricks that the ‘leftist’ economists tried to pull over these basic tenets are as follows: 1. A family cannot ‘create’ or manage its currency whereas a country can; hence a country can determine the level of its wealth through its currency. This ‘law’ fell flat when the currencies so created and artificially managed, like our Rupee and the Soviet Rouble, found their ‘natural’ values in the international markets, however much these governments tried. The pathetic attempts to artificially boost their currencies bled these countries very much. India had to periodically devalue Rupee since 1947. In 1942 a Dollar was worth two and a half Rupees; now it is worth forty-three Rupees. And that too when the dollar itself was sliding down all the time and the Rupee being an inherently strong currency to boot. In short, a government may create its currency, but it is the country’s economy that manages it. No country can become rich by printing currency. 2. There are other ways a country can ‘create’ wealth by redistributing it and by government spending. Some leftists even dare to quote Keynes as the authority who advised this sort of becoming rich through government spending. This method of becoming rich is exactly equal to lifting yourself up in air by pulling your shoelaces. Keynes’ advice was meant for a very special circumstance, namely the Great Depression, when the currency was strong and overvalued, the Government was rich, solvent and conservative but the majority of the people were poorer because they lost their currency. An insolvent Government cannot ‘create’ any wealth by overspending. It rather will cause more inflation and devalue the currency. And this is precisely what Lord Keynes told. So let us not fool ourselves into believing that microeconomics and macroeconomics are altogether different. They are one and the same, only the jargons differ.

Now a brief review of India’s economic history. India always had a balance of trade in its favour, i.e., it always exported more than it imported. This was true even during the height of British imperialism. And again, it always had a surplus budget, i.e., it always earned more but spent less. Again this was true all through the British history except for a few years of the Second World War. Were the British to incur a loss in running India they would have invited Bahadur Shah Zafar to take over. So, when the British handed over India to us, they gave us a solvent government. India had a public debt even then, but it was well within limits. India had a foreign exchange reserve of five billion Pounds in 1947.

Now our socialist experimenters took over. They told us we were a backward economy because we exported raw materials and imported finished goods and we exported agricultural produce but no machinery. Why should a country be backward just because it exported raw materials, they never bothered to answer. They also covered up the fact that we also had a huge labour market and the combination of the raw material and cheap labour would make us a manufacturing country, if only we let the fellows, with the money and the technology, to invest.

No, thanks, we will do it ourselves, we told the world, and set up our public sector, which is public only in making us bear its losses. We frittered away our foreign reserves in buying machinery and technology. We reduced the export of raw materials because it is a sign of backwardness. We nationalized steel, coal and power, with disastrous consequences. We created militant labour unions that were averse to all forms of work. What followed was a communist heaven: no work, full pay. But in Hindu religion, even the longest stay in heaven will end one day, however much be our punya we will eventually exhaust it and return to earth again. This happened after the 1991 foreign exchange crisis. Since then we are limping towards obeying the basics tenets of economics rather than trying to cheat them. But in the process of these socialist experiments we have incurred a huge national debt. Some noise was made about this when India was short of foreign exchange and spent 25% of its earnings to service its debts – a euphemism for the interest we were paying. But now that the foreign reserves are comfortable nobody is worrying about the national debt.

There are many reputed economists who will tell you not to worry. They will tell you that your debt to GDP ratio is still low, your taxes are only about 8% of the GDP and so you must tax more and spend huge amounts in public works for ‘development’. Let us have a look at these gems of wisdom.

Debt to GDP: this is audacious at the very least and atrocious at the most. GDP is roughly the trade turnover of all our people. Public Debt is incurred by the government, often on expenditures that people might disapprove of. The government cannot take away the entire national income as tax, it has to leave a little bit for the people, so that they can subsist and be taxed next year. So the government’s debts must be compared only to what it can collect as tax from the people, not what the people earn in total. It is meaningless to compare the National Debt to GDP. It is like comparing the debts of a profligate son with the business turnover of his patient father who has a big family: however much is his love, he cannot give up any sizeable portion of his earnings to pay off his son’s racing debts. At some point he would disown his son.

Similarly at some point in the raising taxation the people will refuse to pay the taxes. So this Debt to GDP is one of the most malicious tricks of the trade, beware.

In every taxation, people will try to wriggle away and evade as much as possible, an endeavour that our bureaucrats help very much through arcane rules. This will again reduce the tax collectible, and hence the money at government’s disposal. So far there is no authoritative study on how much of the national income can be collected as tax without risking serious riots. But an empirical and witty work of Northcote Parkinson puts this at 36% (of national income, not GDP).

But it is impossible to reach this point in India for the following reasons: the black economy will overwhelm the white economy under heavy taxation; it is easier to bribe the taxman and get away; and India simply does not have such a heavy mechanism that can track all the transactions and tax them. In India’s case, the limit is only 10% of the GDP, given the rudimentary nature of our transactions and the porous tax net. And we are fast approaching this point, as any Finance Minister will tell you that any more new taxes will not fetch much return.

Hence the second point: Taxation as a percentage of GDP is misleading.
Let us get one more thing straight: government is not a mechanism to create wealth, it is a mechanism of the society to govern itself. If we compare the whole society to a business, then the ‘government’ is its administrative expenses. How much should a company spend on administrative costs? Crudely put, you decide to give a free banquet to 10,000 people, costing 10 lakh Rupees, and you engage a fellow to do this. Some part of this money should be spent on this fellow. How much would you allow? Put this way, the answer is obvious: may be ten thousand, may be twenty, but certainly not one lakh Rupees. Put in words, administrative costs should be only one to two percent of the total turnover. Hence the ideal tax to GDP ratio is 1-2 %, not 10%, i.e., the government should take only 1-2% of GDP for all its expenditure, and again of this sum, only 1-2% should be the ‘administrative cost’- salary, etc to its servants.

Now about public spending. The lesser said the better. At present India is like a family that has both some large debts and some small assets. Supposing it decides to sell the assets and get some money; how should this money be spent? Any prudent housewife will advise you to pay off your debts so that your interest burden will come down. If she advises you to buy a plasma TV with this money, to take a trip to the Maldives, or to spend it on the groceries, then it is time you took to sanyas: once the money is thus spent yours will be a family with some large debts and no assets. Yet, here is a government that is selling away its assets in the form of PSU disinvestments, and spending it to cover day-to-day expenditures. In the esoteric language of the Government, capital receipt is being spent on revenue expenditure. Nobody seems to be bothered about it, rather some people want this money to send a satellite to moon, others to fund an outlandish Food for Work scheme.

Of late another interesting twist has been added to this farce. At present due to the vagaries of time India is enjoying an unprecedented foreign reserve. Very learned scholars are debating how to put this money to ‘serve’ the people. Put this surplus in a corpus fund, urges a noble heart, and use the interest for welfare schemes. It is taken for granted that this new found prosperity is going to last forever, without caring to understand the whimsical nature of modern money that it is supported not by any physical asset but only by the credibility of the issuing government (that is what makes Rupee an inherently strong currency: come what may, a billion Indians are accepting only Rupees, therefore anyone wanting to deal with this billion has to keep some Rupees; the day the corner paanwala prefers payment in Dollars or Euros, Rupee is well and truly gone). It occurs to nobody to pay off our huge foreign debts; the nearest suggestion is that we should exchange high-interest loans for low-interest ones. Our ‘huge’ reserves may vanish within a fortnight if we commit a small error in valuing our Rupee, as Indonesia found to its cost a few years ago. The more reasonable option is to take this opportunity to reduce our foreign debts.

Finally a word about our principles of spending. For years we were told that the government could have ‘small deficit’ in its budget to ‘stimulate’ economic growth. Huge deficits were created and debts incurred in following this principle religiously, but the growth was ridiculously small, and unjustly dubbed the ‘Hindu rate of growth’. Now that the private investment is stimulating all the growth ever needed, and the government has a huge debt burden, it is high time this pious advice was forgotten, India’s budget balanced, and the surplus thus created used for reducing our internal debts. It is high time we froze our expenditure for sometime and reduced our debts and interests. This we owe it not to ourselves but to our sons and successors. No son ever likes to take over a debt-ridden family, why should the country be any different ?

To : Communists & Socialists of India

2005-05-02T01:06:00.000-07:00

From :

K.R.Athiyaman,
Chennai

To :
The CPM Politbureau, New Delhi

Dear Sirs,

I am a middle class man working in a private concernin Chennai. I would like to share my views aboutworking class conditions with you.

The unorganised sector constitutes the majority of theworking class : about 91 % ; they are not unionisedand have no security or other benefits.We support privatisation as we feel it will reducecorruptiion, wastage of public funds, and reduce thecost of services and goods ; and increase employement and prosperity in the long run.

In TN, public transport system is to be partiallyprivatised. And naturally your party opposes it onideological grounds. But reality is somethingdiffernt. No one cares for us public who use theinefficent and insufficeint public transport system.If properly liberated from the License Raj (theexisting private bus toutes are sold for lakhs of rupees in black money among the monopoly privateoperators, as you very well know), we belive the bus transport will be efficent and cheap like thelorry transport sector which is efficent and free.We do not have sufficent buses ; and entire publictransport corporations incur losses not because of cross subsidisation or running busues to remote villages. The losses are mainly due to corruption,lack of accountablity, top heavy adminstration andpolitical interferance and nepotism. No one can reformor improve the existing system.If the system is privatised and liberalised like the lorry transport system, then there will be sufficentand cheap buses all over the country.

Yes, there will retrenchment among the govt workers ;they may get jobs with the private bus companies ;the salary may reduce but the buses will be good.May i ask you, why you are bothered only when suchwell paid minority workers loose jobs ; but do notcare when millions of casual labourers (whodesperately need cheap bus transport) loose theirjobs.

Reg bad debts in public sector banks of 75000 crores :Why do only PSU banks have such severe problems ? whyare private banks like LVB, KVB healthy. You do not address the core of the probelm : the corrupt bankemployees who doled out the loans to unethical business men. Blaming the business men alone will notsolve the problem. And the govt of India (means the tax paying public) will have to bear the burden inwriting off these loans. Like UTI fiasco...

The govt of India and the state govts are all bankruptand very soon paying salary for govt employees isgoing to be a struggle.The CPM West Bengal Govt does privatisation and had recently appointed Mackinskey & Co of USA asconsultants for restrutaring process. Can you expain the double standards of CPM in thisregard ??Personnaly i feel that to be a communist, it takesdedication, selfless nature and above all honesty.

The majority of the organsied trade unions (like therailway union members) are dishonest and misuse theirmembership. They do not care for the real prolateriatof India : the unorganised sector, who are exploited,over worked and under paid); that is why the reach ofCPM is shrinking and strikes organised by govt unionsand others get very little attention from the realproletariat. We do not care.

I have yet to meet a honest union leader from INDIAN Railways who has not amassed a fortune by misusing hisposition. Most of these members have bourgeousie mentality and are fascists. Yet you count them as yourcomrades and dream of using them as instruments of revolution.

Swami Vivekanada (a socialistic swami) called for just 100 dedicated and selfless young men to followhim so that he can change the world. The important factor is that he needed honest and selfless youngmen. QUALITY IS VERY IMPORTANT THAN QUANTITY.You may dismiss me as a bourgeousie or a revisionist ;but in our opinion you can never in 10000 yearssucceed in bringing in a revolution like October revolution of 1918, WITH THESE PSEUDO COMRADES.

With Regards
Athiyaman.K.R
Chennai

The real cost of Socialism in India

2005-05-02T01:04:00.000-07:00

Reg : Socialism

All our problems in Indian socieity can be traced to unpractical socialism / leftist ideas since 1947.The corruption, nepotisim, fall in moral standards andvalues in all spheres of life is directly linked tothe undermining of our national currency.the socilistic govts until 1991, stiffled growth ofprivate sector (explotiting imperialists !!) and further spent huge money (borrowed or printed ortaxed)on huge PSUs and in reckless expansion of govtmacihnery and creating white elephants like SAIL. while the price of all products produced by PSUs werevery high due to lack of competition and inefficiency,there was also acute shortage of goods (like cementuntil 1980). it gave rise to black market, smuggling,horading and bribery among govt officials.

At one time there was a maximum taxation of about 90 % for many corporates (in addition to high powercharges, sales tax and excise) ; naturally it led toevasion of taxes and created black money.moreover the govt created inflation by meeting thebudgetery and other deficits by printing money.if the wage levels doubled in ten years, price levelsmultipied by four times. And interest rates werearound 20 % ( and unofficial and real rate at around30 % or more ) . Micro credit in samll town markets, etc is at 200 % (kandhu vatti).all govt stastics reg inflation, interest rates, etcae half triths and doesn't cover the black moneysegment. corruption grew slowly and steadily, as it wasimpossible to live honestly on a fixed salary whileprices were rising annually. and huge power was centralised and given to bureacrats who ruled in thelicense permit, quota raj. naturally, they too becomecorrupt. and their culture spread form dept to deptand finally reached the armed forces (Tehelka, Bofors,etc).

Indians were not this corrupt and morally degradedin 1947. There was expoitation, feudalism,zamindarism,casteism, poverty, unempolyment and hunger then ;but as a whole moral values were very high, producingexemplery leaders in politics and other related fields.

These modern day leftists rever Lord Keyenes, whoadvocated deficit financing to stimulate growth.but he prescribed only 2% or less defict. not the 12.5 % defict (gross defict of central and state govtsput togehter as a ratio of GDP). this defict is madeup by recklessly printing money.Keyes had said " there is no better way to underminethe moral and political standards of a nation than byunderming her currency. "there are no free lunches in this world. only wealth,which has been created can be redistriubuted to all.

Soviet Union crumbled not because of US capitalsiticconspiracy, or by huge defence expeditures or byexporting revolution to third world countries atenormous cost ; it crumbled mainly because of overcentralisation of power with burecarcy, corrputionand inefficency of the state run PSUs, etc.in short, during the last decades of soviet union,the entire country was run like our present TamilNadu Sate Transport Corporation or Co-op Mills.

The chinese are more wiser and far sighted ; they areliberalising fast and invited MNCs to invest in China.china is still ruled by the Communist party with aniron fist ;they are under no presuure from IMF orWorld Bank or US or WTO ; they sponateously do whatthey are doing. Why don't the Indian communists understand and analyse these factors ?

Please read the book " Free to Choose" by MiltonFreedman,an US free market economist (Nobel prize winner).Competition is most important (while privatising) toensure efficency and productivity. you know very wellthe difference in the bus transport and lorrytransportsector in India. if licences are totally abolishedand free enterprise is allowed in bus transports, then there will be good, sufficeint and cheap buses in all routes ; and moreover the corruption intransport ministry and burecracy, and trade unionswill be finished.

Only 9 % of the total labour force in India comes under organised sector. There is no hope or securityfor the crores of contract labourers, child labourers,agri workers ,etc. if labour laws are liberalisedand hire or fire system is introduced in all sectors(including the govt), the sky will not fall down.the best way that anyone can help the poor in Indiais by stopping the reckless printing of money topay the govt expenses. by guranting the minimum wagesthey get does not erode in real value (purchasingpower), the govt can help them. (than with all theanti-poverty alievation schemes)and the govt is bankrupt ; so we will sell all govtPSUs eventually to meet the deficits.

The dramatic fall in STD rates is a good example offree enterprise Vs govt monopoly. And we are payingartifically high rates for Diesel, Petrol and powerdue to govt monopoloy and corruption.

MNCs and child labour

2005-05-02T01:00:00.000-07:00

Dear Sir,

In your recent article in NR you had mentioned about"...exploiting MNCs...".It is ironical that many people object to and opposeMNCs while enjoying the products and services providedby the same MNCs (Santro Car, PCs, Cameras, TVs, VCDplayers, pharma products, garments, software, etc).Globalisation is not evil. And the very humaneeconomist Prof.Amartya Sen (who is respected by Indianleftists) does not oppose globalisation or MNCS.And the workers are better paid and working conditionsare better with MNC factories in India than localones. And the consumers (both of us included) get bestprodcuts and servies at cheaper prices.And wealth is created which will improve the standardand quality of living. And the taxes paid the MNCs andits employees can be used by the govt to fincane itswelfare or other activites.

Everytime i see a child labourer i feel pained andalsoangry with the RBI printing press at Nasik, whichenables the GoI to print ruppees to fiance its growingdeficts.

Growth in money suppy = inflation + GDP growth rate14 % = 7.5 % + 6.5%and 14% grwoth in money supply per year is solely dueto govt deficts (means borrwings from RBI).Economic laws are ruthless and there is escaping theevil effects of inflation ; and over taxation leadsto evasion and corruption (and creation of blackmoney and black economy).I feel that this has corrputed our souls.

One good e.g is the arrest of Kanchi Sankaracjarya.Large amount of donations was received by him frombusinessmes in cash (black money), and probably withBenami people for him. and though his motive in thebeginning was social service, the black moneyeventually have found its way into wrong hands for wrong uses. All of us who use black money wouldbe corrupted in some way or the other and it makesus loose reapect for the law (whatever may be ourraionalisation or justification). Jayendrar's predecessor never touched any cash andnever ever allowed donations in black. And all moneycould be accounted and spent in a legal manner.

The advent of black money donations (the business mentoo could easily donate large amounts in cash, as allof them generate black money in their dealings)changed all this and the end result is now visible.

thanks & regards

Athiyaman
Chennai

What keeps India backward ?

2005-05-02T00:32:00.000-07:00

From 12.9.2000
K.R.Athiyaman,
36, Middle St.,
Pasuapthipalyam,
Karur - 639 004 (T.N)
e-mail: athi68@yahoo.com

To

The Cheif Minister,
Tamil Nadu

Dear Sir,
Permit me to express my views about liberalisation and privatisation of Indian
economy. The leftists and the ignorant public still oppose the liberalisation process
initiated in 1991 as anti - poor. Uncontrolled Government expenditure and socialism
are root cause of all the problems we have, including poverty, unemployment, corruption
and high inflation and interest rates.
The Govt of Tamil Nadu is no exception. Creating more districts is an classical example
of increasing wasteful govt expenditure. For example, our Taluk Karur was made into a district
at a cost of about Rs.10 crores, while the revenue collected remains the same. Now there are
three officers of IAS rank and more Police officers. But the number of clerks, constables and
other lower level posts remain as it was. The whole administrative set up is top heavy and leads
to inefficiency and corruption.
The state transport corporations are notorious for badly maintained buses, corruption and
mismanagement. The private buses are well maintained and cost effective and are
profitable. The govt.can issue more routes through open auction and sell off the loss making
state transport corporation( about Rs.400 crores can be saved in losses every year). Auctioning
of all routes every three years( just like the auction of permits for wine shops) can fetch
enormous revenue for the cash strapped government and avoid corruption at the same stroke.
Every one knows that the "route" for the existing bus routes are traded (in black) for tens of
lakhs of rupees. All this illegal money can be garnered by the govt through open auctions and
privatisation.
I have herewith enclosed an article of mine which was published on the internet (about the
damage caused by socialistic policies in India.
Thanking You
Sincerely,
Athiyaman.K.R

A critique of Socialists of India:

Who are the real proletariat of India ?

Leftists of modern times have lost their power of rational,objective analysis.
They are seldom realistic or pragmatic. There is a lot of grey area but these
gentlemen view in only black or white, their vision clouded by their ideology.
There are two totally different types of working class in modern India.The
majority (about 80 percent ) are of the unorganized sector( farming, contract
labourers, domestic workers,construction,etc.)They are unorganized, have no
union or identity or awareness about their rights. They are the silent and
invisible majority,exploited and under paid with no protection or benefits.
The other type is the organized sector ;unionized and militant, recognized
and used by all political parties(including the Marxists).The leftists work only
for these pampered elite at the cost of the silent majority.Worst among these
are the government employees ( all PSUs and govt. departments).They constitute
less than 2 percent of the population, but the government spends a major portion
of its budget on them.

We Indians have developed, over the socialist decades,a double standard
regarding work ethics. Any Indian will work sincerely while being employed
by any private organization (otherwise he will be sacked). The same chap, if
he is employed by the government will become lazy, inefficient and corrupt,
but demand very high salary,perks and paid holidays.( there are ,of course,
exceptions). Only in India are the bureaucrats so arrogant and corrupt.The
job-for-life rule with no mechanism for monitoring and correcting inefficiency
has made our government the biggest employer in the whole world.
Most of the PSUs and government departments are overstaffed and
underworked. Worse, all of them are top heavy.Too many officers and
bureaucrats.There is no pyramidal structure in any department.Posts are
sanctioned and created with scant regard for cost effectiveness and need.
If any private company (say like Reliance or Tisco),is staffed and run like
a government department(say Home Ministry), it would have gone bankrupt
in no time.But the government is unable to downsize its ministries.As a result
fiscal deficit is growing dangerously fuelling inflation and poverty.About half of
the government income is used for interest payments alone.Salary for
government employees and defense budget swallows a large portion and finally
a meager amount is left for capital expenditure and welfare. Is this socialism?

Less and less money is allotted for vital areas like education, health and
drinking water schemes while the salary bill bloats.To top it all, the loss making
PSUs are maintained at any cost to the exchequer. (for e.g Air India and Indian
Airlines could have been privatized long back avoiding a lot of loss and trouble)
The money poured to maintain them could have been used for more useful activites.
Most people don't realise that less government interference promotes enormous
growth.The IT industry and synthetic fibre industries are good examples. There is
negligible government control or interference in these sectors and no government
owned PSUs in these sectors ;only private initiative and enterprise. Hence the
enormous growth and employment opportunities.

To contrast the striking difference between government inefficiency and private
sector initiative,consider public sector road transport corporations.While there is a crying
need for more buses, the loss making government owned corporations are unable to
expand fleets or maintain the existing buses in good conditions(mainly due corruption,
inefficiency and over staffing of top management)The private buses are generally better
maintened and less accident prone.The licenses for the routes are sold (in the black
market) for tens of lakhs of rupees.Licenses for bus routes can be decontrolled (like
lorry transport sector) to end all these troubles.But there are vested interests (consisting
of transport ministers, bureaucrats,existing private bus operators and trade unions) who
prevent this so that their monopoly and graft can continue as ever.This is nothing but
crony capitalism masquerading as socialism. Fortunately the lorry transport sector is
totally in private domain and hence efficient and cost effective. All other infrastructure
sectors(like power, telecom, ports and airports) are plagued by similar problems,
arresting growth and development of the economy.

Private banks were nationalized in 1969 by Smt.Indira Gandhi (for purely populist
and selfish reasons).The leftists and the intelligentsia applauded the foolish action. Look
at the result. The NPAs (bad debts) are astronomical and most government banks(like
Indian Bank, UCO Bank)are almost bankrupt.Only budgetary support and government
protection keeps them alive.The private banks(like the Karur Vysya Bank, The Vysya
Bank, TMB, etc) are healthy and growing. All banks operate under similar rules and
regulations (including social sector lending obligations ). One must contemplate the
reasons for the decay of only the nationalized banks, while private banks are healthy.
Kerala is a classical victim of this socialistic farce.There is abundandant water,ports
and a skilled and efficient workforce in Kerala.The banks are awash with deposits.But due
to fear of labour militancy and anti-capital government policy,industrialists are reluctant to
start industries there.As a result highly educated and skilled Keralites are forced to migrate
all over India and abroad in search of employment opportunities.
The leftistists condemn IMF and the World Bank as stooges of western capitalism.But
without their timely support we would have gone bankrupt. USA, in the fifties, afforded us
technology,capital and aid to develop our industries like steel, infrastructure,etc.We ignored
them, while nations like Japan and Malasia utilised the offer and prospered.

Rajaji, a visionary leader, fought against this licence,permit,quota raj all his life. He was
for 'lazzie faire' way of economy.Unfortunately his plea fell on deaf ears.Only in 1991 when
we were dangerously short of foreign exchange did we realise our folly and began
liberalisation and privatisation.

The leftists must be realistic and analyse the perils of Indian brand of socialism that
is still plaguing us.

From : K.R.Athiyaman, 36,Middle St.,Pasupathipayam, Karur - 4
To : The Editor, Frontline ; copy to : Mr.C.P.Chandrasekar & Ms.Jayati Ghosh, Columnists
Dt : 25.09.2000

WHY WE PAY MORE FOR OIL

1. In 1973, Arab countries suddenly revised the price of petroleum. Again in 1979 and 1990, due to politicalsituations the prices fluctuated wildly. To act as a cushion and shock absorber,the government proposed to set up an Oil Pool Account. Evey litre of petrol and diesel was taxed and a surplus amountof Rs.15,000 crores was accumulated in this fund.

2. However, this fund was misused by the government. First this fund was used for waiving the agriculturalloans less than Rs.10,000/- Then it was used to pay the raised salaries of government employees .

3. In addition various surcharges and taxes were levied on petrol and diesel.For example, during the 1990- 91 Gulf War, a " gulf surcharge " was introduced. This war was over in 1991, but we are still paying the -surcharge ! If we examone the pricing closely, may be we will find that we are still paying a tax or surcharge levied during the 1971 Bangladesh Liberation War, 1962 Chinese invasion, 1857 Mutiny andBabar invasion of 1526 !

4. In the past, petroleum prices in the world market have gone up and dowm many times, but in India,theprices always go up, and never come down. Petrol and diesel prices are promptly raised whenever petroleum prices go up in the world market, but when they come down, the government of India and its monopoly oil companies simply swallowed the profits.

5. So to save us,the taxes and surcharges should be lowered and abolished. Oil monopoly must be abolished immediately. Foreign companies should be allowed th compete with the Government oil monopoly. Let the cheapest oil win !

WHAT KEEPS INDIA BACKWARD ? 10.11.2000

Politics survives on cliche and slogans.Certain words become popular
at certain times, only to be replaced by other words at other times. After
1991 there was a spate of these words of the age. Liberalisation,paradigm
shift and indicative planning were the new buzz words. But after all these
years,the progress actually achieved is quite low. Why ?

We have the knack of taking only the shell and leaving the core behind.
We had a cursory look at the S.E.Asian countries,China,Korea and Taiwan,
discovered that these countries grew by allowing liberal doses of foreign
investment,and so be it. In India of course some money came in, there was
a lot of growth in computers and software(the IT sector) and suddenly people
were getting more worth for either money in TV,fridge,car and other white goods
but now even this trickle is drying up. What went wrong again ?

We went wrong in finding the proper order of things.we have a 100 million plus
literate labour force, and we need jobs for them. So first we need foreign
manufactures to start their production from here.But this needs power, I mean
electricity,not muscle power or voter power ,so we should have started with a
lot of power plants ;of course there were Enron and Cogentrix, but they never took
off. Why? Because we insisted that our SEB & should be the intermediary between
Enron and the consumers,SEB with all their "transmission losses" of 22%free
electricity to farmers,huts and politicians,and inefficiency. Compare the
transmission losses of BSES, the private company which supplies uninterrupted
and stable power to Bombay city. Transmission losses of BSES is very low
compared to that of SEBs. Highly efficient and cost effective.It would be wonderful,
if we have a similar set up all over India.

The best course would be to start numerous industrial estates- with a private
power plant, that the power company and the manufactures in the estates negotiate
the price ; keep out the SEB and IAS officers and trade unionists and politicians. Then
soon you will have an industrial estate and thousands of jobs ; no money the part
of the govt, and no commissions,"kickbacks",negotiation teams and foreign tours
either. But we went the bureaucratic way,and are still negotiating about power
purchase price,etc.Even Lenin recognised the role of electricity as for back as 1920.
Our bureaucrats are yet to catch up with early Twentieth Century.They will reach
21st century sometime after 2150, I hope.

Then the second step would be to allow the foreign manufacturers to employ
us - the Indians of course the unemployables like our burecurcrats, politicians,economists
,& trade union leaders cannot expect any job from the foreigners. But there are other
and lesser Indians in their millions,who are capable and to work. We were preventing
them from working under a foreign management,saying that the American(or the
Japanese or the Koreans) will underpay them .And we are not giving them employment
ourselves.Being underpaid is much better than being unemployed. We will not employ
the millions-nor will be let them get employed by foreigners.except if they manage to
crawl out of India to the middle east or Singapore.Have you seen an electronic/computer
product of late? I have seen Siemens monitor, Casio digital diaries,Sony peripherals,and
lot of other things,all made in China.It would have been "Made in India"but for our ignorant
policies.

If we fear too much that the foreign companies may exploit an labour,we could have
framed labour agencies, run by Indians,that would take up labour contracts with the
foreign companies.But we didn't. The reason is that, we are still suffering from east India
Company syndrome, believing that given half a chance,the "imperialists"will turn that
into a colony No sane person, especially a capitalist with money to invest,will dream of
"conquering" India again - we have spoiled India too much to be of any use to anybody.
The Indians are not the hardworking,intelligent,artistic and honest people that they were
in the 17th 18th or 19th century.So we need not worry about away colonialism-direct or
indirect.No western country will be eager to take up the headaches of the Indian Republic.
Third, we should have scrapped all the nonsense public sector units like the Bicycle
Corporation of India, ET&T,Indian Telephone Industries,etc.(of course not BHEL, NTC
and some others)and put all the money into primary education. We should stop all the
useless scheme operations from 1955(DWCRA,SITKRA, and others),dismantle the
Block Development Office whole sale,and instead spend the money thus saved in printing
primers for children in all the Indian languages. We didn't and we won't.

We should have allowed everybody (Indian,Foreigners, Indian + Foreigners) to enter into
the basic amenities- roads,phones,transport,etc. We didn't and if we did allow them,that is
after lots of its' and buts,only into basic service not into cellular, or with so much restrictions.
We did none of the realistic and proper things. We made some superficial changes
and there followed some superficial developments. We don't have the capacity to understand
the steam age capitalism. We don't understand the modern economics.For example, an
average American earns 240 times more than an average Indian but consumes electricity
equivalent of 8750 Indians ! This shows how cheap electricity is in USA. All around the
world, right from the days of Pharaoh, bulk consumers always get a discount. But under
our E.Bs and telephone department, the more you consume, the costlier the unit price is !
Weirdest logic !

I do agree that administration cannot be run like a business. But then administrators cannot
run a business. Let our bureaucrats accept this.

To sum up, to really develop India,

1.The power production needs to be increased manifold. Preference should be given to Thermal
power, using natural gas, oil and coal , in that order. The oil should be imported by the individual company at its own cost, not through RBI's foreign reserves. These Power companies should be
allowed to sell the power to who ever that desires it, at whatever price they choose, preferably
restricted in area. Let SEBs continue to function till our people are exorcised of their phobias
about private sector - may be forever, I won't mind.

2.The foreign companies should be encouraged to "source" their manpower from here and establish manufacturing facilities. No "Single window clearance" , "Automatic approval" , "Fast Track Options"and other bureaucratic nonsense, but declare Eco-friendly industries like computer parts and electronic items, etc totally free. The ministry of Environment is not at all protecting the environment, but has become another way of harassing the few unsuspecting investors. The sooner it is dismantled, the better. Hazardous industries are still going on just as ever. Remember : in India, one more monitoring/controlling/clearance authority means one more palm to grease, that's all.

3.Allow total and fair internal competition. No "MRTP" Acts and commissions are needed but all the district consumer forums should be allowed to prosecute the erring companies on their own.
In our country, till our institutions acquire a fair measure of integrity, the only way of preventing corruption is decentralisation. The ancient Athens had a Supreme Court whose judges were impossible to bribe - simply because there were 1000 judges ! Authorise every district forum to prosecute and you make it impossible for the companies to bribe their way through !

4.Concentrate on primary and secondary education. In future, an illiterate will be at a grave
disadvantage. the primary education should be in the mother tongue, simple and rigorous.
The syllabus needs to be pared down for the primary education.

5.Steel, Aluminum and other metals and alloys should allowed to be imported freely.Only free
competition will enable our indigenous producers to become really efficient.Only when Indian
consumers and other downstream industries get the best and cheapest steel, will our economy
grow.

6.Dismantle goverment monopolies of Oil sector. Let the cheapest oil win.
Of course, Indians will be finally forced to take up these steps. After all didn't Spencer say " Man will do the rational thing, but only after exploring all other possibilities " !

From : K.R.Athiyaman, 36,Middle St., Pauvai, Karur - 639 004 10.11.2000

DOES INDIA UNDERSTAND TECHNOLOGY ?

This question may seem absurd. What could be there in technology to
understand ? You need only to know the technology, not understand it.
After all, the related term is know-how, not know-what. And even if it is
argued that there is something to be understoodabout "technology", surely
India will understand it. Are there not Indian satellites ? Have we not
mastered the nuclear science ? And we have our own super computers,
you know.

Still there is something about technology that we did not understand.
Surely our achievements are insignificant compared with what we could have
achieved and what our capacity is.It may spring to the mind that we are a
poor country, half illiterate and backward and that we have missed the first
phase of industrialisation due to the colonial rule. Let us see how these
factors need have prevented us from becoming a technological society.
The most crucial thing that we didn't understand about technology is that
it is dynamic and not static. There is nothing wrong about not developing a
particular technology and importing it.No country could develop all the
technologies it needs. Importing a technology is not new to us.The art of silk
weaving was imported from China and so was the technique of paper making,
block and screen printing, fire works and gun powder. The idea of currency
was developed by the Hydians,and that of paper currency by the Chinese.
Steel making was developed by the Indians. All the people, at sometime
or other in their historyhave imported technology. The British acquired the
technique of making rockets (for war) from Tipu ! So there is nothing wrong
about our technology imports during the fifties and eighties.

What was wrong about it was our failure or inability to develop it further.
This is a result of treating technology as a static method of manufacturing.
When one learns a particular method of making chains, one doesn't master
the technology. To elaborate on this example, there are two ways of learning
technologies. The first is mechanical repetition of some movements. If we
watch a carpenter making a chair, we can learn making chains, by simply
imitating him. But we will get only the copied of the original,may be with slight
changes, fortuitous or deliberate. The second way is understanding what a
chair is : that a chair has a seat, a reclining plane, handrests and legs; that
a chair can havefour legs or simply the same tube bent all around the bottom;
that the reclining surface can be moldedwith the seat ; that the handrests can
be integral with the legs. Now we can make chairs for various designs - two
long plates for legs,the seat aesthetically shaped, the curves flowing, etc.Now
we have truly mastered the technique of making chairs.

It need not be rubbed in that we learnt technology the first way.We imported
not technology, but only assembly lines. Only someone who understands
technology can make technology our of assembly lines. To others, it is a
mere repetitive assembly line. To further handicap is, we had put on the
blinkers of import substitution. To us, mastering a technology meant 100 %
indigenisation and nothing more.To quote a solid example, we bought the
phone technology for ITI and started production here. We took it apart and
found that this spring was imported ; so let's make it. That diaphragm was
imported ; so let us make that. Thus we indegenised it 100% and thought
that we have mastered the technology of making phones. By that time, others
have moved on from dial to push button type. Now we bought that technology.
By that time we mastered that the cordless technology appeared !

The Hindustan Motors started manufacturing cars sometime in the fifties.
Its Ambassador line is still continuing. But the changes made in its are few.
And, if at all there are any changes, they are : i) imported or ii) much behind
the contemporary technology. Hyundai imported an assembly line from Suzuki
in 1969. Now they are designing cars all by themselves. 100 % indigenisation
in manufacturing may not be possible. What is necessary is 100 %
indegenisation in design - the concepts.

Why are we incapable of understanding technologies ? The main reason
is that in India, there is a huge gap between theory and practice. The engineers,
who are supposed to master the technology, don't have first hand experience
with the machines. Ferrari, the famous car designer, has no formal qualifications.
Yet no Indian automobile engineer can match him. Forget Ferrari, most Indian
automobile engineers cannot even repair their own car ! How can we expect them
to design a new carburretor or spark plug or engine ? In medieval Europe, surgery
was done by the local barber, while the doctors supervised it from a distance !

In our country, the labours handle the machine, right from erection, and the
engineers supervise it ! You can very well imagine the results. When some Indian
engineers joined Hyundai plant near Chennai, they wereasked to take a personal
role on erection, and they promptly fled ! No technological improvement is possible
till one "understands" a machine and has hands on experience. In India, the
mechanic who"understands" an engine lacks the theoretical background and the
engineer with the theoretical background has no hand on experience.

An even bigger stumbling block is there in developing new technologies. The
next stage in a technology can come from a totally unexpected field.
Understanding a camera and film developing will not enable you to design a
Polaroid camera ! For example the dot matrix printer was an improved form
of typewriter. There is the ribbon and there is the printing head. The
improvement was that instead of individual letters there is a small hammer.
Now, however much you "understand" the dot matrix printer, you cannot
develop the laser printer out of it, which is the next stage. It came from a
totally unexpected area ; laser combined with xerography ! The only way out
is to encourage basic research which may (or may not) yield unexpected
benefits. India is handicapped here also.

The second most crucial thing about technology development is that a
commercially driven development is cheaper, quicker and more practical
than an institutional/ bureaucratic technology development. It is true that more
new technologies came out of institutional and / or government labs than
commercial labs. But once a technology is marketed, it is developed further
only by the commercially motivated. There is no use in developing technologies
if they are not commercially used. To cite an instance, the erstwhile USSR
successfully competed with the US in space technology. It launched the first
satellite, the first cosmonaut, the first probe to the moon,etc .Still, the US was
successful in one sense.The first satellites of both countries went up in 1957.

Yet, as early as 1964, US found commercial use for the satellite, when it
telecast the 19694 Olympics ! Soon private companies began to build
satellites, and our first Insats were built for us by a private concern, Ford
Aerospatiale. In that aspect, i.e. making practical use of technology, US
was ahead of USSR, only due to its commercial instincts.Our technologies
are notoriously unviable, precisely because our motto is "self reliance at any
cost"- and you cannot afford "any cost indefinitely. That's why, in spite of our
successful Insat system,till 1998 (when the rules were changed) our own
private channels used foreign satellites - because ISRO never cared about
making money. And if you cannot make money out of a technology sooner
or later, that technology will fail to take root.

All our "technological achievements" suffer from the same defect - they are
just showpieces and not commercially viable. Take C-DAC. It has developed
a few software packages - a word processor, a spreadsheet, etc. There are
free packages of exactly the same kind, developed by individuals. Yet we
boast this was"achievement" - because the ministers are technology-illiterates.
Two years ago, INSDOC listed as its"achievement" the bringing out of two
databases in CD. Yet there are scores of libraries bringing out dozens of
databases every year. If this is pointed out the stock reply is that ours is a
resource poor country, that we cannot afford to imitate the rich. But precisely
that is what must be noted : we spend unrealistically huge amounts to bring
out these two CDs - because of "Science at any cost" - slogan. A foreign
company couldhave been contracted to do the same thing cheaply. Year after
year we repeat and confirm the results of experiments undertaken by some
foreigner. Cryogenics, where we had a little lead a few years ago, is now
never talked about. Dr.A.P.J.Abdul Kalam once pointed out that ISRO scientists
had made a light weight caliper for a handicapped child. But it was not
commercialised, nor the technology transferred to some company that
makes calipers. What is the use of that technology ? One showpiece of
caliper ?

Whenever somebody points out that the cost of space research is exorbitant,
the reply is that the spin-offs will benefit everyone. But where are the spin-offs ?
Surely 30 years of research would have left a few spin-offs. Where are the
companies using that technology, and what are the products commercially
available ?

We are not importing technologies, we are simply importing assembly lines.
The HAL is the best example. Right from MiG - 21, every few years, a new kind
of aircraft would be acquired from USSR and its technology "transferred". Yet
HAL never developed so much as tarpaulin covers for these aircrafts. The ICF,
Chennai acquired the technology of railway coaches in the sixties. Now (2000)
it is again shopping for technology. The private sector is no better. Ashok
Leyland, Hindustan Motors and chemical factories shop for "new technologies"
every few years. The least we could have done is abolishing the R & D in all
these organisations and save a few rupees.

Compare this, let us say, with a market dominated by small manufacturers.
The motors and pumps of Coimbatore are of world class - at least in quality,
since they also imitate the foreigners and do not have in house R& D. May
be only cut throat competition will force the companies to care about its
products.

Reverse engineering is almost unheard of in India - except among the
manufacturers of fake "foreign goods". High rates of taxation and bureaucratic
stranglehold ensured that these manufacturers will never improve their quality.
History shows that Japan and Taiwan and Korea, all started their manufacturing
history with shoddy goods and then moved up. The quality of Japanese goods
before World War II was horrible. Yet they improved. Our "cheap manufacturers",
on the other hand, find that they are better off remaining where they are - when
they make a fake citizen watch their profit is high - because they just bribe their
way - but when they try to market it under their own brand name, they attract
may be 15% sales tax, in addition to the bribe. So it is better to make fake
foreign goods than cheap but genuine Indian goods. Thanks to the "quality" of
the Indian goods during the era of "protection", foreign goods enjoy a high
reputation among our people. Our people are willing to pay Rs.500/- for a "citizen"
watch, even when they know it is a fake, but won't pay Rs.300/- for the same
product if it is marketed under an Indian name !

When we are coining slogans for the public consumption, care should be
taken about their subtle psychological effects. During the British rule, we
chanted "Good government is no substitute for self government" there by subtly
implying that self government won't be good ! And in the fifties, we proclaimed
"Indian goods - self reliance - even if it is costly and inferior". This attitude
certainly ensured that Indian goods will be costly and inferior - because we
have decided to buy them, so the manufacturer has no incentive to improve
them !

The third important aspect of technology is its cost. Here also, our myopic
ignorance led us to spoil our progress.Every product or service will be costly
when introduced. But further technological improvements will bring down its
cost, making it affordable to many. X-Rays, Photography, radio, T.V., Computer,
all were much costlier when they were introduced. And so were pens, paper,
aluminum (Napoleon had an aluminum plate ! ), tea, Xerox, bicycles, etc. Yet
in a few years time, technology will make them within the reach of many. Ford
sade the automobile cheaper. Sony made the transistor radio. There are
numerous examples. Yet all these examples staring in the face, our policy
makers divided things into two categories - those used by the rich and those
used by the poor ! The things that the rich use today will reach the poor
tomorrow. If one is really socialistic, one must ensure that even the poor has
access to these goods today itself. But our logic was inverted and perverted.

If the poor can't afford it,the rich shouldn't get it. We implemented this policy
through our tax system - the "costly" things are taxed more - because only
the rich use them thus ensuring that only the rich could afford them forever.

We taxed air travel so heavily that even today it is prohibitively costly to the
majority. During the same period, around the world, air fares progressively
became cheaper and more people traveled by air because it became cheaper
and vice versa. But in India, in the year 2000, thousands of people are forced
to spend two days - 36 hours atleast, to travel from Tamil Nadu to New Delhi.
And we are going to compete with Japan and Germany ! Show me one
developed country where people are forced to loose man hours. Yet it is
certainly possible to offer air travel for the same sector for Rs.1500/- per
person compared with Rs.500/- for the train. This is solely due to the addled
policy makers. Air travel is for the rich - tax it, tax it - till only the rich can
afford it. Let the others crowd into trains and spend days on end. Who
cares ?

Nationalisation of Air India and Indian airlways in the fifties and preventing
the private sector from running efficient air services(until recently) was the final
straw. Indian airlines became highly inefficient and costly. Same "foresight"
was shown in taxing electronic goods. In 1971, the government slapped a 40%
tax on the fledgling electronics industry. The industry promptly died.(Remember
G.D.Naidu of Coimbatore and cheap transistors he mass produced) Companies
that started to manufacture calculators folded up - leaving the field wide open
for the smuggled Casio calculators. Today over 95% of all calculators in India
are Casio - duty paid or smuggled. IBM went out of India in 1975 - just when
the computers were within the reach of big companies. As a result our
computerisation drive was postponed by 20 years. Let us not forget that
Computers became [popular in India because of a lucky accident - Rajiv Gandhi
encouraged it. Otherwise the rusty Devilal or the communists would have banned
them indefinitely and dragged us backward.

Thus, taxation should take a long term perspective. Since this is very difficult,
(who could have predicted the reach of Internet today ?) the best course is to
tax hi-tech items and services at an ad valoreum and low rate uniformly applied
- sales tax of 3% and service tax of 2%.

It is never too late for a people to catch up with the rest of the world, and more
importantly, to gain a lead in technology and research. Japan, Korea and China
are good examples. But this rapid development cannot be achieved merely by
"allotting" 2% of GDP to "research"(of which 1.5% would be taken by
"administrative expenses") or by similar stunts. Only an open, fair and free internal
competition could have achieved it, but now it seems too late. The next best
alternative is to encourage foreign manufacturers to start their production in India.
By this, in the next 15 years we could achieve state-of-art design capacities.

Therefore it is fair to conclude that our policy makers never understood what
technology means. It is not proving your abilities to the world, but using them
to improve your standard of living. Designing and making a better truck or
telephone network or pylons is certainly better than launching satellites but
importing paper. The sooner we get rid of our inferiority complex that drives us
to merely imitate the developed countries at enormous costs, the better.

Individual Liberty, Free Markets, and Peace

Food Vs Clothing in India

Rajaji on Sri Sri Prakasa and Nehru’s policies :

Financial crisis? No, capitalism as usual

Financial crisis? No, capitalism as usual

The bogey of "inequality"

Ayn Rand and Atlas Shrugged

Distortions in money markets due to government interventions

How to Turn a Recession into a Depression

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

Who murdered the financial system?

Where did all this money come from ?

Holiest of all holies

Pains of a slowing miracle economy

An Open Letter to my Friends on the Left

F.A. Hayek’s Dreaming of Swatantra

Aleksandr Solzhenitsyn Is Dead at 89

Mao's "Cultural Revolution" - Real facts

Excess speculation or excess money?

Universal Declaration of Human Rights

Surplus value theory

Fund Schooling, Not Schools

Fund Schooling, Not Schools

DEFICIT FINANCING ; Rajaji in Swarajya 1960

A question about economic polices in India in 1984, for probabale cause of the Bhopal disaster

Ethics, Corruption, and Economic Freedom

Economic Freedom and Corruption

Economic Freedom and the Informal Economy

Economic Freedom and the Rule of Law

Conclusion

Contents

Traffic Problems and Solutions

Why Indians became cynical and corrupt ?

Peter Drucker : tax evasion leads to cynicism

reg : creamy layer misusing reservation policy

An enreupreuner's viewpoint about tax-evasion & Tax/GDP ratio

govt deficits and inflation

On National Debt

To : Communists & Socialists of India

The real cost of Socialism in India

MNCs and child labour

What keeps India backward ?