Concluding Notes on the Social Philosophy Towards which the General Theory Might Lead: John Maynard Keynes

I read it and liked very much, so i think i should share,

http://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/chapter24.html

Dr. Krugman

In response to,

http://krugman.blogs.nytimes.com/2010/11/18/debt-deleveraging-and-the-liquidity-trap/

Dr. Kn.,

Deleveraging shock is quite understandable and is close to the situation, we are in. Advocating fiscal policy to offset liquidity-tarp and reduction in private spending is a common Keynesian solution. The problem is how we are going to finance this spending? The Government is already running a budget deficit. It is already in debt. I think which why they say debt is no solution to debt. But, i agree there is a difference between a Government debt and a private debt, same as public and private, and Government has ways to finance its expenditure. What are those ways?

As far as deflation is concerned, it sets in when aggregate supply exceeds aggregate demand. If that is the situation can we expect that there is an excess of supply of goods in the economy as a result of very low interest rates in the pre-recession period? And, are the businesses are waiting to let the excess stock finish so that they can resume their spending later? Do not we need a policy, like increasing minimum income (wages/salaries), here?

No doubt deficient demand, either because of deleveraging shock or because of high unemployment, is the real problem.

The model, though suggests fiscal policy to escalate demand, it is mute on the account of softening the deleveraging shock. Can’t we extend the loan repayment time to protect the economy against stagnant demand? Like the same as the Federal Reserves unconventional move to purchase bonds and reduce long-term interest rate.

Let US be Hopeful !!!!

The issues endangering the present economic recovery of the United States also raise serious questions about the way policy-makers conducted their policies in the pre-crisis. And, the most important question is that what objectives the Federal Reserve had in its mind when it decided to not to intervene in a situation when home loans were distributed so cheap, that landed the economy in a recession that has made its own core policies so ineffective that the Federal Reserve lost the control of the economy? Or, the Federal had some other objectives in its mind, like it wanted everybody to have a home? (in best spirits…)Or, Political-Economy?

We know that a Central-bank is entrusted with the task of minimizing inflation and maximizing employment. But recently I read somewhere that unemployment is not its concern and rather it should concentrate on price-stability. I think he was a politician, some Republican. So does he mean that unemployment is a Governments’ concern. By the way it is around 9.5, up by 5 percentage points. Why it should be at 5 percent? ? Keynes said “equilibrium is established with employment at 95% because other 5 percent is busy in swapping between jobs”. He must have a plan, especially for employment. Because, Americans need a plan. He was opposing QE2 and was expecting inflation, later. I mean later. I found this on the web,

                                                



Data Source: US Bureau of Labor Statistics CPI-U
FOR CENTRAL BANK:
It did not respond to the rising inflation between Oct-Nov 2006 to Oct-Nov 2008. A period in which inflation rose from 1.3-1.4 to 5.6 percent. Two years and 4 percent

FOR THE THEN GOVERNMENT
Then Republicans were in power. Even they did not realize.

HOPE
Inflation is an indicator of the level of economic activity and thereby employment. Every time economy adds people in its workforce it generates additional income and this increase finds space in markets and generates demand, and drive up prices. Sometimes there is a capacity and prices do not respond, good for Growth and Employment………….

That is why i thought HE must have a solution.

Indian Policies are Aiming in Different Directions...

The Central Banks effort to contain inflation which stands at 12.30 percent is not consistent with the policy in the foreign exchange market which does not show any such commitment towards inflation; neither has it showed any commitment to the deficit in the Balance of Payment situation by not responding to a strengthening Rupee. The pour of foreign capital in Indian economy as a result of quantitative easing, by the US’ apex bank has reduced long term interest rates and has decided to buy bonds worth $600 billion has made INDIA a hot place for foreign investors where interest rates are higher as compared to the US.

Both the policies – foreign-exchange policy and domestic monetary policy – are aiming in different directions. The domestic monetary policy is aiming at inflation by increasing interest rates and curbing investment, and the foreign exchange policy is of the type of promoting investment by not doing anything, not even a bit, as if they are handling two different economies.

This is going to retard the BOP situation, too. A rising rupee will increase the purchasing power of the importer and he is going to import more. The same, i mean a bad thing, is going to happen with exports it will make the Indian products costlier, abroad, which mean a diminished demand for our products.

Domestic policy and foreign policy should be tailored to work for a common goal and these goals have best found their places in the famous Philips’ Curve which is said to be the starting point of the modern macro-economic thinking. The Philips’ curve tells us that growth rates of an economy are nothing but the result of a trade-off between inflation and employment, and, the Central Bank moves interest rates up and down to decide between inflation and employment. When inflation is too high the central bank chooses to increase interest rates and when inflation is low it decides for lower interest rate. In this way it affects the total availability of goods and services in the economy which has a direct bearing on the welfare objects, an economy entails. Their availability increases welfare and vice versa. Economics says the competition between sellers to sell their products results in reduced prices. Availability of goods and services reduces the upward pressure on prices to rise. But, this welfare has limitations because as availability increases it increases employment of labor and scarce resources. As a result income in the economy as a whole increase and the demand for goods and services increase simultaneously, but, if the stock of goods and services do not support the level of demand it results in higher prices or inflation.

Inflow of Dollar in Indian Economy means increased demand of Rupee to give better returns on investment. Here, institutional arrangement to invest in Indian economy and Rupee is worth noting. If investors buy Rupee in foreign-exchange-market, that would increase the demand of Rupee and would drive exchange rate for Rupee up. In the process, Dollar is going in and Rupee is coming out the stock of reserves maintained by financial institutions. Finally, it is increasing the money supply available to the Indian- Economy for investment and is going to hurt the arrangements by the Central-Bank to contain inflation which is already above the normal target level by 7 percent, which should be around 5-6 percent.

Nobody accepts Dollars at our Indian shops but institutions like banks do, and in some cases individuals, too. Currency speculation in the recent times has highlighted shortcomings of the foreign exchange market and foreign currencies, now, are a part of our investment portfolios. Here, Dollar does not pose to be a lucrative option, in the short-run, because of a declining trend due to quantitative easing and depreciation in Dollars’ value. Quantitative-Easing will be done in several rounds to materialize the object the US policy makers have in mind – inflation and un/employment at targeted levels. But, for those who had expected such a move would have bet on the emerging market currencies and must have benefited themselves.

The main argument is that the domestic and foreign exchange policies are not in line with the macro-economic object of low and stable inflation. When we look at other emerging economies like Brazil, and our immediate neighbor China they look much concerned with the rising inflation even-though the inflation rate in China is at a comfortable level of 3 percent. When inflation is higher than the targeted-level the Central Banks is required to raise interest rates although it affects the real-economy, which reduces investment and the total availability of goods and services, and thereby welfare.

Structural reforms, like the one talked about retail, rather than continuously increasing interest rate is the real solution for the inflation India is facing to increase the welfare of the economy. The strategy to not to buy Dollars so as to reduce the upward pressure on the Rupee to rise, a strategy to increase exports and decrease imports, is welcome because that would increase investment in the export sector of the economy and will add to the same problem of employment, income, demand, and, at last, inflation. But, at least, we can levy some kind of tax to reduce the quantity of money flowing inside the economy. After all, it is, ultimately adding to the total quantity of money available for investment and the Central Bank, in the form of higher interest rate, is constantly giving us the message that we need to curb inflation. Moreover, it will also restrict the upward pressure on the Rupee to make exports costlier and imports cheaper because of increasing purchasing power of money on the international front.

Let us be Hopeful !!!!!!!

Beware of Quick Money

Read
Stiglitz: India Could Lose in Capital Controls Race,
at,
http://blogs.wsj.com/indiarealtime/2010/11/11/stiglitz-india-could-lose-in-capital-controls-race/

I've mentioned it before,
http://kshaaleen.blogspot.com/2010/07/globalization-good-servant-but-bad.html

MILTON FRIEDMAN'S SURPRISING SECRET....

It's very nice...
MILTON FRIEDMAN'S SURPRISING SECRET

http://www.boston.com/globe/search/stories/nobel/1992/1992n.html

The World We Live in...

Have a look on the link below,

'Krugman living in parallel universe'

The purpose here is not to defend either Krugman or Ferguson but to keep away the looming threat of a longer recession in the mind of the people that the Government is not much constrained to put the economy back on it usual track- higher employment. The call for a Balanced Budget which became imbalanced due to higher consumption in the past periods at a time when people are reluctant to show what they have got for the economy –consumption or savings- due to the insecurity they feel about the condition of the economy is averse to the common knowledge in which investment, government and/or non-government, and production rise to increase the level of employment. Here, the multipliers, employment and investment, work to result in higher employment and investment, and a higher rate of growth. The inflexible attitude of fine tuning the economy’s budget and advocating a balanced-budget at a time when people, market and the Government all are resource crunched and money supply took the route of international trade and exchange markets instead of domestic markets will be like cutting the branches on which your sitting at the moment. Fiscal consolidation not aimed at improving economy’s health and only for improving balance sheets is not a good idea. We should not forget that the US’ social safety nets like unemployment benefit have only saved it so far, whatever little. The purpose of any economic system is not to make living conditions of its in-habitants worse rather it aims at improving them.

Although America pursued an aggressive monetary policy in the past but I do not think its purpose was to create a Great-Recession. Actually, recessions and depressions are general features of a capitalist economy and the US is no exception. This is happening since the Great- Depression, we can easily see the US falling in recessions every 5-10 years since 1930s. We live in a diplomatic WORLD and things are not as straight as they appear and every country has the right to make choices that increase the well being of its people, even if it is in the form of lower prices. Prices rise and fall in the US every 5 years; they are neither increasing continuously nor decreasing continuously. The reasons may be political, you can not deny, but since the US is a big importer too, its actions affect international prices, they rise and fall, too. America has never been a colonial power but its policies, not only the recent, throughout its history have been around scarce resources like oil. When recession broke prices, especially oil, went down and it helped all the oil importing countries because oil prices fell globally. The only thing that goes against America is the way loans were distributed. They were full of short-comings and were below the standard lending practices.

In case of monetary expansion in the US there is not much to do since interest rates are already near zero. The alternative left to the US is to set higher inflation targets and print some currency to fund production activities, public or private, in order to boost employment and demand. And, the decline of Gold-Standard makes a case for such an action. Countries have resorted to policies like increasing income to have a hold on scarce resources in face of rising inflation and a currency redenomination, later. Thus, if the US chooses to inflate its market by printing currency it does not seem to be a bad idea. Moreover, the US can also decide to pay its debt with the same money. It has happened before. But one problem may arise, after all, increase in imports. How the US is going to handle deterioration in its balance of payments situation?? Nationalism instead of protectionism may help here. BUY AMERICAN!!! Or the US can invite China to make investment in America especially in manufacturing following Paul Krugman’s 1991 paper, “Increasing returns and Economic Geography”, if demand tends to be larger in the US. It will benefit both the countries in terms of foreign exchange, transport- cost, investment, and un/employment.

As far as structural unemployment is concerned it is more due to the cost cutting behavior of the firms. Firms are on a hunt to find multi-skilled people so that they have to pay less in face of recession for the same services by consuming same amount of labor. Nevertheless firms will always try to maximize their returns on investment. Is it really a problem? Very recent in discussion...

Let us be hopefull!!!!!!!!!!

With or With-out Gold Standard...

Actually, the point is not so much about gold standard or dollar standard, in international trade, or simply money in local markets. The point is keeping the value of denomination intact………, i will complete it later. Being a Ricardian, and a follower of many more, but as a student of economics i would like to share what Ricardo said about the discipline. He said the subject-matter of Economics is to explain re/distribution of income. Skewed or un-skewed, i do not know. But statisticians like un-skewed and symmetrical graphs, a figure following other and a point following other. Therefore, completing the above line, the point is keeping the value of denomination intact so that the distribution of income according to ones ability becomes less skewed and faster. It does not matter that the population has figures like $1 billion or $1 a day. But we are all constrained by the working-hours a day regardless of our ability to satisfy the demands.

If the value of denomination keeps changing it will take more time to distribute the fruits of hard work evenly. And, this is what happens with money due to inflation. What inflation does is that it reduces the value of money if income does not rise in the same magnitude. One stand on inflation says that it helps distribution of income but we rarely find examples where income increases simultaneously to offset the effect of inflation and if it does happen it happens later, and that’s a circle, vicious or not hard to say. I think it vicious. And, we end from where we start.

The question is why Central-Banks increase money supply if it devalues money? The rule that follows here is, if the supply increases, it will devalue the asset, be it gold or dollar or rupee. The question regarding the current recession is that, where did all the dollar go if it did not reach the banks again? The thing that happened during the Great-Depression and in Japan in 1990s, happened again in American recession and, the result has been liquidity-trap, in all the three instances. What the liquidity-trap does is that it increases the asset demand for money and people, since interest-rate on deposits due to low economic activity becomes zero, keep money as an asset rather than a means to assets. Precisely, the incentive to save and invest becomes zero. People in this kind of situation, liquidity trap and low inflation, either expect that prices will fall further or interest rate will increase in future, and then they will use their reserves to get benefit from the situation. But in the face of this kind affairs for a considerable period of time when inflation do not fall further people do not find it worth while to keep money for purchases later and start purchasing or they wait for interest rates to increase so that they deposit money in banks and earn interest income. There is one more concern and that is security of the money. Nobody keeps large amount of money at his home due to the threat of theft.

The implication of this kind of affairs is also worth noting. If people start purchasing it will directly add to inflation and if they start depositing money it will indirectly add to inflation through the purchase of consumer durables later. Therefore inflation is inevitable in the process of growth and development. And, then there are others who just save and deposit for increasing scores, their consumption is stagnated, but they are crucial from the point of investment. But investment without anticipating demand is not possible. Therefore, in the chain of profit and growth generation demand comes first. But in money economy money supply or purchasing power constitutes the demand. Now can we say that supply creates demand?

Will currency interventions hurt the global economy?

There are currency interventions/manipulations and then there is currency management. The difference being that the currency management follows a set of rules mainly based import-export indexes and partially, but not less important, on domestic monetary policy whereas as an intervention/manipulation is based only on the motive to boost exports and restrict imports and thereby increasing national incomes. The equilibrium in the balance of payment (BOP) is mainly a function of consumption through international trade, exports and imports, and when exports equal imports the international trade and the value of currency can be said to be stable. The effect of monetary policy on this situation is also worth noting. An expansionary monetary policy is like to partially increase the demand for imports and partially the demand for home products and a contractionary policy will do the just opposite. The features of a currency, like strong or weak, tells us something about the stage of development of an economy and we learn that a strong and developed economy would have a strong currency and high levels of consumption, for example the consumption level of oil, as compared to a weak currency and a weak economy. The point is that currency should reflect the stage of development a country is in. Instead of oil we would use the level of voluntary work/leisure to define the stage of development. A high level of voluntary leisure is associated with a developed and strong currency economy and vice-versa.

In international trade we can correlate work/leisure and consumption, especially of imports. A developed economy may have less work, more leisure, more consumption and more imports or exports equal imports or sometimes even more exports. And, a developing economy would have more work, less leisure, less consumption and fewer imports or less exports or sometimes imports equal exports. The pattern is more or less evident!!! To cut the chain short and for simplicity too, we will only correlate leisure and the level of imports with the stage of development. Higher stages of development may be associated with higher leisure and imports and lower stages with more work and less imports.

Currency intervention without relying on domestic demand with a sole aim to boost export and earning foreign exchange may not be good for a economy for it makes the economy dependent on foreign trade and make the system prone to demand side shocks resulting in the trade partners economy, which is beyond an economy’s control and it chooses to curb imports in order to maintain equilibrium in the BOP situation. Appreciation/depreciation in a currency depends on surplus and deficit in the BOP situation, and also on domestic monetary policy. When exports exceeds imports, i.e., in case of surplus, a country should choose to appreciate its currency so that it reflects the purchasing power of its currency and the stage of development a country is facing. On the other-hand, if imports exceed exports, i.e. in case of deficit an economy may choose to devalue its currency following the set of rules instead of resorting to trade barriers that may trigger a chain reaction in form of retaliation. Or it may choose to invest in import substitution industry, the best strategy. However, it is not difficult to find economies with high imports-exports with inequalities of income and wealth, and the level of poverty.


When we talk about increase in imports and exports we should mean how they are contributing to reduce inequality of global income and wealth. If the correlation between imports-exports and poverty reduction is not positive the whole purpose remains unfulfilled and the distribution of prosperity over the earth’s surface would remain uneven and would add to instability in many forms, of which depression and recession are only two of them.

The question is why a country would want to increase exports by working long hours even when the domestic demand remains unmet and there is a room for employing resources domestically? Nobody likes to serve anybody by affecting its work-leisure balance and consumption.

Has Economics Changed Over Time....

We might think that the crisis has changed economics but is has not; rather, it has changed the way people view at ECONOMICS, economists and non-economists people. Everyone is connected with Economics one way or the other and economics treat every one as its agent, and more precisely as economic agents. Consciously/un-consciously we are at its job. To relate it with a more scientifically proved phenomenon which we famously call the CHAOS-theory (not sure about its origin, the word) which says under the cosmos run an underlying reality. Manifested and/or identifiable. For the majority, particularly individuals i do not know either it is manifested/identifiable, or both. For me as an economist, im not a complete, and as a man or common man, or both, i see money/wealth, and as a common man in particular, i see that we are all living- beings, we are all living, we are not dead, even collectively. Can we say “yes”? Or we would like point out the colours? Even there we are one. We use same kind of colors and with almost same frequency in our daily lives. When we go to shops our preferences are not colors. We go to shop and do not say “ I want toffee with a with color for my kids”. Kids may do that. We say 4 toffes or 1 Kg sugar. Colour white/brown? Not often, but some do. Who? And nobody says we are alive we want this thing. In shopping malls, we go and pick the article we want, ask or read the prices and pay for it. Are we ? I know we all. Or, the other thing we say i’ll pay later, its for convenience without creating ripples in the system, if the provider it not constrained or can manage. They work with a capacity for such a convenience to the consumer. It’s a commitment to pay later. And most of the times we pay for it in many forms. But you should have a good history and/or a good-rapport. This was all to review our systems. The BASICS. Is that?


So we were at the chaos theory. It, in particular says, “even the apparently random phenomenon have underlying order.”


The terror of inflation in the minds of economists is same as the fear of a prices rise in a common man’s head. But at the question of relating inflation to a common price rise we will not find many satisfying answers form a laymen/common-man. An increase in demand for money to contain purchasing power or the cost of livelihood results in inflation and in some cases higher interest rates. In a nutshell, interest rate is the cost of maintaining/manipulating consumption and its business is banking. Many times consumption soon/er. Usually higher interest rate results in higher savings and sometimes at the cost of consumption. Both consumption and saving patterns are flexible upwards in the long-run. But when compared in the short-run consumption is more flexible upwards than the saving pattern which results in higher demand and inflation. Inflation is a short-run pheonomenon in the long-run we do not assume inflation.


There is something as economic consciousness same as in any other field, a state in which claims that he is sufficient to tackle a situation pertaining to his/her economic well-being in order to feel a sense of stability on a physical/material as well as mental/psychological level. This economic consciousness is rightly called by Joseph Stiglitz as information (a)symmetry. How to deal with an economic crisis with the resources at hand would place many of us in an uncomfortable situation and more uncomfortable with limited resources. How to manage resources and how to use a market for best possible outcomes/returns is not less important than any art of living because it adds to a sound survival. The point here is to make the masses more conscious to deal with an economic situation and crises, in particular, and not only the privileged ones, and requires a proper training to use market and not to be used by it.


Markets may be sufficient /insufficient in supplying demands given the incomes depending upon the size of market. Naturally a big market will have more options/substitutes to cover every income group. Understanding the markets and their attributes is not an easy task and only those who want to know it know it. We can find out an array of attributes of specific markets.


Inflation does not pose much problem for those who have right information and/or reserve capacity but for those who do not have these. Since these are indispensable for choice they can help in altering the consumption pattern of the economy as a whole, although in parts. Efforts are required to educate people to help government to tackle inflation down and the pressure to increase interest rates. The problem may not be solved altogether but we can always reduce the pressure through right choices with in our budgets.

Our Healthy-Wealthy Poor

"Growth in the nineties averaged about 6% but now we are consistently doing better at 8%. This has led to a sense of complacency and even triumphalism amongst policymakers and the media. The ‘second fastest growing economy’ appears to be waiting comfortably for China to stumble so that we can perhaps even lay claim to being the fastest growing economy in the world.

Some among us look wistfully at 10% and wonder why with our demographic dividend we do not do significantly better than 8%. Others argue that even the current 8% growth is jobless in nature and that what we need is a lower rate coupled with jobs creation. Then there are the inclusive growth mandarins in the ruling party who simply want funds allocated to relevant vote banks irrespective of whether the extra funds are the product of faster growth or higher allocation from a smaller pie...."

Economictimes/The 8% complacency trap/Sumant Sinha

Comment:

Higher growth rates are the result of higher inflation targets, and if we choose inflation at 8% we can grow at 8%, if we choose inflation at 10% we can achieve a growth rate of 10% and so on. No doubt we are the youngest economy and the scope for boosting consumption is enormous in the years to come. But the composition of poor in our economy is also enormous and does not support the idea of choosing inflation and growth at 10% because the income of the poor is not increasing at the same rate. And, if we can make sure that their income also increases with the same rate we can choose to grow at whatever rate we like. Nevertheless the idea remains same INCLUSIVE-GROWTH. If our growth rate does not include the dream of making poor healthy and wealthy all wisdom will be of no use. Some grow and some choose the way to grow to grow. The choice is ours, we keep ourselves before the economy or we choose economy before ourselves. When we talk about economy we talk about rich and poor alike and the same time. But how can we forget about its composition. It is the demand of the poor which is going to drive the economy for a very long-period of time. The rich do not care about inflation, it simply does not matter to them or even if it matters it matter a little. They do not curtail consumption or fall short on our nutrition-calorie chart.

Let's Innovate and Re-innovate

Malthus said productive-capacity should match the consumptive-capacity, equals. It sounds that he believed in some barter kind of model in which the economy only produces what it consumes. Moreover, it also echoes as he is suggesting no waste of resources in realizing long term goals. IN SHORT-TERM WE CONSUME MONEY, IN THE LONG GOODS. And, since not every body is equally endowed we created money and with it the desire to achieve everything sooner than soon. Lastly, it ends as a tool of exploitation. Actually, exploitation of desires for both engaged in trade. We know our gold reserves ended in accumulating paper-notes which come from green-trees with little metal in it. And, now we have only numbers, our credit-cards and debit cards with more numbers in it. Desires and money are like water in a desert. That sounds like a sage but our common man, most common of all, worth more appreciation. He works and has worked more than everybody else and they needed a break, sabbath. It was a cosmic-plan, joke! Now, we can decide to fulfill our promises. Let’s make the WORLD the most green-beautiful place with beautiful minds in the entire universe. Let us make it a leisure-spot for our brothers from outer space, again joke! I heard Stephen Hawking. Let’s compete to create our places the most sought after tourist destinations. Lets us compete to keep our systems most simple and most beautiful with just distributions of work and leisure all over the earth’s surface, even though we are not equally endowed. Let’s trade once again. The credit goes to Classical economists who suggested innovate then re-innovate then again innovate and re-innovate. Do not MAR (HINDI) in ENGLISH fi-ht (shhh…).

Let us be HOPEFUL l!

Rajan on Interest-Rates

Rajan mentioned an important point which is missing here "two much low interest rates offers easy risk taking and inefficient firms would enter the market and their chances to fail later are more than efficient ones." I would like to differentiate between efficient and inefficient firms here and that is also in-terms of risk-capacity and exploiting a given situation, even a particular rate of interest (even high-interest-rates). The point is not only higher or lower interest rates. It is not difficult to find interest-rate-regimes with high interest rate and high investment in today's comparison. The point is making use of information and rational expectations theory. If a slight manipulation of expectations can get you results, what could be better than that? Efficient firms are normally better, than inefficient, on almost all the fronts. They have a capacity for higher initials investments and they can also invest in training and education. It happens. All the Central bank has to do is facilitate such actions and discourage excessive risk taking. I do not think there is a need to discourage? The Government can further motivate them in form of tax or tax breaks. Tax breaks? Not possible because of a greater need for fiscal consolidation voices. But, in form of lower taxes the Government can definitely help. I read about multiplier in the morning so it is fresh in my mind. Initial investment by a firm will create some multiple of investment in some other sectors of the economy and the tax-base would also be larger than today. Again, lower taxes would leave firm with more disposable profits/income which will be spent and again the multiplier will work. Means more large tax base. The Government can calculate the value of multiplier for next several periods that would help in the consolidation, and, also in finding the means and generating the means.

Financial Innovation Makes Sense During High-Inflation

Financial innovation makes sense when economy needs liquidity or it wants to raise funds. When the economy is in blues and wants to boost consumption or facilitate a particular level of consumption, say subsistence-living or some form of social-security. Innovation of financial instruments make best sense when the economy is experiencing high inflation because it sucks liquidity from customers' hand and place it to more responsible hands. Interest or gains from financial instruments are partially, from the point of view of the composition of rich and poor in a population, a reward for postponing consumption, and partially a reward for accumulating wealth. But, when the onus is on Central-Banks the former is a bigger concern because it directly adds to inflation, in the form of prices of basic goods and services, and higher rate of inflation is direct hit on poor stomachs earning subsistence wages or earning very-low. Therefore, on occasions of high inflation the Bank may choose to reward better for postponing consumption than just accumulation of wealth in a discrete way. At last, to conclude, financial-instrument-innovation makes a better sense in times of high inflation rather than creating it, meanwhile the poor is busy with his two-squares of meals and save very little to reach banks.

Be positive Mr Mittal

Mr. Som Mittal said the move is related to the condition of the economy and the US elections. If we compare both the causes, the US economy’s economic condition is not such, still handling the tail of recession, which can support too much pressure on resources, whatever they may be. Resources are not just resources they are generated out of sheer hard-work, i mean employment generate resources. And, the US because of lower levels of employment may be or is experiencing jobs and resources constrained, and, moreover, it may want to employ the existing human-resource in the US economy before it can offer better jobs to job aspiring immigrants. On a personal-level i will not suggest, though i’m younger than Mr. Mittal and not even experienced, to go to America for next 2-3 years. To be on a safe side, let’s wait for another 5 years. The US economy is not doing too well. I’m not against work permit, but there is a risk of lay-off later, is there not. Therefore, I would suggest a 2 or 3 or 5 years contract between the employee and the employer, without it you should not be moving there.

As far as the math of the US elections is concerned it, again some personal thinking, will go against the Government. Marginal changes are very important in elections and some times they are deciding. Because, your/your parents’ birth place give you a sense of belonging and brotherhood that most country’s upbringing can not change.

To conclude and be optimistic, i think it is in our interest and a blessing in disguise, because INDIA severely faces brain-drain. And, to start once again with a fresh mind, the ending note is, “INDIA HAS A HUGE DEMAND FOR EVERYTHING.”

INDIA AND AMERICA

Inflation is at 3%, in INDIA it is over 10% and everything seems to be fine, because we have enough to feed inflation, i mean supply stocks are enough, and if the government really needs it can bring inflation near 5-6%, which is manageable. The Government here needs will power. Nobody buys consumer-durables out of his monthly incomes. Nobody's is that resourceful, i mean the majority. Manipulating expectations is another way around, only if you do not take them into another trouble. The point is, if you do not want to drop money from helicopters choose to pay them in interest-rates, i mean higher interest rates, around 8-9%. Here you can choose to print some currency. It is supposed to do two things, it will affect expectations, that the economy is reviving, and second it will affect savings, actually savings in banks. Banks' confidence will revive, too. Inflation around 8-9% for a reviving economy is not bad. "IT'S JUST AN OPINION."

Reconciling Increasing-Returns in Industry and Diminishing-Returns in Agriculture for the Sake of Sustainable-Development

“In his quest for attaining well-being man has overlooked ecology. We are on such a turn of history that today we can say that the moral we have derived from our study of sciences, of arts, and of religion is that we should be fair with our ecology. The question is not a single issue, it encompasses the pollution of water, of air, in towns, in cities, everywhere, and drawbacks of using technology and most importantly the phenomenon of global warming has put ourselves at a place from where there is possibly no way back, as far as we can see today. We are in a dire need to develop a consciousness that can take ecology in its purview to reap maximum benefit in the long-run coming generations. We need environment optimum scales of production, a size conducive to ecological well-being. The whole production pattern and distancing between should be eco-friendly. This will not only help us in preserving our environment but will also help in spreading the fruits of development everywhere. Production should be according to the size of local along with global needs of prosperity and development, often and appropriately described as optimal-one.

The idea of an egalitarian society, society that is based on some sort of equality ranging from economic, social, political, religious, and/or cultural, has been central to the notion of Social-Justice. The word egal is French in its origin and means equal. The term social justice and its modern concept were first used by a Jesuit, Luigi Taparelli in 1840. The egalitarian approach postulates that, fundamentally, all human-beings are same, and, therefore, an institution or society should be based on the principle of equality and unity, that values and support human-rights to maintain a level of dignity, for all. Antonio Rosmini Serbati, John A. Ryan, John Rawls, and John Stuart Mill further refined and expanded the term. John Stuart Mill has discussed the connection between justice and utility. He said that the most powerful obstacle of the doctrine of happiness or utility has been the criterion of right and wrong, and it is drawn from the idea of justice. These strong sentiments, with their easy concepts, and the frequency with which they are recalled and considered has made writers and thinkers to pin-point the inherent quality of things to explain that justice is something absolutely different from other measures in its scheme. The concepts of human rights and equality form the core of the design of social-justice and economic-egalitarianism, income redistribution, even property redistribution, by progressive taxation forms the core of the core. Equality of opportunity, one of the basic human-rights, in any society has been the main objective of economic-egalitarianism as propounded by developmental economists. More recently, Paul Krugman in his paper Increasing Returns and Economic Geography (year) explains a simple model to show that how a country can develop an “industrialized core” and an “agricultural periphery”. Krugman says, in order to realize economies of scale and to minimize transportation cost, manufacturing firms prefer to locate in regions with higher demand; however, the demand-location depends on manufacturing distribution. Appearance of the peripheral and core industries depend on economies of scale, transport-costs, and the share of manufacturing in national income. The early period of the British school dates back to the English Classical economists, who believed in decreasing returns to agriculture: a cornerstone on which Ricardo founded his theory of income distribution. For Ricardo, explaining the income distribution is the main objective of economics and because of decreasing returns to scale in agriculture, the income distribution would move in favor of landlords, population would increase and will keep the wage at a subsistence level; the capitalists would be squeezed, and landlords will reap a rising land rent and will live forever in leisure at the expense of the others. Ricardo’s theory is primitive, but in an odd way it is complete.

Economic egalitarianism applies in both cases, in case of nations and in case of its citizens, too, means nation vs. nation and man vs. man. Decentralization of production and manufacturing from few developed regions of the WORLD at a time, when technology is almost stagnant, would reduce inequalities of income and wealth. Paul Krugman’s assumption of industrial-core and agricultural-periphery can not be generalized to a major part of the world, it is not evident, and is only partially true. Moreover, assuming industrialization at core and agriculture at periphery is also far away from reality and is good for word games, alone. We know, while deciding for interest rate inflation is a major concern before the central-banks, and, high inflation rates can not be ignored and high unemployment is not acceptable. Therefore, reconciling Ricardo’s diminishing returns in agriculture and Krugman’s increasing returns in industry, the idea is, that, if agriculture is backbone/heart of an economy then industry is its heart/backbone of the body and the body can not function properly with imbalances and they would always increase uncertainty for growth and development. Balanced-growth of/for, both, agriculture and industry is advisable.

Equality of opportunity as suggested by economic egalitarianism is true for both individuals and nations. In case of individuals equality of opportunity is not difficult to understand, nevertheless, to clear the point, for individual equality of opportunity means “equal opportunity to grow and develop” and if we generalize the argument it is true for nations, as well, equal opportunity to grow and develop. Production concentrated to a few developed regions is not likely to solve our problems of poverty and unemployment, but, the spread of production function gives nations an equal opportunity to grow and develop in order to address the problems of poverty and unemployment. Shift in production-functions mainly imply the shift of technology from developed to under-developed or developing regions; the capital-labour ratio employed by a certain technology. And, the ratio of cost of labour and capital at a time when we are experiencing bottle-necks, a kind of stationary-state or lack of innovation, in case of technology, we can reduce the long-run cost of production by cutting and moving production from the developed to under-developed countries/regions, because labour is cheap in the under-developed world. The idea is to set-up environment-optimum scales of production, more manageable sizes of manufacturing-firm from the point-of-view of environment, is the core of sustainable development. The problem of diminishing returns in agriculture, as put by Ricardo, can also be solved by a just distribution of production over the globe that would spread technology, boost employment and national incomes, and would reduce the exploitation of environment. Equitable distribution of income/wealth depends upon equitable distribution of jobs and production-functions, and, as Ricardo said that the centralization of production in few developed regions would deteriorate the terms of trade with economies based on agriculture. But maintaining a just distribution of production is crucial to maintain a just terms of trade between two countries. We live in a “DEMOCRATIC-WORLD” and we all should have equal chances/opportunity to grow and develop. What it suggests is minimum exploitation of all, by all, and for all. Means we need a democratic kind of thinking here, too.

Assumption Vs Realism

Please read,

John Stewart Mill vs the ECB,

first at,

http://economictimes.indiatimes.com/Opinion/Editorial/John-Stewart-Mill-vs-the-ECB/articleshow/6268798.cms?curpg=1

You know economic-theories are, generally, based on assumptions. Assumptions that belong to different time-frame and far from the realism we live in. To make them workable we need to replace assumptions with realisms, in case we want them to illuminate the reality we live in. To cut short, Economic knowledge is constrained by the assumption of economic theories, mainly international and economic theories related to growth. As far as, fiscal austerity is concerned we are taught in class rooms that government decides it revenue according to its expenditure and not the other way around, that caught my attention the day i heard it. It forced me to think that it must be here where micro becomes macro because at micro level a rational person’s expenditure is decided by his income. I have also read in economic papers that micro-economics should be our base for macro economics but is not in practice (read “Time Consistence Problem: The Credibility and Feasibility of Economic Policy” by Kydland and Prescott). The lust to cash-out long-term demand or long-term interest-rate/profits/income in short-run results in frequent trade-cycles, and, i’am of the opinion that besides income and expenditure the government should also create a reserve or precautionary capacity to meet unforeseen contingencies, like recession.

Debt-Threshold

Threshold as some measure of GDP may not be, but the measures, itself, we choose to take after running deficits and debts to cover the deficit could be. I mean the moment we start realizing that debt has become a burden on GDP and can not be satiated with the GDP, in the next period(s), through taxes, without affecting the level of demand or other measures like paying out of our foreign-exchange reserves or simply resorting to print currency and pay-off debts without losing our purchasing power and adding to inflation. But, the best measure to decide the threshold is that we cannot pay the debt out of our GDP in the next period(s) without affecting demand. And, there could be second, third, or fourth thresholds as we can decide as per our priorities.

Deflation Blues

Ofcourse, the risk in the US is deflation, demand is deficient and inflation is 3%, almost negligible. People who say deficits would drive interest rates are expecting higher demand, but i disagree it will crowd out private investment; it will rather supplement the recovery. Here, the process is demand increases first than supply, just opposite of supply side economics or innovation-economics. We are in a different age and innovation is very limited. Interest rate, for past two years, are at their institutional minimum is a clear sign of liquidity trap. Fiscal measures are required. And, as the demand catches, so will inflation and interest rate, but their magnitudes will be restricted for quite some time and will depend on how fast demand increases.

Threshold in Economics

Actually, reviewing monetary policy every six-week is not a good idea. In the first instance what comes to mind, leave aside inflation and mathematical figures, that economy is not stable and the growth prospects are bleak if it does not add to some positive expectation either for consumers or producers. As an example, it is possible to have both kind of expectation, positive and negative from a rise in interest rate. A rise in interest rate can produce negative-expectations in producers’ mind as we all know it increases the cost loan-able funds, and at the same time it can produce a positive-expectation in consumers’/savers’ mind that his savings are going to earn higher rate of interest-income. But as far as, any Central-Bank all-over the world is concerned they are unable to foster positive-expectations either in form of lower interest rate or higher interest rate. Economics is a material science which starts with assumptions and ends with mathematical-equations; I mean it’s so scientific.

We have all heard about economic-stimulus but we hardly discuss economic-responses as economic-responses, the jargon. You know stimulus is a term in Psychology and its pair is response but a response can only be produced if the stimulus has a particular threshold value. It’s like voltage, below which your refrigerator will not work and at the proper voltage everything is all right and frequent changes in voltage can disturb the system of your refrigerator. The RBI must think to intervene every six-months or greater. I think that’s enough to make my point.

To be quantitative. As far as inflation is concerned, 15% is a high inflation-rate and to cool down the prices the average of the interest rates on savings should be around 6-7% for a deposit of six-months, a guess after looking at interest rate on savings for different terms. Savings are a type of postponed consumption. Therefore, instead of curbing demand altogether we can choose to postpone consumption by increasing interest rate on short-term savings. And, as fa asr interest-rate on investment is concerned we may choose them at level of 12-13% per-annum where necessary to postpone production without resorting to layoffs. This was all i could guess. (Used Bank of Baroda schemes)

An inflation rate of 10% is enough for policy action because not every body’s incomes rise every year, especially, the labor-class. Labour-class wages tend to be sticky at their current levels and a large chunk goes to feeding their stomach, and the opposition in the labour market has a better negotiating power. Inflation is a great concern for unorganized-labour. Inflation is not a problem for those with savings above a particular value, but those below that value can do nothing or loses their savings.The RBI can do nothing because it controls not prices, which can largely be attributed to structural-problems and need direct government intervention by fostering the supply chain. The RBI can only help in postponing consumption but only with limits and those who save not enough to even reach banks will not be profited by RBIs moves.

Kapitalism

Kapitalism comes with an in-built self-correcting mechanism, may be not that self-correcting, or, may be correcting, but, at a cost. Consciously or un-consciously, it produces trade-cycles. Individuals may not realize it, but, it’s a possibility, that some school of thought may realize that "Kapitalism comes at a cost, and sometimes it exploits."

You know, trade-cycles are nothing but a condition of prices. Sometimes inflated and sometimes deflated, and in prosperity they are just prices. And, employment/unemployment comes as a by-product. As long as, we will rely on nominal to deal with the real variable, we will be the loop called trade-cycles.

Can anybody tell me how inflation and deflation are possible in Barter-Economy?

The situation is, price of 1 unit of same good of a company equals the price of 1 unit of good of other company, or, say both products (same but produced by different companies, just to be clear) can fetch you 4 units of a good. The only assumption being that there are no qualitative differences in same goods.

Let us be full of hope!!!!!!!!!!!!!!!!!!!!!!!!

WHILE COMPARING GROWTH RATES

The comparison, that’s actually in vogue, is between a normal base period and periods of high inflation, in case of inflation. And, in case when we are comparing economic-growth, it is the mathematical-figures like 2% or 5% or 8%, just for example, which are point of discussion rather than the rate of inflation, and, the text-books says periods of high rate of economic growth are characterized by high rate of inflation and low interest rates. But, even when it comes to the comparison of rates of economic growth, periods with low and stable inflation, with high rate of economic-growth seems more meaningful than periods with high inflation and high/low rate of economic-growth, interest rate being decided by the Central-Bank. The point remains same, choose a good base year. Or, you can extrapolate a base year, too.

The kind of capacity, here, is a kind of savings. Part of income not spent, certainly not the one that goes to debt-repayment, advance commitment for savings and goes either for investment or purchase. There is a difference; actual savings are not swept by inflation, but commitment is, if income does not rise. Particularly for those who do not have houses and borrow from banks. Productive capacity on producers side can grow but if it does not add or match to the consumptive capacity on consumers’ side, without relying too much on borrowed money, production will not grow optimum, unemployment at 5% (frictional), as Keynes said may be. Here, where the where Keynes-Ramsey rule intervenes which says, the economy should choose a capital- labor-ratio that maximizes present level of consumption. They did not say anything about borrowed money, but they discussed tax-ratio, as far as I can remember. It’s a golden rule, i think. Boosting consumption with borrowed money is a clear bad-idea, recession teaches well.

So, for measuring capacity in a period, too, period with low and stable inflation, with high rate of economic-growth is not a bad idea and bubbles drive demand, then inflation, then interest-rate, and then a little savings (consumptive capacity),and, in the next period interest rate is, again, driven down, there is whole chain-reaction that starts. The point is, we can not restrict our attention to a particular period while deciding for policies, and, it culminates in our discussion of static and dynamic, and taking into account the past 15, 20 years as base or basic for our learning and innovating from our success and failures is better than 5, 10 years.

Another major point is, fix money supply and interest rates for 15-20 years, and let the expectations work, and, then watch how market dances for fulfill our redistribution goals against the policy of maintaining a class at the bottom, a conspi…. the… of economics of Capitalism. I have an idea!!! How many graduate per year in our economy? Book them for two years in social services.

LET’S BE HOPEFULL!!!!!!!!!!!!!!!

The Elasticity of Demand for Money

To understand the comment below understanding of the article at the following link is a requisite,

http://economictimes.indiatimes.com/Opinion/Columnists/Mythili-Bhusnurmath/Dont-take-savers-for-granted/articleshow/6185385.cms?curpg=1

Of course, the assumption is non-behavioral and incomplete for inflation is a major concern, before the Central-bank, while deciding for interest-rates, besides demand for investment and supply of savings. Savings mainly come from middle-class and above and the demand for investment largely comes from upper-class and little from middle-class and the lower-class, the majority in India, rely on their piggy-banks and hardly goes to bank for interest income. The reason being, the cost of reaching banks and/or the banks reaching the cost. And, to mobilize savings for investment purposes, the cost of reaching banks to keep the demand for investment matched with supply of savings, it is good for the banks to bear the cost of reaching banks. The case here for lower class is same as in the Great-Depression of 1930s, when interest-rates were at their institutional minimum or close to zero or economy experiencing a liquidity-trap, and, nobody bothered to incur the cost of reaching banks and neither banks cared for reaching the public. If banks would have cared to reach the public in form of higher interest-rates, the public would have saved and the economy had recovered sooner than it took. The point is that the marginal changes in interest-rates should be sufficient to change the economy’s demand for money as a whole and the demand for low, middle and, high classes in particular, and only then we can expect to determine a relationship between rate of interest and savings for partial equilibrium of different classes. Here the elasticity of demand for money for different classes could be a factor in determining the relationship mentioned above. The cause mainly responsible for decline in rate of savings can be attributed to rate of inflation and the growth rate we realized in the past decade, 8-9%, which are often associated with the same factor, inflation. Higher growth rates are a result of high demand and high inflation-targets and low interest rates and vice-versa.

KEEP THE VALUE OF MONEY INTACT!!!!

The mismatch of ideas and its causes, between Obama and Congress, are hard to guess. But any way, we can expect them either to be political or related with economics, which together become Political-Economy, not a very popular term in an economy like India, but, can be found in text-books. Political because any issue in Congress has a bearing on the vast issue of being elected as Government, next-time, and, Economy or Economics because it affects variables like income, interest-rate, employment, inflation, etc., etc.. And collectively concentrates on the economic well-being of the masses.

But, our main concerns are the levels of inflation and employment, and interest rates, short-term (less than 5 years) and long term (more than 5 yeras), decided by Central-Bank, are often influenced by the policies a Government decides to pursue. Here, a definition of short-term and long-term interest-rates depends upon the time-period for which a government is elected, generally 5-years. But, if the system, mainly Central-Bank, is sure that the same government has a fair-chance of being elected next-time, as well, then the bank can also decide for long-term interest-rates.

The relationship between inflation and employment found by Phillips in his famous curve theory is a positive one and the other thing he found, as far as I can remember, that with a 5% increase in employment inflation also increase by 5%. Therefore, if we generalize his findings a 3% increase in employment is likely to produce 3% of inflation and if we want to grow employment by 10% we will have to choose an inflation rate near to 10%.

It’s kind of same thing we do in our growth-models and theories. For instance, the rate of growth of capital stock = to the rate of growth of labour stock = to the rate of growth. Or, more precisely the actual growth rate must be = to desired rate of growth. So, in a nutshell, we try to equate one mathematical figure with the other. They are all out of 100%. But, of course, units are different. I’m a Harrod-Domar fan.

And, here is some personal thinking. You know in any Congress there are those who are in power and the other in opposition. So, the opposition will shout inflation! inflation!!. And, inflation as we all know need cushions, a capacity to absorb price increase, and everybody is not well-equipped, we also know that. Therefore, a food/inflation-cess to keep a dollar a dollar and to facilitate real-supply of food-items, may be 10% of the food-basket for all income groups is not a bad idea. The idea is to keep the value of money intact and then addressing the distribution issues. “KEEP THE VALUE OF MONEY INTACT!!!!”

LET’S BE HOPEFULL!

Our Questions and Reluctance

The choice of a single right question is what matters for an understanding of our-selves and our surroundings. One single question is what makes all the difference between right and wrong, and, good and bad. We live in a world full of questions unanswered and we are often praised for not questioning for it makes the others around feel uncomfortable and sometimes for the sake of the assumptions, common in material sciences. Gazing empty skies above our head to a simple walk over the earth’s surface can take you in a big-bang of the questions enough to take your lifetime and yet will be carried over for coming generations with many past generations of poverty in a major part of the world. Taking into turn all the trades of knowledge, including religion, for most of their parts are equipments and instruments to earn the economic merits. It is what makes the world go around and the principle underlying the reality we live in. And, is also true to the same degree for those who live on their crude labor, but the underlying reality remain same: the economic benefits of spending time in a productive way.

We live in an age where we are tuned by the clocks in our living- rooms so mechanically that we don not have time for our surroundings. We hardly care that what questions are needed to be answered to be approached. We are not only confined physically, but mentally, as well, so as to result in a consciousness so limited which is so a insignificant part of a greater reality which is broken not just in one or two parts but in millions and billions. The question of identity and individuality is so dear that we very often end up demanding something better and/or more overriding the underlying spirit of equality as humans. The purpose here is not preaching but to cast some light on some of the issues that have dominated the history of mankind and are yet standing as they were. The right to subsistence from the state is one of them whose economic benefits also cannot be ignored. It does not encircle the right to subsistence as the most important of all the rights but as a requisite to concentrate on the work we have chosen to devote time at.

Every body tries to avoid inconvenience. A little avoidance of inconvenience can land the whole economy into a neck-deep trouble just like as the case with our voting rights and is true to the same extent for most of our economic problems. A classic example can be the problem liquidity-trap popular in economics, which says that when interest rates are at there minimum or zero people just do not care to deposit their savings in banks just to avoid the pain of reaching to the banks because they think its not worth taking and no body could imagine the startling consequences except who really know. It would turn the whole economy upside down reducing the economic activity from top to bottom leading to an economic chaos. Among the common one it just could be the reluctance in inquiries regarding small increases in prices at our local grocery shop and when we look back in nostalgia we could hardly believe at the cumulative effect. Some could say that income too has risen but very few will question the unnecessary calls for adjustments in which it is the price which increases first and not the income. Any deviation from equilibrium commonly called the point of stability is not welcomed in economics and in our daily lives but when it comes to pin pointing the causes they are always deducted to some kind of insecurity in some cases and in most it ends just with increasing scores.

China and The United States

I do not know why we are giving so much importance to China’s illegitimate moves on the currency front. Economics and any other stream of knowledge do not talk about absolute actions because they are not simply of any use. For instance, if there would be only one country in this world its decisions would not affect the others, simply because there is no other country. It is the relative significance of actions that matters in any realm of knowledge and Economics is no exception. No single country in this World can dictate the terms to others and exploit Economics to feed its ambitions, without their consent. And, i’am sure it is not possible. I can not believe an economy like States that has almost ruled the modern World, most of its part, is so frightened by China. China’s history is full is currency redenomination to balance inflation and there is no doubt that it has resorted heavily to it, throughout its history. The Chinese currency manipulation can be, simply, offset by retaliatory adjustments in exchange–rates, and affecting money supply and inflation is not just the single way of doing it. It can easily be done on the paper; means America can deliberately depreciate its currency without affecting its credibility, too much. It will certainly augment it productivity and competitiveness, and the ones that are holding its currency in the expectations of profit, may not profit from a stronger currency, but the quantity they will be getting will be sufficient, at least we can expect that. But, i’am nearly sure it will emerge as a stronger currency, later too, if we rely on economic fundamentals, that follow a process. But, if not controlled another 2008 is not too far. This time i expect a food-grain market kind of control for the money-market.

Central-Bank, and, Inflation and Employment

Central Banks has been provided with the most important job of deciding between the rate of inflation, and, the rate economic-growth and employment, and their relationship is a positive one. The rate of growth involves the rate of un/employment of resources, both that are scarce and that which are not. To keep it simple, we can take only labor and capital, where capital is scarce and labor is not that scarce, at all, in an economy like India. And, when the level of investment decreases the worst thing that comes into play is the fall in the level of employment and in India to a greater extent. Any change in the prevailing rate of interest results in a corresponding change in the supply of credited along the length and breadth of the economy, which is a very direct kind of control and gives result in just a matter of days since it is just a matter of liquidity, upward movements may be sticky because organizing business takes more time. The situation is more or less just like a stock-market, and changes in variables are very prompt. But, when it comes to control wages and consumption and thereby prices, all these variables are flexible upwards and their downward movement is often painful - unemployment and decreased wages, except prices (food-inflation) when they go down it is a moment of relief for the majority, but that seldom happens, moreover the case remains the same, when prices reach a level they provide a floor, itself, for future upward movements, which provides an important insight for long-run trend of prices and their control, for essential commodities. But, in case of wages, even though they are flexible upwards they are also sticky to their current level. However, its control is not that direct and is only through credit-control and investment. Therefore, results, to obtain, like lowering wages, consumption, and prices- which has to be actually affected, in the very short-period of time with an indirect mechanism is a difficult task and can be obtained easily and in lesser time by more direct price controls, price-control, itself.

And, i do think it can be justified on the same ground as the control in credit, investment, employment, wages, consumption and savings, and then prices. This is no different than a more direct price-control. Both are equally painful but the merit with direct price-control is that it doesn’t affect the industrial out-put and economic-growth and, can rather be expected to complement it. The process will not be that painful.

GLOBALIZATION, A GOOD SERVANT, BUT, A BAD MASTER

Actually, it’s, now, been almost three-decades since the process of liberalization started in the year 1990-91 and our departure from our Hindu-growth-rate of 2-3% to 8-9% in the past decade, is a testimony to the hypothesis that “liberalization pays better than other forms of growth-models” mainly the closed ones with an emphasis to rely on augmenting domestic consumptions level and capital-formation rather than on foreign demand. Both, the level of consumption and the rate of capital-formation are more or less interdependent but the process starts with a certain level of demand for the mechanism to work and here the foreign demand steps-in. To be clearer, an entrepreneur, as against a social-entrepreneur, only takes risk of investment only when he thinks that there is a demand for his investment and that he is going to make profit from, either, just form supplying his good/service or by sharpening the competition.

The problem before the year 1991 was mainly low levels of domestic-demand, so, the initiative to cash foreign demand, as against, the former, was not a bad idea, anyway, and we can clearly compare the results before and after. Reduction in the level of poverty and employment-scores may not at their maximum, but they are satisfactory. Atleast, we started realizing it. And, again, since we did not have a strong domestic-demand, therefore, the supply of foreign goods/services has never been an issue except foreign currency, capital or investment, which kept pouring in since the process started and India’s huge foreign exchange reserves and its ability to pay for food-security, a pre-condition for economic-growth, is commendable and can not be underestimated.

But, as with any stream of thinking, Globalization, still incomplete in concepts, is not different form Free-Market and Lassiez-Fare ideology. Both support free-movement of labour, capital, and goods, and production-functions. Even the preliminary models, advocating International-Trade and specialization, did not assume shifts in production-functions and relied on domestic capital-labour ratios very different from the profit ideology of entrepreneurs, which believe in exploiting the best conditions of investment. Capital-labour ratio is the equivalent of the ratio of cost of labour and cost of investment. But, another type of cost, and an important one comes-in, the transport cost, which is important in international-trade-settings and is the base of our purchasing-power-parity theory. It says, transport-cost is an important factor in determining the purchasing-power of our respective currencies.

But, the transport-cost in the long-run, 10-15 years, becomes a sunk-cost when compared to the cost of setting-up of production of normal goods/services, especially in case of venture-capital and Franchise-models. Moreover, erasing poverty, generation of employment, and capital formation, all culminates in a higher domestic rate of growth. The purpose of the discussion, just above, is to discriminate between liquid and illiquid investments crossing national boundaries. Liquid investments and mainly the ones in a stock-market lack the content of stability not only because it is liquid but also because it depends upon domestic environment –policies and prospects of growth. A policy conducive to growth will attract inflow of capital and vice versa. Moreover, they also depend upon political and domestic-weather conditions, and inflation, which retard the growth of investment. Liquid investments are easy to withdraw as against to illiquid and makes an already deteriorating system more unstable as a result of domestic changes, whatsoever.  

Therefore, a short-term liquid investment does not make a case for Globalization because liquid and speculative investment, just for profits and not betting on the long-run growth and development prospects of a region, is not very reliable, especially in case of developing economies but may support the idea of Globalization in developed-economies with infrastructure for economic-activities. And, in between there may be varying cases that may or may not to support the concept. But, the one thing to keep in mind is that, “short-term liquid/speculative kind of investments will always add to the instability of a system.”

I would like to point out a difference between the ideas of “liberalization” and “globalization”, based on terminologies. The path of liberalization, on which India embarked almost three decades ago, believes in lowest possible tariff-barriers and not the removal of them, altogether, as evident. But, the concept of globalization would support tariffs, as tariffs, i’m not sure. In form of taxes or some other kind of levies it may be, because even regional-governments can not do away with taxes and revenues, in case of public-goods. The case of Corporate-Governance is better untouched here, because it is also a hypothetical concept like Globalization and is still in the making, as well.

To conclude, may be too early, we can say that; “The idea of Globalization is still evolving and is more appropriate in the sense of globalization of welfare and localization of in-stability. A globe without boundaries is not conceivable. May be regions with more manageable, in economics optimal, sizes seem to be more logical. Only optimal families, societies, workplaces and production functions, and governance will be conducive for optimal environment, whatsoever.”

THE ENERGY DEBATE MAY END HERE

Decentralization which goes in favor of market, means survival of the fittest, will flush out competition sooner or later, and is not very different from centralization, again, a kind of monopoly, in which government dictates the terms and often revenues are important. But, actually, they are revenue minus subsidy or subsidized-revenue. So, the price movements of all the firms are almost predictable, upwards or downwards, mostly upwards and rarely downwards, depending on the consumption patterns responsible for business-cycles and of-course during recession they go down, but India wasn’t severely hit so the effect was almost negligible. And, also because lower levels of demand as compared to developed regions of the world. But it won’t be like this too long and i’am sure I will not. Cartels are also responsible for similar price movements, and, for a common man that’s why they are cartels. But, market, as mentioned above, means survival of the fittest, where survival is not a very difficult term to understand but “fittest” need some explanation. It refers to, as far as, i think, most efficient – lowest cost, lowest price, and content with the margin as long cost does change wile maintaining a capacity (a sub-optimal point, for economists) –firm. Capacity to absorb demand side shocks. And, such a thing is possible only under Perfect Competition, for layman, price-competition with maximum number of firms. Actually, as far as, the regions enjoying monopoly over energy-resources are relishing nature’s monopoly, and as a, whole we are all doing the same. But nature has also suggested the use of JATROPHA ;ent of India, Dr. Abdul Kalam, is one of the strong advocaters of Jatropha cultivation for production of bio-diesel.[4] In his recent speech, the Former President said that out of the 6,00,000 km² of waste land that is available in India over 3,00,000 km² is suitable for Jatropha cultivation. Once this plant is grown the plant has a useful lifespan of several decades. During it life Jatropha requires very little water when compared to other cash crops. For plan for supplying incentives to encourage the use of Jatropha has been implemented.”

“ http://en.wikipedia.org/wiki/Energy_policy_of_India#Bio-Fuels”

“The hardy Jatropha is resistant to drought and pests, and produces seeds containing 27-40% oil [2](average: 34.4% [3]). The remaining press cake of jatropha seeds after oil extraction could also be considered for energy production[4].”

“ http://en.wikipedia.org/wiki/Jatropha”

The plan to use Jatropha should outpace our regular plans and policies, if the debate has to end.

LET’S BE HOPEFULL!!!