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.