Thursday, April 7, 2011

Why being partial...

Inflation rates/targets has something to do with the stage of development and growth of an economy. Normally, underdeveloped, developing, and developed economies have different conditions and targets for the rate of inflation ranging from 11-12, 8-9, and 5-6 percent, respectively, for each type of country. Since, underdeveloped economies have high unexploited opportunities for investment and resources utilization, high level of unemployment and low level of savings; it is good for the economy to set high inflation targets for the sake of motivation. Similarly, in a developing economy like India where investment opportunities and the level of resource utilization is higher than an underdeveloped economy but lower than a developed economy inflation target are set also set lower than developing but higher than a developed economy. And, in developed economy inflation targets are lower than underdeveloped and developing economies because of high level of investment and low levels of unemployment.

When A. W. Phillips discussed the trade-off between inflation and unemployment, back in 1957 in the UK, the country was considered a developed economy, high rate of capital accumulation/formation, besides high rate of investment and employment.

Mrs. Joan Robinson who is famous for her model ‘the accumulation of capital’ has visualized a ‘golden age’ for her economy. Her economy believes in ‘the capitalist rule of game’ in a completely independent economy, closed economy with zero imports and exports, capitalist produce and households consume. Firms are free to adopt a price policy and distribute profits among shareholders. But, later in her model she assumes price-level unchanged or constant and here the real problem arises. If we assume price level unchanged and constant we should also assume that the level of output and population will also be constant, if it is not deflation will set in. Nevertheless, her model is read and taught with great vigor in classrooms. Here comes the main point; instead of capitalist, government can set prices to suit the economy’s needs, but this does not mean that we are moving away from the market rather it is to supplement the market. Capitalist should be free to set prices for their product (non-farm) and the government should be free to set prices for farm products. Why being partial? Both, government and capitalists are responsible for taking economy ahead.

Moreover, Don Patinkin presented his model in the context of the Great-Depression and liquidity trap, and, found that capitalism is no solution to mass unemployment. His model moves between neutrality and non-neutrality of money which lacks rational expectations and a proper definition of it. He found that an increase in money supply has a real-effect on individual and a nominal-effect on the general price-level, and, concluded that real balances foster dynamic-stability.

Long live reforms!

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