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!!!!!!!!!!!!!!!!!!!!!!!!