By Ajay Shah, on October 12th, 2012
Harsh Vardhan’s excellent blog post on this subject made me think further about the questions.
Finance policy makers in India are often proud of the fact that India has avoided a large systemic crisis in which substantial fiscal resources have been put into rescuing financial firms. I think this optimism is overstated. If we look back into the last 20 years, there has been a steady process of government money going into financial firms. On one hand, we have big events like UTI or IFCI or Indian Bank where large sums of public money were put into financial firms. Equally important is the regular flow of government money into PS Banks.
India is in the midst of a business cycle slowdown. This has come after the biggest-ever credit boom in India’s history: in 2007, year-on-year growth of non-food credit was nudging 35%. As we know well, a boom in credit is followed by a boom in NPAs when a downturn comes about. We may well be at the cusp of an upsurge of NPAs. In this case, the pressure on capital in PS banks is going to be acute. If government thoughtlessly continues on the path of putting public money into PS banks then it would involve large sums of money.
As Harsh remarks, the striking feature of this annual resource flow is the way it has become commonplace. Nobody even notices this any more. In a time where government does not put equity capital into any other PSUs, the scale at which this is taking place is quite remarkable.
When the government builds a highway, the cost-benefit analysis is straightforward. Do we want to spend Rs.5000 crore in order to get a 1000 kilometre highway? A tangible result — the highway — is the fruit of the fiscal labour. In contrast, capital infusions into PS banks are not animated by a clear goal. What are we doing? Why is this wise? What is the cost benefit analysis? Are there other mechanisms through which the same objectives can be obtained at a lower cost? As the approach paper of the FSLRC has emphasised, perhaps the most important element of the public policy process that we require in India is clarity on objectives, and a clear demonstration that the proposed policy initiative is the best way to achieve the objective. I would classify the annual fiscal transfers to PS banks as part of the larger problem, that the edifice of Indian financial economic policy has been grounded in inadequate analysis. I am almost certain that 1000 kilometres of highway is a better use of public money than putting it into the equity capital of a PSU.
Once objectives are articulated, it becomes possible to measure the extent to which those objectives are being achieved. Evidence can be brought to bear about the extent to which the claimed objectives are being pursued. As an example, Shawn Cole did a beautiful paper which demonstrates the extent to which PS banks are a tool for rigging elections in India [journal link, ungated pdf]. If this is what PS banks do, are we better off if PS bank assets would decline, as a fraction of GDP?
Harsh’s calculations treat one key number — 1.1% return on assets for Indian banks as a whole — as a given. If this number is given, the average Indian bank is not generating enough retained earnings to support growth, and then there is an inexorable need for fresh equity capital. I would attenuate this discussion in two dimensions:
- A key feature of a world where banks are required to have equity capital is that not all banks get this equity capital. Some banks do well, they build up their balance sheets, they have good prospects and are able to raise equity capital, and they are able to grow. Alongside them, weaker banks fail to grow. This is perfectly appropriate and a desirable feature of the system: a healthy banking system must be one where only some banks are able to grow. The fact that a bank with the average ROA requires capital for growth does not mean that we should be putting public money into all banks that require capital for growth. Many, many banks in India do not deserve to grow and hanging tough is the right way to deal with them. Growth is not a birthright: a bank must do well, and pass the market test, and thus earn the right to grow.
- There are many elements of banking policy which are driving down the return on assets. Easing these constraints is a better path for policy rather than putting in public money.
Banks in India are facing a combination of swelling NPAs, and difficulties in finding capital to grow. It is not fair for private banks to face competition from PS banks that get equity capital for free. I am reminded of Kingfisher. As long as Kingfisher was around, with an artificially low cost of capital, this exerted downward pressure on air fares, and hurt all healthy airlines. The exit of Kingfisher was of essence in bringing the rest of the industry back to health. This is the story of Japan’s `zombie firms’: when failed firms were kept alive using public money for capital infusions, this infected healthy firms. Percy Mistry famously pointed out that Indian finance suffers from the presence of `zombie banks’, who only walk the world on the life support of public money. This is a deeper consequence of easy access to capital for public sector companies that we in India should be worrying about.
Harsh is undoubtedly right in suggesting that government should be willing to accept a reduced shareholding in PS banks while retaining control under the Bank Nationalisation Acts. But this leaves the residual question: if PS banks have a low ROA, the share price that this can support is low, if investors see no possibility of true privatisation in the years to come. The amount of equity capital which will come by going down this route is limited. The real story has got to be to ask PS banks to demonstrate that their claim on public money is backed by a good possibility of using capital better than NHAI.
Suppose we suggest that the government should be stingy in giving equity capital to PS banks. In the short term, the partial equilibrium analysis suggests that this will hold back the growth of banks and thus the size of Indian banking. We should bring two different perspectives to this. First, the very absence of free capital for PS banks will increase the profitability and thus equity capital access for private and foreign banks. The overall impact for India will thus be attenuated. In addition, it’s easy for government to have entry of 20 new private banks. Suppose each is asked to bring in Rs.500 crore as equity capital. Using the rough 20x leverage that’s found in Indian banking, this gives us new bank assets of 2% of GDP or Rs.2 trillion.  Join the forum discussion on this post - (1) Posts
By Simon Grey, on July 26th, 2012
You (and the supermajority of pundits) labor under the false assumption that everybody needs jobs, that a healthy economy involves 90%+ employment. This simply is not consistent with the reality of automation, it will become less and less consistent in coming decades. Immigration and outsourcing are small factors next to automation. Within a couple generations, almost everything is going to be automated, and a realistically healthy economy would have single-digit EMployment, rather than UNemployment. The proper fix is a completely unconditional universal guaranteed basic income.
I’ll be upfront about my biases as they relate to this subject. First, as a Christian, I believe that man was created by God to work, and therefore it is wholly unnatural for man to not work, and therefore man will always need to have a way of working. I also believe that the unemployment statistics are a useful—though imperfect—barometer of whether people are actually working, as would natural for them. There are obviously some differences between the ideal of work and its reality, but they can be ignored for the time being. Now, as to the topic at hand, it is entirely true that I assume that a healthy economy is one where everyone works. But it is also true that those who argue for complete automation are making some assumptions of their own. In many ways, the proponents of a guaranteed minimum on the basis of the automation of production (which renders human labor unnecessary) are making several assumptions of their own, some of which may or may not turn out to occur.
The first and most obvious assumption is that the current trend towards automation will actually continue. If the business cycle is any indication, it is not only possible that the trend of automation ceases at some point in the future, it is likely. Just as innovations in papyrus production were superseded by paper production, which was then superseded by the various digital formats, so too is it possible that the current trend towards automation may be superseded by something else altogether.
A second assumption is that advances in technology won’t hit a serious point of diminishing returns. Imagine, for example, the sheer amount of technology that would be necessary to automate, say, apple picking or painting houses. It certainly possible that these activities could be automated (i.e. it is within the realm of technical feasibility). But it is not necessarily possible that it would be worth the R&D costs to automate these things. And there are thousands of more activities similar to these that would have generally high costs of development.
A third assumption is that technology will able to interface with humans in such a way as to handle the vagaries and nuances of human interaction. Which is to say, it is assumed that technology will be able to, say, address customer complaints (or, more broadly, customer emotions).
A fourth assumption, as it relates to the guaranteed minimum income, is that human ingenuity will not spread beyond its current state. By this I mean that it is assumed that humans will not use the eventual automation of production as the foundation for expanding production into new, uncharted territory. Stated another way, the automation of production could enable people to simply open up new frontiers of innovation and production that are not directly based on automation (i.e. open up another level of goods).
A fifth assumption is that the economy will not collapse and undo any of the current technological advances we currently enjoy. Massive economic and cultural collapses usually correlate to technological collapses as well. See the collapse of the Roman Empire for an example. See also Neurodiversity for an in-depth look at the subject. A sixth assumption is that status-seeking will no longer exist. Quite simply, automation should lead to decreasing prices in what were once luxury goods (see: the costs of silk stockings after the beginning of the Industrial Revolution). Things that were once the province of the wealthy will become available to everyone. As such, wealthy status-seekers will need to find a new way to demonstrate value, which simply turn into direct displays of controlling labor (the current model is an indirect display of controlling labor). Alternatively, the market could invert back to increased demand for direct craftsmanship, like that which was once seen prior to the Industrial Revolution (Etsy seems to be an indication of this trend). This could be easily accomplished with increasingly user-friendly CADs and 3D printers.
A seventh assumption is that human interaction won’t become an economic good. If prostitution is any indication, there is no substitute for another human being. Human nature, generally being a constant, suggests that there might always be demand for other people’s time, and might lead to people getting paid for it, which is simply a higher-order form of employment.
An eighth assumption is that technology will develop to the point where only a few people are needed to manage it. Also, in keeping with this, it is assumed that GUIs won’t be dumbed-down enough to the point where non-engineers can manage them. Given the massive amount of IT support needed to maintain this level of technology, it seems reasonable to conclude that increases in the ubiquity of technology will drive demand for IT, particularly as technology handles increasingly complex tasks. Now, in response, the UIs of technology should dumb down to the point where non-engineers can solve basic problems The cumulative effect of this will be an increase in demand for IT support while simultaneously enabling growth in the pool of potential labor candidates in this field.
As can be seen, there are a myriad of conditions necessary to see the complete automation of production. It is certainly possible that all of them can be met; I will leave it to the reader to determine whether it is likely and whether, by extension, a guaranteed minimum income will be necessary.
By Ajay Shah, on July 24th, 2012
The news from Maruti is disgusting. I have been curiously watching how the stock market takes it in:
That Maruti has serious labour problems has been known for a long time. But the brutality that unfolded in recent days was out of the world. It was news. When I read about it on Thursday, it seemed to me that Maruti was facing a Tata Motors style situation: of suffering the fixed cost of closing down the existing plant and relocating to a state with better governance. The costs faced in this would be substantial. In that case, a 6 per cent decline of the stock price seemed pretty modest. I watched the small recovery on Friday with surprise. Surely, the cost and complexity of moving out of Manesar is worse than 5%.
Today, on Monday, the market has shifted from a less sanguine assessment to a 10% drop in the stock price. I wonder if this is new information or a modified judgment about how this will play out. Were the speculators on late Friday evening just wrong, or did some new information break?
Bad macroeconomic outcomes and social stress
I would conjecture that poor macroeconomic performance — low GDP growth and high inflation — is correlated with greater stress of this nature. With inflation, the logic is straightforward: The worker who had a nominal wage contract finds the need to renegotiate when the value of the rupee changes. This links back to the earlier discussion here on why solving India’s inflation crisis is important. Too often, we in India are cavalier about inflation. But we should see inflation as an acid that corrodes all nominal contracts, whether stated or unstated. Renegotiation is costly.
Turning to GDP growth, most people that I know seem to think that a couple of per cent of real per capita GDP growth is important for keeping the peace. A lot of people become a lot more unhappy when growth slows. Indian democracy does a pretty good job of containing the angst. There will be no revolution here. But life is substantially easier if the engine of GDP growth is purring. When it stalls — as it appears to have done in 2012 — a whole host of social problems erupt.
Law and order as the fundamental foundation of civilisation
This is a reminder to us about how law and order is the fundamental precondition of civilisation. The most important public good of all, the first claim on the resources of the State including the time and attention of the senior leadership, is police, courts and laws. The entire story of the market economy and high GDP growth can only come about when safety of life and property is guaranteed. The events in Maruti are an important reminder to every investor about the weaknesses of governance in Haryana.
In tracking conditions in any state, I find it useful to watch the time-series of the share of the state in the overall all-India investments outstanding, that are `under implementation’, in the CMIE Capex database. Here’s an example, for Bihar:
November 2005 is the date that Nitish Kumar became the new CM of Bihar. He is widely reputed to have made important progress on improving law and order. At first, the share of Bihar (in all-India under implementation investment) continued to drop. I am sure the changes brought about by Nitish took time; Rome wasn’t built in a day. And, after improvements come about, skeptical investors would take some time in making up their minds that conditions are now better. From 2009 onwards, it appears that there is some upward movement. The overall gain seems to be roughly 1 per cent of the all-India total, which is a significant change.
Compare this with Haryana:
There was a big spurt in the share of Haryana in the overall under-implementation investment in India. After that, the numbers have steadily trended down. Is Haryana suffering from a resource curse in terms of proximity to Delhi?
Rethinking labour law
In the early decades about independence, India constructed a remarkable legal framework which was strongly pro-trade-union. Few countries have enshrined trade unions into laws on the scale that India has done. In those years, trade unions were primarily led by socialist/communist parties. While we may disagree with their views, there was a fundamental decency about them. Some of the best human beings in India, in the 1950s and 1960s, were communist. Perhaps this coloured our thinking, and encouraged us to respect and empower trade unions strongly in the legal framework which fell into place over the 1960s and the dark days of the 1970s.
Today, a hyper-empowered trade union is a potent tool for extortion in the hands of local goons. To solve this problem, it is important to rethink the checks and balances embedded in labour law, which have gone too far in the direction of making trade unions strong. Now that we know that the people in trade unions are most likely local goons, do we want to hyper-empower them through labour law?
By Simon Grey, on April 23rd, 2012
In a prior post, I offered an alternative explanation for socialism’s failure. In doing so, I critiqued economists that defend the free market on the grounds of monetary incentive structure of being too narrow in their thinking. While monetary incentives play a role in human behavior, they are not the only motivator, and are often not the primary motivator.
Unfortunately, many economists ignore this simple truth in their analysis of various market-related issues. I suspect the main reason for this has to do with the very simple fact that many economists have a sort of penis envy towards physicists, by which I mean that economists seem to love complex mathematical models. Price points are extremely useful to these models, as they lend the models an air of objectivity and, in some cases, finality. While some of the more sophisticated economists know that they can assign value functions to non-monetary indices, the assignments of value often feel arbitrary, thus undermining the air of objectivity that economists are so desirous of, perhaps in their quest to gain some sort of influential power over policy-makers, which is thus ultimately a form of status-seeking.
This mechanistic approach to economic analysis is quite autistic in that it generally fails to account for value that humans place on things that cannot be quantified monetarily, like emotions. Indeed, the economics profession is filled with sundry examples of autistic jackassery that is fundamentally predicated on economists being, for whatever reason, completely unable to understand what motivates human behavior. To their surprise, humans are motivated by things other than money. The economists call these motivations irrational.
The most egregiously autistic economists are those that defend free trade and free labor, which usually requires the denial of the social constructs broadly known as culture and society. This in turn undermines the concept of the sovereignty of nations and states. Whether this is a good thing is debate best reserved for another post. For now, the relevant consideration is that not everyone thinks that free trade and free labor are good ideas because some people drive some value from what they perceive to be patriotism. To put it another way, there are a decent number of people who find the feelings they get from identifying with a collective entity (say, the US) or supporting a concept (say, Americanism) to be worth the cost of excluding foreigners. Because this imposes some quantifiable monetary costs without providing quantifiable benefits, those who oppose free trade and free labor are derided as ignorant, xenophobic, and/or simply stupid.
This autism extends to even the presumably least autistic branch of economics: behavioral economics. Here, people are defined and accepted as being irrational. As such, it is the policy makers who need to get on board with man’s irrationality and adjust accordingly.
But even this view, where human idiosyncrasies are tolerated and occasionally celebrated, is essentially predicated on the notion that value is only measured monetarily. For example, leading behavioral economist Dan Ariely tried to prove irrationality in his book Predictably Irrational. The irrefutable experiment undertaken by Ariely consisted of offering people chocolate for purchase. There were two options: one with a simple, sticky price (two pieces for five cents, if memory serves me correctly) and one with a more complex price (a differently-weighted piece for three or four cents, assuming my memory serves me correctly). The utility maximizing option was the latter one, yet the vast majority of people chose the former. From this Ariely concludes that people are irrational. He does not ever think to consider whether such a trivial decision merits any significant consideration as regards to utility maximization. Stated another way, when the stakes are so low, there is little point in weighing your options.
Like the mainstream economists, Ariely and other behavioral economists fail to account for non-monetary value, which in the aforementioned case would be the value of time. Is it really rational to use much mental energy for such a negligible decision? If not, how can it be considered irrational to not use one’s time to maximize a miniscule amount of utility?
Beyond this, economists seem to be unable to recognize the motivating forces behind common interactions, like gift-giving. Economists soullessly deride people for giving non-cash gifts, declaring such interactions to be “inefficient.” The theory is that if people valued the gifts they received at par with or in excess of market price, they would have bought the gifts themselves. That the recipients of a certain gift did not buy the gift for themselves is proof positive that they did not value the gifts at price, and therefore the giver is wasting money because the value the recipient places on the gift is not equal to or greater than the price of the gift. This analysis fails because it fails to account for the value of the gift exchange itself. Both the giver and the recipient place value on the interaction itself, and simply that which is being exchanged. The giver enjoys an emotional response to pleasure exhibited by the recipient and vice versa. Furthermore, the broader signal that the giver cares for the recipient presumably has long-term non-monetary value. Unfortunately, economists’ autism prevents them from seeing the emotional and social value of a gift exchange, thus leading them to deride a longstanding tradition.
This autism is occasionally, and quite perversely, worn as a badge of honor. Some economists often seem to view themselves as somewhat superior for having overcome some of their petty irrationalities. But doing this can be dehumanizing, since it is our so-called irrationality that makes each of us unique, and provides some meaning in our lives. Who cares if we’re more likely to buy chips when their cost is 2 for $5 than when they’re $2.50 a bag? This heuristic may not be totally rational from a pricing standpoint, but it is an efficient way of dealing with a trivial decision, which means less time is wasted thinking about trivial things and is instead spent enjoying life. Should people be begrudged for that?
Now, none of this is to suggest that the study of economics is worthless and unworthy of support. On the contrary, economics is an important subject, and most analysis is useful and worthy of study. However, economics does have some blind spots, mostly due to its current autism. Understanding economics’ autism is helpful, then, because it enables one to see the limits of economic analysis and adjust one’s interpretation accordingly. Thus, economics need not be scrapped; rather, people should be aware of its limits imposed by the autistic tendencies of its practitioners.
By Simon Grey, on February 3rd, 2012
In an axiomatic sense, wealth is always distributed in some way. Likewise, any transfer or exchange of wealth is a redistribution of wealth.
Redistribution of wealth comes in two forms: coercive and voluntary. The former method of redistribution is associated with socialism and, more generally, any statist attempt at transferring the goods or wealth of an individual or group to another individual or group. The latter method of redistribution is associated with capitalism and, more generally, any form of voluntary exchange.
It is obvious, then, that wealth is continuously redistributed. People constantly desire to trade some portion of what they have for something else they desire more. Thus, redistribution of wealth occurs in the free market, and often occurs via the mechanism of exchange. However, there are some instances when wealth is redistributed freely, such as when a parent provides for his child in exchange for nothing. More generally, though, the redistribution of wealth in a free society usually requires exchange.
Therefore, what those who clamor for the redistribution of wealth actually desire is an option to acquire wealth by force in exchange for nothing. They may not be inherently opposed to trade, nor may they be totally desirous of charity—particularly if that charity has behavioral strings attached. Rather, they simply desire to have the option to have wealth redistributed to them without having to offer anything in exchange.
By Simon Grey, on February 2nd, 2012
A while back, I asked if libertarian political theory was an ex post rationalization used simply to justify the cause of freedom without actually explaining why it worked. It seems reasonable to ask a similar question of socialism: is socialist political theory* simply a rationalization for pursuing a certain course of action?
At first blush, the answer is no. Socialist theory is pretty robust and generally accepted as sound. For example, one tenet of socialism is the redistribution of wealth, wherein it is theorized that poverty can be eliminated by taking money from rich people and giving it to those classified as poor. This proposition is so self-evidently true that it borders on being tautological.Yet, every time the redistribution of wealth is put into practice, it generally tends to not eliminate poverty. Of course, poverty can never be eliminated if it is defined in relative terms. But, even when poverty is defined absolutely, there are still some who persist in living in poverty, and no government program is apparently able to change that fact.
Thus, it is to be concluded that socialism is nothing more than an ex ante rationalization. How else to explain its unmitigated and predictable failure? Incidentally, the reason why socialism continues to fail in practice is simply due to the fact that the theory is predicated on artificial class constructions, and can therefore never truly and properly account for individual motivation. It should be note, though, that libertarian political theory accounts for individual motivation but is still incapable of explaining why humans do what they do.
At any rate, the easily observed fact of the matter is that socialist political theory has little grasp of reality, and continues to fail miserably. It only use is in convincing people that there is a reason to try collectivism in spite of its miserable and repetitive failures.
* Please note that “socialist political theory” is a broad term that covers any political movement that generally tends toward increasing government power instead of limiting it. This stands in contrast to libertarian political theory, which refers to any political movement that attempts to limit government power instead of increasing it.
By Ajay Shah, on December 12th, 2011
There is a lot of gloom in India today about the broad-based failure of the UPA strategy of combining left-of-centre populism, fiscal profligacy, theft, and a lack of interest in the foundations of India’s growth. We learn from history that we learn nothing from history; India has clearly learned very little from its escape from the Hindu rate of growth. The moment we got a little bit of growth, the old style socialism and theft reared up again. In one of the many pessimistic articles of this theme, Shekhar Gupta in the Indian Express says:
What is the Hindu Rate of Growth two decades after reform? It certainly can’t be the 2-3 per cent of India’s socialist Brezhnev decades. The new Hindu Rate of Growth is 6 per cent, and on all evidence, from macroeconomic data to the empty billboards of Mumbai, we are headed there next year.
In thinking about GDP growth, it’s always useful to think about both growth and fluctuations. Growth is about the underlying trend growth rate. In the olden days, this was all you needed to worry about. The economy trundled along at roughly the trend growth rate (the Hindu rate of growth of 3.5 per cent), being kicked up or down by good or bad monsoons. In that period, macroeconomics in India required thinking in completely different ways, when compared with standard Western textbooks.
But from the early 1990s onwards, India changed. The market-oriented reforms, which began with the Janata Party in 1977 and gathered momentum in the 1980s, had started creating a market economy. And every market economy in the world experiences business cycle fluctuations. So, in addition to the trend, we got a cycle about the trend. There were good periods and bad periods, and the story running in there was much like that found in mainstream Western textbooks, with a prominent role being played by profitability, inventories and investment by firms.
From this viewpoint, it’s useful to decompose two elements of what we are seeing after 2009. On one hand, trend growth has been influenced by decisions of the UPA. Any perceptive observer also tends to rage at the lost opportunities, of policy decisions that should have been taken, which would have accelerated trend growth. But the second big story is that of fluctuations. Corporate investment is a major driver of business cycle fluctuations in India, and there has been a certain deceleration in this. This may have set off a downturn.
The bulk of the drama that we’re now seeing, and what will play out in 2012, is business cycle fluctuations. This is about fluctuations, not the trend. When trend growth is 7 per cent, the fluctuations make GDP growth range from 4 per cent to 10 per cent. Even if trend growth does not change by even a bit, business cycle fluctuations can take us from a high of 10 per cent to a low of 4 per cent, which is a huge swing of 6 percentage points.
Many elements of economic policy are pro-cyclical: when times are good, they make things better and when times are bad, they make things worse. The financial system tends to suffer from pro-cyclicality: when times are good, bankers lend exuberantly (thus expanding the boom) and when times are bad, bankers tend to be cautious (thus accentuating the bust). It is important to look for a framework for stabilisation, of tools that will counteract business cycle fluctuations. India has crossed one major milestone, in getting to a floating exchange rate. The floating exchange rate is stabilising, in and of itself. In addition, it opens up the possibility of stabilising monetary policy.
As of today, by and large, I think of both fiscal policy and monetary policy as being part of the problem and not part of the solution. While floating the exchange rate (decisions from 2007 to 2009) opened up the possibility of sound monetary policy, the logical next step did not materialise. As of yet, we do not have a sound monetary policy regime. We’re going to require far-reaching surgery to laws and institutions, in order to craft frameworks for fiscal policy and monetary policy that do stabilisation. Until these changes are made, Indian GDP growth will have the high volatility that is characteristically found in countries with weak institutions.
A lot of our work in the Macro/Finance group at NIPFP is rooted in this conceptual framework. In particular, you might like to see two relatively non-technical articles: New issues in macroeconomic policy and Stabilising the Indian business cycle.  
By Ajay Shah, on June 14th, 2011
Sanjaya Baru in the Business Standard on India’s relationship with Taiwan.
I added Monsoon: The Indian Ocean and the Future of American Power by Robert D. Kaplan to my suggested India bookshelf. It is a truly fabulous book.
Sanjay Banerji in Business World on how socialism went wrong in Bengal.
Minxin Pei has an excellent note on the CASI website titled Dangerous misperceptions: Chinese views of India’s rise.
On 16 May, I had written a collection of links titled A new low for Indian economic policy. This story has evolved badly.
Today, the Economic Times has reported a set of accusations by K. M. Abraham.
SEBI’s autonomy is under attack by Mobis Philipose in Mint.
Mahua Venkatesh in the Hindustan Times.
Editorial, titled India’s wobbly regulators in the Mint.
Govt influencing selection of UTI AMC head, alleges T Rowe by Shaji Vikraman and Sangita Mehta in the Economic Times and Why North Block can’t do without Omita Paul by Sruthijith KK, in the Economic Times.
A troubling upheaval in SEBI is in the works. After the departure of C. B. Bhave, we are now facing the departure of K. M. Abraham, M. Sahoo, J. N. Gupta, K. N. Vaidyanathan, J. Ranganayakulu and Pradnya Saravade. These individuals were of essence to SEBI’s remarkable performance in recent years, and will be very hard to replace.
Striking the right keys by Vikram Doctor and Kalyan Parbat, in the Economic Times.
`Coke Studio’ is an impressive concept in innovative music that’s run by the American corporation, Coca Cola, in Pakistan. A precis
on Wikipedia, and here’s their web page. This is an interesting future for music: All the music is freely downloadable. And now, they
are bringing this to India.
Google street view will now come to India.
The uncommon experience of reading high quality thinking on Indian macro in the press: Keerthik Sasidharan.
For all of us interested in Satyam, here’s a fascinating story about the fraud at Longtop Financial Technologies, a Chinese firm, which was similar to Satyam in many ways.
I did an interview for IFMR Blog on India’s financial architecture. Here is the interview in text and the audio.
Siddhartha Deb has a fascinating profile of IIPM and Arindam Chaudhuri in Caravan magazine.
Mahesh Vyas analyses the CMIE Capex database for insights about emerging trends in investment (in the Financial Express).
Martin Feldstein evaluates the scary things that Greece has to now pull off.
Tina Rosenberg, in New York magazine, tells the story of the world’s first person who had AIDS and was cured.
By Simon Grey, on March 30th, 2011
Cohen’s book proceeds as follows. First, he has us imagine a camping trip among friends. Food and goods are shared freely. Everyone abides by (purportedly) socialist principles of community and equality. Everyone does his part. No one takes advantage of anyone else. No one free rides. Everyone contributes. Everyone shares.
After a while, people begin to act like capitalists (as Cohen understands realistic capitalistic behavior). Harry demands extra food because he is especially good at fishing. Sylvia demands payment when she finds a good fishing spot. Leslie demands payment for her special knowledge of how to crack nuts. Harry, Sylvia, and Leslie refuse to share without extra payment. Morgan, whose father left him a well-stocked pond 30 years ago, gloats over having better food than the others.
The fundamental flaw in this argument is that there is an assumption of scalability, which simply means that socialism, which works well on a small scale, should also work well on a large scale. Unfortunately, this assumption is simply incorrect.
In the first place, socialism requires a large degree of knowledge in order to be systemically efficient. When one is dealing with a small number of people (e.g. a family), it is possible to have a large degree of knowledge without necessarily possessing a large amount of knowledge. When more people enter the people, the degree of knowledge necessary remains the same while the absolute amount of raw knowledge required increases correspondingly (e.g. 60% of 10<60% of 100). As the famous Dr. Sowell has remarked, “economic decisions are about tradeoffs, not absolutes.” This principle applies to determining which economic system should be used.
In the second place, socialism requires that actors within a system be close in proximity. It is difficult to ensure that all producers are producing enough if they are scattered over a large geographic area. It is also difficult to determine who isn’t pulling their weight if people are not close in social proximity as well, which simply means that people who aren’t “close” to one another, in a platonic sense, are not likely to know what the others do.
Again, these two factors play a significant role in determining which system to use. For small-scale societies, like the nuclear family, the socialist system makes more sense, for the absolute knowledge demands are low, and proximity is near. This, then, is a very economical way of determining how to distribute production and resources, based on the specific skill sets and desires of the individuals working within the small-scale society. In fact, socialism naturally lends itself to a system of informal barter.
Socialism is not, however, well-suited to a large-scale society. The knowledge demands are simply too great for one person, or even a large number of persons. And since large-scale societies also require large amounts of land for sustenance, there is then not enough proximity to reinforce the necessary social norms, leading to a significant free-rider problem. Capitalism (or, more accurately, the free market) solves this problem through the division of labor, which requires only that system participants pay attention only to those things which are directly related to their interests, thus solving the knowledge problem and, to some extent, the proximity problem.
The break-even point for these systems is unknown, but I am willing to bet that the system size strongly coincides with Dunbar’s number. At any rate, it should be obvious that advocating wide-scale socialism based on the success of small-scale socialism is as foolish as advocating small-scale capitalism based on the success of large-scale socialism. Note: I use the word “capitalism” interchangeably with “free market” in this post, simply for the sake of syntactical brevity.
By Winton Bates, on August 18th, 2010
Over the last few years quite a few political commentators have been saying that no-one really knows any more what the Australian Labor Party stands for. Some of them contrast modern Labor’s apparent absence of philosophical underpinnings with ‘the light on the hill’ that former prime minister, Ben Chifley, spoke of in 1949.
I imagined that Chifley must have been talking about the socialist objective – nationalisation of the means of production, distribution and exchange – that Australian Labor dispensed with a long time ago.
However, when I looked, what Chifley actually said about the ‘light on the hill’ seems to have much more contemporary relevance:
‘I try to think of the Labour movement, not as putting an extra sixpence into somebody’s pocket, or making somebody Prime Minister or Premier, but as a movement bringing something better to the people, better standards of living, greater happiness to the mass of the people. We have a great objective – the light on the hill – which we aim to reach by working the betterment of mankind not only here but anywhere we may give a helping hand. If it were not for that, the Labour movement would not be worth fighting for’ ( Speech by Ben Chifley at the ALP conference in 1949).
Now, if you leave out the mention of the ‘Labour movement’, that statement doesn’t seem to me to define anything peculiar to the Labor Party. If anything, it seems to have a Benthamite liberal flavour to it. I can’t see how the meaning of ‘greater happiness to the mass of the people’ could differ much from ‘the greatest happiness of the greatest number’. The ‘betterment of mankind’ sounds like a phrase that John Stuart Mill might have used. The internationalist flavour of ‘anywhere we may give a helping hand’ does not seem to me to express a sentiment that is peculiar to the Labor Party.
I don’t think that Labor ever had sole ownership of Chifley’s light on the hill. Chifley made a great speech but it didn’t define what Labor stood for in the way that Menzies ‘forgotten people’ speech a few years earlier still defines a lot of what the Liberal Party stands for. The idea of ‘bringing something better to the people’ was just as much a Menzies objective as a Chifley objective. Today, it is just as relevant to Tony Abbott as to Julia Gillard.
When a political party doesn’t have a guiding philosophy voters are largely left in the dark about how it is likely to respond to the problems it will face in government, other than that it is unlikely to bite the hand that feeds it (trade unions in the case of the Labor Party). The policies that the parties take to an election tell only a very small part of the story of what they are likely to do in government. Tony Abbott has written books about his guiding philosophy (his latest was reviewed on this blog last year). Like him or loathe him, voters do at least know where Abbott is coming from.
I think Julia Gillard could probably give Labor something distinctive to stand for – something to move forward to – if she sets her mind to it either as prime minister or leader of the opposition. There could be the germ of a distinctive objective for a social democratic party in moving toward more equal opportunity for children in some of the things that Gillard has been saying about education. But those ideals, if they exist, remain hidden beneath endless outpourings of meaningless verbiage.
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