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.
By Russ Nelson, on April 8th, 2010
Apparently some Democrats object to the idea that Jamestown was run as a socialist enterprise, as Dick Armey pointed out. They say “Oh, no Jamestown was established as a capitalist venture to make a profit.” Well, that’s true, but internally (which is the only thing that matters) it was run in the same way as any socialist venture. There was no money, no market, everyone got free food and housing, and — this is key — there was no incentive to work because only the corporation made profits. Individuals who wanted to work harder than others had no incentive to do so. So naturally, the enterprise foundered, as any socialist venture does.
Before you object by pointing to Sweden, do please consider that Sweden is nothing like a socialist country. It has high taxation and generous social benefits, but it has a vibrant and free market. Socialist countries don’t have free markets. They have government-controlled markets. The idea that socialist countries can have free markets is a recent and ignorant one. Go read up on the history of socialism, and you will see that their first goal was to eliminate the marketplace, preferring instead government allocation of profits.
Okay, now you can object with Sweden, but at least now you’ll know in advance that I think you’re wrong. And crazy, but mostly wrong.
By Rok Spruk, on January 12th, 2010
In yesterday’s edition of NY Times, Paul Krugman opened a puzzling discussion on the economic performance of Europe relative to the United States (link), suggesting that the European model of social democracy is an envy for economic success compared to the U.S economy.
By Ajay Shah, on January 11th, 2010
I wrote a column in Financial Express on Friday: How leftist is India?. This draws on the data shown in this previous blog post. I just noticed a piece in The Economist which dwells on related themes which is well worth reading.
Many people wrote me email about this piece. An important criticism of this evidence is that individuals parse questions differently across countries. In India, it’s easy to construct questions such as: The government must setup more PSUs so as to give jobs to the people where it will seem that there is overwhelming support for a more socialist position. The main advantage of the Pew data is that they are doing it, across time, and across countries. More fine-grained measurement of political attitudes would surely be nice to have. But we don’t yet have such household survey databases in India. The CMIE Consumer Pyramids is good data – but on politics they ask really only one question, that of the most favoured political party.
By Thersites, on January 8th, 2010
As mentioned in my previous post, most businessmen will do anything they can to preserve their position. This extends to people in all realms. Whether manufacturers, farmers, financiers, academics or politicians, those who wish to preserve their power will promote as many measures as necessary to do so. In the case of those in the latter two fields, they impose the same anti-competitive barriers as those in the former ones. For the statists of the academy and the capitol, they put up barriers to entry by stifling debate in marginalizing anti-statists such as the Tea Partiers, imposing punitive tariffs in engaging in ad hominem attacks against opponents and peddling their products in the marketplace of ideas by sophistry, obfuscation and at times fraud.
More generally, given that in most cases one need be accepted by the elite in order to enter academia, the political realm and even many industries, this creates another superficial barrier to entry. This is well-depicted when one considers that while the Austrians seem to be the most accurate economists, most all professors of the subject are evidently blacklisted from the most prestigious institutions, and in the fact that there are so few Ron Paul’s in Congress.
Those wedded to the state – be it the politicians or their propaganda arms in academia and the MSM further cement their power by creating a permanent underclass via their policies. This would explain why the most liberal urban areas are afflicted with the most widespread poverty, crime and education problems. It is the policies of the statists that make these areas fertile for these conditions, but the people, imbued with the notion that the state is there to help them with their plight given its coddling from day one remain even more wedded to the paternal politicians the more desperate their situation. The politicians throw their impoverished constituents crumbs, but at some point the pols will run out of crumbs when they plunder those who produce them to a large enough degree.
The slums of America reflect the ultimate end of statist policies, and the reason is as follows. Statists remove the incentives to produce by encouraging failure, extending largess and attacking mutually beneficial exchange in free commerce. The economic and political environment of urban America destroys the values that led to the creation of wealth squandered on the welfare state in the first place.
Ultimately, my sense is that those in power today, radical Cloward-Piven and Alinsky-ites that they are are not so much concerned with developing a socialist Utopia. Contrary to this, I think they are using the socialists in academia, and the elites, former students brainwashed by academia, CNN and the New York Times as useful idiots. They have institutionalized their progressive ideas over the last hundred years so that those with the most influence in society know of nothing else and more disastrously lend credence to their policies.
They are at peace with their yielding a hellish country like the ones incubated historically by leftists replete with widespread poverty, chaos and violence to reach their goal. The goal of this administration and most all in government is power. They will usurp our freedoms stealthily or outright in order to preserve and enlarge it. Most evil in my view is the man bankrolling the whole operation, George Soros, who will push the country to the brink with his puppet politicians running the show, for his own profit.
In sum, I urge you to understand that ideology is a mere means to an end – secondary to all those who use the state as an instrument, be it the One-Worlders, Greens or Marxists. Do not be fooled, their concern rests with one thing and one thing alone: power. With every state encroachment, their power increases whilst individual liberty is extinguished.
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