Tuesday, February 9, 2016

Austrian Economics in India

Recently I sat down with Mr. Jayant Bhandari - Jayant Bhandari is an investment adviser, particularly in the natural resource sector, living in Canada. He advises institutional investors. -  to discuss India, Gujarat, Narendra Modi, Liberty and Austrian Economics in India and other such relevant issues. The following is the audio podcast of our discussion.


Monday, January 25, 2016

Present Condition of the Indian Economy

Since the beginning of 2016 the stock markets around the world are collapsing. The Indian stock market has erased all the gains which it had achieved after Narendra Modi came to power; all Modi mania has now evaporated. The Indian currency rupee is again trading below 68 level against US dollar, and inflation is picking up too. in this analysis I discuss why the world and Indian markets are crashing and what lies ahead of us.

Tuesday, December 1, 2015

India and Capitalism

In this book review I am going to take a look at a very important book written by French sociologist Professor Jean Baechler, The Origins of Capitalism. What differentiates the Western civilization from the rest of the world is its capitalist spirit, which, sadly, started waning in the last part of the twentieth century. What makes the Western world materially richer and better than other parts of the world in the past two and a half centuries is its economic system of Capitalism. Jean Baechler discusses important questions like what is Capitalism? Where did it come from and when? What are its distinguishing features? Why was it essentially a western phenomenon and now a Western export?

This book and its teachings are important for a country like India, which is still reeling in poverty in this twenty first century. If India, or any other country, wants to make economic progress then its people will have to take these teachings to their heart,  understand the forces that are responsible for material riches and try to realize these forces. Understanding why the Western world thrived and the rest of the world was left behind is the real beginning of making India rich again.

Baechler's book is divided into three parts.
  1.  In the first part Baechler begins his analysis by critically examining Marx's theory (or non-theory!) of how Capitalism came into existence. He does this to use Marx's analysis as a spring board and a point of diversion for his own analysis in later sections. I won't spend time discussing this part here.
  2. Part two is where Baechler begins his own analysis of the origins of Capitalism. This part is titled, What is Capitalism? As the title suggests, Baechler begins his analysis by clearly defining the concept of Capitalism. As he makes it clear, the systematic study of the origins of any phenomenon requires that one defines it clearly because the whole analysis follows from this definition. If one defines the phenomenon under study wrongly then he is bound the draw wrong conclusions about it. Baechler distinguishes Capitalism from all other economic systems by its incessant search for economic efficiency: By nature therefore, every economic act is rational, and aims at maximum efficiency. Economic efficiency, however, is limited (with a good deal of variation) by the interference of other values - religious, magic,ethical political and soon. Now, the most original feature of Western Capitalism, which distinguishes it radically from all other economic systems, is its real efficiency. It is the first system that may be characterized by a massive and, up to now limitless increase in production, circulation, and consumption.
  3. After clearly defining and distinguishing the Capitalist system, he goes on to discuss its essential features in the next section. 
  4. The last part of the book contains a detailed discussion of the origins of Capitalism, which contains a systematic discussion of "the Genesis of Bourgeois", "the Genesis of the Market", "the Genesis of the Entrepreneur and the Technologist", and "Genesis of the Laborer and the Consumer". 
Instead of going into the detailed discussion of the whole process of how Capitalism came into existence, I want to focus on the major results of Baechler's study of origins of Capitalism. As I said above, the teachings of this book is important for India and all other countries who are aspiring to grow rapidly i.e., raise the material standard of living of their populace.

Factors Responsible for the Rise of Capitalism
Baechler's search for the origins of Capitalism takes him in the realm of politics. He discovers that the origins of Capitalism lie in the realm of politics. The way in which the political scenario emerged in the European Middle Ages (beginning from the 11th Century onward), it gave rise to the system of Capitalism. Here is Baechler,
I consider that the key to the problem of the origins of Capitalism is found on the side of the political system. (p. 40)

These brief remarks bring me to a decisive conclusion: The degree of capitalist activity achieved in any given society is defined by the intersection of two curves. The one is determined by the area governed by the society, by the number of people in the society, and by the amount of wealth created by a given state of technology. The other is determined by the degree of autonomy the state grants to trading activities. The more that the State undertakes to arrogate the surplus to itself and to redistribute it as well, the less will any capitalist activity be able to take place. In the extreme it will disappear altogether (p. 41)
The expansion of capitalism owes its origins and raison d'etre to political anarchy. (p. 77)
The implication of this finding is clear for India. As long as the behemoth State of India (i.e., the Indian government) is meddling with the economy, which it is doing since 1947 in the post-independence era, this country is never going to see any significant capitalist activity. Economic efficiency of the economy will remain low resulting into problem of low standard of living of its mass people. The high level of meddling of the Indian government in the economy and the resulting low capitalist activity is also responsible for the problems of poverty, unemployment, inequality etc., etc. 

Baechler, after defining Capitalism as Capitalism is the state the economy must attain when nothing arises to hinder its law, the law of efficiency, goes on to chalk out his model of a Capitalist society. Here are the essential parts of the Capitalist society. 
  1. The producers have as their sole objective the search for maximum profits, not at all in order to enjoy the goods of this world, but simply for profit itself.
  2. The intellectual activity of the society be entirely devoted to the creation of scientific and technical procedures that permit the lowering of costs. 
  3. The laborers reduce their leisure and rest time to the minimum compatible with survival; their adaptation to variations in the economic apparatus is to be perfect and immediate (which means a perfect aptitude for changing their residence, employment, and qualifications); and 
  4. The absorption of production by the social organism suffers no impediments. 
Now these conditions are hard to realize 100% in reality. Why? because every society up to now has raised some or the other kinds of obstacles which have hindered the essential processes of a capitalist system outlined above. Here is Baechler again:
up to now, every society has placed obstacles in the way of the pursuit of economic efficiency. This has been done either in a general fashion, by retarding economic activity as much as possible, or only by repressing such and such aspect of the model (the entrepreneur, technology, labor, inelascity of demand, limitation of the market etc.). However, all societies have not established the same obstacles, which gives a precise scale for classifying societies in terms of their economic activities. One society has gone the greatest way in getting rid of all obstacles, western society. (p. 59) (emphasize mine).
The Indian society hardly meets these conditions in the modern time, especially after the so-called independence in 1947. The powerful Indian state, being run from Delhi by politicians and bureaucrat, has never allowed the producers to follow their profit motive by making their industries more efficient. In fact, the producers were not allowed to function at all during the central planning era when the public sector got the "commanding heights" i.e., the state itself was trying to run the economy. When it failed in doing so, it, instead of dismantling all regulations and controls, it only slightly loosened its grip on the economy while continued to regulate and micromanage the economy to this date. The Indian producers, instead of following their profit motive in the market by serving their consumers in the best possible way, are busy buying out political support for their businesses to remove their competition! They are spending all their energies in political maneuverings instead of serving their consumers in an honest way. They are compelled to do so by the state management of the economy.

The intellectual activity is also stifled in this country since ages. The public schooling system has created unemployed armies of graduates who are good for doing nothing. Public schooling, instead of changing the social, political, and economic order, is only reimposing the same social, political and economic order on the next generation. The state is meddling has created so many impediments for the intellectuals in this country that most intellectuals leave this country the moment they get the chance to do so. The phenomenon of brain-drain (sic) is a clear example of this issue. The political, social and cultural environment of this country is a big hindrance for the talented people, and this is the reason why they are not in a position to divert their activities in entrepreneurial and technological activities.  

And the laborers of this country also hardly meet the conditions of a capitalist system outlined above. The labor market of this country is extremely rigid because of various state controls and regulations.

The internal market is also highly restricted because of myriad of state controls and regulations.

No wonder Capitalism never emerged in the Indian subcontinent! And as long as the Indian state is meddling in all aspects of the Indian economy and society, it won't ever emerge in future also.

Baechler, in the end, sums up his thesis:
  1. The specific feature that belongs only to the capitalist system is the privileged position accorded to search for economic efficiency.
  2. The first condition for the maximization of economic efficiency is the liberation of civil society with respect to the state.
  3. This condition is fulfilled when a single cultural area is divided in several sovereign political units.
  4. So that all these potential factors lead to all their consequences, it is also necessary that the value-systems be modified to the detriment of religious, military and political values, and that demand be liberated. 
  5. Only the West has experienced an evolution where all these conditions were met.
As I already mentioned above, these conditions are not at all met in the post-independence India. The civil society is still in the firm grip of the state control. The value system is also heavily against capitalist mentality. Religion is still the driving force of the majority of the society. Young people, instead of becoming entrepreneurs, still dream of a government job and joining the political system. Politicians, and not entrepreneurs, are still hold the high status symbol. Military people are seen as heroes, and not the entrepreneurs. And, the Indian subcontinent is not divided into small sovereign political units, like it use to be in antiquity. Diverse population is forcefully merged into a one big Indian state after the independence by some politicians. As long as this behemoth state is alive, situation for the commoners will never improve.

Saturday, November 28, 2015

Bihar Liquor Ban

After a thumping victory against Narendra Modi and his nationalist BJP party, the new CM of Bihar, Nitish Kumar, has announced to fulfill one of his many election campaign promises of banning liquor sell and consumption in Bihar beginning from 1st April next year. After this imposition of ban, Bihar will be one among few of states in India, including Gujarat, my home state, were liquor is totally banned since 1960s, where liquor will be banned by the state government. In this short write-up I will analyze the economics of this liquor ban. People must know what will be the consequences of this ban. Will it become successful in achieving its stated goals?

So why Nitish wants to ban the sell and consumption of liquor in Bihar. Let's hear the stated goals of this policy from his own mouth:
My government is committed to fulfilling promises made to women during the election campaign. There was a surge of complaints from women about male members of the family resorting to drinking and creating nuisance, which also affected the education of their children. (source)
Will the ban achieve this end? If we see theory and history of alcohol ban around the world and in India then the answer is, a definite No (for those who want to know the detailed reasoning for this "no" can refer to Mark Thornton's wonderful book, The Economics of Prohibition).

Let me give a brief analysis of why this prohibition of alcohol sell and consumption in Bihar will fail in achieving its stated goals. First of all, let us remind ourselves that since the beginning the modern man (Homo Sapiens) has resorted to some kind of use of addictive drugs/drinks for religious or spiritual experiences or for simple recreational purposes (for evidence see here). In India itself the ancient Rishi-Munis and other people were known to consume Soma Ras, which was kind of hallucinating drink (see here). This history tells us that consuming such drinks is very natural for human beings, and something that is natural to humans is impossible to remove by such governmental bans. The ancient habits are not going to die quickly or die at all. Government trying to impose its will - or other peoples' will - on others will always fail because of basic human nature. Such bans have never worked in history, and will not work in future too. Actually the issue here is of moral character. Government - or other people who are hiring the government agents to impose their wills on others - has no moral right of stopping people from voluntarily consuming whatever they want to. It is none of government's business to interfere in peoples' lives as long as they are not physically harming others.

Apart from this problem of the ban going against basic human nature, other worst consequences will follow this ban. A basic knowledge of the laws and demand supply will make this point clear.

First, in the aftermath of this ban, the supply of liquor will become less which will increase its price at a given demand. This higher price will make the liquor industry more profitable, which will now attract illegal sellers i.e., bootleggers, liquor barons, mafias etc., into this market because selling prohibited liquor illegally is a very risky business and a crime which can only be carried out by such criminal people. Entry of such mafias will make this once peaceful market into a violent one! Crime will increase. More people will go to jail for a victimless criminal act of consuming liquor. People who are addicted to liquor, which includes everyone who is consuming it in present and many future addicts, will have to now find new sources of income to buy high price costly liquor now, and for that they will resort to petty crimes like theft, robbery etc. If males where creating nuisance in home before this ban, they will create more nuisance after the ban to get more money for consuming liquor. If they were spending 100 rupees on liquor before the ban, now they will have to spend 200 for the same! This means less money will be now left over for their children's education compared to before the ban scenario!!! Not surprisingly, the government policy will, once again, achieve the exact opposite goal compared to its stated goal.

Second, the quality of liquor will also deteriorate once the ban will be imposed. Alcohol prohibition will make the liquor more potent. Because liquor is banned, those who will sell liquor in the underground market will produce low quality liquor e.g., hooch. Many people will die consuming this hooch like we have witnessed time and again in Gujarat where liquor is banned since 1960s (for example see here).

Third, police force will now be busy in imposing this ban leaving aside the important work of apprehending real criminals. This means, those real criminals will have a free play now, which in turn will increase other types of serious crimes in Bihar.

All these means, what is mainly a health issue right now will become a criminal and bigger social issue because of this ban. The Bihar government, instead of making lives better of its people, will make their lives even worst. What more can you expect from the government?

Btw, this proposed ban is just yet another addition in so many bans that Modi's BJP government has already imposed on innocent people of this country (see the growing list here). This new inclusion in this list is coming from Nitish Kumar, whom many are seeing as a new PM of India! This only shows that all these politicians are one and the same. BJP or JDU or Congress, it just doesn't make any difference to the lives of people of India. As I am saying since long, all these political parties don't represent true choice in front of people. True choice is between having a state ruling over us or not! As long as people are trapped in the false choice of voting for the lesser evil, situation is not going to change for better.
    

Saturday, October 3, 2015

RBI Governor Rajan is Lying

Last Tuesday the central bank of India, RBI, announced its much awaited last quarter monetary policy. The present governor of RBI Dr. Raghuram Rajan was under tremendous pressure of his Delhi masters to reduce the interest rates. Not disappointing his masters, he reduced the repo rate by a big 50 basis point. Raghuram Rajan has an image of an "inflation warrior"; a "monetary-policy hawk"! He is quite famous for his so-called "anti-inflation stance". People think that he was at loggerheads with his Delhi masters, especially the finance minister Arun Jaitley. Many well-known international investors have praised his stubbornness to reduce the interest rate; many even thought of nominating him for a "Nobel Prize" in economic science (it is a different matter that there is no Nobel Prize in economic science; the present prize is given by the Swedish Central Bank in the memory of Alfred Nobel!).

So, is Raghuram Rajan an "inflation warrior" or is he "inflation creator"? Is he really at loggerheads with his Delhi masters or he is complying with them whenever they demand him to? The key to answer all these questions and to understand Raghuram Rajan is to observe his actions, and not his words. Listening to his speeches will make one feel as if Rajan is seriously worried about inflation, but when we look at his action we see something very different. Remember, at the end of the day, it doesn't matter what you say, but it matters what you do.

Is he inflation warrior or creator? 

To understand this answer we must first clearly understand what inflation is. Today's mainstream economists define inflation as a "rise in the general price level". Is this definition correct? Inflation, traditionally, was never defined in this way. Prior to 1980s the true definition of inflation always was a "rise in the supply of money and credit" e.g., read this Wall Street Journal article showing the evolution of definition of inflation. Why did the mainstream economists change the definition? Because they wanted to divert gullible publics' attention from the real cause of inflation, which is the rise in the supply of money and credit, to its effects, one of which is rising prices! Once you change your focus from the real cause of inflation to its effects, it is easy to blame everyone else but the real culprit who is creating inflation. In today's time the central bank - in India RBI - is the monetary central planning institution which has a monopoly over printing rupees. That means, it is the RBI which is solely responsible for creating inflation in the Indian economy. Rising prices is just one of the chief effects of inflation; it itself is not an inflation (please read this one page article on inflation by Henry Hazlitt to understand this phenomena).  

Once clarifying the definition of inflation now we can see that Raghuram Rajan is no "inflation warrior". He, in fact, is the main guy who is creating inflation in the Indian economy just like his predecessor governors. Since assuming the governorship of RBI in September 2013, Rajan has decreased interest rates from peak 8% in January 2014 to 6.75% today (data here)! That is a big cut of 1.25 basis point. RBI reduces interest rates by increasing the money supply in the economy, and that is what IS inflation. The commercial banks will now pyramid their own money supply on this base money provided by RBI and inflate the currency more (to understand the mystery of banking please read Rothbard's brilliant book, The Mystery of Banking). So, Rajan is the one who is creating all the inflation that we see in the Indian economy. To think that he is an "inflation warrior" is a mockery of economic science.

And these continuous reductions in last one an half years' time also shows that Rajan is not at all at loggerheads with his master Delhi government. Whenever they demanded an interest rate cut, he has sooner or later followed their orders notwithstanding his rhetorics against inflation.

This is not everything about Raghuram Rajan. During the recent rate cut press interviews he said few things which will outrage most sane people. In an interview with newspaper The Hindu, Rajan said that, Common man is always benefited by a rate cut. Really? How so? His twisted logic, and I quote, is this:
I think bringing down inflation is the most proper move we have done. Once inflation comes down, keeping rates at a very high level increases the cost for the entire economy. I receive letters periodically from pensioners who say they used to get 10 per cent on their deposits, but now they are getting only eight per cent. However, they don’t realise that they got 10 per cent when the inflation was 11 per cent. Even though they got 10 per cent returns their principal was eroded by a greater amount every year. So, real value of savings were going down. 
Today, if they are getting 8 per cent with inflation at 6 or 5.5 per cent they getting a real return of 2.5 per cent, which is compensating the erosion of their principal so real returns have gone up.
On the surface this arguments looks plausible, but to see why Rajan is wrong we have to only see how the government statisticians measure inflation. Government inflation numbers are based on wholesale prices where prices are always lower than the retail market. Not only that, they only include selected goods in their inflation basket, and the selection of these goods is arbitrary depending on the whims of government politicians and bureaucrats. The highly aggregate macroeconomic inflation numbers hide all the differences in the life styles of individuals in this country. The inflation numbers may go down on government and RBI records, but in ground reality the prices never come down; in fact, they keep on rising year over year e.g., I have never seen prices of most products that I consume go down like many common men of this country (see here). The whole exercise of measuring inflation by taking prices of selected goods in consideration is dubious. It doesn't reflect the ground reality of how people are living and facing real prices rises in their day to day life. Rajan's above arguments are totally disconnected from the ground reality. He is living in his ivory tower with his dubious official numbers. He forgot what the famous phrase about the use of statistics, which is falsely attributed to the British Prime Minister Benjamin Disraeli, says: "There are three kinds of lies: lies, damned lies, and statistics." Rajan is just fooling the pensioners and other hard working saving public of this country with his misleading false arguments. He is not realizing that millions of poor people of this country, who earn their daily bread, never receive any pension! They don't even have any bank account where they get any interest. Their wages are

Above all, as I said above, inflation is not rising prices! It is the increase in the supply of money and credit for which Rajan himself is responsible. Rising prices is only one of the chief effects of inflation. Rising prices definitely do not benefit the common man, but the worst part of inflation is its other effects in the forms of the business cycles and the rising inequality of income where poor gets poor and rich, richer. The manipulation of interest rate results into boom-bust cycle in the economy which hurts the whole economic structure and thus every one of us. The distribution of money by RBI to its favored unproductive debtor class hurts the productive creditors (i.e., savers) of the economy.

Conclusion

So RBI's rate cut policy can never help common men. Rajan is outright lying when he said that. Rajan is not an "inflation warrior". He is the prime creator of inflation in India. Only dismantling RBI and bring the Gold standard back, we can think of doing anything good for the common men of this country.