How Demonetization Changed My Life

Do you write as well?

It was November. Shorts were fading rapidly out of the streets. Many girls queued to the ATM machines near my home in night clothes around midnight, their t-shirts knotted at their waist. Aren’t their parents home? I don’t read newspapers, and I don’t watch TV. The bright fellows I follow on Twitter and Facebook don’t like news either.  So, I didn’t know what was coming. I slept for many hours without knowing that those clever girls were trying to get cash before the news got through to everybody.

There are always enough such girls to go around in Noida. My landlady’s niece is one of them. When I first met her, she was sitting on the bed, pouting and sulking, complaining about some ridiculous thing. My landlady and her mother tried to calm her down, but that didn’t have any effect on her. I, the scholar and gentleman, was at my desk, poring over tomes on economics of culture. It was not that I did not see her, but my mind wasn’t there. When her mother said that it was time for them to go, she snapped straight and scratched her back, raising her top. She then turned  around  and  smiled  at  me,  her  eyes  twinkling.  I  raised  my eyebrows, glanced at her and smiled. “Bye”. Continue reading “How Demonetization Changed My Life”

What If Mumbai Were Taller?

To borrow an invaluable metaphor from Voltaire, if Alain Bertaud did not exist, it would have been necessary to invent him. When I read about Indian real estate, I almost never come across anything that is good. Alain Bertaud’s work is a rare, honorable exception. If Mumbai were a beautiful, livable city,  many great minds would have lived in Mumbai. They would’ve written about Mumbai. Even in such a dense city, there isn’t anyone who can write intelligently about housing and urban policy.

But, I find Alain Bertaud’s position that raising the floor area ratio (FAR) will not raise Mumbai’s population density strange. For beginners, Floor Area Ratio is the ratio between the floor space constructed on a plot to the area of the plot. For example, if the FAR is 2, a 2000 square feet building can be built on a 1000 square feet plot. If the FAR is 3, a 3000 square feet building can be constructed on a 1000 square feet plot. The higher the FAR, taller buildings can be. In Mumbai, the FAR is 1.33, while in some cities, FAR in the city core can be as high as 25. In Hong Kong’s city core, for example, a 100 storey building can be constructed on the plot on which a 4 storey building can be built in much of South Mumbai. In fact, this is the major reason why space is so congested in Mumbai. This is the single biggest reason why housing is so expensive in Mumbai.

To put it shortly, this is Bertaud’s argument, as best as I understand it.

Density=Population/Built-up Area.

So, density would change only if the amount of land developed changes or if the number of people in the city changes. For reasons unknown to me, Alain Bertaud maintains that changing the FAR does not change either the population in the city or the land developed. Bertaud thinks that if FAR is lowered, people will deal with it by consuming less floor space. Similarly, if FAR is raised, people will, at best, consume more floor space. Bertaud claims that this will not change Mumbai’s population.

But, I suspect people are more likely to move to a city where floor space is abundant, and rents are low. Wouldn’t that happen if FAR is raised in Indian cities? Better amenities attract more people. Spacious houses will have the same effect, right? How on earth can someone believe that this wouldn’t happen? Wouldn’t Mumbai attract more people if it were a more livable city? I have never lived in Mumbai. I would love to live in India’s most cosmopolitan city. But, I have never considered moving there. Why? Having lived in large houses much of my formative years, I won’t be able to adapt to such congested spaces. Delhi is bad enough. I can’t be the only guy who thinks along these lines. Remember: I am a misanthrope who loves density.

When there is more floor space, there will be more job opportunities too. This would, again, have the same effect.  I am willing to believe that this is an empirical problem. I am willing to believe that the number of people who wish to migrate to Mumbai has nothing to do with how spacious Mumbai’s houses are. But, I would like to hear why.

Post Script: Tyler cowen thinks that Indian cities are under-crowded. And if they are in fact, under-crowded, wouldn’t more people migrate cities when it is easy to build tall? (Alain Bertaud would say that density and crowding are not the same.) Robin Hanson thinks the same, though I am not sure in what sense he used the word density:

“City density, and hence city size, is mainly limited by the abilities of the conflicting elements that influence local governments to coordinate to enable taller buildings. Remember those futurist images of dense tall cities scraping the skies? The engineers have done their job to make it possible. It is politics that isn’t yet up to the task.”

Bryan Caplan thinks that if real estate markets are deregulated in such cities that would lead to more affordable housing elsewhere. This is perhaps the most interesting view I have come across. But, I’m not sure how easily it can be reconciled with the fact that Mumbai has about the highest disparity between personal incomes and housing prices. 

Tyler Cowen has a very interesting post, on why migration to cities is unusually low in India, where financial returns from migration is high: 

Indian migration to the cities is much lower than for China or Indonesia. The explanation that we propose for India’s low mobility is based on a combination of well-functioning rural insurance networks and the absence of formal insurance, which includes government safety nets and private credit. In rural India, informal insurance networks are organized along caste lines. The basic marriage rule in India (which recent genetic evidence indicates has been binding for nearly two thousand years) is that no individual is permitted to marry outside the sub-caste or jati (for expositional convenience, we use the term caste interchangeably with sub-caste). Frequent social interactions and close ties within the caste, which consists of thousands of households clustered in widely dispersed villages, support very connected and exceptionally extensive insurance networks. Households with members who have migrated to the city will have reduced access to rural caste networks.”

Leave Us Alone?

“I swear—by my life and my love of it—that I will never live for the sake of another man, nor ask another man to live for mine.”, so ends the speech of John Galt, the hero of heroes of Atlas Shrugged.

The above sentiment is echoed by many in the libertarian movement, especially Ayn Rand’s followers. Objectivists single out Altruism as a scapegoat for most, if not all of the problems faced by mankind. I myself believed much of the rhetoric years back, when I came across her works for the first time in my life. I still find much merit in them. Given the fact that Voters have systematically biased beliefs, selfishness is likely to significantly improve the way democracy works.

GMU economist Bryan Caplan puts it well: “Why? If selfish voters misinterpret markets as a method for the rich to exploit the poor, at least the rich will still favor markets. They’ll want what they falsely see as their “pound of flesh.” But if unselfish voters misinterpret markets as a method for the rich to exploit the poor, the rich and poor alike will unite against the imaginary evils of the market. Instead of petty squabbling, we get a consensus for folly.” It should be obvious that it is important to emphasize that altruism is not an unconditional virtue in a world where most people wrongly believe that we are our brother’s keepers and get that notion institutionalized. Self interested actions are generally virtuous, as long as it doesn’t involve taking advantage of others. When Caplan says: “I often wish the people around me were more selfish – or at least better at being selfish. I know how to deal with rational, self-interested actors. They’re really quite charming. If I want them to change their behavior, I offer them a deal. While they might hold out for more, at least they don’t take offense.”, I tend to agree. Continue reading “Leave Us Alone?”

Crisis In Economics?

Ayn Rand summarized the attitude of present day intellectuals in these words: “Forgive me, Father, for I know not what I am doing-and please don’t tell me.” She continued: “Observe how noisily the modern intellectuals are seeking solutions for problems-and how swiftly they blank out the existence of any theory or idea, past or present, that offers the lead to a solution. Observe that they profess to be moved by compassion for human suffering –and close their eyes indignantly to any suggestion that man does not have to suffer.” Such an attitude was evident in Sumati Mehta’s article on George Soros’ “Institute for New Economic Thinking” in Business Standard. George Soros, who pushed for a world central bank in his book “The Crisis of Global Capitalism”, founded the institute “to provide fresh insights and thinking, with a view to promoting changes in economic theory and practice”. Continue reading “Crisis In Economics?”

Exporting Woes

The appreciation of rupee against dollar is hitting hard up on the small exporter. The Rupee, which in a nine year high, and trades just over 39 Rupees, has risen around 13% in the past one year. . It has taken an economic toll on the export community, and has led to a slackening in Industrial Production, as a stronger currency has made exports less competitive. It is opined by an economist that it would move to close to 30 in course of time. Rupee is now the second best performer in the past year in the currencies traded in Asia outside Japan.

As the rupee appreciates, the exporters earn less in rupees for each dollar of revenue they bill overseas clients. The hardening of the Rupee makes Indian products more expensive to foreign customers. Industries which source their raw materials from the domestic market now have to face the competition from the low cost nations such as China. In the past four months, the export growth had fallen 30 percent. The effect is seen across the sectors and millions are put out on the streets. The Government has woken up to the fact that its export target of $160 billion can’t be met. The most affected are the textiles, leather and handicrafts industries. The fastest growing IT industry, too, is no exception. Seafood exports too, are taking a hit.

Many are to put up their shutters and reduce their workforce. Some have made up their mind to export their raw materials from low cost Asian countries. They are in some cases, unable to turn to other markets, as they too are dollar traded. IT firms like Infosys are reusing their code. Textile exporters are exploring the possibility of exporting through Rupee billing to pass over the currency risk to foreign buyers, allowing themselves to earn profits through manufacturing alone. In other words, buyers are being asked to pay more for their exports. Pharma companies, one of the key sources of foreign exchange, too are hurt, and are busy lobbying for Government sops.

Earlier some economists were of the opinion that an appreciation in Rupee wouldn’t necessary lead to a decline in exports as a sizeable percentage of the exports are import led. With rupee appreciation, imports were supposed to become cheaper and the manufacturers were expected to leverage that benefit to make good of the erosion in the price competitiveness on account of hardening. RBI was expected to relax its grip on the interest rates, which would have made the exporters to source goods for export purposes at a cheaper cost. They seem to be right, but only when taking some aspects in account. The strengthening of the Rupee has made sourcing of cheaper raw materials from abroad easier, as it makes imports seem less expensive. There is a surge in the exports of petroleum products, gems and jewels, all of which are import led exports. The overall export growth rate was the highest in the past year and a quarter in October. The figures could as well be misleading, as bigger firms are likely to suffer loses to keep their presence. But, exports have taken a hit in other sectors such as IT, textiles, handicrafts and pharma.

Exporters are running to the Government for handouts in the form of customs duty reductions, tax exemptions and interest subsidies. “There is an urgent need for the government to take measures to bring relief for exporters and help them not lose their markets,” said Ganesh Kumar Gupta, president of the Federation of Indian Export Organizations in New Delhi. The Commerce & Industry Minister, Mr. Kamal Nath, had written to the Prime Minister, Dr Manmohan Singh. “You have to make exports competitive. Rupee appreciation is obviously hurting the exporters.”The government, in October, had notified refund of tax paid by exporters on three additional services of general insurance, technical testing and analysis, and inspection and certification.

The Finance Minister P Chidambaram had ascribed the fall in inflation to the appreciation of Rupee. He added that the appreciation of Rupee is not that bad as, “Strengthening of the Rupee has led to a decline in rupee prices of imported goods, contributing to a fall in inflation from its highs in 2006-07″. To link the fall in inflation to the appreciation of Rupee, but, is to substitute the cause for the consequence. It should be obvious that it is a fall in inflation which must lead to the appreciation of Rupee.

Whenever a currency is overvalued in relation to the other, it encourages imports and discourages exports. It is the overvaluation of Indian currency which has made the imports cheaper and exports less profitable than they otherwise would have been. It makes the price of imports less in terms of the Indian currency and the price of exports high in terms of dollar. It discourages United States from buying Indian exports.

As the overvaluation of rupee makes Indian goods expensive in terms of dollars, the Indian exporter would have to reduce his price in terms of Indian rupee in order to meet the competition of other sellers in the American market. The exporter keeps away from that, as he can realize much more profits from the local market as of inflation. The favoring of imports over exports in the recent times certainly is not a coincidence. We have only our own policies to blame here.

When exporters push for Government handouts, it is forgotten that it is the very Government regulations which lead to fluctuating exchange rates. Exchange ratios are, ideally, not to be arbitrarily set by the government, or to be left to the market to decide. Each currency should be strictly defined in terms of gold, and fixed permanently that it is interchangeable and redeemable at that weight. When done so, each and every currency would be anchored to each other at a fixed exchange rate, that seasonal fluctuations wouldn’t wreak havoc on the export or import communities. The maintenance of fluctuating exchange rates and Government subsidies would only reduce the incentives to innovate and hence impede it.

Overproduction Doctrine

One of the greatest fallacies on economic depressions is that it is caused by overproduction. “Overproduction is the natural tendency of capitalism to expand the production of commodities that does not acknowledge the limits of the market (demand). Since the production and circulation of goods is not planned and firms are in constant competition for larger profits and greater market share, capitalist’s booms are always followed by busts as we see in the business cycle. In short, capitalist markets are NOT self regulatory.” This Marxian myth is based on the fact that in a depression there are unemployed factors of production and unsold surplus of goods?The adherents of these fallacy conclude from this that the capitalistic system produces too much in the period of boom,which is cleared away in the depression period.

Whatever be the popular perception,the idea that depressions are caused by overproduction is pure hogwash?Human needs are unlimited and as long as there are unsatisfied wants,there can be no overproduction.When this fact is pointed out,the supporters of this doctrine state that though there are unsatisfied needs,people lack the purchasing power to buy the unsold goods.What they fail to notice is that some money exist even in the deepest deflation and it could be used to buy the unsold goods.The fact that businessmen would suffer losses is besides the point.It leads our attention to the fact that businessmen bid up the costs ,which means:prices of the factors of production,so that they would suffer losses.Why did that happen? Such a question takes us back to the Austrian theory of business cycle.It is only the Austrian theory that explains the bidding up of costs and the cluster of errors,which is due to government intervention in the economy-specifically,government manipulation of money and credit.There is no general overproduction of goods.There is overproduction of specific goods and underproduction of other goods.It means that credit expansion has led to malinvestments-which means:investment in wrong lines of production.Depression is the period of liquidation of these investments in wrong lines of production.

What people fail to realize is that overproduction of specific goods and underproduction of other is not caused by anything inherent in capitalism,but due to government intervention?A free uncontrolled,unregulated economy would never lead to overproduction.

Profit Motive:An Evil?

Profits are often reviled by collectivist intellectuals and by most of the general public.Profit motive is often considered as the greatest of evils.People with an inadequate knowledge of economics think that profits are taken away from the workers or consumers.At the bottom of the fallacy,all that there lies is economic ignorance.

It is often said that Capitalism means profits over people.Intellectual savages who utter such nonsense don’t realize that profits can be acquired on a free market only through serving people.Profits are a signal of how well the business is serving its customers.Yet,serving the public is not the justification of profits.It is the right of a person to exchange vaue for value.It is interesting,as an economist had said,people who say “profiteer” doesn’t say “wageer” or “losseer”. Blinded with envy they don’t realize that businessmen take risks and profits are the reward they get when they suceed.Those who say “excessive profits” seem to be totally unaware of the fact that what they see as excessive can only by acquired through a better forecast of the future.Why don’t the ones who feel that the businessman is making excessive profits,save the society by abstaining from buying his products? Profit motive can’t be eliminated without resulting in chaos.

The failure of socialism due to the lack of profit mechanism and pricing system is for all to see. What I am saying is that the main problem with socialism is not practical,but theoretical.I’ll explain why.Imagine that you have to bake some bread.You make the bread out of flour.Assume that you make 10 loafs of bread using 5kgs of flour.How do you know whether you have increased your wealth through making that bread? How would you know whether wealth has increased when 5 kgs of floor has turned to 10 loafs of bread—To know an answer to that question,you have to reduce both quantities to a common denominator-Do you see? For instance,if you bought 5kgs of floor for 10$ and you sold 10 Loafs of bread for 20$,you can conclude that you have increased your wealth by 10$.It means that for you to understand whether you have done your job well-Which means whether you have increased your wealth,a pricing and monetary system is necessary.Profit mechanism is necessary for an economy. This exactly is what is lacking in a Socialist world.

Now let me explain the importance of a pricing system and profit mechanism.
The importance of a pricing system is that it would lead to the most efficient allocation of resources.For instance,if you are that bread manufacturer and if you make profits,the funds and resources would flow to you.You would be able to invest these funds further in production.In this manner funds and resources flow to the most efficient people who would further invest it in production.Moroever,the stock markets divert the funds to the most efficient citizens.The fact that the most efficient citizens take hold of the production process is very beneficial for the whole of the society.This process of transferring resources to the most efficient people is lacking in the socialist system.In a socialist system who would take hold of the production process would be decided by the central planners and they would not be in a position to determine who are the most efficient people.Even if these central planners were the most intelligent people and the most virtuous men,they can’t decide what is the most efficient means of producing goods.

One of the most widespread arguments against privatization of education and of private institutions in general is that private institutions are run solely on profit motive & lacks ‘social commitment’. Almost every child is born capable of knowing pain and pleasure. He acts to further his pleasure and avoid pain. As he grows up, he learns to endure pain when necessary, when it furthers his pursuit of long term pleasure. Often we find children, and of course grown up men pursuing short term pleasure no matter what it’s long lasting effect may be. No sane, intelligent person now would argue it is expedient to cut of this pain-pleasure mechanism in order to avoid such self hurting tendencies. Children lacking this mechanism, as we all know wouldn’t live long enough to be a grown up man. As pain-pleasure mechanism acts as the life-nerve of a child, profit motive acts as the life-nerve of an organization. An organization can’t survive well for long when profit motive is taken off from its goals. I offer you Soviet Russia –Or any public sector enterprise-as an elegant example of what I am talking about. Such is the intellectual status of a man arguing against profit motive.

Let’s now, talk of his moral status. What sort of a person would argue against man’s striving for pleasure? He’s the doper, the drunkard, the chain smoker, the woman-chaser, the irresponsible semi-somnambulist wretch. What could be said of his notion of pleasure? Is there any wonder that he finds it expedient to cut it off? Such is his moral status. And such is the moral status of a man opposing profit motive.

We now have to find out what the word ‘social commitment’ is supposed to mean. Parents have commitment towards their child. A man has it toward his wife and the wife has it in back. An employer has the responsibility to pay his employees as much as he has agreed to pay. Employees have the same responsibility to finish off the work in the best manner possible. A trader has it toward his customers. A man of course, has to take responsibility for his acts and should live up to his promises. All the commitments above mentioned are individual. No man, but has any responsibility toward the child or woman he just met on the street. No employer has the responsibility to grant employment to every seeker, nor has any one the responsibility to work for any prospective employer. No one has to trade with all prospective clients. If so, what is this ‘social commitment’ supposed to mean other than living up to the promise of educating the consumers as they had promised? Isn’t it preposterous that the ones, who argue against a man’s responsibility to educate his own child, call for ‘social commitment’ from the part of private educational institutions? Logical inconsistency is explicit when one argues a man should not be held responsible for his acts, but shall be held responsible for the acts of his fellow beings. Why it is that one should be held responsible for the education of another man’s child? Is it the high promiscuity in our society which the left liberals are trying to point out?

An Enemy Of Capitalism

Alan Greenspan, the former chairman of the Federal Reserve, was often considered as one of the most powerful men on earth. What is interesting about Alan is that he was once an acolyte of the novelist-philosopher Ayn Rand, and a proponent of the Gold Standard. It is indeed an irony that he later renounced his views on Gold Standard and headed the very institution he attacked-The Federal Reserve.

As advocates of a free market economy know, it is a characteristic of the enemies of capitalism that they blame the evils of interventionism on the free market. It is, they say, the “laissez faire” policies of Alan Greenspan, which caused the present economic crisis. They conveniently forget that Greenspan gave up his views on Capitalism long ago. It is also forgotten that the existence of the Federal Reserve is incompatible with a free market economy. How is Government manipulation of money and credit a free market policy? Isn’t it a form of central planning? Isn’t it ridiculous to blame the present mess on Capitalism when Capitalism never existed in the first place?

There is one thing in common between those who blame Capitalism for the present crisis. It is that they are totally ignorant of Economics, and yet hold strong opinions on the topic. As of a gross misrepresentation of terms, anti-capitalists now hail Greenspan as a “laissez-faireist”. As everyone, including anti-capitalists know, a full free Capitalism never existed anywhere in the world. All nations known as Capitalist are “mixed economies”. Isn’t it the same men who remind us this fact when we point out the fact that higher the degree of freedom, higher the prosperity who blame all these evils on Capitalism? When an allegedly ‘Capitalistic’ nation “breaks down”, value judgment is placed on the system, ‘Capitalism’ and when a Socialistic nation is tyrannical, value judgment is placed on individual leaders and not on Socialism. It just obviates that they know the truth deep inside. In a mixture of Statism and Capitalism, it is Statism which causes all the evils and it is Capitalism which takes the blame. Statism means force and Capitalism means freedom.

The very same men argue Soviet Communism failed not because the system was intrinsically evil, but as human nature is flawed. They argue, the flaw isn’t in bureaucracy as such, but in individual men. They scream ‘evils of commercialization’ when it comes to a private enterprise. Why is value judgment passed on the system when it comes to the Free Market? Why is value judgment passed on individual men when it comes to bureaucracy or statism? The answer is obvious.

To make sense of the present crisis, one should first have a strong causal theory. This phenomenon of boom-bust cycles is clearly explained by the Austrian theory of Business Cycles. Economic depressions are caused by nothing inherent in the free markets, but due to government interference in the market-specifically, government manipulation of money and bank credit. At any point in time, a particular amount of money would be spent in investment and savings and the rest in consumption. This investment-consumption pattern would be decided by the time preference of the people. If time preference is low, the investment consumption proportion would be high and if time preference is high, it would be low. The boom starts when banks print money and lend it at lower interest rates to businessmen and the general public. The increased money supply lowers the rate of interest below the market level artificially. This artificial lowering of the interest rates makes several projects seem profitable to businessmen which wouldn’t have appeared so otherwise. If the interest rates had fallen due to lower time preference of people, and was backed by real savings, boom-bust cycles wouldn’t have taken place. But, the artificial lowering of the interest rates sends wrong signals to businessmen about the savings-consumption pattern of individuals. Businessmen are mislead to think that there are more savings, when there isn’t. This low interest rate sends a signal to the entrepreneurs that consumers are asking for more goods and services in the future. In order to fulfill those future demands at a future date entrepreneurs starts new long term capital projects in present time which will enable them to produce more in future and thus meet the future demand of consumers. This leads to mal-investments. The recession is the necessary part of liquidating these mal-investments.

The Federal Reserve kept the interest rates artificially low and encouraged people to borrow, which lead to the housing bubble. Add to this: The community Reinvestment act forced banks to lend to poor debtors. Add to this: Government licensed rating agencies gave AAA rating to mortgage backed securities. In an entirely free market, lending to poor debtors would never have happened, as it won’t be profitable. It was Federal Reserve’s inflationary policies which made it profitable.

It makes no sense to blame the present crisis on deregulation.51, 000 new regulations were added in the past 12 years. The financial and housing system is highly controlled by the Government. There was never a free market in finance and housing. Fannie Mae and Freddie Mac are government-sponsored, government regulated mortgage giants. Banks are chartered, defined and regulated by the Government. Government promoted increased home ownership. The existence of the Federal Reserve is totally incompatible with Capitalism. Artificially low interest rates wouldn’t have been possible in the absence of the Fed. The existence of the Securities and Exchange Commission too is incompatible with Capitalism.

Let’s now analyze Alan Greenspan, the man, in detail. My introduction to Alan Greenspan was through an article-“Gold And Economic Freedom” he wrote for Ayn Rand’s “Capitalism-The Unknown Ideal”. In the article, Greenspan made a strong case for free banking, the Gold Standard and a free economy. It is safe to assume that he renounced his free market views for the Chairmanship of the Fed. He is no longer an Objectivist or a Capitalist. He might be considered as a traitor to Objectivism and Capitalism. He wrote in his autobiography about Objectivism that “as contradictions inherent in my new notions began to emerge the fervor receded”.

When Greenspan was asked whether Ayn Rand would have been a fan of the Federal Reserve, he answered that they never discussed the issue in particular. This is certainly a dishonest statement. In his 1966 article for the Objectivist Newsletter, Greenspan himself wrote these words: “Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.” And More: “A free banking system would have been compelled, by economic necessity, to put the brakes on this process of runaway speculation. Credit and investment, in such a case, would be drastically curtailed; the banks which made unprofitable investments, the enterprises which proved unproductive, and those who dealt with them, would suffer—but that would be all; the country as a whole would not be dragged down. However, the “anarchy” of a free banking system had been abandoned—in favor of “enlightened” government planning.” However, when Greenspan was made the Chairman of the Fed, he didn’t even make a move to institute the Gold Standard.

In his Biography, Greenspan wrote that he has always harbored nostalgia for the Gold Standard which guaranteed price stability. Further, he wrote that he doesn’t see the likelihood of its return in the near future and it is a necessary cost for the existence of the welfare state. What is this statement intended to mean? It is certainly that the Federal Reserve creates money out of thin air to fund the welfare state. Moreover, Greenspan got it all wrong. Price stability is both unachievable and undesirable. As Friedrich Hayek had once written, the “impossibility of achieving in practice an absolute stabilization of the level of prices in a dynamic economy has been proven time and again.”

When he was asked in a recent interview whether he was wrong, he replied-“Well, partly.” “’A critical pillar to market competition and free markets did break down,’ Greenspan said. ‘I still do not understand why it happened.’” “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.” Was this the man who wrote this about the 1929 Crash that “The excess credit which the Fed pumped into the economy spilled over into the stock market–triggering a fantastic speculative boom.”? He blamed the fraud of Enron, WorldCom and Global Crossing on “infectious greed”. Wasn’t it Greenspan who wrote for the Objectivist Newsletter that “it is precisely the ‘greed’ of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer?”

The greatest crime that Greenspan had done was not his inflationary policies during his term. It was that he “admitted” that his belief in enlightened self interest was wrong! Greenspan was just passing the blame to the market. Surely, this man is a hypocrite!

Economic Recessions: Causes And Cure

The world economies are withering in financial pain. If there is anything more dangerous than the suffering we are going through,it is the belief held universally, both by economists and laymen alike, that this crisis was born out of the excesses of freebooting capitalism, or “greed”. Nothing could be farther from the truth. As some good economists have noted, to blame the crisis on greed is tantamount to blaming plane crashes on gravity. Economic depressions are caused, not by anything inherent in the free markets, but due to government intervention in the economy-specifically, government manipulation of money and credit.

There is one thing in common between the intellectuals who blame the crisis on “laissez faire” capitalism. It is a complete lack of understanding of economics and the nature of capitalism. The term capitalism has a specific meaning and is not to be used loosely. Capitalism is a politico-economic system in which all property is privately owned, and the economy is left uncontrolled and unregulated by the government. It is ridiculous to blame the present mess on capitalism, when capitalism never existed anywhere in the first place.In the United States, government extorts a large part of personal income in the form of taxes.There are fifteen federal cabinet departments and more than hundred federal agencies and commisions.There are several other rules and regulations which tamper with the functioning of the free market.

It has also become customary to point out that we got here due to the deregulation that happened in the past three decades. No such deregulation happened. Fifty-one thousand new regulations were added in the past twelve years. The federal register has seventy-three thousand pages of government regulations, of which, ten thousand pages were added in the past three decades.The financial and housing system are highly controlled by the Government. There was never a free market in finance and housing. Fannie Mae and Freddie Mac are government-sponsored, government regulated mortgage giants. Banks are chartered, defined and regulated by the Government. Government promoted increased home ownership through loose monetary policy. Artificially low interest rates wouldn’t have been possible in the absence of the Fed. The existence of the Federal Reserve is totally incompatible with Capitalism. So is the existence of the Securities and Exchange Commission.

To make sense of the present crisis, one should first have a strong causal theory. This phenomenon of boom-bust cycles is clearly explained by the Austrian theory of Business Cycles. At any point in time, a particular amount of money would be spent in investment and savings and the rest in consumption. This investment-consumption pattern would be decided by the collective time preference of the people. If time preference is low, the investment consumption proportion would be high and if time preference is high, it would be low. The boom starts when banks print money and lend it at lower interest rates to businessmen and the general public. The increased money supply lowers the rate of interest below the market level artificially. This artificial lowering of the interest rates makes several projects seem profitable to businessmen which wouldn’t have appeared so otherwise. If the interest rates had fallen due to lower time preference of people, and was backed by real savings, boom-bust cycles wouldn’t have taken place. But, the artificial lowering of the interest rates sends wrong signals to businessmen about the savings-consumption pattern of individuals. Businessmen are mislead to think that there are more savings, when there isn’t. This low interest rate sends a signal to the entrepreneurs that consumers are asking for more goods and services in the future. In order to fulfill those future demands at a future date entrepreneurs starts new long term capital projects in present time which will enable them to produce more in future and thus meet the future demand of consumers. This leads to mal-investments. The recession is the necessary part of liquidating these mal-investments.

It is important to realize that the recession is the markets readjustment process, and is to be embraced. Business failures and bankruptcies are to be celebrated, as the market is correcting its own errors. There is no reason for the recession to last for a long time, if the government doesn’t intervene with the markets correction process. The intervention of the Government with the markets adjustment process aggravates the very problem it is supposed to cure.Bailouts are neither necessary, nor just.Usually governments prevent or delay the liquidation process,which prolongs the depression period.They inflate and creates more malinvestment,and this keeps down the interest rate.They keep wage rates up and hence aggravates the unemployment problem.They keep prices up creating unsaleable surpluses.They subsidize unemployment and hence prolong it.They stimulate consumption and discourage savings.All the above are the courses resorted to be the governments during a depression and each one of them is a bad course to take.

It might seem disturbing for some when I say that the Government should do nothing during a depression. Yet, “laissez-faire” is the ideal policy to take during a depression.Ideally, the government should liquidate the federal reserve and institute a free banking system based on 100% reserve requirements. Prices would steadily fall, year after year, and boom-bust cycles would come to an end!

Economic Depressions And Capitalism

Economic depressions have its roots in Central Bank credit expansion.

The world economies were withering in financial pain after the economic crisis of 2007-2008. If there was anything more threatening than the suffering we went through, it was the belief held universally, that the crisis was born out of the excesses of the free market, or human “greed”. There can be no notion which is so far from the truth. As some sound economists had pointed out, “to blame the crisis on ‘greed’ is tantamount to blaming plane crashes on gravity”. Economic depressions are caused, not by anything inherent in the free markets, but due to government meddling in the economy-specifically, credit expansion steered by the central bank. Continue reading “Economic Depressions And Capitalism”