Wednesday, August 16, 2017

Can Monetary Easing Increase India’s Economic Growth?

The second volume of government’s Economic Survey recently flagged a great risk of faltering economic growth in India, and demanded a loose monetary policy stance from the RBI in the form of further easing of the interest rate to combat this downside risk. The report said, Forecasting “greater downside risks” to economic growth, the Survey, tabled in Parliament Friday, argues that the “scope for monetary policy easing is considerable” and could go up to 75 basis points.

The underlying theoretical basis of this recommendation of monetary policy easing is that a loose monetary policy in the form of lowering of interest rate will revive the economic growth. This means, this policy of loose money will only work if that underlying economic theory is correct. In this article we will analyze this theory and its implications. Is it true that a loose monetary policy can revive economic growth? To understand the answer of this question we need a quick short lesson of sound economic theory, which I present below.

What is the real Wealth of Nation?
As most economic thinkers like Adam Smith, John Stuart Mill, J B Say or Frederic Bastiat etc., of the past age said, the wealth of a country is nothing else but the amount of economic goods that it produces in a given time frame. It is measured by the supply of things like food, potable water, clothes, homes, shoes, cars, computers etc., etc., myriad of endless products. The modern way of measuring wealth, what the mainstream economists call GDP (Gross Domestic Product), by combining these goods and then multiplying them by market price is faulty (see here and here).

What is Economic Growth?
Economic growth is nothing but yearly growth in the above defined wealth of nation e.g., if the Indian economy last year produced 5 homes, 10 pairs of clothes, 15 pairs of shoes and next year it produces 10 homes, 20 pairs of clothes, 25 pairs of shoes then we say that the economy is growing; the economic growth rate can be calculated by above given YoY (year over year) numbers of homes, clothes and shoes.

What Determines Economic Growth?
After understanding what wealth and its growth is, we can now understand what determines the economic growth of an economy.  We all know that to produce wealth any economy requires different factors of production. The original factors of production that nature has endowed us with are land and labor. But by using just land and labor the production process is less productive. What makes land and labor both more productive is the use of capital goods like an axe or a spade or a shovel or modern day automatons like factory robots etc.  For example, if I ask you to dig a 10 feet deep and wide hole in a ground with your hands then you might take 10 hours to do that job, but if I give you a hand shovel then you will be able to do that job just in an hour. The problem that primitive humans faced was that like land and labor capital goods are not readily available in nature. What makes the capital good a unique factor of production is that we have to produce it first before we use to produce goods meant for final consumption. Only the use of these capital goods will help any economy grow in future. But the problem for any economy is to produce these capital goods in the first place before they can be used to increase the future production of final consumption goods. This means, to understand what determines an economy’s economic growth we have to understand the whole process of producing capital goods first and I now discuss that process. We use the method of Crusoe economics for this purpose. Suppose Robinson Crusoe is stuck on an island and now he needs to survive. He is catching 10 fish with his bare hands everyday working for 10 hours, and he consumes all 10 fish daily for survival. In this condition his life and production method is primitive like our ancestors. He knows that this type of hand to mouth survival is dangerous because if he gets injured or sick for some days then he has nothing in spare for survival; he may die. He decides to better his condition in future. For increasing his chances of survival and standard of living he needs a buffer stock of fish i.e., saving and for that he will have to produce more fish than he is consuming right now i.e., he will have to produce more than 10 fish daily. In our modern day language Crusoe will have to increase economic growth of his economy. What should he do to catch more fish daily? He will need fishing net, of course. Only the use of capital good (fishing net) can increase his labor’s productivity. The problem here is, fishing net is not available ready in nature; he will have to produce it first. Crusoe decides to make the fishing net. Now, suppose making a net requires 10 hours a day work. This means, when Crusoe is making this net he cannot catch fish on that day. This is the economic cost of making the net. He will have to make provision of food for that day when he will make the fishing net so he decides to eat only 5 fish out of his total 10 fish catch today and save 5 fish for the next day consumption when he will sit down to make the net. We can see that he will have to sacrifice some of his present consumption (5 fish) in order to make his future better and secure. The next day now he will invest 5 fish that he has saved yesterday in making the fishing net (basically Crusoe will give wages to himself in the form of 5 fish out of his saving, and he will use this wage for consumption). This way the next day the fishing net (the capital good) is ready and now Crusoe can catch 30 fish using that net working 10 hours a day; he can now consume his daily quota of 10 fish and save 20 for any kind of future unforeseen contingencies. We say that Crusoe’s economy has experienced economic growth; his economy is growing making his life safe and standard of living higher.

We can break down the whole process presented in above analysis in simple economic principles, and I quote Robert Murphy, in the jargon of economics, we can step back and describe what Crusoe has done. By consuming less than his daily income—by living below his means—Crusoe saved fishes in order to build up a fund to guard against sudden disruptions in his future income. Moreover, Crusoe then invested his resources into the creation of a capital good that greatly augmented his labor productivity. (I have replaced coconut, the original example used by Murphy, with fish in this quote).

Now we know what determines any economy’s economic growth. The citizens of an economy first must produce more than what they are consuming, then they must save the surplus production and invest it in producing physical (and human) capital goods. Only this accumulation of physical and human capital will then increase the future wealth (income) of the economy and the economy will grow. There is no escape for any economy from this process. There are no other short cuts.

What is monetary policy? Can it increase economic growth?
After seeing the whole process of generating economic growth above now we can answer our original question, but before that we briefly need to understand what monetary policy is. Monetary policy is nothing but the decision by central bankers to either increase or decrease the supply of fiat paper currency (what they call money) in the economy. We have to understand that money is just a common medium of exchange and nothing else. Injection of more money, via lowering interest rates, will not do anything to increase production of economic goods in future. As long as real pool of saving (i.e., savings of formerly produced goods) and investment is not increasing, economy cannot grow. Injecting more money in an economy will only increase prices of various producer and consumer goods. It will only distort the production structure of the economy by transferring available limited resources, without augmenting them, from productive desirable sectors to unproductive undesirable sectors i.e., it will only generated business cycles further damaging the economy and economic growth.

Here I cannot elaborate all the complex processes involved in above analysis, but those who are interested in understanding can read Peter Schiff’s book, How an Economy Grows and Why It Crashes.

As we saw above, only production, saving, investment and accumulation of physical and human capital can increase economic growth of the Indian economy. Any manipulation of the market interest rates by manipulating the supply of paper currency rupee by RBI will not increase economic growth. In fact, it will only damage the economy by generating inflation and business cycles. This means, RBI and government’s actions will decrease economic growth of the Indian economy.

Tuesday, August 1, 2017

The Myth of Political Opposition

We are witnessing an age old fact about the State playing out in front of our eyes in India today. This fact is that of, as Murray Rothbard said, the state as an apparatus of parasitism which uses, as Franz Oppenheimer said, political means for its survival. The state is an institute which represent political power which its officials like politicians and bureaucrats use to parasitically live-off productive people on whom they forcefully and clandestinely rule by use of propaganda. One of such propaganda is that there are opposition parties in politics. Of late opposition party politicians are joining the ruling BJP party en-masse in India e.g., many Congress politicians switched over to BJP in the state of Gujarat, The Bihar chief minister Nitish Kumar broke-off his alliance with Congress and other so-called anti-BJP parties like Lalu Yadav’s RJD to form a new government with its enemy BJP party, quite a few MLAs from the SP and BSP parites also joined BJP etc. These events illustrate the above mentioned fact that the whole concept of political opposition is a myth. This myth is perpetrated by the politicians themselves to misguide the public to rule over them. The fact of the matter is exactly the opposite. All political parties only represent political power over people, which they use for the parasitical survival whether they are in government or outside it for a while. There is no actual battle between BJP and Congress and other political parties when it comes to fleecing the productive tax payers for their parasitical survival. They all agree on that common purpose. The only disagreement is about the speed or manner of fleecing. None of these parties represent the real opposition against the coercive state power. That opposition remains with individuals and institutions that are fighting the state power root and branch. The real political battle is always between the people vs. the state (aka government).

Tuesday, July 25, 2017

Indian Nation State is Shooting in its Own Foot

In the zeal of controlling everything that either walks or doesn’t walk, the present Narendra Modi government of India is shooting in its own foot. It is giving one shock after another to the society and economy in the form of mob lynching of innocent people in the name of “cow protection”, beef and myriad of other bans, attacks on minority communities, compulsory use of Aadhar card, demonetization of 86% of total currency supply, GST etc.

Why am I terming these policies as government shooting in its own feet? The reason can be understood with the aid of the laws of human action. Any individual needs freedom to achieve his full potential and flourish e.g., if I chain you in one room or throttle you then you cannot act to do something progressive and you will most probably die. The same is true for the body economy and society. Freedom is the precondition of any growth or development process. If people and businesses are strangulated by myriad of controls and regulations by the government, they cannot flourish and progress. On the other hand, an economy without the government interference will flourish to its full potential e.g., a free market enterprise economy, where there are zero taxes and controls and regulations of the government, will thrive due to market process of competition among entrepreneurs who will be competing to win over the businesses of their customers by providing them best quality goods and services at the cheapest possible prices. Competition will fuel the innovation process which will continuously improve the quality of products while lowering their cost of production and price. A society free of controls, both physical and importantly mental, can experiment with different social, cultural, political and religious ideas and can launch itself on the path of the civilization process. A place where dissent is not suppressed can quickly go on the path of renaissance and enlightenment. A society with a close and static mind will stagnate and decay sooner or later.  Only a dynamic society can become civilized.

In light of the above mentioned facts it is easy to see that the policies of the present Indian government is reversing all the progress that this country has achieved after 1947, especially after 1990 economic reforms of leaning more in the direction of market and private sector. Under the weight of these myriad of controls the economy is crumbling. Indians are becoming poor. The middle class is slowly vanishing. And here remember, a poor nation state can never defend itself from anyone either internally or externally! The way Modi government is locking its horn with the Chinese nation state right now a conventional war cannot be ruled out. And, if tomorrow there is a war the Indian nation state only has resources enough to fight a war for 10 days! The controls that the present government is putting on physical lives and minds of people and the way one after another community is targeted for hatred and violence, the day is not far enough when the Indian nation state, which is a forcefully put together artificial entity, itself will stop existing.

Thursday, July 20, 2017

Should Indians Boycott Chinese Goods?

The on-going stand-off between the armies of the Indian and Chinese nation states on the Sikkim border has created quite a bit of ruckus in the, now very nationalistic, Indian public. People in India are calling for a total boycott of Chinese goods. This demand for boycott of Chinese goods is nothing new.

Economics of Boycott
The relevant question here is that, what consequences will follow if India’s nationalistic public actually decide to boycott Chinese goods? Without going into the details of numbers of what is the volume of trade between India and China etc., let us carry out a theoretical analysis of the consequences that will necessarily follow this action of boycott.

What will happen in India after the boycott?
The first thing that will happen in India is that the consumers will be at a loss immediately because they will not be able buy and consume the cheap Chinese goods now. They will have to spend more on acquiring the same product because similar Indian good will be of high price. This means their standard of living will now be lower compared to the situation of no boycott.
Second, now because consumers are forced to spend more of their limited income on costly Indian goods, they will be left with less income to spend on other Indian goods being produced by other Indian industries. This in turn will lower the demand and employment in these Indian industries. For example, if before the boycott I was spending 50 rupees on buying a Chinese bulb out of my total 100 rupee income and 50 rupees on buying Indian pen then now after the boycott I will be forced to spend 70 rupees on an Indian bulb leaving me with spare income of only 30 rupees which will not be enough to buy the 50 rupee Indian pen; this means the pen industry suffers losses and they either shutdown or downsize and fire some of their workers unemploying them. This in turn will result in pen producers and laborers spending less on other Indian goods in turn lowering income of other producers too. This will be a cascading effect engulfing the whole economy. A boycott basically will make everyone poor in India compared to the scenario of ‘no boycott’. This poverty will kill many in India; surely more will die compared to deaths right now in Sikkim border confrontation!
Third, investment activities in India will also slowdown because now saving will reduce due to the fact that the boycott forced the consumers to spend more on costly Indian goods. This lowered saving in turn will lower investment which in turn will lower the future income of Indians again making them poor!
Fourth, Indian producers will also suffer the same fate as consumers. They will also have to spend more on buying costly Indian capital goods for their businesses. This high cost will lower their efficiency and production. It is very much possible that some businesses will simply shutdown because they totally depend on imported cheap Chinese technology. This will again make Indians unemployed and poor. Again like consumers, because producers will be forced to spend more of their limited income on costly Indian capital goods, their saving and investment activities will suffer. This will again make Indians poor.
And last but not the least, as the French economist Frederic Bastiat said, when goods will not cross borders, armies will!   This boycott can actually start a real all out conventional war between the Indian and Chinese nation state. And we all are aware of the fact that war only means ‘death and destruction’. The Indian nation will be destroyed. All the progress that has taken place in last 70 years will turn into rubble in a matter of minute. India will be back in the dark ages.

All in all, if Indians want to be poor, hungry, unemployed and if they want to totally destroy their country then they can happily go ahead and declare a boycott of Chinese goods.

Monday, July 3, 2017

Should Indians pay taxes to become a developed nation?

The finance minister of Narendra Modi government Mr. Arun Jaitley recently, in the Institute of Chartered Accountants while celebrating Chartered Accountants  Day (sic), said that India should have a “new normal” with citizens ready to pay the taxes they need to pay and a new mindset to move from a developing nation to a developed one … During the time of demonetisation I have said that India now needs to define the new normal. And the normal is whatever taxes I have to pay, I need to pay”.

Is this true? Will paying taxes make India developed as a nation? Not at all. Quite the contrary. It will make India and Indians poor. Let us see why.

Any society, at a given time, has a limited amount of resources which it can use to fulfill various unending present and future consumption needs of its citizens. The first stage of any development process requires the fulfillment of basic material needs of people. A nation of hungry people can never develop. Now, a society can either use all its resources to fulfill the present consumption needs by consuming those resources immediately or use them to fulfill present as well as future consumption needs by consuming some and investing the rest of resources in accumulating capital (both physical and human). As any sound economist will tell us, the basic requirement for a growing (developing) economy is that it uses large part of its present resources in investment to accumulate capital so that the future growth can be higher. This is like our Mr. Robinson Crusoe, on an island economy, consumes 5 fish out of his daily 10 fish catch and saves 5 fish which he invests the next day when he is manufacturing fishing net for catching more fish with less effort the day after tomorrow. If Mr. Crusoe will consume all his 10 fish catch everyday then he will remain on the 10 fish per day standard of living forever because he can’t manufacture fishing net. Without the present investment (and sacrifice of present consumption), future cannot be better. In this process the government taxation is like Mr. Jaitley forcefully taking away 5 fish of Mr. Crusoe, which he saved for investment, and distributing it to some so-called poor Mr. Friday who will use it for immediate consumption because he is poor with many unfulfilled present needs. Mr. Jaitley’s taxation thus will make Mr. Crusoe and Friday both poor in future, and not rich or developed! The same economic process of this island economy takes place at a larger scale in a nation like India. Mr. Jaitley’s taxation will make all of us poor and not developed.

Also, the idea that Mr. Jaitley – i.e., the government – somehow knows where and how to invest Mr. Crusoe’s saved resources (fish) is false. Only and only Mr. Crusoe knows what he wants in his life. Only he knows what is good for him and what is bad. Only he knows well his subjective needs. No Mr. Jaitley can replace that subjective calculation of an individual citizen of any nation. If on one hand Mr. Crusoe wants fishing net then on other hand Mr. Jaitley will use Mr. Crusoe’s saving in starting a Smart Island or Swaccha Island or any such boondoggle project wasting that saving in things that no one wants!

In conclusion, as professor Mises said, the poverty of the backward nations is due to the fact that their policies of expropriation, discriminatory taxation and foreign exchange control prevent the investment of foreign capital while their domestic policies preclude the accumulation of indigenous capital (The Anti-Capitalistic Mentality, p. 83). Government taxation, no matter how small, wastes precious resources of a nation; it crowds out all productive investment activities in a nation, and so makes it poor and not developed. Mr. Jaitley either doesn’t understand basic economics or, as usual, he is taking gullible Indians for a ride!