Tuesday, September 19, 2017

Narendra Modi Government Faces Economic Reality

The full impact of Narendra Modi government’s economically unsound policies of demonetization, GST as well as lose money policy of RBI in the form of lending cheap artificial credits to insolvent borrowers via commercial banks resulting in huge load of unproductive debt has started to show on the Indian economy.

Finance ministry officials are now saying that India could be forced to cut spending on key infrastructure such as railways and highways as lower-than-expected tax collections and sluggish growth have upset the government’s budget calculations. This was well expected. As we have said in past here on Mises India, when the government gets bigger and totalitarian, the economy tanks rapidly. When the business environment becomes extremely uncertain, entrepreneurs will halt their business plans and stop any further present or future investments, and this will hit the economy hard because only production, saving, investment and capital accumulation can increase economy’s future growth. As Thomas Sowell famously said, the first principle of economics is that there is scarcity of everything, and the first principle of politics is to disregard the first principle of economics! Politicians like Narendra Modi think that they can disregard the laws of economics, which are absolute a priori laws of human action, forgetting the consequences of ignoring them. They forget that the forces of market are much more powerful than any politician and his political power. Market forces are always working in the background, and in the end they will force politicians like Modi to stop wasting society’s resources, and that is what is now happening in India. The report throws light on this fact:
The main problem has been the introduction of the GST, billed as India’s biggest tax reform in 70 years.
Ambiguous rules, an onerous return filing system and glitches with its IT back-end have made doing business far more complicated for many companies. Frequent changes in tax rates after the GST’s launch have heightened business uncertainty, resulting in many firms failing to register for the new tax.
India’s GDP growth itself has slowed to 5.7 percent in the April-June quarter from 7.9 percent a year earlier, a slowdown also partly blamed on the introduction of the GST, adding to the pressure on the state coffers.
Dividends from state-run companies are expected to fall and a $11 billion share sale programme is slowing down.
Complicating the finance ministry’s budget arithmetic further, the Reserve Bank of India announced last month that its annual surplus, a dividend transferred by the central bank to the government each year, would be only $4.9 billion, less than half the initial estimate, largely due to costs of Modi’s shock “demonetisation” initiative last year.
If Narendra Modi is not going to learn any lesson out of his momentous mistakes then the Indian economy is just going to go in a total free fall in future. If he continues his binge spending programs and RBI keeps on cutting interest rates to boost growth artificially then the economic woes of Indians are just going to become astronomical in future. Government spending and RBI manipulation of interest rates can’t create or boost growth. Government spending is always inimical to progress because what government spends on A, it has always took that forcefully from B; spending on A is always wasteful because it ignores the individual’s subjective preferences embedded in price signals, and so it lacks the market test of profit & loss. Progress requires government spending of 0 rupees.  As long as that is not happening, do not expect any real growth in India. The disaster in India continues to unfold.

Monday, September 4, 2017

The Demonetization Disaster

The exercise of demonetizing around 87% of all circulating currency note supply taken by Narendra Modi and RBI last November has resulted into nothing but overall disaster for the economy. In his televised speech on 8th November, 2016 Narendra Modi talked about three main goals of the whole demonetization exercise, and they were:
  1. Curbing financing of  terrorism through  the proceeds of Fake  Indian Currency Notes (FICN)   and use of such funds  for subversive activities such  as espionage, smuggling of arms , drugs and other contrabands into India; and
  2. For eliminating Black Money which  casts a  long shadow of parallel economy on our  real economy
At that time Modi government was expecting that the substantial amount of black money that people were hoarding will never return in the banking system and that will become a windfall gain for RBI which it can then transfer in the government account. Now that 10 months have passed and data are coming in, what is the outcome of this exercise? Did this exercise bring back any windfall gain to RBI which it transferred to the Modi government? Did a substantial amount of black money never returned to the RBI vaults? Did the fake currency notes stopped circulating in the economy? Did the terrorism financing stopped and so terrorism stopped?

Even after 10 months of this exercise the Indian central bank RBI has yet to release full figures, but in their annual report, released few days ago, the RBI said that total 99% of all banned notes have returned in the system: India received a total of Rs 15.28 lakh crore in banned 500 and 1,000-rupee currency bills, the RBI said, which means 99 per cent of the banned cash has been legally returned in the eight months since demonetisation. The one per cent that has not returned to the RBI adds up to around Rs 16,000 crore. This means the demonetization exercise failed in unearthing any black money. In fact, people were able to convert their black money into white using the demonetization exercise itself! After this news came out, the finance minister Arun Jaitley was seen changing objectives of this whole exercise to hide his government’s failure by saying that, that was not the objective of demonetization…it was not an exercise to confiscate money but to nudge India towards digitization, ending anonymity of cash. Basically the government is now saying that the whole aim of demonetization was making India a ‘cashless digital economy’ and not curbing corruption and black money as originally stated by them.

Did RBI receive any windfall gain which it then transferred to the Modi government? Not at all. In fact, the recent data released by RBI show that instead of getting any windfall gain, RBI has made losses and it is only transferring Rs 30,659 crore, less than half the amount Rs 65,876 crore it transferred last year, dividend to the government this year implying lesser non-tax revenues to the government. This means, demonetization exercise turned out to be very costly for the government! It cost more money to RBI to print new currency notes and bring back old notes in the system than any so-called benefit of demonetization exercise!

Demonetization has also failed in curbing terrorism as can be seen in the on-going almost daily insurgent attacks on Indian nation state forces in places like Kashmir, North-East etc. The data released by the South Asia Terrorism Portal shows that, after demonetization exercise in year 2017 132 security personnel and 139 civilians have died in Jammy and Kashmir region itself. The three years of Modi government has turned out to be more deadly for the security forces compared to past years of Manmohan Singh government.

And, the fake currencies of even the new currencies introduced by the government started circulating in the economy during the demonetization exercise itself.

Not only this, the latest GDP data released by the Central Statistics Office (CSO) show that the first quarter GDP growth rate of the Indian economy has hit the lowest in last 3 years of 5.7% only, which is the slowest pace of growth under the Modi government. The demonetization exercise and then implementation of GST last July has hit the Indian economy hard. This was expected because when government fiddles with 87% of economy’s money supply, increases taxes on its people incessantly and also makes tax compliance so complicated that no one knows what is going on, the economy is going to tumble. Businesses survive and thrive in an environment of secure property rights and lower future uncertainty. When the economy gets one shock policy move after another in the form of demonetization and GST, it creates an environment of extreme suspicion and uncertainty among the business community. They start expecting more such shock policy moves from the government and stop any big present or future investment plans, which results into economy almost halting.

All in all, demonetization has resulted into total disaster for the Indians and their economy. The former RBI governor Dr. Raghuram Rajan warned about the dangers of demonetization and told Modi government about its heavy short term cost which will far outstripped its any presumed long-term benefits (sic), but Modi didn't listen to him and removed him from his position. The present BJP government is not ready to accept its failures and make corrections, but is busy making excuses. In such an environment expecting anything positive in future is going to result into disappointment only. We must brace-up for even worst situation in future because the world itself hasn’t got out of the deep depression that started in 2007.

Friday, August 25, 2017

Is Privacy a Human Right?

Yesterday a 9 judge bench of the Supreme Court of India gave a so-called historic decision of declaring privacy a fundamental human right now enshrined in the article 21 of the Indian constitution. Many are saying that this for the first time that some verdict is given unanimously by the bench 9 judges. This verdict now includes privacy also as a part of fundamental rights in article 21 of the Indian constitution, which wasn’t the case previously. Most people of the country and intellectuals have cheerfully welcomed this verdict hoping that this will stop the ruling BJP government from becoming totalitarian. The legal experts have hailed this verdict as historic, a watershed moment and a victory for common citizens by saying that it has far reaching implications for the matters like the beef ban, forceful use of Aadhaar card, government telling people what to wear and eat, abortion, LGBT rights, government surveillance in the form of reading peoples’ emails, text messages, listening to phone calls (wiretapping), and married women will have the right not to get raped in marriage etc. etc.

Most freedom loving people of India are also cheering this verdict because they think this is a blow to the Modi government who was arguing that people don’t have a right to privacy.

I think this is a moment which needs a calm reflection without any kind of such euphoria. I can understand that people are happy because the way Modi and his government are trying to control the body and mind of people this verdict seems like putting a break on those efforts. Notwithstanding this perception, the fundamental issue involved here is, should we give so much of importance to the issue of right to privacy and think it is a fundamental human right? What if the fundamental human right is something else and Supreme Court is not talking about it at all? In that case all hope of this verdict stopping Modi and his government from trampling on human rights turns out to be delusional. A careful logical analysis of ‘privacy as a human right’ issue will make this clear.

Is Privacy a Human Right?
Before answering this question of whether privacy is a human right or not we have to understand what human right actually is. To show that something is right for the humans we have to understand the basic human nature. Anything that is in accordance with this human nature is right and if it is not then it is wrong. The basic human nature is that nature has given all of us life. The basic life form is our own body. This life we can all sustain and enjoy only if we are free to use our bodies without any kind of restrictions from outside. Our body is thus our own i.e., we are the ultimate owners of our body, and ownership means this body is our property. For sustaining and enjoying our lives to its fullest potential we also need other resources like food, water, clothes, home, cars, computers etc. etc. We can acquire and own these prior unowned physical scarce resources via use of our bodies by appropriating them first. By this way we can make these resources our property too. Thus, as long as we are free to use our bodies and resources appropriated by using that body, together called our private property, we fulfill our nature. Anyone who infringes on the use of our private properties is violating our right. This proves that human right is nothing else but property right. This also proves that human right is basically a negative right i.e., others cannot stop me from using my property and similarly I cannot stop others from using their properties. As Prof. Murray Rothbard, the great 20th century philosopher of ethics, said:
And yet, on the contrary the concept of “rights” only makes sense as property rights. For not only are there no human rights which are not also property rights, but the former rights lose their absoluteness and clarity and become fuzzy and vulnerable when property rights are not used as the standard.
In the first place, there are two senses in which property rights are identical with human rights: one, that property can only accrue to humans, so that their rights to property are rights that belong to human beings; and two, that the person’s right to his own body, his personal liberty, is a property right in his own person as well as a “human right.” But more importantly for our discussion, human rights, when not put in terms of property rights, turn out to be vague and contradictory.
After elucidating what human right is, we are ready to tackle the question of privacy as a human right. As Murray Rothbard above said, when human rights are not defined based on the bedrock standard of property rights they lose their absoluteness and clarity and become fuzzy and vulnerable to misuse. The case of privacy as a fundamental human right, as declared by the Supreme Court, falls in this category of defining human right without the firm base of property right. As Prof. Walter Block said, privacy is a benefit and not a right. To understand this fact let us take an example involving the issue of privacy. In this regard I am going to quote Prof. Murray Rothbard. Rothbard is using an example:
Does Smith, for example, have the right to print and disseminate the statement that “Jones is a liar” or that “Jones is a convicted thief” or that “Jones is a homosexual”? There are three logical possibilities about the truth of such a statement: (a) that the statement about Jones is true; (b) that it is false and Smith knows it is false; or (c) most realistically that the truth or falsity of the statement is a fuzzy zone, not certainly and precisely knowable (e.g., in the above cases, whether or not someone is a “liar” depends on how many and how intense the pattern of lies a person has told and is adjudged to add up to the category of “liar – an area where individual judgments can and will properly differ).
Suppose that Smith’s statement is definitely true. It seems clear, then, that Smith has a perfect right to print and disseminate the statement. For it is within his property right to do so. It is also, of course, within the property right of Jones to try to rebut the statement in his turn. The current libel laws make Smith’s action illegal if done with “malicious” intent, even though the information be true. And yet, surely legality or illegality should depend not on the motivation of the actor, but on the objective nature of the act. If an action is objectively non-invasive, then it should be legal regardless of the benevolent or malicious intentions of the actor (though the latter may well be relevant to the morality of the action). And this is aside from the obvious difficulties in legally determining an individual’s subjective motivations for any action.
It might, however, be charged that Smith does not have the right to print such a statement, because Jones has a “right to privacy” (his “human” right) which Smith does not have the right to violate. But is there really such a right to privacy? How can there be? How can there be a right to prevent Smith by force from disseminating knowledge which he possesses? Surely there can be no such right. Smith owns his own body and therefore has the property right to own the knowledge he has inside his head, including his knowledge about Jones. And therefore he has the corollary right to print and disseminate that knowledge. In short, as in the case of the “human right” to free speech, there is no such thing as a right to privacy except the right to protect one’s property from invasion. The only right “to privacy” is the right to protect one’s property from being invaded by someone else. In brief, no one has the right to burgle someone else’s home, or to wiretap someone’s phone lines. Wiretapping is properly a crime not because of some vague and woolly “invasion of a ‘right to privacy’,” but because it is an invasion of the property right of the person being wiretapped.
Similarly, the reason why government cannot stop us from eating whatever we want (beef) or force us to use Aadhaar card by making it compulsory everywhere is not because these actions of government violates our ‘privacy right’ but it violates our ‘property right’. The government cannot invade our privacy not because we have such ‘right to privacy’ but because the government itself has no rights at all. The government itself is an illegitimate illegal institution because it violates property rights of everyone, by initiating violence against all of us in the form of taxation etc., for its existence! Because of this reason, the government has no right to do anything.

As we have seen above, privacy is not a human right let alone a fundamental one. The only fundamental human right is property right. The Supreme Court ruling never ever mentioned this property right. In fact, the Indian constitution nowhere mentions property right as a fundamental human right. In fact, the Indian constitution is replete with rights like right to education, right to be not discriminated against etc., which are not rights at all but violation of (property) right! The fact remains that there is no concept of property right in India!

The danger of cheering for Supreme Court’s decision of including privacy as a fundamental human right in article 21 of the Indian constitution is the implicit acceptance of whatever the Indian constitution is saying. This constitution is a flawed document designed, prepared and signed by few people six decades ago. That document cannot bind billions of Indians in some imaginary implicit social contract with the Indian nation state (aka government). In this regard the great American legal theorist Lysander Spooner said:
The Constitution has no inherent authority or obligation. It has no authority or obligation at all, unless as a contract between man and man. And it does not so much as even purport to be a contract between persons now existing. It purports, at most, to be only a contract between persons living eighty years ago. And it can be supposed to have been a contract then only between persons who had already come to years of discretion, so as to be competent to make reasonable and obligatory contracts. Furthermore, we know, historically, that only a small portion even of the people then existing were consulted on the subject, or asked, or permitted to express either their consent or dissent in any formal manner. Those persons, if any, who did give their consent formally, are all dead now. Most of them have been dead forty, fifty, sixty, or seventy years. And the constitution, so far as it was their contract, died with them. They had no natural power or right to make it obligatory upon their children. It is not only plainly impossible, in the nature of things, that they could bind their posterity, but they did not even attempt to bind them. That is to say, the instrument does not purport to be an agreement between any body but “the people” then existing; nor does it, either expressly or impliedly, assert any right, power, or disposition, on their part, to bind anybody but themselves.
The Indian constitution has no authority over us. It is a ruse used by the state officials to rule and control us for centuries. As long as Indians continue to be ruled by these state officials, by using the document that they designed, Indians can never be free to enjoy their lives, property or even privacy.

Thursday, August 24, 2017

Is Artificial Intelligence Threatening India Inc. Jobs?

A recent news report said that in India The IT services industry alone is set to lose 6.4 lakh low-skilled positions to automation by 2021.

Is this true? Let us scrutinize.

What is Artificial Intelligence?
As Jerry Kaplan, the author of Artificial Intelligence: What Everyone Needs to Know, has said, there is no one all agreeable definition of Artificial Intelligence in the computer community today. Roughly speaking, Artificial Intelligence means, as its founding father John McCarthy said, a process “that of a making a machine behave in ways that would be called intelligent if a human were so behaving.” Artificial Intelligence is an all encompassing name given to different automation technologies that is coming in the market since last couple of decades. From the economic perspective AI is nothing but just another type of capital good (machine) that is going to make the life of humans more comfortable because it increases human labor productivity. It is a form of technology that is part of the fourth industrial technological revolution, and is nothing very different from the three technological revolutions that preceded it. It is true, as Thomas Davenport and Julia Kirby, the authors of Only Humans Need Apply, have argued that these AI technologies are not only going to complement the labor, as previous technologies have done, but they will also substitute and replace them because they can do exactly the same type of work that the human workers are doing. But we should not overly worry about this fact because by doing so they will only free up more labor force to work on fulfilling other endless wants of the people. A world without work is impossible simply because of the fact that human wants are unlimited as Milton Friedman famously observed, you could reach a point where you pay a personal psychiatrist to follow you around!

Yes, during the transition period there will be some dislocation of jobs; some workers will lose jobs but they will get new ones soon as have always happened in past. The Indian laborers will have to learn new set of skills that are going to be in demand in the coming automation AI economy. As Geoff Colvin, the author of Humans are Underrated, has argued, in the age of machines consumers and thus employers are demanding more human like skills from the employees. Deep down in our nature we humans are social animals and ultimately we prefer to interact with other humans rather than with robots. He lists down some of these social skills as follows: 1) Empathy 2) Team work 3) Storytelling 4) Innovation and creativity etc. Thomas Davenport and Julia Kirby also have presented an alternative strategy both for the human workers and their employers for tackling the machine age changes. Their suggestion is to augment instead of automate. The meaning of augmentation is that instead of simply replacing a human worker with machine, it is better to augment the productivity of that worker by allowing him to work with an automation technology i.e., laborers working in partnership with the machines. They also present five other pathways of career for humans to adapt to the changes that are coming in the labor market, and they are: 1) Step up 2) Step aside 3) Step in 4) Step narrowly, and 5) Step forward. Briefly, step up means you step up to the cognitively higher ground where the rational decision making work is not yet conquered by the computers.  Stepping aside means moving to a type of non-decision-oriented work that computers aren’t good at, such as selling, motivating people, or describing in straightforward terms the decisions that computers have made. Stepping in means engaging with the computer system’s automated decisions to understand, monitor, and improve them. Stepping narrowly means finding a specialty area within your profession that is so narrow that no one is attempting to automate it-and it might never be economically to do so. And, stepping forward means developing new systems and technology that support intelligent decisions and actions in a particular domain i.e., inventing new AI technologies.

Once workers make these adjustments and learn how to work with the machines, jobs will no longer pose a problem.

How The Indian Government Is Destroying Jobs?
The AI technologies are not really threatening the India Inc. jobs. The entity that actually threatens jobs of India Inc. is the welfare-warfare Indian nation state (aka government) itself. By interfering in the workings of the freely functioning market, especially the labor market, the Indian government either directly destroys jobs or hinders job growth. To understand this I will work with an example. We all know about Government’s minimum wage laws and how they are deployed to benefit the poor unskilled workers, who mostly work in the unorganized sector, whose wages are low. Although everyone knows that minimum wage laws are suppose to help poor unskilled workers by raising their wages, but the actual impact of these laws is to make these very same poor unskilled workers unemployed! We now see how minimum wage laws destroy jobs. It is a well known economic fact that no private sector company can survive in the business without making profit. Profit is calculated by subtracting total cost out of total revenue. Now, total revenue is determined in the market by the marginal revenue product of every individual labor i.e., the marginal contribution of every laborer in company’s revenues via their marginal productivity. Every individual laborer receives his wages according to this marginal contribution in company’s revenues. And labor wage bill forms the significant part of any company’s total cost. Suppose before the passage of the minimum wage law, a company is employing 100 laborers and paying each laborer 1000 rupees per month wage then their monthly wage bill will be 100,000 rupees. If non-wage bill of that company is 50,000 rupees then their total cost is 150,000 rupees. On the other side if their total revenue per month is 200,000 rupees then their total profit is 50,000 rupees. Now the government imposes a minimum wage law on them and forces them to pay 1600 rupees to their laborers. In this case now their total cost will go up to 210,000 (160,000 wage bill plus 50,000 non-wage bill) rupees while the revenue remaining the same because revenue will not increase automatically after the imposition of minimum wage law. We can now see that the profit of this company has disappeared and it is actually making 10,000 rupees losses. This situation cannot go on for long for this firm, and to survive in the market it will have to fire some workers to lower its wage-bill and total cost. If it cannot fire workers because of the provisions in the law then in the situation of continuously mounting losses it will be forced to shut down in the long run unemploying its whole labor force! In both conditions the end result of imposition of the minimum wage law is unemployment for the workers. This unemployment is structural one in-built in the design of the system because minimum wage laws are here to stay for a long period of time, and so they cause very long term permanent unemployment.

Like minimum wage laws myriad of other laws of the government like work condition laws, labor union laws, payroll tax laws, anti-hawking laws, license raj laws, job security laws, unemployment insurance laws, equal pay laws etc., etc., causes long term unemployment. Also, government’s direct and indirect taxes siphon off the productive saving resources from the private sector, where they can be used to start new businesses or expand old businesses and generate new employment opportunities, and divert them to wasteful unproductive consumption activities of the government and their welfare schemes. Government’s central bank RBI also generated business cycles in the economy which also destroys jobs.

So India Inc. jobs are under threat not from the AI technologies, which are only making our lives better, but from the very Indian government which promises to secure these jobs! It is better for the Indians to stop worrying too much about the artificial intelligence machines and start worrying about their big intrusive government which wants to control everything. If India Inc. wants to save jobs of people then they must pressurize the government to remove their regulations and controls and free the economy for market competition, which will not only generate more jobs but also improve everyone’s standard of living too.

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.