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!

Tuesday, June 27, 2017

Discrimination is a Human Right

Recently a woman named Tailin Lyngdoh from Meghalaya was removed from the Delhi gold club premises by staff officials because she was wearing a traditional dress ‘Khasi’ and was apparently looking like a ‘maid’. The union government minister Mr. Kiren Rijiju has protested against this incident by saying that it is a clear case of racial discrimination and is wrong. He is asking the Delhi police to investigate this matter and punish the club owners.

Now, instead of making noise like the minster, let us analyze this case logically. The real question here is: is there anything wrong in such discrimination? Not really. Discrimination per se is not wrong or bad. In fact, it is a right of every individual. Let us see why.

Right to discrimination is a human right which in turn, fundamentally, is a right to private property. As Murray 
Rothbard said, all human rights are basically property rights.  As property owners we all decide everyday to whom we are going to give admission in our home or office or a golf club and to whom not. There is nothing wrong in this. Discrimination is a basic outcome of individual choice. Every human being is at liberty to choose what they want as long as they are not violating others’ similar liberty by aggressing upon their person and property.

As Prof. Mises said, the right to ones property implies not only the ‘right of association’ but also the ‘right of disassociation’. A person is free to associate, with mutual consent, with other person and also disassociate whenever he feels the reason to do so. Such discrimination is a normal day to day behavior of all human beings as can be seen in everyone making choices e.g., if a girl chooses one bridegroom for herself out of total fifty then we don’t say that the girl did something horribly wrong by discriminating against remaining forty nine candidates; if person X goes to buy his grocery from a particular store like the Big Bazaar then we don’t say that he is an evil racist who discriminated against the local grocery stores! Like that with all other choices that we make daily. We live our lives in a general condition of scarcity and that means we have to choose one thing over another; we have to prioritize everything because choosing everything at one time is impossible. We all face such trade-offs at every moment of our lives. Such choice of one thing over another is not bad, but necessary. Discrimination, stereotyping etc., are necessary part of our day to day normal lives.

So fundamentally it was the Delhi Gold Club owners’ right to remove Ms. Tailin Lyngdoh from their premises because their rules didn’t allow her to be there. Ms. Tailin, or the minister, has no right of accusing the golf club of doing something wrong by practicing discrimination because she was the one who was violating their rules in the first place!

N.B.: Anyone interested in pursuing this idea of right to discrimination further is advised to study Prof. Walter Block’s brilliant book, The Case for Discrimination.

Sunday, June 11, 2017

The Suffering of Indian Farmers

Farmers from various states of India like Madhya Pradesh, Maharashtra, Punjab, Gujarat etc., are right now agitating against their local state governments demanding, mainly, cancellation of their debts as well as better minimum support prices of their products. In the on-going agitation already six farmers have been killed by police firing.

This agitation is a sign of total dependency of Indian farmers on the state. The reason why they have to demand cancellation of their huge debt burden today is because in past they were given easy loans by the government’s central bank RBI and its commercial, mostly state run, banks. Specifically, these protests and killings of farmers are a making of RBI’s cheap money and credit policy. Overall, this uprising is yet another making of the failures of the state’s central planning socialist policies.

In the absence of these policies of cheap money and credit and central planning, farmers would be careful in borrowing money from the banks. More than farmers, private banks, working in a competitive environment of free market, would be extremely cautious in giving loans to sub-prime credit customers like many of the farmers who are right now agitating for cancellation of debt because they can’t repay it. Such banks will check the creditworthiness of their borrowers extremely carefully before lending them any money of their depositors. They would surely want to avoid the kind of NPA (non-performing assets i.e., unpaid loans) problems that is right now endangering the Indian banks. In a free market banking system the lending and borrowing activities will be regulated by the natural rate of interest which will be determined by the saving and consumption choices of Indians. In that system only economically viable projects will get loans from the banks, and that will definitely lower the possibilities of future debt default scenarios.

In the absence of availability of such easy artificial credit from the state run and regulated banks farmers will also be careful in starting new ventures or expanding the present ones. In the absence of minimum support price policy of the government, farmers will only do farming if they find it profitable. If some crop is unprofitable then they will either change the crop or get into some other line of business which is now profitable. The market price of agriculture products will efficiently regulate the farming sector activities. Basically, in the absence of welfare state policies, farmers will rely more on their own abilities of managing their affairs instead of looking at the government all the time for help. The way farmers in India are committing suicide is a sure sign of farmers’ inability to manage their own affairs and handle stress. Government’s years of easy money policies have corrupted hard working habits of farmers. Such policies have also destroyed local communities and self help groups which used to exist in past. Farmers together used to manage their own affairs, but now they can’t even take one step without government’s help! This situation is sad and deplorable. The welfare state has put the very welfare of farmers at risk!

The Indian welfare state, in its zeal of controlling and regulating everything, is meddling everywhere in the economy and making a mess of everything. The present suffering of farmers is just another such mess.

Thursday, June 8, 2017

Affordable Healthcare?

Since coming to power in 2014 one of the aims of the Narendra Modi government’s welfare state is to make healthcare more affordable in India by, mainly, trying to curb prices of drugs used to treat critical ailments such as cancer, HIV/AIDS and diabetes. In their efforts to do so they have declared some 350 drugs as essential drugs and imposed a price ceiling on them. Not only this, in February this year they also cut the price of some heart stents by 75 percent. Now a letter from Modi government’s drug price regulatory bureaucracy The National Pharmaceutical Pricing Authority (NPPA) shows that they intend to add four more medical devices to a list of products eligible for price controls to reduce costs to patients.

Making healthcare affordable is a noble objective, but the real question is whether the method of using government price control measure will achieve this objective? Only sound economic theory can shed light on this issue.

Economic science tells us that, any market, whether that be apple or healthcare, requires freely functioning price and profit & loss system for efficient (and just) allocation of given scarce of resources. For example, in a freely functioning market, if at a given time the price of heart stent is very high then that will attract new sellers from outside who will now enter that market because they see possibility of making high profit; as these new sellers enter the market with their fresh supply of heart stents, the supply of stent goes up in turn lowering its price. Similarly, if the price is too low, it will result in sellers exiting this market until the time when the losses disappear. The same will happen in any freely functioning market when the price and profit & loss system is working without any impediments.

Now, what happens when the government doesn’t allow the price and profit & loss system to work freely by imposing its price control measures? Four things will follow immediately after the imposition of the price control measure. Because we are here discussing the method of price ceiling – price ceiling means the government doesn’t allow the producers/sellers to charge higher prices than the price stipulated by the government – imposed on the healthcare market, I will only discuss the case of price ceiling (other form of price control is price floor where government stipulates to producers/employers to pay prices higher than the stipulated amount e.g., the minimum wage law).
  1. Immediate shortages: the first consequence of price ceiling measure will be an immediate shortage of the product on which the measure is imposed. In our case these products are the heart stent, possible four more medical devices as well as those 350 essential drugs. The shortage will occur because now at a new given lower prices production of these items will become uneconomical and a loss making enterprise. A simple example will help here. Suppose a medical company X is making 10 heart stent at total cost of 1000 rupees per stent (100 rupees per stent); it is selling 1 stent at a price of 120 rupees so its profit is 200 rupees (10 stent sold at price of 120 rupees means 1200 (120×10) rupees revenue; profit = total revenue – total cost so here 1200 – 1000 = 200 rupees). Now the government imposes a price ceiling of 80 rupees per stent. At this government controlled price now our company X can not make any profit; in fact, it is now making a loss of 200 rupees. Remember, the government can easily impose a price ceiling, but the company cannot easily and immediately bring down its production cost. Because no company in a competitive market can survive without making profit, company X will lower its production to lower losses. This in turn will create shortage of stent in the market. And we all know that this shortage of stent will make it even more unaffordable to the very patient for whom the government wanted affordable healthcare! A short supply of stent means it is not available for all patients.
  2. Lower supply in the long run: In the long run it is possible that many or almost all producers of medical equipment exit the market because there is no chance of lowering losses or making profit! If that happens then the heart stent, and all other price controlled devices and drugs, will totally disappear from the market putting lives of millions of patients at risk!
  3. Non price rationing: One of the chief aims of the price system is to allocate scarce resource efficiently between various competing demands of that resource. When price system couldn’t do that work because of price control measure, the market participants will start to ration that resource by other non-price means e.g., as it is happening in the case of heart stent the sellers are now charging higher price of other equipment accompanying heart stent as reported by the news report cited above: It has been found that after the price control of cardiac stents several hospitals have increased the various ‘procedure charges’ in order to compensate for their losses … In some cases the cost of balloons and catheters have been charged at (a) much higher level than the cost of (the) stent itself! This totally defeats the whole purpose of government making healthcare affordable!
  4. Drop in quality: Not only the above dire consequences will follow the policy of price control on medical devices and essential drugs, but in the longer run the quality of these devices as well as drugs will also deteriorate. Producers will lower the quality of these products to lower their cost to compensate for the drop in price and revenue due to government’s price control measure. Instead of using high grade material to manufacture their products now they will use cheap material. This lower quality means these devices will not work as well as they would have if their quality didn’t deteriorate because of price control measure. Again, this lower quality devices and drugs will defeat the whole purpose of providing healthcare to patients!
All in all, as we have seen above, the price control measure of Modi government on the healthcare industry will only lower the health standards of the Indians. Instead of making healthcare affordable, it will make it unaffordable and inefficient.

If the Modi government is serious for making healthcare affordable and efficient for the Indians then they must immediately remove these price control as well as all other regulatory measures which are stifling competition in the healthcare market. Only market competition can lower the prices of healthcare devices and drugs as well as improve their quality. Healthcare companies competing for every rupee note of consumers will do everything possible to make their goods and service affordable and efficient. The price control measure of the Modi government is only going to kill more Indians.