Monday, December 10, 2012

Guns: Girl's Defense Against Violent Sexual Attacks

Sexual attacks and rapes on girls are pretty common in India. Recently many such cases were reported in North India, especially in Haryana and Punjab e.g., see here, here, and here. In all these cases, the state officials i.e., the police officers, did nothing to stop the incidents or even react to the complaints made by the victims when they were harassed before the rape or sexual attack incident actually took place. In many cases, police officers even refused to file the FIR (first information report) to lower the on-paper number of rapes! In Punjab, one of the policeman's daughter was sexually attacked, and that policeman was killed by attacker political activist when he went to complain about his daughter's harassment (see this, and this). Moreover, instead of the criminals getting punished, the victim's family is living in fear of retaliation from the rapist family gang members (see here)!   

Since ages these violent aggressive attacks are taking place on girl's bodies, which is their private property, and state officials are doing nothing. They are doing nothing because they are not designed for populace's protection [sic], as is commonly thought, but they exist for the protection of state officials themselves e.g., just take a look at the horde of black cat commandos protecting lives of scumbag parasite politicians or the manner in which the judiciary system works hard to protect these politicians and their cronies in such cases.

All these events should be enough to wake-up the sleeping populace, especially girls who are frequent victims of these violent aggressions. Girls must realize, that the system is not going to protect them. They should understand, that they must take the matter of their life's security in their own hands. Unless they start protecting themselves, their life will never be safe. Girls must protect their private property i.e, their bodies. Relying on state officials for the safety of our private property is foolish because state is the biggest violator of private property rights in the history of mankind. State's existence is based on violation of private property rights i.e., tax theft! State safeguarding our private property is a contradiction in terms.

You Decide
To protect their lives against these physical aggressions, I suggest, that girls should, at least, start owning guns. Guns will be one of the biggest defense means in the hands of girls. Empirical studies conducted by Professor John Lott proves, that in a country were citizens own more guns, there are less crimes (See his well researched book, More Guns, Less Crimes). Because owning guns for the citizens is illegal - another trick of state officials to make us defenseless against their exploitation - girls should start applying en masse for gun license citing risks to their lives in this lawless country as the primary reason. This movement of applying for gun licenses en masse will also wake-up the sleeping populace, and people will start discussing the very important issue of citizens carrying guns for defense of their private property against the violent aggressions from the parasitic class of Indian society.

Owning a gun will surely not solve all of the problems which girls are facing, but, at least, they will have some solid means available in their hands for protecting their lives instead of relying on the stupid state system. Own guns, train yourself and know how to use it for your defense, and then face those evil criminals with courage.

Finally, I know there are many other issues under consideration here, but then, I am writing this piece just to make people aware about this possible alternative system of security. We need to break free of the status quo thinking, and actively start searching for other alternatives which are much better than this status quo e,g., private defense and judiciary system (for a starter see this, this and this). As long as people will not look for and understand better alternative ideas, things will never improve. Unless we take our security in our hands, the state will continue to exploit us, and our daughters, mothers, sisters etc., will continue to get raped and attacked. 

Friday, December 7, 2012

Higher Taxes: Means of Societal Suicide

The New York Times recently reported, that there are few places to hide as taxes trend higher worldwide. As the parasitic welfare warfare states around the world are going broke, due to years of borrow and spend Keynesian policies, they are getting desperate to find any means of survival. And what better means than to fleece and slaughter their slave sheeple citizenry. The trend is clear world over e.g., after winning the French election, the socialist president Hollande has raised the personal income tax over income of 1 million euro to 75%, and eliminated the limits on wealth tax; US taxes are about to go up as the reelected Obama government is planning to deal with the looming so-called fiscal cliff with tax hikes; tax rates across Europe are also going high; and, the Indian government is also looking to plug the tax loopholes while simultaneously trying to change the tax laws retrospectively.

Those of you who understand the true nature of the state - as the gang of criminals - know, that these taxes are just nice names of a simple phenomena of day light robbery of citizens' wealth by the state officials. As Frank Chodorov said, Taxation is Robbery. Now, why I am writing this small piece today is to discuss the dire consequences of these higher taxes worldwide. I just finished reading J B. Say's A Treatise on Political Economy last night where in  book III, Ch. VIII he discusses taxation and its effects. While reading that chapter, I could see, that whatever Say said there is absolutely relevant with today's events of worldwide tax hikes. I thought everyone should read this chapter to understand what is going to happen next when governments all over the world are raising taxes. Instead of solving any problems, these tax hikes are going to result into economic disasters in future. Once you will read Say in full, this fact will become clear to you also. Economic laws are immutable and once they are violated, their dire consequences are sure to follow. Below I reproduce some important excerpts from Say's chapter on taxation. I think it is self explanatory so I will keep my commentary to minimum.

First, Say defines what taxation is,
Taxation is the transfer of a portion of the national products from the hands of individuals to those of the government, for the purpose of meeting the public consumption or expenditure. Whatever be the denomination it bears, whether tax, contribution, duty, excise, custom, aid, subsidy, grant, or free gift, it is virtually a burthen imposed upon individuals, either in a separate or corporate character, by the ruling power for the time being, for the purpose of supplying the consumption it may think proper to make at their expense; in short, an impost, in the literal sense. (emphasize added).
And then he dispels the myth, that taxation can somehow increase national wealth,
It is a glaring absurdity to pretend, that taxation contributes to national wealth, by engrossing part of the national produce, and enriches the nation by consuming part of its wealth.
 After dispelling this myth, he goes on to discuss the major characteristics of least bad taxes. But before that, here is Say on the best system of finance,
The best scheme of finance is, to spend as little as possible; and the best tax is always the lightest. 
You can easily see, that most of the governments today are doing exactly the opposite! Their spending is going through the roof, and taxes are going sky high too!

He then discusses the characteristics, and the first one is of our interest because it is directly relevant with our discussion of worldwide tax hikes today. Here is that characteristic followed by Say's further elaborations.
1. Of such as are most moderate in their ratio. 
He then discusses what happens when taxes are not moderate,
Taxation, pushed to the extreme, has the lamentable effect of impoverishing the individual, without enriching the state. We may readily conceive how this can happen, if we recall to our attention the former position; viz. that each tax-payer's consumption, whether productive or not, is always limited to the amount of his revenue. No part of his revenue, therefore, can be taken from him without necessarily curtailing his consumption in the same ratio. This must needs reduce the demand for all those objects he can no longer consume, and particularly those affected by taxation. The diminution of demand must be followed by diminution of the supply of production; and, consequently, of the articles liable to taxation. Thus, the tax-payer is abridged of his enjoyments, the producer of his profits, and the public exchequer of its receipts.
This is the reason why a tax is not productive to the public exchequer, in proportion to its ratio; and why it has become a sort of apophthegm, that two and two do not make four in the arithmetic of finance. Excessive taxation is a kind of suicide, whether laid upon objects of necessity, or upon those of luxury; but there is this distinction, that, in the latter case, it extinguishes only a portion of the products on which it falls, together with the gratification they are calculated to afford; while, in the former, it extinguishes both production and consumption, and the tax-payer into the bargain. (emphasize added).
As Say said, excessive taxation is a suicide for the society, and the coming tax hikes will not be any different. And there are possibilities, that these higher taxes will plunge our societies again back in the age of barbarism, as Say said,
But, should the abuses and complexity of the political system lead to the prevalence, extension, increase, and consolidation of oppressive and disproportionate taxation, it is much to be feared, that it may plunge again into barbarism those nations, whose productive powers are now the most astonishing; and the condition of the labouring classes, who are always the bulk of the community, may in such nations present a picture of drudgery so incessant and toilsome, as to make them cast a wistful eye upon the liberty of savage existence; which, though it offer no prospect of domestic comfort, at least promises emancipation from perpetual exertion to supply the prodigality of a public expenditure, yielding to them no satisfaction, and, perhaps even operating to their prejudice.
J B. Say was a classical liberal thinker, so he favored lower taxes, but today we know, that taxation itself - even low rates - is a drag on societal progress. As I said above, taxation is a robbery, and we must stop it. Lower tax rates should be seen as just one small step in the direction of no taxation at all. Abolishing all kinds of taxation is our final goal. Only after stopping this robbery can we see our societies and its inhabitants flourish again. Meanwhile, when the tax rates are sure to go higher in future worldwide, we must protect ourselves from the coming economic disaster. 

Monday, December 3, 2012

RBI's War on Gold

Since last year or so the Reserve Bank of India, in the militaristic language of the US government, has declared a war on Gold. For example, take a look at the list of announcements by various RBI officials re their strategy of halting the vast imports of Gold in India.
  1. On 19th November, RBI banned the Indian commercial banks for loaning money to people for buying Gold. The RBI notification said, "...it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold mutual funds."  And this, according to RBI officials, is to dissuade people from indulging in speculative activity.
  2. On November 25th RBI deputy governor Subir Gokran said,"there is a need to "dematerialize" gold like any other financial product to reduce its physical imports." He further gave the reason for his whim of dematerializing Gold,  "It (high gold imports) is creating some macroeconomic stresses and so the challenge is to find ways to replicate the financial characteristics of gold without necessarily causing physically importing." And what are these macroeconomic stresses? According to government and RBI officials, "The current account deficit or CAD has been rising on the back of record trade deficits, which in October jumped to a 12-year high of $ 21 billion on the back of rising oil and gold imports."
  3. On November 21st, newspapers reported, that the Indian government is planning to issue Gold bonds. The news story reported, " You may soon have options to invest in new financial instruments that are linked to gold, such as a possible gold bond.   With savings rates dropping from 35% about five years ago, the government, trying to boost savings and discourage hoarding of gold in physical form as a speculative activity, is planning to soon come out with attractive paper products including gold bonds, riding on India’s craze for gold."
  4. And finally, on 2nd December two former RBI governors, C. Rangrajan and Y V. Reddy, warned the government, "against taking tough measures to rein in gold imports — a major reason for the persistently high current account deficit (CAD)." Rangrajan warned, that such tough measures will only encourage smuggling of Gold, which has already started to pick-up pace, and Reddy said, “If Mercedes Benz and aftershave lotion can be imported, why not gold? It is both an investment and consumption good. Many people seem to mistake that it is only hedge against inflation. There is a demand for it. It is being imported. If you can, try to stop it.”
As seen above, the major reason cited by RBI and government officials for these increased concerned over rising Gold import is, that it is increasing the current account deficit and putting government under pressure! Or Gold is being used for speculation. And for this phony reason, they not only are trying to reduce the import of physical Gold directly, but are also wanting to divert people from buying physical Gold to buying "paper gold" [sic] in the form of gold bonds e.g., Subir Gokran wants to dematerialize Gold i.e., replace physical Gold with paper Gold.

Now, in past also I have said, that the root cause of rising current account deficit is not peoples' purchases of physical Gold and rising import, but RBI's inflationary policy itself which is fueling these purchases and thus imports. RBI officials are fooling public by blaming them for their own shenanigans. The fundamental question we have to ask here is, why people are buying gold rapidly? There are many reasons for that, and one of the reasons is, the inflationary policy of RBI. When rupee is losing its purchasing power rapidly, people are replacing useless RBI notes, which are depreciating in value everyday, with an age old store of value, Gold. Gold is being used as money by humans since last 5000 years, and Gold again is reasserting its role as a monetary metal. Gold purchases are also part of Indian culture and that is also because Gold is seen as an ultimate insurance for future uncertainties by people. In present time  government and RBI officials are creating lots of future uncertainties against which people are trying to protect themselves by buying Gold (and Silver). Either RBI officials don't know that Gold primarily is not an investment product - it is money - or they are knaves (I strongly think the latter). And speculators are government's favorite scapegoats since centuries. Speculators are not at all bad (see this).

Not only RBI officials are fooling people, they are scamming them into buying useless "paper gold". Paper gold in the form of "gold bonds" or "gold ETFs" is not physical Gold at all, and it won't give people the kind of safety which physical Gold can provide in the time of crisis. The major reason why one should be buying Gold in this crisis time is for personal financial safety, and investing in paper gold defeats this very purpose. By luring or forcing people into buying these paper gold products, RBI officials are committing a big crime. They are very disingenuous.

In this tough economic times, it is advisable for people, that they do not get fooled by this propaganda of RBI and government thugs. They should continue to regularly accumulate physical Gold (and Silver) and stay away from any paper product. When finally the present phony fiat currency world monetary system will crash, Gold (and Silver) will only be the last safety resort.

And above all, more than any investment or financial asset, as Warren Buffet's father Howard Buffet said, human freedom rests on Gold redeemable money! Gold preserves human Liberty and it is one of the ultimate weapons in our fight against the criminal gang of the State. So, continue to purchase physical Gold and safeguard your Liberty.

Friday, November 30, 2012

J B. Say and India and China's Population Policy

Last night I was reading J B. Say's 'A Treatise on Political Economy' Book II, Ch. XI, OF THE MODE IN WHICH THE QUANTITY OF THE PRODUCT AFFECTS POPULATION, where Say discusses the major principles of population growth. What he has to say is very relevant for both India and China because both country governments have implemented 'population control' measures since last 50 years or so. Chinese government has implemented one child policy and Indian government has its family planning program. Here is what Say has to say about the determinants of population, and I quote the passages:

"...and it may be laid down as a general maxim, that the population of a state is always proportionate to the sum of its production in every kind."
In one line - which he logically builds up in this chapter - he exposes the whole Malthusian population theory that population growth will outstrip food production! He goes on and discusses other implications of that maxim, and I quote again:
"...It appears to me, however, that one very natural consequence, deducible from this maxim, has escaped their observation; which is, that nothing can permanently increase population, except the encouragement and advance of production; and that nothing can occasion its permanent diminution, but such circumstances as attack production in its sources."
So, population growth in India, and China too, is not a problem at all because it has only increased due to increased production of consumer products. And, it will only decline if somehow this production declines, and for that, as Say discusses further, lo and behold, governments are responsible. Here is say again,
"... But though such temporary calamities are more afflicting to humanity than hurtful to the population of nations, far other is the effect of a vicious government, acting upon a bad system of political economy. This latter attacks the very principle of population, by drying up the sources of production; and since the numbers of mankind, as before seen, always approach nearly to the utmost limits the annual revenue of the nation will admit of, if the government reduce that revenue by the pressure of intolerable taxation, forcing the subject to sacrifice part of his capital, and consequently diminishing the aggregate means of subsistence and reproduction possessed by the community, such a government not only imposes a preventive check on further procreation, but may be fairly said to commit downright murder; for nothing so effectually thins the effective ranks of mankind, as privation of the means of subsistence."
And downright 'murder' it is that every government commits. Politicians are criminal murderers. They are killing people since ages.

Say also exposes the uselessness of Indian and Chinese government's family planning programs of controlling population, and gives a better alternative. I quote again:
"...Some parts of India and of China are oppressed with population, and with misery also; but their condition would be nowise improved by thinning its numbers, at least if it were brought about by a diminution of the aggregate product. Instead of reducing the numbers of the population, it were far more desirable to augment the gross product; which may always be effected by superior individual activity, industry, and frugality, and the better administration, that is to say, the less frequent interference of public authority."
So, there you have it. 50 years of family planning program in India and China is nothing but a huge wastage of precious resources. In fact, China is already facing the adverse consequences of their one child policy and is reconsidering easing it. Same kind of consequences India will also face in future when its population starts to age. Instead of instituting these useless policies, it would have been much better if government allowed freedom - less interference or, as we now know, no interference at all - and let the free market increase the production!

Saturday, November 24, 2012

J B. Say and Today's Fiat Paper Money Standard

J B. Say
I have written many times in past about what money actually is, what are the qualities of sound money, and what is wrong with today's fiat paper currency monetary system, which is in the root of our problems of inflation, business cycles, government's reckless spending and ballooning fiscal deficits, central bankers' enabled state wars, botched welfare system of giving freebees to everyone etc., etc. It is crucial for the state officials to keep a tight control over the supply of money because only through that control they can control peoples' lives, and slowly confiscate their wealth. Fiat money is the main tool of our oppression in the hands of the state officials. The state uses court intellectuals - school teachers, university professors, professional economists, media journalists etc. - to spread propaganda re money to hide their sinister motives of robbing us. In such foggy environment, it is important to pierce through this fog of propaganda and keep our focus on the realities of money. In this battle of ideas, we must know and understand the right ideas and discard the wrong ones. In this regard, I am presently reading J B Say's wonderful A Treatise on Political Economy, and in this short write up I want to discuss his brilliant chapter on 'money' where he dislodges many erroneous notions re money - which were floating around in his time also! - and clearly discusses the true nature of money. As always, I will reproduce Say's chapter excerpts below which will be followed by my brief comments showing relevance of Say's ideas in today's world.

In chapter XXI, Book I titled, Of the Nature and Uses of Money, J B. Say discusses what money actually is.

If there exist in the society any specific commodity that is in general request, not merely on account of its inherent utility, but likewise on account of the readiness with which it is received in exchange for the necessary articles of consumption, and the facility of proportionate subdivision, that commodity is precisely what the cutler will try to barter his knives for; because he has learnt from experience, that its possession will procure him without any difficulty, by a second act of exchange, bread or any other article he may wish for.

Now, money is precisely that commodity.


As Say said, money is just another commodity in the market which people from their experience accept as a common medium of exchange i.e., money. Money is not government issued paper notes etc. Say has more to say on this false notion of money is a social convention or government issued money.

I have referred to custom, and not to the authority of government, the choice of the particular article that is to act as money in preference to every other: for though a government may coin what it pleases to call crowns, it does not oblige the subject to give his goods in exchange for these crowns, at least not where property is at all respected....

The sole reason why a man elects to receive the coin in preference to every other article, is, because he has learnt from experience, that it is preferred by those whose products he has occasion to purchase. Crown pieces derive their circulation as money from no other authority than this spontaneous preference: and if there were the least ground for supposing, that any other commodity, as wheat, for instance, would pass more currently in exchange for what they calculate upon wanting themselves, people would not give their goods for crown pieces, but would demand wheat, which would then be invested with all the properties of money. And this has occurred occasionally in practice, where the authorized or government money has consisted of paper destitute of credit or public confidence. (emphasize mine).


So, government's central bank RBI issued notes are not real money. Real money slowly evolves in the market exchange process. People today use fiat notes because there are legal tender laws which compel them for using only RBI issued currency notes. As Say said above, whenever authorized or government money consisted of paper destitute of credit or public confidence, that paper money will no longer be used by people in the exchange process. Today's government issued paper money is losing its value real quick, and so it is losing public confidence too. This is the prime reason why people are converting their paper wealth into real wealth, Gold and Silver. In future, these fiat currency notes will no longer remain in circulation because government continues to debase them.

Next, Say discusses the qualities of sound money. I discuss them one by one below and compare it with today's fiat paper currency.

Market value

Only those commodities can serve the function of a common medium of exchange which are already having value in the market. Here is Say:

Yet, to enable it to execute its functions, it must of necessity be possessed of inherent and positive value; for no man will be content to resign an object possessed of value, in exchange for another of less value, or of none at all.

Fiat paper currency notes are made of paper, which has very little positive value in the market. No sane person in the free market will accept pieces of paper as money in exchange for other valuable commodities like car, home, cloth etc.

Divisibility

We are told by Homer, that the armour of Diomede had cost nine oxen. A warrior, that wished to arm himself at half the price, must have been puzzled to pay four oxen and a half. Wherefore, the article employed as money must be capable of being readily and without injury apportioned to the different objects of desire, and subdivided in such manner, as to admit of exchanges of the exact amount required.

Paper currency notes are not that easily divisible e.g., if I have one 100 rupee note and I want to buy an apple of 50 rupee, then, I can not tear that note in half and exchange it for an apple!

Scarce supply

At Newfoundland, it is said, that dried cod performs the office of money, and Smith makes mention of a village in Scotland, where nails are made use of for that purpose. Besides many other inconveniences, that substances of this nature are subject to, there is this grand objection, that the quantity may be enlarged almost at pleasure, and in a very short space of time, and thereby a vast fluctuation effected in their relative value. But who would readily accept in exchange an article, that might, perhaps, in a few moments, lose the half or three-fourths of its value? Wherefore, the commodity employed as money must be of such difficult acquisition, as to ensure those who take it, from the danger of sudden depreciation.

As we can clearly see, paper note - and these days only computer digits - quantity can be increased very easily by the RBI and commercial banks! Just few strokes on the key board generates vast amount of such paper and digital currency, which is the prime reason why it is losing value daily i.e., inflation.

Universal acceptance

In the Maldive islands, and in some parts of India and Africa, shells, called cowries, are employed as money, although they have no intrinsic value, except that they serve for ornament to some rude tribes. This kind of money would never do for nations that carry on trade with many parts of the globe; a medium of exchange of such very limited circulation would offer insuperable objections. It is natural for people to receive most willingly in exchange that article, which is the most universally received in like manner by other people in their turn.

Fiat paper notes are not universally received by every people in the world e.g., if I get lost in an African jungle then my rupee notes will not be accepted by the African inhabitants there!

And, if not paper then which commodities have these qualities and are thus suitable for use as money? Say gives the answer:

...and it is long since the precious metals, that is to say, gold and silver, have been almost universally adopted. To this use they are particularly applicable:
  1. As being divisible into extremely minute portions, and capable of re-union, without any sensible loss of weight or value; so that the quantity may be easily apportioned to the value of the article of purchase.
  2. The precious metals have a sameness of quality all over the world. One grain of pure gold is exactly similar to another, whether it came from the mines of Europe or America, or from the sands of Africa. Time, weather, and damp, have no power to alter the quality: the relative weight of any specific portion, therefore, determines at once its relative quality and value to every other portion: two grains of gold are worth exactly twice as much as one.
  3. Gold and silver, especially with the mixture of alloy, that they admit of, are hard enough to resist very considerable friction, and are therefore fitted for rapid circulation, though, indeed, in this respect, they are inferior to many kinds of precious stones.
  4. Their rarity and consequent dearness are not so great that the quantity of gold or of silver, equivalent to the generality of goods, is too minute for ordinary perception; nor, on the other hand, are they so abundant and cheap, as to make a large value amount to a great weight. It is possible, that in progress of time, they may become liable to objection on this score; especially if new and rich veins of ore should be discovered: and then mankind must have recourse to platina, or some other yet unknown metal, for the purpose of currency.
Gold and Silver, the precious metals, are the real money used by human beings since last 5000 years. They have all the qualities of sound money and so they are chosen by the market participants spontaneously to be used as a common medium of exchange. Most importantly for us today is the fact, that the world monetary system is again moving in the direction of Gold and Silver standard after having a terrible experience of last 40 years or so with the pure fiat paper money experiment.

After discussing the nature of money, Say goes on to discuss what happens when authorities fiddle with the standard money. I reproduce some quotes below which has direct relevance with what is going on today.

Should a government attempt to force an ill-adapted medium into circulation, it would sustain a loss itself on every bargain, and the people would, by degrees, adopt some other medium.

Precisely this is what is happening today. Governments around the world are trying to force their ill-adapted - i.e., debased - medium of paper notes in circulation. And this inflationist policy is very likely to result in people adopting some other medium in the end! The day fiat paper notes will lose considerable amount of its value, people will adopt some other - mostly Gold or Silver - standard.

He then discusses how princes debases their money and says this:

..Princes, that resort to such pettifogging expedients, can be viewed in no other light, than as counterfeiters armed with public authority.

Exactly. Today's governments and their central banks - RBI is case of India - are the counterfeiters armed with public authority.

And for how long this counterfeiting and looting will go on? Not forever. Here is Say again:

A system of swindling can never be long-lived, and must infallibly in the end produce much more loss than profit. The feeling of personal interest is that which soonest awakens the intellectual faculties of mankind, and sharpens the dullest apprehensions. Wherefore, in matters affecting personal interest, a government has the least chance of outwitting its subjects. Individuals are not easily duped by measures tending to procure supplies to the state in an under-hand manner: and although they cannot guard against direct outrage, or breach of public faith, yet it can never long escape their penetration, however artfully disguised and concealed. The government will acquire a character for cunning as well as faithlessness, and will lose entirely the powerful engine of credit, which will operate with infinitely more efficacy, than the mere trifle that fraud can procure.

People world over are slowly waking up to this swindling game of government and central bank led counterfeiting. Although they can't directly fight the government behemoth, but they are taking all those steps - e.g., buying Gold and Silver - which will safeguard their wealth against this swindling. In the end government will lose its credit, and the system will crash and we will see a wholesale change in the world monetary system.

Say also discusses what kind of monetary system is best suitable for human progress, but I will discuss it in future post.

Sunday, November 11, 2012

J B Say's Critique of Mathematical Economics

Today's mainstream neoclassical economics is in a deep trouble because of its inability to explain the reality of our economy and society at large. Most mainstream economists have no idea about how an economy actually functions e.g., take Nobel prize winner [sic] Paul Krugman who keeps on saying that destruction of wealth is somehow going to generate more wealth (see here his space alien threat strategy of fixing the ailing US economy)! He thinks that inflation will bring the economy out of recession! Most of them failed to anticipate even the 2007 world financial crisis e.g., at the height of US housing bubble in 2006, US Federal Reserve bank chairman Ben Bernanke was saying, that the housing prices will keep on rising when the bust was just around the corner (see here). The main reason for this failure to understand the economic reality is their faulty methodology of doing economic science. The heavy use of mathematics has ruined mainstream economics to such an extent that most mainstream economics textbooks look like math books more than economics e.g., see the picture below.


A Typical Mainstream Microeconomics Textbook


Abstruse mathematical and econometric models have created a big gulf between the reality of economic life and mainstream economic theories. This trend of mathematization of economics is at least 150 years old. It started mostly in the middle of the 19th century when many engineers, mathematicians and physicist started developing their mathematical theories of economics. It picked up speed in the 20th century and today it is so off the track that, as Sutter and Piesky's papers showed, even Adam Smith won't be able to publish in today's mainstream econ journals! Many brilliant minds of olden times tried their best to warn economists against this use of mathematics for developing economic theories. Jean Baptiste Say was one of those brilliant minds. I am reading his Treatise on Political Economy where in the Introduction he discusses some of the major problems with the use of mathematics in economics. Below I am reproducing some paragraphs and one lengthy footnote where Say discusses these issues.

Say begins by stating what the science of political economy i.e., economics is, and he contrasts it with statistics stating latter's limitations. Here is Say:

Political economy, from facts always carefully observed, makes known to us the nature of wealth; from the knowledge of its nature deduces the means of its creation, unfolds the order of its distribution, and the phenomena at tending its destruction. It is, in other words, an exposition of the general facts observed in relation to this subject. With respect to wealth, it is a knowledge of effects and of their causes. It shows what facts are constantly conjoined with; so that one is always the sequence of the other. But it does not resort for any further explanations to hypothesis: from the nature of particular events their concatenations must be perceived; the science must conduct us from one link to another, so that every intelligent understanding may clearly comprehend in what manner the chain is united. (emphasize mine)  

The founder of the Austrian School of Economics, Carl Menger, in the very first line of his treatise also said, All things are subject to the law of cause and effect. All economic phenomenon like inflation, unemployment, price, interest, wage etc., etc., have their definite cause(s) which sound economic theory should investigate. But, today's mathematical economists think that everything is simultaneously determined - their use of simultaneous equations - and so they never give proper attention to this causality in the economic life. This is one of the prime reasons why they are clueless about the present economic crisis! Say, after discussing what economics really is, talks about the limitations of use of statistics in economics. Most mainstream economists and other pundits are obsessed with economic data. They continue to compile one data set after another, and most importantly, they use these data (wrongly) to test economic theories. Here is Say on this issue:

The study of statistics may gratify curiosity, but it can never be productive of advantage when it does not indicate the origin and consequences of the facts it has collected; and by indicating their origin and consequences, it at once becomes the science of political economy.   

Just like Say's above statement, Ludwig von Mises's work informs us, that economic data are history, and they have nothing to do with the economic theory. 

Say then goes on and warns us about the misuse of mathematics in economics. I reproduce the paragraphs and that lengthy footnote below: 

It would, however, be idle to imagine that greater precision, or a more steady direction could be given to this study, by the application of mathematics to the solution of its problems. The values with which political economy is concerned, admitting of the application to them of the terms plus and minus, are indeed within the range of mathematical inquiry; but being at the same time subject to the influence of the faculties, the wants and the desires of mankind, they are not susceptible of any rigorous appreciation, and cannot, therefore, furnish any data for absolute calculations. In political as well as in physical science, all that is essential is a knowledge of the connexion between causes and their consequences. Neither the phenomena of the moral or material world are subject to strict arithmetical computation. (emphasize mine) At this point he then inserts the following footnote:

We may, for example, know that for any given year the price of wine will infallibly depend upon the quantity to be sold, compared with the extent of the demand. But if we are desirous of submitting these two data to mathematical calculation, their ultimate elements must be decomposed before we can become thoroughly acquainted with them, or can, with any degree of precision, distinguish the separate influence of each. Hence, it is not only necessary to determine what will be the product of the succeeding vintage, while yet exposed to the vicissitudes of the weather, but the quality it will possess, the quantity remaining on hand of the preceding vintage, the amount of capital that will be at the disposal of the dealers, and require them, more or less expeditiously, to get back their advances. We must also ascertain the opinion that may be entertained as to the possibility of exporting the article, which will altogether depend upon our impressions as to the stability of the laws and government, that vary from day to day, and respecting which no two individuals exactly agree. All these data, and probably many others besides, must be accurately appreciated, solely to determine the quantity to be put in circulation; itself but one of the elements of price. To determine the quantity to be demanded, the price at which the commodity can be sold must already be known, as the demand for it will increase in proportion to its cheapness; we must also know the former stock on hand, and the tastes and means of the consumers, as various as their persons. Their ability to purchase will vary according to the more or less prosperous condition of industry in general, and of their own in particular; their wants will vary also in the ratio of the additional means at their command of substituting one liquor for another, such as beer, cider, &c. I suppress an infinite number of less important considerations, more or less affecting the solution of the problem; for I question whether any individual, really accustomed to the application of mathematical analysis, would even venture to attempt this, not only on account of the numerous data, but in consequence of the difficulty of characterizing them with any thing like precision, and of combining their separate influences. Such persons as have pretended to do it, have not been able to enunciate these questions into analytical language, without divesting them of their natural complication, by means of simplifications, and arbitrary suppressions, of which the consequences, not properly estimated, always essentially change the condition of the problem, and pervert all its results; so that no other inference can be deduced from such calculations than from formula arbitrarily assumed. Thus, instead of recognizing in their conclusions that harmonious agreement which constitutes the peculiar character of rigorous geometrical investigation, by whatever method they may have been obtained, we only perceive vague and uncertain inferences, whose differences are often equal to the quantities sought to be determined. What course is then to be pursued by a judicious inquirer in the elucidation of a subject so much involved? The same which would be pursued by him, under circumstances equally difficult, which decide the greater part of the actions of his life. He will examine the immediate elements of the proposed problem, and after having ascertained them with certainty, (which in political economy can be effected,) will approximately value their mutual influences with the intuitive quickness of an enlightened understanding, itself only an instrument by means of which the mean result of a crowd of probabilities can be estimated, but never calculated with exactness.

Cabanis, in describing the revolutions in the science of medicine, makes a remark perfectly analogous to this. 'The vital phenomena,' says he, 'depend upon so many unknown springs, held together under such various circumstances, which observation vainly attempts to appreciate, that these problems, from not being stated with all their conditions, absolutely defy calculation. Hence whenever writers on mechanics have endeavoured to subject the laws of life to their method, they have furnished the scientific world with a remarkable spectacle, well entitled to our most serious consideration. The terms they employed were correct, the process of reasoning strictly logical, and, nevertheless, all the results were erroneous. Further, although the language and the method of employing it were the same among all the calculators, each of them obtained distinct and different results; and it is by the application of this method of investigation to subjects to which it is altogether inapplicable, that systems the most whimsical, fallacious, and contradictory, have been maintained.'

D'Alembert, in his treatise on Hydrodynamics, acknowledges that the velocity of the blood in its passage through the vessels entirely resists every kind of calculation. Senebier made a similar observation in his Essai sur l'Art d'observer, (vol. 1, page 81.)

Whatever has been said by able teachers and judicious philosophers, in relation to our conclusions in natural science, is much more applicable to moral; and points out the cause of our always being misled in political economy, whenever we have subjected its phenomena to mathematical calculation. In such case it becomes the most dangerous of all abstractions. 

Indeed, what dangerous of all abstractions today's mathematical economics has become! It has lost its way so much that most mainstream economists have become a laughingstock amongst the people. Not only J B Say, but many other eminent economists warned against this mindless use of mathematics and econometrics in economics. I reproduce some quotes from  Boris Ischboldin's paper below. First Alfred Marshall: 

Afred Marshall himself, who was originally a teacher of  mathematics, would have decisively rejected such treatment of his mathematical contributions. Many times he emphasized that an academic economist should give all the outlines of his theory in ordinary language and that to read lengthy translations of economic doctrines into mathematics is unreasonable.  In his correspondence with the famous British statistician, Bowley,  Marshall stated that if an economist arrives at some hypotheses by mathematical means, he should translate them into ordinary language and burn his mathematical notes. (emphasize mine) 

Here is Joseph Schumpeter:

Joseph Schumpeter who, toward the end of his life  manifested a distinct interest in historical generalizations and an increasing reluctance to use mathematical symbols in economic theory, came to the conclusion that an outstanding mind is able to find its way through  the maze of an intricate theoretical problem without recourse to the formal devices of mathematics.(emphasize mine)

Paul Samuelson once said, that an economist can become a great theorist without using mathematics but one must be more clever and brilliant.

And, finally, as Ludwig von Mises said, As a method of economic analysis econometrics is a childish play with figures that does not contribute anything to the elucidation of the problems of economic reality!

Despite all these warnings, mainstream economists continue their way in the wrong direction. Unless they change their methodology, it won't take long for their pseudo-science to become junk in the dustbin of history. 

Thursday, November 8, 2012

The School of Salamanca and India's Inflation Problem

Recently the RBI governor announced the second quarter review of the monetary policy in which his monetary policy stance was, "to maintain an interest rate environment to contain inflation and anchor inflation expectations".  As Subbarao - the RBI governor - indicated, he is right now trying to find some kind of balance between inflation and growth dynamics [sic]. But his major worry is inflation. Indian economy is facing the problem of inflation, as defined by mainstream economists as "the rise in the general price level", since very long time. Government officials, mainstream economists and media pundits frequently bamboozle the populace with a propaganda, that the major cause of inflation is supply bottlenecks (see this, and this)! This is a hoax. Supply bottleneck has nothing to do with inflation. What these propagandists are talking about is actually price changes, which they erroneously call inflation, and inflation is all about the increase in the supply of money and credit, especially increase out of thin air in the present day fiat paper currency monetary system. Price rise is one of the chief effects of inflation. These knave officials use this wrong definition of inflation deliberately to misguide the public, and to create a smokescreen to hide their own sinister actions of stealing productive peoples' wealth via inflation heist. 

This inflation phenomenon is not new. In this write-up I want to throw some light on the similar events which took place in the 16th century Europe, especially Spain. Studying and analyzing such historical episodes is important to understand today's inflation phenomenon. In the middle of the 16th century, after Columbus conquered the Indies, huge amount of Gold and Silver started to flow back in the Spanish empire. Remember, during those times both Gold and Silver were money. That means, the supply of money increased in Spain, which made every other goods dearer than before this influx of Gold from the new Spanish colonies began. This new problem needed an explanation and the Spanish theologians from the famous school of Salamanca took up this challenge. What these group of people from the school of Salamanca said at that time is very important for all of us in the present time when we are experiencing essentially the same phenomenon of increase in the supply of money. The only difference today is, that we don't have Gold and Silver as money; We have government's fiat paper currency notes circulating as money whose supply is increasing out of thin air due to the loose so-called monetary policies of the central banks. The major cause of price rise, which was identified by these Spanish theologians, is also in operation today in India, and all over the world. Below I am reproducing the writings of some of the major figures of Salamanca school (those readers who want to read more about this school can grab a free soft copy of Marjorie Grice-Hutchinson's wonderful little book, The School of Salamanca). Reading their analysis will help everyone understand the main cause of our inflationary pain today. I begin with Martin de Azpilcueta Navarro. In 1556 he published his book, commentario Resolutorio de Usuras, in which he said:

Third, that (other things being equal) in countries where there is a great scarcity of money all other sale­able goods, and even the hands and labour of men, are given for less money than where it is abundant. Thus we see by experience that in France, where money is scarcer than in Spain, bread, wine, cloth, and labour are worth much less. And even in Spain, in times when money was scarcer, saleable goods and labour were given for very much less than after the discovery of the Indies, which flooded the country with gold and silver. The reason for this is that money is worth more where and when it is scarce than where and when it is abundant. What some men say, that a scarcity of money brings down other things, arises from the fact that its excessive rise makes other things seem lower, just as a short man standing beside a very tall one looks shorter than when he is beside a man of his own height.  

And, the exact opposite of what Navarro said is also true i.e., when money is abundant, bread, wine, cloth, labor etc., are worth more; you have to pay more fiat notes to buy the same amount of wine, cloth, bread etc., now than before the increase in the supply of money. Today in India money - the fiat currency rupee - is worth less because it is abundant due to RBI's loose monetary policy. This same inflationray policy is also the cause of weaker rupee in the foreign exchange market. Tomas de Mercado explained the causes of this weakness or strength of money in the foreign exchange market. In 1569 he published his work Tratos y Contratos de Mercaderes, in which he said: 

The second point is that from Seville on Medina, Lisbon, and any other place, the thing that causes a rise or fall in the market is the abundance or scarcity of silver. If it is abundant the rate is low, and, if scarce, high. Clearly, then, abundance or scarcity causes money to be little or greatly esteemed. 

Clearly in India today, rupee is printed in abundant supply by the RBI, which is causing it to depreciate against other currencies in the international foreign exchange market. And, as Navarro said, this abundance is also making every other economic goods dearer.

Next scholar, Martin Gonzalez de Cellorigo, published his work Memorial de la Politica Necessariay util Restauraci6n a la Republica de Espana in 1600 in which he makes number of good points which exposes many economic fallacies which we see being used today by the government propagandists. Re money as wealth of the nation, he said: 

...This is because we will not understand that true wealth does not lie in the possession of great quantities of gold and silver (whether wrought, coined, or in bullion) which are destroyed as soon as they are consumed, but in the possession of things which, even though they are consumed by use, are yet preserved in kind by the medium of substitution, which enables us to take gold and silver from out of the hands of friends and enemies, just as we have negligently allowed them to be snatched from our own... 

...It is likewise an error to suppose that in good politics the wealth of a State is increased or decreased because the quantity of money in circulation is larger or smaller. 
 
The same is true with respect to merchandise and foreign trade: speaking generally, Spanish prices are high on account of our large circulation, although our products could find an easy vent if we so desired. But apart from these cases the same may be done with little money as with much, as is well proved by the contracts made a hundred years ago: for a thing that could then be bought for one real is worth fifty today. The Romans were quicker to understand this. When Paulus Aemilius (as the histories relate) brought the gold and silver from out of Macedonia, the estimation of things rose (so Pliny, Plutarch, and other authors say) by a third. And when Julius Caesar caused the spoils of Egypt to be brought to Rome, usury and the exchanges fell heavily and the cost of living rose.

The implication of Martin Gonzalez's analysis for today's India is, that the true wealth of India is not in having abundance of rupee notes and coins! It is in having abundant supply of final consumption goods. And as he said, in India prices are high today mainly because there are more rupee notes and coins in circulation, again due to RBI's lackluster monetary policy. As it happened in Ancient Rome, our cost of living is increasing because RBI is bringing rupee notes into existence out of thin air. Rome had to at least conquer Egypt to bring its money supply - which was Gold and Silver - into Rome, while RBI just have to push few keyboard buttons to increase the money supply out of thin air!!!

Then we have Luis de Molina. He said:

Just as an abundance of goods causes prices to fall (the quantity of money and  number of merchants being equal), so does an abundance of money cause them to rise (the quantity of goods and number of merchants being equal). The reason is that the money itself becomes less valuable for the purpose of buying and comparing goods. Thus we see that in Spain the purchasing­ power of money is far lower, on account of its abundance, than it was eighty years ago. A thing that could be bought for two ducats at that time is nowadays worth 5, 6, or even more. 

There you have it. Molina very clearly cited the reason why prices are going through the roof in India and elsewhere. It is because of abundance of money i.e., fiat rupee notes.

As we can see above, as long as the supply of money is going to rise via RBI's monetary policies, prices will continue to climb and the rupee will continue to depreciate against other currencies. The only solution of inflation is to immediately stop money printing and for that RBI's dismantling is necessary. This politically incorrect work we can not expect from the politicians and bureaucrats. In the end this phony fiat currency system will implode from inside due to very high level of inflation and following deep depression. Common man's focus right now should be only on protecting his wealth from this destruction.