Thursday, September 27, 2012

Chief Economic Adviser Raghuram Rajan's Flawed Economics

Dr. Raghuram Rajan - the finance professor from the Chicago University Booth School of Business - just took over the charge of the chief economic adviser of the UPA government's finance ministry. As expected from him, upon taking over the charges, he has straight away started to misguide the public. When Kaushik Basu - the former chief economic adviser - left his post, I said, that the new adviser will just like be the old one. 

Dr. Rajan, in his opening interview with the press said this, "One of the concerns of the last few years has been food inflation, which has been not so much within the control of the government, but which has been sort of because our population has become richer ... and, therefore, demanded more sort of higher end food products like, milk, egg, meat rather than the old cereals."

I don't know where should I begin to comment on this ridiculous and totally flawed statement, which is fraught with economic absurdities and pack of lies. Let me first focus on what he meant when he said, food inflation. This is important because these mainstream economists don't understand the true meaning and nature of inflation. What he meant by food inflation is, the rise in the price of various food products. For these economists inflation means 'rise in the general price level'. So, he is essentially saying that, one of the concerns of the last few years is the rise in the price of various food items. Secondly, he said, that government is not responsible for this rise in food prices! Rise in food prices is a phenomena which is not so much within the control of the government, and this is a total pack of lies coming from the mouth of the chief economic adviser Dr. Rajan. Government, in fact, is not only totally responsible for this rise in the price of food items, but if they wish, then, they can immediately bring an end to this rise via sound economic policies. To fully comprehend my argument, readers must first understand what determines the price of various food items, and for that a sound understanding of the market forces of demand and supply is necessary. Price actually is an exchange ratio of two economic goods which are trading in the market process of buying and selling. For example, in a primitive barter economy, if Robinson sells his 20 coconuts for 10 fish of Sunday, then, the price of 1 coconut is 0.5 fish and the price of 1 fish is 2 coconuts. Now, in a modern day indirect exchange economy where money is used a common medium of exchange, this trade will look like this: Robinson selling his 20 coconuts for Sunday's 100 rupees, which means, the price of 1 coconut is 5 rupees. In short, to buy 1 coconut from Robinson, Sunday will have to give him one 5 rupee note. Now, because money is the common medium of exchange, and it is one half of every economic transaction, the prices of all food items, which are trading against money, are expressed in terms of this common measure. In India fiat currency 'rupee' is a legal tender i.e., common medium of exchange, and thus prices of all food items are denominated or expressed in rupee e.g., 1 kg potato is 20 rupees, 1 kg tomato is 15 rupees, 1 kg onion is 30 rupees, 1 quintal wheat is 600 rupees etc. What these various exchange ratios - i.e., prices - mean is, that to buy 1 kg potato you have to give in exchange two 10 rupee notes. If you understand this market process, then, the meaning of rise in the price of various food items means, compared to past, now you have to give more of those fiat currency notes in exchange e.g., suppose the price of 1 kg potato now rise to 40 rupees, that means, that you are now giving four 10 rupee notes.

Now, the question is, how this price rises from 20 rupees to 40 rupees? The answer lies in the supply of total rupee notes that people are having with them. Whereas people were only giving two 10 rupee notes in exchange for 1 kg potato in past, now they are in a position to give four 10 rupee notes for that same 1 kg potato. This is only possible when these people are not earning their rupee notes by working and producing something in the labor market, but are receiving this money for free from the government or banks, which in turn is only possible when the Indian central bank RBI is creating money out of thin air and handing it over to the government - in the form of government treasury purchases - and the banks via their easy monetary policy. In a free market economy, without the existence of government or its central bank, every individual will have to actually earn their rupee notes by first working in the labor market, producing some good (or service) which is valued by consumers, selling it to consumers in return of which receiving their rupee notes, which those consumers also have earned in a similar way. If one understands this economic process, then, it is easy to understand J B. Say's Law of Markets. While stating this law, J B. Say said: 'One can only buy with what one has produced', 'The one product constitutes the means of purchasing another'. This law implies, that at the economy wide level, production of various economic goods will create the demand for those various economic goods produced in that economy e.g., suppose in an economy there are 4 people, a farmer, a mason, a tailor and a cobbler. They all need economic goods which are produced by each of them. Farmer needs home, cloth and shoes; cobbler needs food, home, and cloth; tailor needs food, home, and shoes; and, finally, mason needs food, cloth and shoes. Farmers food is demanded by all 3 others, so to buy shoes from cobbler, cloth from tailor and home from mason, farmer will have to first produce a surplus food and then sell it to cobbler, tailor and mason in return getting his shoes, cloth and home. Mason will produce surplus homes and sell it to farmer for his food, tailor for his cloth and cobbler for his shoes. The same is true for the cobbler and tailor. This means, that each individual's production constitutes their respective demand of each others' produce. The point is, without producing the surplus first, no demand for others' produce can come into existence. In a nutshell, demand can not increase without a prior increase in the production. But, in an economy where government intervention is omnipresent and where RBI is the central planning authority in charge of money supply, demand very much can outstrip the production of various food items. And, this in turn, can increase the rupee price of every food item in the economy. It will not only increase price of food items, but every other economic goods as well. This is exactly what is happening in India. RBI is creating money out of thin air, which is first going in the hands of most unproductive people of  the Indian society like government servants, bureaucrats, politicians and their cronies, fraud bankers, and corporatists who have big connection with the government and banks. This people are getting this rupee notes without any prior productive work, and so when they go and spend this rupee notes in the market, it raises prices of various food items slowly sector by sector. These are the people who are giving four 10 rupee note for 1 kg potato. 

In the light of this analysis, it is now clear that Dr. Raghuram Rajan is either lying or his economics is totally flawed. If Indian people are becoming richer by producing and selling economic goods, then, they have already produced the goods which are in demand in the market, and in that case, price should not rise relentlessly as it is rising since time immemorial. But, this surely is not the case in India. What Dr. Rajan actually means by becoming rich is, people are having more money in their pockets, which they have not earned through some kind of productive work. In this case, his definition of riches itself is flawed. Country can become rich - i.e., wealthy - only when its inhabitants are producing more economic goods via saving and investment. Just having more money in your pocket or bank account doesn't mean you are rich as the opposite photos from Zimbabwe hyperinflation episode shows. I am reading Étienne Bonnot, Abbé de Condillac's Commerce and Government, and this 18th century philosopher discusses this whole issue of wealth/riches brilliantly. Here is Condillac, "But whatever value one places on gold and silver, the first and main wealth is not at all in the plentifullness of these metals. This wealth is only in the abundance of products which are consumed. However, because with gold and silver one can lack for nothing, one soon comes to regard these metals as the sole wealth, or at least as the principal wealth: that is an error" (emphasize mine). Because during his time Gold and Silver were used as money, he talked about them, but the same is applicable today for fiat currency rupee notes. In fact, Gold and Silver at least are valued as jewelery in the market while fiat paper rupee note is just a useless piece of paper! 

Surely the above mentioned minority of unproductive class of the Indian society is becoming rich - both money and goods wise - because they receive RBI's freshly printed notes first, but majority of other people who receive this money in the end are becoming poorer because the purchasing power of their rupee notes is steadily declining, and thus, they can't buy enough goods for their livelihood.

And, his statement that, egg, milk, meat etc., are higher end food is a pure baloney. It is his value judgement and his own whimsical idea. Milk and egg are, may be, higher end food items for Dr. Rajan, but the same is not true, at least, for me. For me, milk is the most basic necessity item in my life, and I am sure there are many millions of people out there for whom milk or egg or meat is not a higher end but a necessity product in their lives. Dr. Rajan must understand that he and his government has no moral rights to pass on such value judgements on other peoples' preferences. He must think about the millions of poor people who are struggling to buy even the old cereals about which he is talking about so casually. Inflation is killing the common men and instead of mocking them by making such silly statements, Dr. Rajan should resign and go back to Chicago to do his private market teaching work.

If Dr. Rajan is serious about eradicating inflation - which I am sure he is not - then he should tell Manmohan Singh to immediately dismantle the RBI and stop intervening in the economy. When RBI will stop printing money and a freed economy will start progressing, prices of various economic goods will come down slowly but surely. As long as RBI is active and government is intervening in the economy, inflation and its one effect price rise won't disappear.

Dr. Rajan also urged to boost productivity to fight inflation. He said, "In order to rebalance or reduce food inflation we have to produce more of that. Which means more productivity. So productivity is going to be part of the fight against inflation." This again is a pure baloney. Inflation has nothing to do with the productivity. Inflation is, creation of money and credit out of thin air and rise in prices is one chief consequence of inflation, and not inflation itself. That means, no matter how much more productivity of Indian workers increases, if RBI keeps on creating money and credit out of thin air at a faster rate than this rise in productivity, inflation will never come down, and consequently prices will never come down too. The productive class of the Indian society is already working very hard, but all the fruits of their hard labor is stolen by the RBI's inflationary policy. Inflation is a hidden tax on productive peoples' earnings. RBI is looting the public and giving that looted wealth to its crony government politicians, bureaucrats, fraud banksters and fascist corporatist business houses.

As I said in the beginning, immediately after joining the finance ministry, Dr. Rajan has started misguiding the public on these vital economic issues. His statement that government is not in control of inflation is totally wrong. Government and its central bank RBI are solely responsible for inflation and its consequences, high prices, wealth transfer and boom-bust cycles. They are stealing productive peoples' wealth and giving it to their cronies. Only those people who are in bed with the government are becoming richer. Majority of productive Indian populace is struggling to find their ends meet amidst this highly inflationary economy.  


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