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.

Monday, May 15, 2017

Deadly Military Industrial Complex Rising in India

Since the Narendra Modi’s BJP government came to power in 2014 the dreaded military industrial complex is taking its firm roots in India e.g., recently the present defense minister of India Mr. Arun Jatiley held consultations with representatives of Chambers of Commerce and Industry (CII) on the proposed Strategic Partnership (SP) model meant to promote the private sector in defense manufacturing. Not only this, already many Indian private companies are diverting their manufacturing businesses from consumer goods to war machines e.g., Tata Advanced Systems won a contract of surface surveillance radar project for Navy from the Ministry of Defense; Reliance defense also bagged a contract of 916 crore from the defense ministry; Mahindra group also signed a deal with Airbus to manufacture parts of its Panther helicopters in India. 

These are all the worrying signs of the dangerous military industrial complex taking its deep root in the Indian economy and society. Already the Indian nation state is no. 1 in terms of foreign arms imports in the world, and now within its boundaries too the government is pushing for more resource allocation towards manufacturing of arms and ammunition. This military industrial complex is dangerous because once it gets firmly rooted in an economy it will have to be kept going at any cost because the whole economy will start to depend on it heavily for jobs and growth! The American nation state is the prime example in the world today of the dangerous effects of this military industrial complex. The then retiring US President Dwight D. Eisenhower, in his 1961 farewell speech, warned against this rising military complex in America (see the video below):

No one listened to him and now the US Empire goes on waging one war after another all over the globe just to sell the arms and ammunition being produced by this complex. There are so many vested interest involved in this complex in America right now that simply shutting it down is no longer an option. It will collapse only after it collapses the whole American economy and society. The same will happen in India in future. Just to keep the entrenched military industrial complex going the Indian nation state officials will also go on looking and waging wars everywhere. 

Economic science tells us that any economy, at any time, has scarcity of resources to fulfill goals of its inhabitants. This scarcity means people, in reality the so-called public representative policy makers like the politicians or bureaucrats, will have to choose their ways of using these scarce resources very carefully otherwise there will be a huge wastage of resources, which no country can afford. In a country like India where still around 30% of its people are living below the poverty line such extravagance expenditure by the government – in the fiscal year 2017-18 government budget allocated 3,59,854 crore rupees to the Ministry of Defense – on manufacturing war weapons is absurd and antithetical to its goal of progress. 

I know many will say that India is surrounded by enemies like the Pakistani and the Chinese nation states so it must keep a big military force for the purpose of national defense, but there is little evidence in theory and history in believing that the Indian nation state will be attacked and taken over by either the Pakistani or Chinese nation states in present or in foreseeable future. In fact, if we look at the recent history, then it is the Indian nation state who engineered the disintegration of the Pakistani nation state into modern day Pakistan and Bangladesh! Historically speaking India has been the country with imperialistic dynasties like the Mauryas and the Cholas! The Indian nation state is the reason of worry for most of its smaller neighboring nation states like Nepal or Sri Lanka. And besides that, the whole idea of national defense itself is flawed. There are much better alternative ways of protecting the Indian populace other than state’s standing military forces. 

All in all, the people of India will have to decide, in the end, whether they want their government to use resources in the making of ‘bullets, guns and bombs’ or ‘daal and roti’! If they choose the former, they will starve to death. If they choose the latter, they will survive and thrive.

Saturday, May 6, 2017

Venezuela again proves that Socialism Kills

The latest victim of Socialism is Venezuela. Following are some headlines of past few months concerning that country:
  1. Venezuela Is Starving Once Latin America’s richest country, Venezuela can no longer feed its people, hobbled by the nationalization of farms as well as price and currency controls
  2. Venezuela death toll rises as unrest enters fourth week 
  3. Death toll jumps to 20 in Venezuela protests 
  4. GM halts operations in Venezuela after factory is seized 
  5. Maduro orders Venezuela army into streets 
  6. Clashes in Venezuela as Maduro starts constitutional rewrite
  7. Ranks of Political Prisoners Grow as Democracy Ebbs in Venezuela 
  8. Venezuela has a bread shortage. The government has decided bakers are the problem 
  9. Emaciated Venezuelan elephant becomes latest symbol of food crisis   
  10. Venezuela's epileptic patients struggle with seizures amid drug shortage 
  11. Venezuela is down to its last $10 billion 
  12. Venezuela Follows India’s Example and Voids Half of Its Cash
  13. Heartbreaking image of newborn babies being kept in cardboard boxes in Venezuela due to 'hospital crisis' 
  14. Venezuela: Over 15% of People Eat Garbage to Survive
  15. Venezuela's "Death Spiral" - A Dozen Eggs Cost $150 As Hyperinflation Horrors Hit Socialist Utopia
  16. Hungry gang butchers thorough bred horse after breaking into zoo in search of food 'due to economic crisis'

I can go on and on like this for a little while, but this, I think, is enough to prove the fact of the futility of Socialism. Venezuela is flirting with Socialism since long , and its ugly head came to fore under the charismatic leader Hugo Chavez and his successor Nicolas Maduro. Under them Venezuela tried socialism and failed spectacularly, as expected. Venezuela once was an oil rich country which in the 1950s had a fourth highest GDP ranking in the world, but now it is dirt poor. 

This result was well expected because theory and history both show the impossibility of socialism. The great Austrian economist Ludwig von Mises proved long ago that under a socialist economy, in the absence of the price system, economic calculation of how to efficiently allocate society’s scarce resource is impossible. And this impossibility means wastage of resources on a gigantic scale ultimately resulting into huge chaos as Venezuela’s case proves once again.  

The choice against any country then is between Capitalism (in its pure form) on one side and Socialism on other. The so-called "middle of the road" policy of interventionism will always lead to full Socialism in the end as exhibited by Venezuela. If a country chooses Capitalism then it survives and thrives, but if it chooses Socialism then it kills itself and die as Venezuela shows.

Thursday, April 20, 2017

Parents against High Fees of Schools

Many parents in different states of India, including the state of Gujarat which is my home state, are right now agitating against private schools (sic) for higher fees (see here, here and here). Troubled about the rising cost of their children’s schooling many of these parents are asking the government to control the fees of these schools. The question here is: is this the right way of achieving their goals of lower fees school education? Let us see.

Why School Fees are High?

A basic understanding of the demand and supply analysis will throw light on this question. Education is a scarce economic good just like any other such good like apple or orange that is trading in the market, and consequently its price (fees) is also determined by its demand and supply forces just like prices of apple and orange. In the education market parents and children are the consumers who are demanding education services and schools are the suppliers of those services. The price of education will be higher if the supply of schools is lower than the given demand for it (see graph 1 below) or if the demand for it is higher than the given supply of it. In India the supply of educational services (schools/colleges/universities etc.) is lower compared to the given demand for it.   
Graph 1: Education demand and supply

Now the question arises that, why the supply of educational services is lower in India? The answer is simple: Government monopoly of the whole Indian education sector. The state and central governments in India fully control and regulate the education sector. The government education czars decide how many schools/colleges/universities etc., will open in the country. They decide what these schools will teach and in what manner. They decide who will get admission and who will not. In short, from A to Z of education is determined by these government educational bureaucratic administrators. And anyone who has studied basic economics knows full well that the prime characteristics of any monopoly system are two: 1) lower supply, and consequently 2) higher prices!

So the reason why these private schools can charge higher fees (price) is because there is lack of competition in the education sector because of government imposed monopoly. The price of schooling is higher because the supply of school is less compared to its demand. And the root cause of this shortage of supply is the monopoly regulation of the government of the education sector. The licensing system of the government gives monopoly power to these licensee schools. Under this government monopoly system parents do not have many choices.
What is the Solution?

The only solution of this problem then is to end the government monopoly over the education system. The government must end its control and regulation of education sector and free it for market competition. Once the sector becomes open and competitive, meaning no licenses required for starting your school/college/university, many more new educational institutions will open in the country in turn increasing the supply which will reduce the fees drastically. Not only competition will drive down the price (fees) of education, but it will also improve the quality of education giving more choices to parents for whatever kind of education they want to give to their children unlike present government socialized system where all children are reduced to same level of mediocrity and dumbness.

The fundamental mistake those parents are making is looking for a solution of their problem in a system that itself is the root cause of their problem! Instead of asking the government to control the fees of schools they should be demanding the government to end its monopoly of education system.