Wednesday, August 16, 2017

Can Monetary Easing Increase India’s Economic Growth?

The second volume of government’s Economic Survey recently flagged a great risk of faltering economic growth in India, and demanded a loose monetary policy stance from the RBI in the form of further easing of the interest rate to combat this downside risk. The report said, Forecasting “greater downside risks” to economic growth, the Survey, tabled in Parliament Friday, argues that the “scope for monetary policy easing is considerable” and could go up to 75 basis points.

The underlying theoretical basis of this recommendation of monetary policy easing is that a loose monetary policy in the form of lowering of interest rate will revive the economic growth. This means, this policy of loose money will only work if that underlying economic theory is correct. In this article we will analyze this theory and its implications. Is it true that a loose monetary policy can revive economic growth? To understand the answer of this question we need a quick short lesson of sound economic theory, which I present below.

What is the real Wealth of Nation?
As most economic thinkers like Adam Smith, John Stuart Mill, J B Say or Frederic Bastiat etc., of the past age said, the wealth of a country is nothing else but the amount of economic goods that it produces in a given time frame. It is measured by the supply of things like food, potable water, clothes, homes, shoes, cars, computers etc., etc., myriad of endless products. The modern way of measuring wealth, what the mainstream economists call GDP (Gross Domestic Product), by combining these goods and then multiplying them by market price is faulty (see here and here).

What is Economic Growth?
Economic growth is nothing but yearly growth in the above defined wealth of nation e.g., if the Indian economy last year produced 5 homes, 10 pairs of clothes, 15 pairs of shoes and next year it produces 10 homes, 20 pairs of clothes, 25 pairs of shoes then we say that the economy is growing; the economic growth rate can be calculated by above given YoY (year over year) numbers of homes, clothes and shoes.

What Determines Economic Growth?
After understanding what wealth and its growth is, we can now understand what determines the economic growth of an economy.  We all know that to produce wealth any economy requires different factors of production. The original factors of production that nature has endowed us with are land and labor. But by using just land and labor the production process is less productive. What makes land and labor both more productive is the use of capital goods like an axe or a spade or a shovel or modern day automatons like factory robots etc.  For example, if I ask you to dig a 10 feet deep and wide hole in a ground with your hands then you might take 10 hours to do that job, but if I give you a hand shovel then you will be able to do that job just in an hour. The problem that primitive humans faced was that like land and labor capital goods are not readily available in nature. What makes the capital good a unique factor of production is that we have to produce it first before we use to produce goods meant for final consumption. Only the use of these capital goods will help any economy grow in future. But the problem for any economy is to produce these capital goods in the first place before they can be used to increase the future production of final consumption goods. This means, to understand what determines an economy’s economic growth we have to understand the whole process of producing capital goods first and I now discuss that process. We use the method of Crusoe economics for this purpose. Suppose Robinson Crusoe is stuck on an island and now he needs to survive. He is catching 10 fish with his bare hands everyday working for 10 hours, and he consumes all 10 fish daily for survival. In this condition his life and production method is primitive like our ancestors. He knows that this type of hand to mouth survival is dangerous because if he gets injured or sick for some days then he has nothing in spare for survival; he may die. He decides to better his condition in future. For increasing his chances of survival and standard of living he needs a buffer stock of fish i.e., saving and for that he will have to produce more fish than he is consuming right now i.e., he will have to produce more than 10 fish daily. In our modern day language Crusoe will have to increase economic growth of his economy. What should he do to catch more fish daily? He will need fishing net, of course. Only the use of capital good (fishing net) can increase his labor’s productivity. The problem here is, fishing net is not available ready in nature; he will have to produce it first. Crusoe decides to make the fishing net. Now, suppose making a net requires 10 hours a day work. This means, when Crusoe is making this net he cannot catch fish on that day. This is the economic cost of making the net. He will have to make provision of food for that day when he will make the fishing net so he decides to eat only 5 fish out of his total 10 fish catch today and save 5 fish for the next day consumption when he will sit down to make the net. We can see that he will have to sacrifice some of his present consumption (5 fish) in order to make his future better and secure. The next day now he will invest 5 fish that he has saved yesterday in making the fishing net (basically Crusoe will give wages to himself in the form of 5 fish out of his saving, and he will use this wage for consumption). This way the next day the fishing net (the capital good) is ready and now Crusoe can catch 30 fish using that net working 10 hours a day; he can now consume his daily quota of 10 fish and save 20 for any kind of future unforeseen contingencies. We say that Crusoe’s economy has experienced economic growth; his economy is growing making his life safe and standard of living higher.

We can break down the whole process presented in above analysis in simple economic principles, and I quote Robert Murphy, in the jargon of economics, we can step back and describe what Crusoe has done. By consuming less than his daily income—by living below his means—Crusoe saved fishes in order to build up a fund to guard against sudden disruptions in his future income. Moreover, Crusoe then invested his resources into the creation of a capital good that greatly augmented his labor productivity. (I have replaced coconut, the original example used by Murphy, with fish in this quote).

Now we know what determines any economy’s economic growth. The citizens of an economy first must produce more than what they are consuming, then they must save the surplus production and invest it in producing physical (and human) capital goods. Only this accumulation of physical and human capital will then increase the future wealth (income) of the economy and the economy will grow. There is no escape for any economy from this process. There are no other short cuts.

What is monetary policy? Can it increase economic growth?
After seeing the whole process of generating economic growth above now we can answer our original question, but before that we briefly need to understand what monetary policy is. Monetary policy is nothing but the decision by central bankers to either increase or decrease the supply of fiat paper currency (what they call money) in the economy. We have to understand that money is just a common medium of exchange and nothing else. Injection of more money, via lowering interest rates, will not do anything to increase production of economic goods in future. As long as real pool of saving (i.e., savings of formerly produced goods) and investment is not increasing, economy cannot grow. Injecting more money in an economy will only increase prices of various producer and consumer goods. It will only distort the production structure of the economy by transferring available limited resources, without augmenting them, from productive desirable sectors to unproductive undesirable sectors i.e., it will only generated business cycles further damaging the economy and economic growth.

Here I cannot elaborate all the complex processes involved in above analysis, but those who are interested in understanding can read Peter Schiff’s book, How an Economy Grows and Why It Crashes.

Conclusion
As we saw above, only production, saving, investment and accumulation of physical and human capital can increase economic growth of the Indian economy. Any manipulation of the market interest rates by manipulating the supply of paper currency rupee by RBI will not increase economic growth. In fact, it will only damage the economy by generating inflation and business cycles. This means, RBI and government’s actions will decrease economic growth of the Indian economy.

Tuesday, August 1, 2017

The Myth of Political Opposition

We are witnessing an age old fact about the State playing out in front of our eyes in India today. This fact is that of, as Murray Rothbard said, the state as an apparatus of parasitism which uses, as Franz Oppenheimer said, political means for its survival. The state is an institute which represent political power which its officials like politicians and bureaucrats use to parasitically live-off productive people on whom they forcefully and clandestinely rule by use of propaganda. One of such propaganda is that there are opposition parties in politics. Of late opposition party politicians are joining the ruling BJP party en-masse in India e.g., many Congress politicians switched over to BJP in the state of Gujarat, The Bihar chief minister Nitish Kumar broke-off his alliance with Congress and other so-called anti-BJP parties like Lalu Yadav’s RJD to form a new government with its enemy BJP party, quite a few MLAs from the SP and BSP parites also joined BJP etc. These events illustrate the above mentioned fact that the whole concept of political opposition is a myth. This myth is perpetrated by the politicians themselves to misguide the public to rule over them. The fact of the matter is exactly the opposite. All political parties only represent political power over people, which they use for the parasitical survival whether they are in government or outside it for a while. There is no actual battle between BJP and Congress and other political parties when it comes to fleecing the productive tax payers for their parasitical survival. They all agree on that common purpose. The only disagreement is about the speed or manner of fleecing. None of these parties represent the real opposition against the coercive state power. That opposition remains with individuals and institutions that are fighting the state power root and branch. The real political battle is always between the people vs. the state (aka government).

Tuesday, July 25, 2017

Indian Nation State is Shooting in its Own Foot

In the zeal of controlling everything that either walks or doesn’t walk, the present Narendra Modi government of India is shooting in its own foot. It is giving one shock after another to the society and economy in the form of mob lynching of innocent people in the name of “cow protection”, beef and myriad of other bans, attacks on minority communities, compulsory use of Aadhar card, demonetization of 86% of total currency supply, GST etc.

Why am I terming these policies as government shooting in its own feet? The reason can be understood with the aid of the laws of human action. Any individual needs freedom to achieve his full potential and flourish e.g., if I chain you in one room or throttle you then you cannot act to do something progressive and you will most probably die. The same is true for the body economy and society. Freedom is the precondition of any growth or development process. If people and businesses are strangulated by myriad of controls and regulations by the government, they cannot flourish and progress. On the other hand, an economy without the government interference will flourish to its full potential e.g., a free market enterprise economy, where there are zero taxes and controls and regulations of the government, will thrive due to market process of competition among entrepreneurs who will be competing to win over the businesses of their customers by providing them best quality goods and services at the cheapest possible prices. Competition will fuel the innovation process which will continuously improve the quality of products while lowering their cost of production and price. A society free of controls, both physical and importantly mental, can experiment with different social, cultural, political and religious ideas and can launch itself on the path of the civilization process. A place where dissent is not suppressed can quickly go on the path of renaissance and enlightenment. A society with a close and static mind will stagnate and decay sooner or later.  Only a dynamic society can become civilized.

In light of the above mentioned facts it is easy to see that the policies of the present Indian government is reversing all the progress that this country has achieved after 1947, especially after 1990 economic reforms of leaning more in the direction of market and private sector. Under the weight of these myriad of controls the economy is crumbling. Indians are becoming poor. The middle class is slowly vanishing. And here remember, a poor nation state can never defend itself from anyone either internally or externally! The way Modi government is locking its horn with the Chinese nation state right now a conventional war cannot be ruled out. And, if tomorrow there is a war the Indian nation state only has resources enough to fight a war for 10 days! The controls that the present government is putting on physical lives and minds of people and the way one after another community is targeted for hatred and violence, the day is not far enough when the Indian nation state, which is a forcefully put together artificial entity, itself will stop existing.

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.

Conclusion
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.

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.
 
Conclusion

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.