"Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety."
- Benjamin Franklin
This was the quote in the first page of the book, "The road to serfdom" by Hayek (probably the greatest advocate of free market theory). And this is the perfect one line summary of Hayek's theory.
I am in the process of assimilating Hayek's theory. I shall write more about it once i do that.
Saturday, March 15, 2008
The Rs.60,000 crore farm loan waiver in Budget 2008
Few of the questions that came up to my mind when I read about this relief package announced by "P.C., the populist"...
- What is the fundamental cause for the farmer's indebtedness? Did they grow the wrong crops at the wrong time or is it because of the too low/too high rainfall?
- Should the farmers continue to bet on such rainfall sensitive crops?
- The Finance Minister indicated that more credit should be available to the farmers. And that once their old loans are waived they should be eligible for fresh loans. What if the farmers bet on the same crops and fail again? Will the Government pay off their loans again?
- Isn't the Government covering up the consequences of their bad decisions? So, where's the motivation for the farmers to act right?
- What about the farmers who acted harder and wiser and repaid their loans? Doesn't this demotivate them?
- I learnt that the money would be paid to banks in cash over next 3 years from the budget provisions (which means that includes my money too). So whats the opportunity cost of the Rs.60,000 crores spent on this ?
- What is the fundamental cause for the farmer's indebtedness? Did they grow the wrong crops at the wrong time or is it because of the too low/too high rainfall?
- Should the farmers continue to bet on such rainfall sensitive crops?
- The Finance Minister indicated that more credit should be available to the farmers. And that once their old loans are waived they should be eligible for fresh loans. What if the farmers bet on the same crops and fail again? Will the Government pay off their loans again?
- Isn't the Government covering up the consequences of their bad decisions? So, where's the motivation for the farmers to act right?
- What about the farmers who acted harder and wiser and repaid their loans? Doesn't this demotivate them?
- I learnt that the money would be paid to banks in cash over next 3 years from the budget provisions (which means that includes my money too). So whats the opportunity cost of the Rs.60,000 crores spent on this ?
Tuesday, March 4, 2008
Economics of Discrimination
We had an economics professor (Dr.xxxx) deliver us a guest lecture on economics of discrimination. He spoke about how the white males had dominated the United States during his generation (he is around 60 yrs old..so shud be a baby boomer) and how opportunities were denied for the blacks and Hispanics.
And then we discussed about the affirmative action policies and about how the white males are now in the receiving end. Dr.xxxx said, " I feel bad when I see my grandson struggle. We didn't have to go through this when we were young. But, yeah.. we got too many benefits. So you guys need to pay a price for that".
And Michael, my friend responds.." Dr.xxxx, then why don't you give us ur social security??"
And then we discussed about the affirmative action policies and about how the white males are now in the receiving end. Dr.xxxx said, " I feel bad when I see my grandson struggle. We didn't have to go through this when we were young. But, yeah.. we got too many benefits. So you guys need to pay a price for that".
And Michael, my friend responds.." Dr.xxxx, then why don't you give us ur social security??"
Friday, February 29, 2008
A borderless and frictionless economy: Part-1
- "Why is it so hard for the internationals to get a visa to work in the United States?"
- "Why do people in US crib about outsourcing?"
- "Honda closes down a manufacturing plant in Ohio. What lies in future for the auto workers in the US?"
- "Is this another structural shift in the American economy? If so, is United States well equipped to handle this structural shift?"
- "For how long can China sustain this manufacturing boom?"
- "Will Vietnam be the next China to the world?"
- "When will Wal-Mart be able to open its first retail outlet in India? Will the restrictions in FDI (Foreign Direct Investment) be taken off?"
- "Will the 'Lexus' forces of Economic Integration eventually overcome the 'Olive Tree' forces of Identity and Nationalism?" ( Borrowed the terms from Thomas Friedman's 'Lexus and the Olive Tree'. Haven't read the book though.)
- "Will P2P business models present a potential alternative?"
- "Is the world really flat as Tom claims?"
Did i doze off searching answers for the above questions? Might be. That is probably why i dreamed about a border less and frictionless world.
Lemme try to figure out answers for the first 5 questions. I dreamed about a free economy in which goods, people and ideas flow freely between countries. There are no hurdles and no friction. No cap in the H1 visas. Let people move wherever their services are needed. Let the country that is good in producing guns produce as many guns as efficiently as possible and the one thats good in producing butter produce that. And let the two countries trade their produces. What is the point in carrying out activities in which you are not efficient at, which are not your strengths? If India can provide better IT services, do good R&D and if China's manufacturing is better let them do it. And let the United States trade its strengths with China and India.
But this is kind of a structural shift in the American economy. Moving from manufacturing to more knowledge oriented economy. Is the US equipped well enough to handle this shift? The last time there was a structural shift in the US economy was after the second world war. But the US had the advantage of being a monopoly then. The war devastated Europe and Japan were just beginning to recover. India and China were nowhere in the picture.
But things are not the same this time around. The European Union is far more stronger now. China and India are fast catching up and might soon land up in the list of top 5 economies. Russia is fast ascending even after the disintegration of the USSR. Terrorism is rampant & wide spread across the globe. The war on Iraq has let the budget deficit grow into a monstrous size. Transition from a manufacturing to a knowledge based economy is much more complex. This requires a huge investment on the human capital. Its time for the policy makers in the US to analyze and understand whats their core competence in this new economy and help the American labor force acquire those skills to sustain in this new world. People who fail to understand the importance of the human capital will be left out.
I see two solutions for this. An ideal border less world solution for this would be to let the manufacturing workers in the US migrate to China and India. And let the knowledge based skilled workers from India and China come and work in the US. Since the ideal solution is not always practical, the more pragmatic solution would be to increase the penetration of formal education in the US workforce and make them employable in the knowledge based economy.
And beware China. A decade from now the same scenario could happen in China. As more companies move their manufacturing to China (because of cost arbitrage), the demand for the labor goes up. When the supply ceases to increase proportionally with the demand, the wages will go up. This will result in a higher cost. Thus China will cease being a low cost production alternative. But will the production be shifted back to US after a decade? "No". That is not likely to happen. A backward structural shift does not take place. Instead the production would move to other place like Vietnam, Thailand, South America, Africa, etc.
India, ever since the opening up of economy, has been growing rapidly. What began as a boom in the Information Technology sector has now turned into a wide spread growth and success story. IT, Bio-technology, Pharma, Auto are some of the sectors that moved far ahead in India. But still there are sectors that remain closed. The organized retail sector, port handling, nuclear energy, etc are some of the sectors that are not open for foreign players to participate. The FDI cap in the multi-brand retailing has halted Wal-Mart's plans of opening up retail outlets in India.
So, what could be the benefits of a border less world? Each one does what he is best doing at. The manufacturing expert does manufacturing, IT expert creates software and services, banking expert does banking, etc. This improves the overall productivity drastically. Lets have one common trading currency, so that the effects of the exchange rates can be negated. Best quality goods can be made at least cost. A free and fair trade can be carried out between countries.
And what are the potential hurdles to this? The Olive tree forces of "Nationalism and Identity". People in most of the countries associate themselves with their religion first, next with their country and least with the mankind as a whole. Will this pride of identity and nationalism let the people across borders get together and work and trade with each other. Can that friction be eliminated?
A free world economy is inevitable. But how long will it take to achieve that is the question? The phenomenal growth in India for the last decade has not evaded the tire-2, tire-3 cities there. The hitherto unheard of towns and cities now host some of the biggest factories and IT parks. The standard of living in these places has increased manifold. If this growth formula can be extrapolated in a global scenario, the opportunities for the third world countries is not far behind. If its India and China now, it could well be some other country tomorrow. The overall growth in the global economy will percolate into these third world countries too. Its just a question of time.
The P2P business model is greatly aiding this process. The Peer to Peer model originated during the internet era. The great reach and connectivity offered by the internet is transforming the way business is done. People no longer have to got to a bank to secure a loan. We need not go to a music store to get a music CD or DVD. The online file sharing system has revolutionized the way media content is shared. P2P money transactions have greatly increased with websites like "Prosper.com". The borrowers and lenders come together and meet up through the portal. The borrower gets a rate that is lesser than the bank lending rate and the lender earns more than the bank deposit rate. This creates a win-win situation for both. People with solar panels now sell power to their neighbors. This brings people more closer.
So, is the world really flat? Is a frictionless free world economy a possibility? It is. We are moving much more faster towards it than we think we are. My only wish is that I could see that in my lifetime.
-Sam
- "Why do people in US crib about outsourcing?"
- "Honda closes down a manufacturing plant in Ohio. What lies in future for the auto workers in the US?"
- "Is this another structural shift in the American economy? If so, is United States well equipped to handle this structural shift?"
- "For how long can China sustain this manufacturing boom?"
- "Will Vietnam be the next China to the world?"
- "When will Wal-Mart be able to open its first retail outlet in India? Will the restrictions in FDI (Foreign Direct Investment) be taken off?"
- "Will the 'Lexus' forces of Economic Integration eventually overcome the 'Olive Tree' forces of Identity and Nationalism?" ( Borrowed the terms from Thomas Friedman's 'Lexus and the Olive Tree'. Haven't read the book though.)
- "Will P2P business models present a potential alternative?"
- "Is the world really flat as Tom claims?"
Did i doze off searching answers for the above questions? Might be. That is probably why i dreamed about a border less and frictionless world.
Lemme try to figure out answers for the first 5 questions. I dreamed about a free economy in which goods, people and ideas flow freely between countries. There are no hurdles and no friction. No cap in the H1 visas. Let people move wherever their services are needed. Let the country that is good in producing guns produce as many guns as efficiently as possible and the one thats good in producing butter produce that. And let the two countries trade their produces. What is the point in carrying out activities in which you are not efficient at, which are not your strengths? If India can provide better IT services, do good R&D and if China's manufacturing is better let them do it. And let the United States trade its strengths with China and India.
But this is kind of a structural shift in the American economy. Moving from manufacturing to more knowledge oriented economy. Is the US equipped well enough to handle this shift? The last time there was a structural shift in the US economy was after the second world war. But the US had the advantage of being a monopoly then. The war devastated Europe and Japan were just beginning to recover. India and China were nowhere in the picture.
But things are not the same this time around. The European Union is far more stronger now. China and India are fast catching up and might soon land up in the list of top 5 economies. Russia is fast ascending even after the disintegration of the USSR. Terrorism is rampant & wide spread across the globe. The war on Iraq has let the budget deficit grow into a monstrous size. Transition from a manufacturing to a knowledge based economy is much more complex. This requires a huge investment on the human capital. Its time for the policy makers in the US to analyze and understand whats their core competence in this new economy and help the American labor force acquire those skills to sustain in this new world. People who fail to understand the importance of the human capital will be left out.
I see two solutions for this. An ideal border less world solution for this would be to let the manufacturing workers in the US migrate to China and India. And let the knowledge based skilled workers from India and China come and work in the US. Since the ideal solution is not always practical, the more pragmatic solution would be to increase the penetration of formal education in the US workforce and make them employable in the knowledge based economy.
And beware China. A decade from now the same scenario could happen in China. As more companies move their manufacturing to China (because of cost arbitrage), the demand for the labor goes up. When the supply ceases to increase proportionally with the demand, the wages will go up. This will result in a higher cost. Thus China will cease being a low cost production alternative. But will the production be shifted back to US after a decade? "No". That is not likely to happen. A backward structural shift does not take place. Instead the production would move to other place like Vietnam, Thailand, South America, Africa, etc.
India, ever since the opening up of economy, has been growing rapidly. What began as a boom in the Information Technology sector has now turned into a wide spread growth and success story. IT, Bio-technology, Pharma, Auto are some of the sectors that moved far ahead in India. But still there are sectors that remain closed. The organized retail sector, port handling, nuclear energy, etc are some of the sectors that are not open for foreign players to participate. The FDI cap in the multi-brand retailing has halted Wal-Mart's plans of opening up retail outlets in India.
So, what could be the benefits of a border less world? Each one does what he is best doing at. The manufacturing expert does manufacturing, IT expert creates software and services, banking expert does banking, etc. This improves the overall productivity drastically. Lets have one common trading currency, so that the effects of the exchange rates can be negated. Best quality goods can be made at least cost. A free and fair trade can be carried out between countries.
And what are the potential hurdles to this? The Olive tree forces of "Nationalism and Identity". People in most of the countries associate themselves with their religion first, next with their country and least with the mankind as a whole. Will this pride of identity and nationalism let the people across borders get together and work and trade with each other. Can that friction be eliminated?
A free world economy is inevitable. But how long will it take to achieve that is the question? The phenomenal growth in India for the last decade has not evaded the tire-2, tire-3 cities there. The hitherto unheard of towns and cities now host some of the biggest factories and IT parks. The standard of living in these places has increased manifold. If this growth formula can be extrapolated in a global scenario, the opportunities for the third world countries is not far behind. If its India and China now, it could well be some other country tomorrow. The overall growth in the global economy will percolate into these third world countries too. Its just a question of time.
The P2P business model is greatly aiding this process. The Peer to Peer model originated during the internet era. The great reach and connectivity offered by the internet is transforming the way business is done. People no longer have to got to a bank to secure a loan. We need not go to a music store to get a music CD or DVD. The online file sharing system has revolutionized the way media content is shared. P2P money transactions have greatly increased with websites like "Prosper.com". The borrowers and lenders come together and meet up through the portal. The borrower gets a rate that is lesser than the bank lending rate and the lender earns more than the bank deposit rate. This creates a win-win situation for both. People with solar panels now sell power to their neighbors. This brings people more closer.
So, is the world really flat? Is a frictionless free world economy a possibility? It is. We are moving much more faster towards it than we think we are. My only wish is that I could see that in my lifetime.
-Sam
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