China and Economic Freedom

The relationship between economic freedom and prosperity is empirically verifiable. Countries that are relatively economically free — meaning free markets and private ownership of capital — do better than countries that are not economically free.

South Korea, for example, is a rich country and North Korea is a disaster zone; Chileans are better off than Venezuelans; capitalist West Germany was richer than socialist East Germany. Continue reading

Have the Laws of Economics Changed?

The correlation between economic freedom and economic prosperity is well-established and robust. Economics explains why this relationship exists and also the causal direction — economic freedom is the cause and prosperity the effect.

I am by nature in favor of freedom of all flavors, not just economic freedom. I value freedom as an ultimate good, although it fortunately happens to be an instrumental good too. Even if material prosperity did not follow from economic freedom — meaning that it was not instrumental in creating wealth — I would still value economic freedom for itself. Philosophically I am not a utilitarian.

These musings are provoked by a comment to the piece on Economic Freedom and Well-being last week. Here’s the comment:

Continue reading

Ask Me Anything — Is Economics Hard?

There’s a funny story in Robert Heilbroner’s 1953 book The Worldly Philosophers (which has been republished dozens of times):

One evening Keynes was having dinner with Max Planck, the physicist who was responsible for the development of quantum mechanics. Planck turned to Keynes and told him that he had once considered going into economics himself. But he decided against it – it was too hard. Keynes repeated this story with relish to a friend back at Cambridge. “Why, that’s odd,” said the friend. “Bertrand Russell was telling me just the other day that he’d also thought about going into economics. But he decided it was too easy.” Continue reading

Competition in Free Markets

Production

The primary purpose of production is consumption. Economic activity is by definition the production and consumption of goods and services. Except for the special case of the so-called “Robinson Crusoe” economy (an economy in which there is only one person who has to necessarily be self-sufficient) every real economy involves exchange or trade. The ability to trade what one has produced for things that one wants to consume generates wealth and increases welfare.

You can of course restrict your consumption to only those things you produce, but you will have a Hobbesian existence: “solitary, poor, nasty, brutish, and short.”

Exchange

Exchange makes possible the creation of wealth through division of labor and specialization, two intimately connected concepts. Surgeons operate, bakers bake, brewers brew, carpenters build, architects design, programmers code, … ad infinitum. The ability to exchange decouples production and consumption. Crusoe’s production and consumption are rigidly linked. In our case, we don’t produce any of the things we consume, and don’t consume what we produce. Continue reading

An 1980 interview with Hayek

This is a Friedrich Hayek interview by Bernard Levin at the University of Freiburg which was broadcast in May 1980. Hayek was, in my professional opinion, one of the greatest economists of all times. We are wonderfully privileged to be able to watch videos of his brilliant exposition on the web. I am also impressed by Mr Levin; he does his job as the interviewer magnificently. Continue reading

The Peculiar Case of the Somali Shilling

Sudipta, a dear friend in the Silicon Valley, asked me to comment on a March 2013 article titled “Orphaned currency, the odd case of Somali shillings.” The piece is about how the Somali shilling continued to circulate even after the Somali central bank was literally destroyed in the civil war around 1991. The bank notes were “orphaned.”

When Somalia collapsed into civil war in January 1991, the doors of the Central Bank of Somalia were blown apart, its safes were blasted, and all cash and valuables were looted.* But something odd happened—Somali shilling banknotes continued to circulate among Somalians. To this day orphaned paper shillings are used in small transactions, despite the absence of any sort of central monetary authority.

I will leave you to read up that article before continuing here.  Continue reading

On the Distress of Indian Farmers – The Introduction

Of the three major sectors of any economy, agriculture is the primary sector. It is prior in time and naturally enough forms the basis for the other two sectors — manufacturing and services. Without a solid foundation provided by an efficient agricultural sector, no society can prosper.

Everybody — factory workers, quantum physicists, doctors, programmers, musicians, writers, politicians — needs food. Farming is the oldest occupation and all civilizations begin as essentially agrarian societies. Agricultural success is the necessary precondition for the advancement of civilization. Without an agricultural revolution there can be no avenues for social, technological, and economic development.

The claim of this essay is that India has not had a comprehensive agricultural revolution. All the other problems that India faces derive from that failure. The good news is that India has the opportunity to have an agricultural revolution. It has always had that opportunity. Primarily because of plain idiocy — let’s not sugarcoat this bitter fact — India has failed in progressing much beyond subsistence agriculture. India’s abysmal poverty follows relentlessly from that fact. Continue reading

Does capitalism destroy jobs?

If by capitalism one means “free market exchanges and production through the use of privately owned capital”, then indeed capitalism destroys jobs — those jobs that are made redundant by increasing the productivity of labor.

Imagine an economy which only produces food, and the only input to food is labor. Further imagine that the productivity of labor is such that on average, one persons’s labor produces only one’s person’s demand for food. In that economy, all the jobs will be in food production.

Now imagine someone invents a machine (that’s capital — a produced means of production) that doubles the productivity of labor. Let’s call it the Great Invention. Now only half the workers are required to produce food for everybody. That’s destroyed half the existing jobs in our economy,

After the Great Invention, half the labor of the entire economy can now make clothes. Clothes were not available to anyone before the Great Invention. Now the clothes makers can trade some of their clothes for food. There are jobs for people making clothes, and on average the consumption bundles includes both food and clothes.

More great inventions follow that make both food and clothes production more efficient. Further loss of jobs from food and clothes production. But now some labor can be devoted to making shelters. Fewer jobs in food and clothes production but more jobs in shelter construction. You get the picture.

The main point is that it is not jobs that we are primarily interested in. What matters is production. And production matters because we are interested in consumption. Were the world so that everything we need fell like manna from the heavens. In that world, we wouldn’t need to work at jobs. We’d spend our time like the lotus eaters of Greek mythology.

The Industrial Revolution released the power of human ingenuity and created wealth (stuff that we value) unimaginable to our ancestors. Untold number of old jobs were lost, and in exchange we gained leisure, and all manner of stuff what we enjoy — from smartphones to air travel to medical services and comfortable homes. That’s capitalism working its magic.

Here’s how rich we have become:

That per capita GDP growth becomes all the more astonishing when you consider that the world population has exploded around 20 times what it was in the 14th century CE.

That, ladies and gentlemen, friends and colleagues, boys and girls, is the amazing truth about the world we live in. Three cheers for capitalism.

Did Britain Impoverish India?

Asking “Did Britain impoverish India?” is like asking “Is water wet?” Of course, Britain impoverished India during their rule as the colonial masters of India. To extract wealth from a colony and exploit its people is the primary motivation for colonization.

Expecting the colonial masters to be a benign, self-sacrificing force is delusional. Colonization is not a win-win exchange relationship. It’s a milder, gentler form of slavery; not quite as cancerously malignant but severely chronically debilitating.

British rule had two phases: first the Company Rule which began around 1757 when the British East India Company gained control over parts of the Indian subcontinent; the second when the Crown Rule began in 1858, and nominally ended in 1947. I say “nominally” because while the British Raj more or less came to a formal close in August 1947, India continued (and continues) to be governed by laws that were made by the British during the Crown Rule.

So you could say that the Britain raj lasted nearly two centuries, and that’s enough time to loot a country. But here’s the point of this piece — contemporary India’s poverty has little to do with the crimes the British committed. They committed crimes not just in India but around the world that it dominated. Pressed for time as we are, we can’t read the piles of history books written about that but we can get a sense of how terrible those crimes were by reading the twitter account titled “Crimes of Britain.”  Continue reading

Saving and Investment

To understand the relationship between producing, consuming, saving and investment, it is useful to start with a simple story.

Imagine a Robinson Crusoe economy — just one person in it. RC’s consumption is limited to what he can produce by fishing, hunting and gathering. He allocates his time either laboring or enjoying leisure. If he consumes less than what he produced during a particular period, he can save that for later consumption.

For example, if he has saved some fish, he can forego fishing and instead use that time to fashion a spear for hunting. That means, his savings allowed him time to invest in creating that spear. He “converted” his saved fish into a spear. The spear is what is called “capital” — something that is not directly consumed but is used for producing goods for consumption (or even more capital.) His spear will increase his productivity in hunting, thus enlarging his consumption possibility. Continue reading