Category: Economics

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 “Did Britain Impoverish India?”

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 “Saving and Investment”

Credit-constraint — the Inability to Borrow

For anyone concerned about the poor and poverty, the first task is to clearly define the words “poor” and “poverty.” Wealth and income are reasonable measures that usually serve in defining a poor person: one who has less than some defined minimum of wealth and/or income.

But that definition is not comprehensive. What if a person could borrow the money needed for an investment with a sufficiently high return such that it would be possible to return the money with interest, and still have some left over? Then the person is not poor. Meaning, anyone able to borrow is not poor. Conversely, anyone who is unable to borrow is “credit-constrained” and is comprehensively poor.

For a person to be considered poor, it is not necessary that the person have zero net worth or wealth. The sufficient condition for being poor is that one is credit constrained. Even if a person has negative net wealth, as long as the person is able to borrow, the person is not poor.

For example, consider a person who does not have money for acquiring a particular skill that would enable him to earn a very good living. Suppose further the person could borrow the money needed and be able to pay back the loan from the higher income from the acquired skill. When he borrows, his net wealth (his assets minus the loan liability) will actually be less than zero. Yet he will not really be poor because it will only be a temporary situation. In this case, he creates assets (acquires the skill) using the loan that later enables him to repay the loan.

We are familiar with many cases of “wealthy” people who at some point in their lives had negative or zero wealth but were able to borrow (sometimes to the tune of hundreds of millions) that allowed them to build up their fortunes and repay the loans. Even with a negative net wealth, they were not poor because they were not credit constrained.

So what is the main implication of this definition of being poor? It is this. An efficient way to help those who are poor is to somehow release the credit-constraint they face. Economic efficiency considerations recommend that.

But what if the poor are being denied access to wealth that they have a legitimate claim to, and which they need? Then it would be a moral imperative to return that wealth to them.

The poor of India have a share of the public wealth of India. It is economically efficient and morally right to give them that wealth. It has to be done now, and not in some indeterminate future. [Previous post in this series: Public Wealth Return.]

Disasters, Price Gouging, Greed, Ignorance, and Stupidity

You can bet on this fact: that occasionally there will be natural disasters like floods, fires, and earthquakes. You can also bet on a follow-on fact: that in those places, prices of essential goods and services will go up. And finally you can bet your life on this: that popular accusations of price gouging by greedy corporations and windfall profits will motivate politicians and bureaucrats to impose price controls.

Of all the harm that a natural disaster brings in its wake, one of the most harmful and the most avoidable is the deliberate, the imposition of price controls. It’s entirely human-caused. There is no justification. The move to control prices is based on ignorance of reality, a desire to do good, to signal a virtuous concern for the plight of the poor. It is wrongheaded and outright evil in its consequences. Continue reading “Disasters, Price Gouging, Greed, Ignorance, and Stupidity”

McCloskey on Economics, Economists and Physicists

When Nobel laureate physicist Ernest Rutherford (1871 – 1937) claimed that “Physics is the only real science. The rest are just stamp collecting” he was perhaps displaying the arrogance that comes with the territory of knowing certain fundamental truths that are denied to non-physicists.

Economists too can be arrogant for similar reasons. They know something about human society that others are generally not aware of — and what’s more — are unaware of their ignorance.

It’s not a sin to be arrogant but displaying it is definitely impolite and predictably makes a person unpopular. I speak from experience. What am I going on about, you may ask. I was reading Deirdre McCloskey today.  Continue reading “McCloskey on Economics, Economists and Physicists”

What is Socialism?

Robert Heilbroner (1919 – 2005) defined socialism as “a centrally planned economy in which the government controls all means of production.”

Why is Heilbroner worth quoting on this matter? Because he knew what he was talking about. He was a committed socialist all his life. He was a best-selling author. His book The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers (1953) sold over 4 million copies. Clearly he was not stupid. And when he could not deny the evidence, late in his life he came to recognize that socialism had failed and was honest enough to admit that he had been wrong. Continue reading “What is Socialism?”