The Wealth of Nations — Part 4: What’s Wealth?

Wealth?   Maybe!

Most people would readily identify a heap of gold ingots as wealth. But a moment’s reflection is enough to conclude that what can be considered wealth depends on the context.

Imagine Robinson Crusoe alone on his otherwise uninhabited island coming across a pile of gold nuggets in a stream. What’s more valuable to him: the gold or the fresh water in the stream? Gold is pretty useless to him because he cannot use it for anything. Gold is a heavy, soft metal. A piece of iron would be more valuable for making a knife or a pickax. Gold is of little value to him.

Continue reading “The Wealth of Nations — Part 4: What’s Wealth?”

The Wealth of Nations — Part 3: How Rich was India

Historical world income shares
Historical world income shares

The persistence of the canard that India was once a rich country is understandable. A quick glance at the simple graph illustrates very clearly why it is easy to conclude that India was rich.

This piece has loads of graphics — more than any other piece I ever wrote. No arguments here, just a lot of data-based graphics.

Here’s the TL;DR version: India is not rich today, and really never was rich in the past. In fact, all countries were poor until about a thousand years ago. India had a large share of the world GDP because India’s population was a large share of the world population. India was not rich. It was merely big. Just like it is today: big and poor. Like China used to be just a few decades ago.

Continue reading “The Wealth of Nations — Part 3: How Rich was India”

The Wealth of Nations — Part 2: Freedom

 

Very little freedom
Very little freedom

If you ask me what are the necessary causes of the wealth of nations, I will answer — having spent decades learning about and pondering that question — in just one word: Freedom!

Freedom is the sweetest word I know in English.

The advancement of civilization is essentially the expansion of individual freedom — the release from constraints imposed by nature, by other humans or by one’s mental and physical limitations. The notion of the freedom of a group has content only when individuals of that group are free. If the individuals are not free, the group cannot be considered to be free in any sense.

Freedom means you have the right to do whatever you please, provided you respect the corresponding right of others to do as they please. In short, mind your own business. A free society is one in which everyone minds only his own business. Free societies are prosperous societies.

The greater the collectivization of society, the greater the size of the government, the greater the constraints on individual liberty, the less free the society, and consequently the less prosperous the society. Unconstrained democracy is inconsistent with individual freedom, and therefore group freedom, and consequently leads to impoverishment.

Below I outline briefly why the universal application of the notion of minding one’s own business leads to the possibility of universal prosperity through individual freedom. And conversely, when people poke their noses into other people’s businesses, it leads to needless misery.
Continue reading “The Wealth of Nations — Part 2: Freedom”

The Demand and Supply of Fines and Corruption

supply-and-demandA comment on the last piece prompts this tiny lesson in microeconomics.

“Corruption is one big pain point in the economic growth of a country. I have this funny idea but would like your inputs from an economists perspective. If things get costly it reduces its demand. Can corruption be made costly? This may increase compliance. Just to illustrate. If we raise fine for a fault, say traffic violation, which suppose today is Rs 500 to Rs 5000. Today the violator gets away by paying Rs 100 to traffic police. This is 20% of legal cost. If the penalty is 5000 and assuming traffic police acts rationally thereby asking for bigger bribe…won’t that deter future violations by the offender? Here I presume that traffic police will act smart knowing fully well that offender isn’t going to pay 5000 but at the same time he himself won’t settle for just Rs 100 and may raise ‘price’ to Rs 200 or 300. This is effective 100-200%% jump in bribe money that may pinch offender at some point in time. Pls throw some light.”

To start off, let’s examine the statement “If things get costly it reduces its demand.” In lay terms, that is true but economically speaking, prices don’t affect the demand or the supply of a product. To understand why not, we have to clearly understand what economists mean by “demand” or “supply” and distinguish them from “the quantity demanded” and “the quantity supplied.” Continue reading “The Demand and Supply of Fines and Corruption”

The Wealth of Nations — Part 1


Warren Buffett
In his 2016 annual letter (pdf, 28 pp) to the shareholders of Berkshire Hathaway, Warren Buffett makes this observation about America’s economic dynamism.

One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

“You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.”

Buffett is right about the factors that create wealth — ideas (or human ingenuity), ambition, the free market system, and the rule of law. Let’s explore some of these in more details.
Continue reading “The Wealth of Nations — Part 1”

Private Goods, Club Goods and Public Goods

Lighthouse at Point Reyes
Lighthouse at Point Reyes

Charging home owners’ association dues based on the size of the property is common practice in many places across the world. Is that economically efficient and is it equitable? The short answer to the question raised by reader Mr Baransam1 is yes. The longer answer needs to start with distinguishing different categories of goods that are produced, traded and consumed.

Private Goods

The most common category are called “private goods.” These are formally defined by being “rival” and “excludable.” The rivalrous characteristic arises from the fact that one’s consumption of the good precludes any other person from consuming it. If you eat an apple, that apple is not available for consumption by others. Excludability means that one can be prevented from consuming the good. You can lock up the apple and exclude others from consuming it.
Continue reading “Private Goods, Club Goods and Public Goods”

Getting There from Here

You can't always get what you want
No way, Jose.
James Burke tells a story about a time when he and his team were lost in some place in Ireland. This was before Google maps and mobile phones. They asked a local for directions to some place who replied in all seriousness, “To get there, I wouldn’t start from here.”

The humor in that statement arises from the fact that to get anywhere at all you have to start from where you are, and not some ideal place that you are not at. You have to make do with what you have, and not what you should ideally have to get the job done but in fact you don’t. Continue reading “Getting There from Here”