Category: Economics

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?”

AMA – Order Out of Freedom of Choice is a Scientific Mystery

“At the heart of economics is a scientific mystery: How is it that the pricing system accomplishes the world’s work without anyone being in charge? Like language, no one invented it. None of us could have invented it, and its operation depends in no way on anyone’s comprehension or understanding of it. … The pricing system–How is order produced from freedom of choice?–is a scientific mystery as deep, fundamental and inspiring as that of the expanding universe or the forces that bind matter.”

That’s Vernon Smith, who was awarded the 2002 Nobel Memorial Prize in Economic Sciences.  Continue reading “AMA – Order Out of Freedom of Choice is a Scientific Mystery”

On Taxes and the Nature of the Government of a Society of Morons — Part 2

There are fundamental facts about the nature of the world we live in which are unalterable by human desire or action. Conservation laws are an example of this. You cannot get something for nothing, on the aggregate. Certainly, A can get something for nothing but only if someone else, B, gets nothing for something.

When the government gives something to some identifiable group, it cannot do so without taking (usually by force) from some other person or group. On the aggregate, the government does not produce the goodies it distributes. It merely takes through taxation what it intends to distribute, keeps part of it for its own consumption and distributes the remaining (often a very small part of what it takes) to certain groups to buy their allegiance.  Continue reading “On Taxes and the Nature of the Government of a Society of Morons — Part 2”

On Taxes and the Nature of the Government of a Society of Morons — Part 1

Death and Taxes

In 1789 Benjamin Franklin wrote that “in this world nothing can be said to be certain, except death and taxes.”

I beg to differ. Unlike the certainty of death which is imposed by nature, taxes are entirely man-made and therefore avoidable. But most people accept taxes with the same resignation as they do the inevitability of death, and by this uncritical passive acceptance of taxes they acquiesce in the persistence of a system that is positively harmful to personal well-being and social welfare. What’s worse, they consider taxes to be a social good.

The existence and persistence of bad institutions and norms can only be attributed to wrong ways of thinking and acting. An inverted view of reality that considers what’s harmful as beneficial causes untold avoidable harm. Continue reading “On Taxes and the Nature of the Government of a Society of Morons — Part 1”

Economic Principles and Immunity from Silly Ideas

A reasonable way to think about any subject — science, engineering, technology, economics, etc etc — is to base the analysis on fundamental principles. It’s like using maths, starting with axioms and logically deriving theorems that can then be said to be true within that axiomatic system. If you know the underlying bits, you can work out the rest yourself — or rely on the work of others who have worked out the maths.

We know that there are fundamental principles, whether we know them or not. Some people do know, and they use that knowledge to make stuff that we find useful. I know precious little fluid dynamics but I know that those who design airplanes understand fluid mechanics, and I fly around in airplanes that are the result of various people’s understanding of various different scientific principles or truths.

Economics also has discovered certain “truths”. These relate to property, division of labor, exchange and subjective theory of value. These ideas are not generally known by people, and understandably so. They don’t need to. They get by very well without knowing them, thank you very much.
Continue reading “Economic Principles and Immunity from Silly Ideas”

Understanding Economics is Easy

In the previous post “Economics and Physics” I briefly explored why the basic explanations of physics are hard to understand and why the basic explanations of economics are easy to understand. Physics is called a “hard science”. I believe it is hard in the sense that advances in physics are made by supremely intelligent people and even comprehending them requires a good deal of training and intelligence.

Physics is also hard in that it is not some soft and squishy, namby-pamby whatever goes kind of nonsense, unlike in some other intellectual enterprises where people just make up stuff as they go along.

Continue reading “Understanding Economics is Easy”

Economics and Physics

Physics is Not Logical

Twinkle, twinkle, little star, I finally know what you really are

Nobel Prize winning New Zealand physicist Ernest Rutherford (1871 – 1937) is reported to have claimed that “all science is either physics or stamp collecting.” He evidently meant that physics is the only real science and everything else that goes under that label is just a collection of facts.

The wiki’s definition of science as “a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe” serves our purposes. Physics is the über-science because it alone provides the ultimate foundation for all explanations related to what the natural world is about.

What makes physics not merely a heap of facts — what distinguishes it from stamp collecting — is that it is organized knowledge. The organization of knowledge is achieved through what are called “theories”. Theories are conjectures (hypotheses) about the nature, structure or working of some aspect of nature. Theories in physics are conjectures about what the physical world is and how it functions. Continue reading “Economics and Physics”