why we don't need power located in one hand because it will be invariably abused by someone. Even very intelligent, great , purer than thou soul once given power will be enamored by the possibility of using power for his/her own agenda.
the other thing is the risk of relying on a single person, its all about diversifying risk by taking opinion from a group and finally deciding on what to do .. one can always say that it finally leads to horse-trade, bullying, cheating to do things your way . but we are comparing this to a system where one person takes decision .. expected value of taking a right decision over a long time will be higher in democracy . no hard number proof , but this is sociology, so will be difficult to do so..
In democracy , one intend to come up with institutions which can cancel each other powers. so judiciary is a check on executive and one will hence want judiciary to be independent of executive . but making them too independent will concentrate power in their hands which will be also an undesirable state.
I see judiciary are in a position where they can take unpleasant decision which will be good for long term where the political class fails a lot..
Fama in his interview said that regulation fails because it is driven by political affiliations which are not efficient rather than prices which are efficient because of its ability to gather information from all places. Politicians are driven by short term greed/political favor and hence will enter in bubbles of under and over regulation. As we have seen that prices can also be irrational , so there are limits to both .
Prices are the most democratic institution from a point of view . They get inputs from all and finally decide on one ..
Friday, May 28, 2010
Thursday, May 27, 2010
Friday, May 21, 2010
Beating up the speculators
Gary Becker on usefulness of speculation
"Applied to the financial crisis, if when housing prices were rising so rapidly, more speculators had been shorting the housing market, or shorted mortgage-backed securities whose value depended on what happened in the housing market, their actions would have reduced the sharp increase in housing prices, and reduced the subsequent steep fall in these prices. Therefore, it was the absence of sufficient short speculators when commodity and asset prices were rising sharply that helped widen the run up and eventual collapse in these prices.
No amount of writing by economists will eliminate the hostility to individuals who make lots of money when times are bad."Tuesday, May 18, 2010
Interesting bit as part of news about Euro Debacle
"Yet even as it predicted the trouble, Germany failed to anticipate that the countries running a trade surplus would inevitably need to finance the southern states’ shortfalls. The five most heavily indebted euro members owe German banks an estimated 700 billion euros (nearly $900 billion), and these German surpluses, once regarded abroad as a symbol of great strength, have emerged as a dangerous source of vulnerability. Most sickeningly for the Germans, the indebted nations are likely to say that their debts need to be reduced or restructured in the name of European solidarity."
China shall be looking at how Germany has to fund his neighbors to save European union future , china would be in similar danger sometime if they keep on running trade surpluses and US decides to default.
China shall be looking at how Germany has to fund his neighbors to save European union future , china would be in similar danger sometime if they keep on running trade surpluses and US decides to default.
Tuesday, April 27, 2010
rumblings II ( innovation and social usefulness)
So taking the story forward in the last post- what will happen if the innovation by the third person in business activity is not weaving clothes but say brewing alcohol. The third person finds out a way to produce alcohol from food produced by the other two person. The alcohol is liked by all the thriee persons and hence GDP increases which comprises of three portions of food and three portions of alcohol.
So how this situations stands vis a vis the earlier situation of three portions of food and three portions of clothes. In terms of GDP, this will depend on what is the utility value of clothes vs alcohol to people. How does one calculate utility? Well it will be the value/happiness that one will get out of consumption of alcohol/cloth? Both alcohol and cloth can keep you warm in winter but clothes can do extra in making one fashionable.
From a GDP growth perspective, does it matter? Well in short term no. In long term may be. If usage of clothes lead to better processes of weaving of clothes and people discover another profession like fashion consultant which is of higher utility, while on the other hand , usage of alcohol may lead to finding its usage in medicine and someone start producing them. So in the long term, GDP may grow differently depending on the productivity growth and the future innovation of goods.
The next question is what is socially useful. Well for that we need to get a definition of social usefulness which doesn't exist or change depending on the person that you talk to.
Lets take the social usefulness as factors that affect social structures like family, legal system etc which in long term will negatively affect the economy. On this criteria, if say alcohol consumption makes people violent and more prone to fighting , this will make it socially harmful. So clothes innovation is better than alcohol on this scale.
The other criteria is a more philosophical one. What type of society do we want. Do we want to develop a society where clothes symbolizing comfort takes precedence over alcohol symbolizing leisure or vice versa. Or to take a better example whether we shall spend money/innovate profession in finding medicine for AIDS or on space exploration. In the short term, it doesn't matter. In the longer term the results may vary.
What matters here is who are "we". Could there be political leader or social evangelist deciding what we want or is it the choice arising from trials and errors of utility functions of people, the other name of this is entrepreneurship.
This also explains the charm of planned economy vs market economy. In planned economy, the planners by their supposed "super- intelligence" decide what type of goods/profession/path that the economy shall take. So in this case, through their calculations and social judgments, the planner will decide what is beneficial and hence choose the path. This will be done through quotas on goods production in private arena and capital investment by government. Also since the goods are already planned, there is no waste in form of entrepreneurship since no experimentation on utility function of people is required.
And there lies the fallacy that someone or a group of people can know what is beneficial for others in the economy and hence make a judgment on the utility functions which is impossible to perceive for a single individual leave aside the whole country.
The "socially useful" advocates also makes implicit assumption on long term utility functions of individual while deciding on what set of professions need to take precedence. Deciding on expenditure on AIDS drugs over space exploration does have the assumption that people would have larger utility of AIDS drugs as there is fear of epidemic rising in future. What may happen that in future, space exploration may lead to discovery of alien race that has already discovered drugs for AIDS.
Financial innovations can also be thought in this framework but that will be the subject of another post.
So how this situations stands vis a vis the earlier situation of three portions of food and three portions of clothes. In terms of GDP, this will depend on what is the utility value of clothes vs alcohol to people. How does one calculate utility? Well it will be the value/happiness that one will get out of consumption of alcohol/cloth? Both alcohol and cloth can keep you warm in winter but clothes can do extra in making one fashionable.
From a GDP growth perspective, does it matter? Well in short term no. In long term may be. If usage of clothes lead to better processes of weaving of clothes and people discover another profession like fashion consultant which is of higher utility, while on the other hand , usage of alcohol may lead to finding its usage in medicine and someone start producing them. So in the long term, GDP may grow differently depending on the productivity growth and the future innovation of goods.
The next question is what is socially useful. Well for that we need to get a definition of social usefulness which doesn't exist or change depending on the person that you talk to.
Lets take the social usefulness as factors that affect social structures like family, legal system etc which in long term will negatively affect the economy. On this criteria, if say alcohol consumption makes people violent and more prone to fighting , this will make it socially harmful. So clothes innovation is better than alcohol on this scale.
The other criteria is a more philosophical one. What type of society do we want. Do we want to develop a society where clothes symbolizing comfort takes precedence over alcohol symbolizing leisure or vice versa. Or to take a better example whether we shall spend money/innovate profession in finding medicine for AIDS or on space exploration. In the short term, it doesn't matter. In the longer term the results may vary.
What matters here is who are "we". Could there be political leader or social evangelist deciding what we want or is it the choice arising from trials and errors of utility functions of people, the other name of this is entrepreneurship.
This also explains the charm of planned economy vs market economy. In planned economy, the planners by their supposed "super- intelligence" decide what type of goods/profession/path that the economy shall take. So in this case, through their calculations and social judgments, the planner will decide what is beneficial and hence choose the path. This will be done through quotas on goods production in private arena and capital investment by government. Also since the goods are already planned, there is no waste in form of entrepreneurship since no experimentation on utility function of people is required.
And there lies the fallacy that someone or a group of people can know what is beneficial for others in the economy and hence make a judgment on the utility functions which is impossible to perceive for a single individual leave aside the whole country.
The "socially useful" advocates also makes implicit assumption on long term utility functions of individual while deciding on what set of professions need to take precedence. Deciding on expenditure on AIDS drugs over space exploration does have the assumption that people would have larger utility of AIDS drugs as there is fear of epidemic rising in future. What may happen that in future, space exploration may lead to discovery of alien race that has already discovered drugs for AIDS.
Financial innovations can also be thought in this framework but that will be the subject of another post.
rumblings - I
so i was thinking of some basic economics and thought to put down in a basic form so as to improve my understanding.
So how will be new jobs created in a economy? Let take an example comprising of three people where all of them are involved in food gathering and they work for 12 hours every day to gather enough food(3 portion) to satisfy hunger for each of the three. In this case, each of the person has wages equal to 1 portion of food. All have 12 hours of leisure everyday.
Now lets think of situation that by trial and error and working in 2 hours of leisure, they figure out a way of producing food out of land which is agriculture. By this method, they can produce enough food using only 24 manhours per day so as to satisfy hunger of three people. Now in this case, there are two choices.
First choice is that all three now work 8 hours a day, produce three portion of food which they divide among themselves. But each of them will have 16 hours of leisure in this case. The economy remains the same and in the way we calculate GDP, the GDP has stagnated. This is socialism at its best.
The second choice is that two of them decide to continue working 12 hours a day to produce three portions of food. And the third one becomes unemployed because he doesn't know the technique of agriculture. So what will happen now.
Case one is that he dies of hunger. Since there is no one to consume 3 portions of food, they will start producing 2 portions of food and start spending more leisure time. The GDP will reduce but per capita GDP remains the same. This is capitalism at its worst if one has even a slight bit of humanitarianism in his soul.
Case two is that the third person innovates and create a product which is useful for all three. Say that he learns to weave clothes for which the two farmers are ready to provide one portion of food to him for his survival. This situation increases the economy and GDP grows to three portion of food and three portion of clothes. The per capita GDP also increases. This is capitalism at its best.
So how will be new jobs created in a economy? Let take an example comprising of three people where all of them are involved in food gathering and they work for 12 hours every day to gather enough food(3 portion) to satisfy hunger for each of the three. In this case, each of the person has wages equal to 1 portion of food. All have 12 hours of leisure everyday.
Now lets think of situation that by trial and error and working in 2 hours of leisure, they figure out a way of producing food out of land which is agriculture. By this method, they can produce enough food using only 24 manhours per day so as to satisfy hunger of three people. Now in this case, there are two choices.
First choice is that all three now work 8 hours a day, produce three portion of food which they divide among themselves. But each of them will have 16 hours of leisure in this case. The economy remains the same and in the way we calculate GDP, the GDP has stagnated. This is socialism at its best.
The second choice is that two of them decide to continue working 12 hours a day to produce three portions of food. And the third one becomes unemployed because he doesn't know the technique of agriculture. So what will happen now.
Case one is that he dies of hunger. Since there is no one to consume 3 portions of food, they will start producing 2 portions of food and start spending more leisure time. The GDP will reduce but per capita GDP remains the same. This is capitalism at its worst if one has even a slight bit of humanitarianism in his soul.
Case two is that the third person innovates and create a product which is useful for all three. Say that he learns to weave clothes for which the two farmers are ready to provide one portion of food to him for his survival. This situation increases the economy and GDP grows to three portion of food and three portion of clothes. The per capita GDP also increases. This is capitalism at its best.
Monday, April 26, 2010
too big to fail
Its not about preventing "too big to fail", it is about preventing "too connected to fail". Breaking up Too big financial institutions make sense for political reasons since these lead to legislation favoring banks and which are detrimental to general public welfare. But that is a phony arguments since that is true for all private enterprises and that brings into question of determining what is meant by "too big".
The concern over future bailouts come from "too connected to fail". That is the reason why credit market freezed after Lehman collapsed and there were billion dollars bailout even though Lehman by its size is quite small compared to overall size of financial institutions. The same thing can be seen in earlier crisis of 1930s where it was the failure of many small banks but inter-connected bringing the whole of US economy to ground.
Hence in future, one can't be sure that when banks start failing , one may not have option of not bailing it out if it is too inter-connected and hence endangering the system. Inter-connectedness can't be determined apriori since that will depend on the general situation of economy and the environment of fear, cynicism present in such situations.
The concern over future bailouts come from "too connected to fail". That is the reason why credit market freezed after Lehman collapsed and there were billion dollars bailout even though Lehman by its size is quite small compared to overall size of financial institutions. The same thing can be seen in earlier crisis of 1930s where it was the failure of many small banks but inter-connected bringing the whole of US economy to ground.
Hence in future, one can't be sure that when banks start failing , one may not have option of not bailing it out if it is too inter-connected and hence endangering the system. Inter-connectedness can't be determined apriori since that will depend on the general situation of economy and the environment of fear, cynicism present in such situations.
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