Thought for the day
“It does not matter how slowly you go as long as you do not
stop. ”
-
Confucius (Chinese, 551-479BC)
Word for the day
Verbicide (n)
The willful distortion of the original meaning of a word.
(Source: Dictionary.com)
Teaser for the day
If this market rally is Modi rally, then 1999 Y2K rally was
ABV and 2004-2007 infra rally was MMS.
If you disagree, have a rethink!
Who
wants some cold nights in Davos
At the moment Narendra Modi is not giving any impression of a
man in hurry. In giving shape to his government, he seems to be to be
consulting all the concerned. I guess it is better to iron out all differences
well before the government is formed, rather than leaving them unattended and
hoping that things will sort out on their own – pretty much a hallmark of the
regime Narendra Modi will be replacing.
In the meanwhile, the speculations about likely constitution of
Modi’s government are at high. Media pundits, studio experts and bookies,
especially those who failed miserably in judging the strong Modi wave across
the country during elections, are almost audacious in their anticipation of
likely allotment of key portfolio. In their haste, or should I say in chafe,
they are again making the same mistake they made during the campaign –
anticipating Narendra Modi to be a conventionalist.
Anyways, it’s another 4-5days before this game of conjecturing
comes to an end. For record, I do not care who the next finance minister will
be, for it is “Narendra Modi” who will be setting the policy agenda.
FM, unlike his/her predecessors, will have the pleasure of
reading the budget speech to a thoroughly demoralized opposition, and spending
some cold nights in Davos. If I am wrong on this count, I will have no reason
to bother about this government anyways.
Besides, a multitude of experts have been busy writing economic
agenda for the new government. After spending many hours carefully going
through many of these agenda notes, especially by some “victorious” global
economists, I have not found an iota of difference from what everyone was
telling UPA government for past five years.
Allow FDI in key areas, manage inflation, spur investments, kick
start stalled infrastructure projects, and reduce lending costs and taxes for
consumers etc. are some of the common suggestions I have been hearing for past
so many years. Though no one has apparently offered any “HOW TO?” solution so
far.
Going through Unlearning
Economics I found an interesting post which quotes extensively from
the John Maynard Keynes' The General Theory (TGT), and establishes its
relevance to the current context. The following excerpts are in particular
relevant:
“In Chapter
14, Keynes explicitly states the point that you cannot measure the
'productivity' of capital independent of its price:
Nor are those theories more successful which attempt to make
the rate of interest depend on “the marginal efficiency of capital”. It is true
that in equilibrium the rate of interest will be equal to the marginal efficiency
of capital, since it will be profitable to increase (or decrease) the current
scale of investment until the point of equality has been reached. But to make
this into a theory of the rate of interest or to derive the rate of interest
from it involves a circular argument, as Marshall discovered after he had got
half-way into giving an account of the rate of interest along these lines.
For the “marginal efficiency of capital” partly depends on the scale of
current investment, and we must already know the rate of interest before we can
calculate what this scale will be. The significant conclusion is that the
output of new investment will be pushed to the point at which the marginal
efficiency of capital becomes equal to the rate of interest; and what the
schedule of the marginal efficiency of capital tells us, is, not what the rate
of interest is, but the point to which the output of new investment will be
pushed, given the rate of interest.
In Chapter
6, Keynes articulates the idea that investment effectively 'creates
its own savings':
The equivalence between the quantity of saving and the
quantity of investment emerges from the bilateral character of the transactions
between the producer on the one hand and, on the other hand, the consumer or
the purchaser of capital equipment. Income is created by the value in excess of
user cost which the producer obtains for the output he has sold; but the whole
of this output must obviously have been sold either to a consumer or to another
entrepreneur; and each entrepreneur’s current investment is equal to the excess
of the equipment which he has purchased from other entrepreneurs over his own
user cost. Hence, in the aggregate the excess of income over consumption, which
we call saving, cannot differ from the addition to capital equipment which we
call investment. And similarly with net saving and net investment. Saving,
in fact, is a mere residual. The decisions to consume and the decisions to
invest between them determine incomes. Assuming that the decisions to invest
become effective, they must in doing so either curtail consumption or expand
income. Thus the act of investment in itself cannot help causing the residual
or margin, which we call saving, to increase by a corresponding amount.
In Chapter
7, Keynes offers an argument against the Hayekian Natural Rate of
Interest:
Thus “forced saving” has no meaning until we have specified some
standard rate of saving. If we select (as might be reasonable) the rate of
saying which corresponds to an established state of full employment, the
above definition would become: “Forced saving is the excess of actual saving
over what would be saved if there were full employment in a position of
long-period equilibrium”. This definition would make good sense, but a sense in
which a forced excess of saving would be a very rare and a very unstable
phenomenon, and a forced deficiency of saving the usual state of affairs.
Professor Hayek’s interesting “Note on the Development of the Doctrine
of Forced Saving” shows that this was in fact the original meaning of the
term. “Forced saving” or “forced frugality” was, in the first
instance, a conception of Bentham’s; and Bentham expressly stated that he had
in mind the consequences of an increase in the quantity of money (relatively to
the quantity of things vendible for money) in circumstances of “all hands being
employed and employed in the most advantageous manner”. In such circumstances,
Bentham points out, real income cannot be increased, and, consequently,
additional investment, taking place as a result of the transition, involves
forced frugality “at the expense of national comfort and national justice”. All
the nineteenth-century writers who dealt with this matter had virtually the
same idea in mind.